The European Union in 2014: Challenges and Opportunities

January 16, 2014

Part I: Self-Reflection and Internal Reform

by Nicholas Hager

EU Flag

The European Union invested a great deal of time and effort into preparing Ukraine to sign an Association Agreement with it, which would have benefitted both parties. This agreement would have brought about widespread sectorial renovation and integration, but it would also have secured a stronger EU foothold in Eastern Europe, in addition to helping Ukraine break from the economic doldrums which currently overwhelm it. Unfortunately, while negotiations seemed to be on track for this to happen, they began to fall apart ahead of the EU summit in Vilnius late November. Ukraine ultimately spurned the EU’s advances and opted to join Russia’s nascent customs union instead.

While disappointing to many, the Ukraine episode highlights the need to increase the “attractiveness” of the EU going forward in 2014. Before this is possible, however, the EU must reflect on its current construction and operational efficacy, and work to rectify its shortcomings. There are three major challenges currently plaguing the EU that have eroded its capacity to function and serve as a model of political and economic development for bordering states: the Eurozone crisis, the rising tide of Euroscepticism, and the Union’s seeming neglect of countries which have been attempting to join it for years.

The Eurozone Crisis

The Eurozone crisis is one of the principle challenges which threaten the stability and viability—and therefore the attractiveness—of the EU, and making earnest progress toward resolving it would go a long way toward restoring the public’s waning trust in the institution while also undercutting much of the ideological support of virulent Eurosceptic parties. Yet, predictions about Europe’s economic fate are frustratingly ambivalent. Some suggest that the Eurozone is heading toward imminent deflation which could trap it for decades, while others believe that 2014 will be “brighter” with European stock market rebounds expected and the IMF’s soon-to-be-announced upward revision for EU growth. But significant efforts are being made to shift Europe’s erstwhile moribund economy into the next gear. There is no straightforward plan or silver bullet that will accomplish this goal, but the European Central Bank (ECB) is taking steps to institute stronger financial regulations on non-performing loans and to address capital shortfalls in order to “encourage banks to face reality and sell or restructure bad loans.” These regulations would not directly address the sovereign debt crisis but, because “the main dodgy assets that have been swept under the European carpet are…bad loans made to households and companies,” making progress here should have a substantial, positive impact on the private economy.

An additional pillar to this broad economic reform is the proposed creation of a banking union to help resolve future cases of bank insolvency, thereby obviating the need for bailouts. This proposal also “[adds] a ‘narrowly defined’ ban on…big banks using their own money for trading,” which is intended to keep their clients’ money out of these operations. But these reforms are criticized as not being extensive enough to address the problem, while others argue the new regulations will only increase costs and complexity while actually making regulation easier to skirt. Regardless, it is a positive step toward consumer protection and, with banks “expected to be more active in the debt market this year,” there should be clear, early, indications whether these regulations are adequate. If the EU can focus its efforts on developing and implementing the appropriate reforms, and monitor progress with an eye toward maintenance and problem-solving, it could pay dividends in the near future by easing the economic pain of its citizens, thereby restoring some confidence in the Eurozone and the broader EU.

Rising Euroscepticism

One of the side-effects of this recent downturn is a surge in the prevalence of far-right, Eurosceptic ideologies which typically accompany economic hardship. The concomitant diminution of trust in the EU’s capacity to adequately safeguard its citizens’ interests has eroded its ability to govern effectively, which could create a recursive process whereby its perceived failure is the rationale for stripping the EU of its authority, leading to a succession of future “failures” and subsequent institutional rollbacks. This pattern is manifest in the prevalent calls from some to adopt policies to diminish the role of the Union—as Germany’s Christian Social Union proposes—or reflect an outright desire for separatism—which is the platform of, among others, the United Kingdom Independence Party (UKIP).  Eurosceptic gains in the upcoming European Parliament elections may not be “dramatic,” but the salience and popular currency of these Eurosceptic ideas is sufficient to undermine the public’s faith in the EU. This is perhaps the foremost challenge currently facing the Union because, without the firm support of its member states, establishing and implementing a coherent agenda will be all but impossible.

There is no single approach to dispel this rise of the right, but taking clear steps toward greater institutional transparency and imbuing the process with more accountability would be effective in stymying at least some of the most broadly expressed criticisms of the Union. A few steps that could be taken to achieve this are outlined in a report by the Center for European Reform, which suggests reforming the European Commission to more clearly define its roles and responsibilities as well as reinforce its independence from the politics of the European Parliament. Likewise, expanding the resources and ambit of the European Court of Auditors would help EU citizens feel more comfortable about where their money is going and how much of it is going there. Additionally, the authors of the report advocate an expanded role for national legislatures in the Commission’s rulemaking processes, allowing a certain number of state legislatures to challenge, and potentially block, any proposed reforms.

Of course, these are not necessarily the only reforms the EU could undertake to restore public confidence, and they are not necessarily optimal either. Moreover, it is likely that any such reforms will face opposition from within the EU’s institutional structure and the populace at large. But with that said, these proposals are at least tangible steps toward reinforcing the EU’s legitimacy. Actively confronting this issue is crucial because restoring trust will be paramount if the EU is to weather the Eurosceptic storm, and it will be instrumental in ensuring the success of all of the Union’s future endeavors.

Expansion

A final way to strengthen the EU’s appeal is to focus its expansion efforts on those countries with longstanding applications for membership. The eight countries that have active applications for EU membership—Montenegro, Serbia, Macedonia, Albania, Bosnia-Herzegovina, Kosovo, Iceland, and Turkey—would each make unique economic and cultural contributions to the EU, but would also allow it to consolidate its base of power on the European continent. Arguably the most glaring omission is Turkey, whose application for EU membership actually predates the EU itself, and whose induction would bolster the European Single Market by adding Europe’s seventh, and the world’s seventeenth, largest economy while also establishing a strategic military bulwark on the threshold between Western Europe and Russia.

Yet, there are still numerous hurdles to Turkey’s inclusion. It not only faces longstanding opposition from EU member Cyprus over its support for the illegitimate Turkish rule in the Republic of Northern Cyprus, but it has now drawn the opposition of EU powerhouses France and Germany over concerns that Prime Minister Erdogan is molding Turkey into an authoritarian state. Even so, inducting these countries would offer the Union a unique opportunity to consolidate its influence in the region without necessitating an overextension of its focus or resources. Therefore, it may be wise for the EU take a more vigorous approach to assisting those countries that have a genuine, demonstrated interest in joining to meet the “Copenhagen Criteria” laid out in the Maastricht Treaty. By shifting the focus to facilitating their entry into the EU, instead of allowing them to languish in a bureaucratic limbo, the process of European integration would be sped up dramatically.

The preceding suggestions may be somewhat bromidic and more than a little optimistic, but they are not necessarily intended to provide the solution or the path forward for the EU. Rather, they are meant to illuminate the major obstacles which impede the functioning of the EU and to demonstrate that there are, indeed, viable steps that can be taken to overcome them. Moreover, and perhaps most importantly, this is meant to highlight the fact that the EU’s failure to secure an Association Agreement with Ukraine association might be better seen as an opportunity to reflect on the crux of what makes the Union an attractive idea, and to undertake reforms along those lines so that it is prepared to meet the challenges of 2014 and beyond.       

Nicholas Hager is an Intern at the Streit Council. Photo credit: MPD01605

Charting a New Direction for France and Europe: How Hollande Will Steer His Country and the Continent

June 12, 2012

by Geoff Atchison

Stepping into office May 15th as the first Socialist president of France in 17 years, François Hollande marks a strong departure from the center-right policies of his predecessor, Nicolas Sarkozy, and intends to focus on leading the country towards economic growth and a balanced budget. Having served in his new position only three weeks, Hollande has already made his international debut at the recent NATO and G8 Summits as well as the informal eurozone meeting among European leaders. Beating out Sarkozy in the run-off elections with 51.6% of the vote, Hollande’s victory represents a distinct shift in popular French attitudes and an overwhelming concern for the eurozone crisis and its possible consequences. While critics continue to cast their initial reviews, Hollande’s performance so far has illustrated a desire to reshape French domestic policy and to take active leadership in charting a new direction for European economic affairs.

At home, plans to reinvigorate the French economy and balance the government budget sit at the center of President Hollande’s agenda. In order to reduce the national debt, Hollande intends to raise taxes for the wealthiest portion of the population, implementing a 75% annual income tax for those earning more than €1 million.  Moreover, Hollande and his cabinet have slashed their own salaries by 30% to help achieve the President’s electoral promise of reducing the government deficit from around 4.5% to 3% of GDP.  Struggling against high public debt and nonexistent GDP growth rates inherited from the previous administration, Hollande must also confront the country’s recent credit downgrade from “AAA” to “AA+”.

Amid these economic challenges, President Hollande also intends to carry out a number of social and energy reforms. Standing out as a top priority, Hollande and his recently appointed Prime Minister Jean-Marc Ayrault advocate the immediate repeal of the current pension law enacted under Sarkozy. While the former French president raised retirement to age 62, Hollande and Ayrault wish to return the law to age 60, allowing individuals to receive their pension after working 41 years.  Although this reform will mark a symbolic and important achievement for Hollande in French social policy, the change is expected to come at a cost of nearly €1 billion.  In addition to pension reform, Hollande and his new administration have vowed to reduce the country’s unemployment rate, currently at 10% and growing, as well as minimize dependence on nuclear energy and implement a three-month freeze on gasoline prices.

Moreover, President Hollande has offered a bold approach to international affairs, touting a more independent stance towards NATO while promoting strong French leadership in European politics. At the recent NATO summit in Chicago, Hollande declared that he would withdraw French troops from Afghanistan by the end of the 2012, one year ahead of the timetable drawn up by the alliance.  Hollande’s decision to remove French troops from Afghanistan signals growing intervention fatigue among European partners in what has been a more than decade-long conflict in the country. France’s withdrawal from Afghanistan not only suggests a reduced French role in NATO, but also calls into question the strength and primacy of the organization as a leading global security force. Critics fear that mounting disinterest and selective involvement in NATO missions by France and other members may ultimately lead to a weakened NATO alliance in the future.

Meanwhile, as the eurozone debt crisis continues to ravage Greece and other parts of the continent, Hollande has emerged as a key player in ongoing efforts to resolve the financial emergency. As member states debate the possibility of another bailout or even a Greek exit from the eurozone, the rising feud between President Hollande and German Chancellor Angela Merkel over divergent solutions has created a deep fissure across Europe. While Merkel continues to push for increased austerity measures in Greece, Hollande advocates for the creation of Eurobonds to jointly hold the debt of Greece and other failing countries and encourage collective burden-sharing. Gaining support from leaders in Spain, Italy, Belgium and Luxembourg, Hollande further championed his position at an informal eurozone summit on May 23rd. While Germany, along with Austria, Finland and the Netherlands, have demanded that Greece implement stricter financial accountability measures, Hollande’s blatant rejection of her proposal and focus instead on revitalized growth measures marks a noticeably unfavorable shift in Franco-German relations. With Merkel and former President Sarkozy almost always in lockstep on political and economic issues, the heated rivalry which has emerged between Hollande and the German leader threatens to reshape the traditionally cooperative relationship between the countries and sever the continent into two camps under opposing leadership.

As the country’s new head of state, François Hollande represents a pronounced change in French political attitudes as he looks to steer the country towards an improved social policy, fiscal sustainability, and economic growth. Working to cultivate economic stability across the region and at home, France may reduce its engagement in NATO and other international security and defense missions under Hollande. Cooperating multilaterally with the U.S. and EU, Hollande will continue to display active leadership in resolving the eurozone crisis and will further promote increased financial and economic integration. The rift between Hollande and Merkel could widen as the two leaders continue to argue over the appropriate mix of austerity and growth measures, leading to a fractured Franco-German axis and a severely divided Europe. With Hollande at the helm, France hopes to become Europe’s role model for economic and social policy as the continent attempts to weather a treacherous sea of financial instability.

 

Geoff Atchison is an intern at the Streit Council; Photo credit sagabardon (http://www.flickr.com/photos/sagabardon/7209236216/lightbox/)

 

Is an EU-wide Minimum Wage the Solution?

May 2, 2012

by Uzoma Ekenna

According to a recent news report from EurActiv, on April 18 The European Commission proposed instituting an EU-wide minimum wage, increasing the current salary in many nations and introducing a minimum wage for the first time in others.  “Setting minimum wages help prevent a destructive race to the bottom in the cost of labour, and are an important factor in ensuring decent job quality,” reads the draft communication which the College of Commissioners also adopted on April 18th.  Although that statement may be true, one can also argue that over expenditures by governments lead to debt and a deepening of national financial issues, a problem that more nations within the eurozone cannot afford to endure.

One of the first articles in the Lisbon Treaty is dedicated to social issues, as it mentions creating a “competitive social market economy, aiming at full employment and social progress”.  But in recent years, this mission has become increasingly harder to achieve, as the EU unemployment rate has climbed to 10.2% (as of February 2012) and the disparity amongst the wealthier and poorer nations continues to increase, partly due to the financial and economic crisis in the eurozone.

Interestingly enough, the nations without a current minimum wage, including Germany, Austria, and the Scandinavian countries, have some of the highest GDP’s in all of Europe.  They also hold some of the lowest unemployment rates, with Austria at the lowest of the EU member-states, at 4.3% (in January 2012).  Establishing a minimum wage in these nations may end up increasing labor costs, which could cause the prices of goods and services to rise.  Also, if companies aren’t able to afford to pay their employees, this may lead to massive layoffs and a halt in companies’ expansion.  Depending on the existing wage structure in these countries, economic growth could actually be hindered.

If an EU-wide minimum wage should be established, it would need to be high enough for residents of wealthier member states to be able to survive, but low enough so governments of poorer member states will not fall into debt by overpaying its citizens.  That itself poses a problem, because the fiscal inequality of EU member states is so great.  Luxembourg, whose GDP (per capita) as of 2011 was over $84,000, has a minimum wage set at 1,800 euros per month.  On the other extreme, one of the poorest members of the EU, Bulgaria, has a minimum wage of merely 138 euros per month (GDP of Bulgaria: $13,500).  Bulgaria maintains a very poor welfare state and lacks social service programs; even schools and orphanages in the country rely heavily on private donations to operate.  Many citizens refuse to pay taxes, creating even less funds for government operations. A government of this caliber is highly unlikely to be able to create funds that would assist in raising the minimum wage for its citizens.  It would be unrealistic for these two nations to share the same minimum wage, due to dissimilarities in economy size and the standard of living.  Countries in the same economic position as Bulgaria could be driven to over-spending, putting them in a crisis potentially worse than their current situations.

What about countries tackling debt issues due to high government spending?  Part of the Greek’s government bailout plan included a 22% cut in the minimum wage, which is currently at 877 euros per month.  After a round of tax increases and a pay cuts in both the government and private sectors, the Greek economy continues to slide into a deeper recession, increasing the number of people living below the poverty line.  How would a potential enforced minimum wage affect Greece and similar nations?  It, along with Portugal and Ireland, have agreed to cut back on government spending, but it is difficult to determine if the EU-wide minimum wage will create more an issue for countries already facing austerity measures.

One feasible alternative to an EU-wide minimum wage could be to adjust the minimum wage to the countries’ purchasing power.  That way each country is assessed relative to each other instead of the EU as whole.  Or, the European Commission could just abandon the idea of creating a wide-spread minimum wage altogether and spend more time deliberating on ways to increase funds for job creation, especially in the private sector, which would be the real solution to disparity amongst member-states.

As the eurozone crisis carries on, members of the European Commission continue to scramble to generate solutions that will improve the current economic state of the EU as a whole.  But instead of finding a collective solution, each country should be assessed separately, based on their current financial status.  An increase in the minimum wage in certain countries may be a viable resolution, but an EU-wide minimum wage could possibly be a solution that deepens the existing crisis.

Uzoma Ekenna is an intern at the Streit Council; Photo credit Images_0f_Money (http://www.flickr.com/photos/59937401@N07/5930032284/lightbox/)

 

 

Is a “United States of Europe” on the Horizon?

September 15, 2011

by Mitch Yoshida

A sculpture of the euro currency sign in front of the European Central Bank in Frankfurt, Germany

The Eurozone sovereign debt crisis is again roiling markets as doubts about political will in the common currency area deepen. In the past two weeks, German Chancellor Angela Merkel and her center-right coalition have come under intense pressure as they endured another defeat in a state election, crumbling public support for additional bailouts, a suspenseful wait for a court ruling on the constitutionality of last year’s bailout of Greece, the resignation of a German member of the executive board of the European Central Bank, and apparent infighting among themselves. These strains have fueled fears that the coalition will splinter in an upcoming vote on upgrading the European Financial Stability Facility (EFSF) – the temporary bailout fund that is the centerpiece of Eurozone’s latest plan to combat the crisis.

To make matters worse, economic growth has slowed across the currency area, Italy and Greece have faced significant political obstacles to deeper budget cuts, and Finland and other member states are delaying a second bailout of Greece. Altogether, these factors have contributed to dramatically higher borrowing costs for some Eurozone members and steep drops in European bank stocks. At this point, investor fear is feeding on itself and aggravating the situation.

As the crisis worsens, calls for the fiscal integration of member states are growing louder. Yet there is still no consensus on what form it should take. German and French leaders emphasize the need to institutionalize fiscal discipline at the national and EU levels. Although Italy and Spain are already in the process of amending their constitutions toward this end, both they and other Eurozone states with questionable financial outlooks have mainly called for jointly-issued Eurobonds to spread credit risk across the Eurozone and reduce their cost of borrowing. This is a step that German and French leaders have ruled out, at least in the short-term.

Despite these various political cleavages and the risks they pose to the Eurozone, there is cause for optimism. Last week, Germany’s Federal Constitutional Court removed one source of uncertainty when it struck down legal challenges to Germany’s participation in last year’s bailout of Greece. What’s more, the Italian parliament has granted final approval for a new round of deficit-cutting measures and Greek Prime Minister Georgios Papandreou is making progress on this front. It is also likely that Chancellor Merkel’s coalition will maintain its cohesion and vote to upgrade the EFSF – allowing Germany to join other Eurozone states that have already ratified the step. And, most importantly for the Eurozone’s long-term prospects, the stage has been set for the creation of a fiscal union that would diminish the risk a similar crisis in the future.

On this last point, the basic outline of an agreement already exists. The political imperative of Germany, France, and other lender states is to avoid the need for future bailouts by instituting balanced budget rules. In their view, issuing Eurobonds without such rules would encourage further profligacy in financially unstable members. Borrower states, in contrast, have little political stomach for deeper austerity and want to avoid it by creating Eurobonds. In spite of these differences, both sets of actors have a strong interest in compromising to prevent repeat of the crisis. By creating a common fiscal authority, which would have the ability to impose fiscal discipline and issue Eurobonds, they can bolster the stability of the Eurozone and attain more narrowly conceived interests at minimum cost. This is the compromise that many former leaders and economists are calling for.

This is not to say that the creation of a fiscal union is inevitable. Much will depend on how far current and future Eurozone leaders will be willing and politically able to go in reforming the common currency area. And there would be additional challenges: ensuring that the new union is democratically accountable and pushing a revised EU treaty through national parliaments are at least two. Even if the crisis worsens, accomplishing these tasks would probably take years. Investors may lament this slow and uncertain path to fiscal union, but the fact that fiscal integration is even being discussed is a far cry from debates over the Lisbon Treaty that occupied Europe not too long ago. By forcing Eurozone lender and borrower states to articulate their views on how fiscal integration should proceed, the crisis has – perhaps for the first time – opened the door to a “United States of Europe.”

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Mitch Yoshida is a Research Fellow at the Streit Council, Photo credit: UggBoy (http://www.flickr.com/photos/uggboy/4416979159/)

The Eurozone at the Brink

June 30, 2011

by Mitch Yoshida

German Chancellor Angela Merkel and Greek Prime Minister George Papandreou at a European Council meeting in March. Can they hold the Eurozone together?

In the latest episode of the Eurozone’s ongoing fiscal drama, the Greek Parliament has approved a €28 billion austerity plan aimed at winning €12 billion in emergency EU/IMF funding to stave off default. Today’s parliamentary vote, which centered on the specific steps needed to implement the measures, also passed.

On the face of it, this can be easily construed as a decisive step toward resolving the crisis. Eurozone donors will be able to keep the Greek government solvent while protecting their own economies. Letting Greece default would undermine many of the currency area’s banks and reduce investors’ willingness to lend to other Eurozone states with dubious financial outlooks. While the Eurozone may be able to cope with unsustainable levels of debt in Ireland and Portugal, which have also received bailout packages, it may not be able to support Italy, Spain, and Belgium if they go under.

So, from an economic standpoint, bailing Greece out is a no-brainer. But at the moment, it’s far from clear that donor governments will be able to command the political support needed to continue doing so for years to come. It’s widely understood that Greece will need funding until, and possibly beyond, 2014. The question is, will domestic political forces in Germany (the biggest donor, aside from the IMF) and Greece (the reluctant enactor of austerity measures) allow the bailouts to continue?

A poll conducted earlier this month found that 60 percent of Germans are opposed to extending a second round of assistance to Greece; a mere 33 percent support it. This is consistent with German attitudes toward last year’s bailout of Greece, which 51 percent opposed. Support is also dangerously thin in Greece, where 47.5 percent wanted parliament to reject the austerity plan. The German public’s opposition could soften if the French and German governments convince financial institutions to share the bailout burden by “voluntarily” holding on to Greek debt for a longer period than they otherwise would. But this is unlikely to make a large enough dent given the fact that most of Greece’s lenders are public institutions. Nor are Greeks likely to tolerate much more austerity.

The reality is that the Eurozone’s Achilles heel is turning out to be its level of solidarity. It’s true that its leaders have agreed to a slew of measures designed to enhance the “economic governance” of the Eurozone, including: closer EU surveillance of member states’ economic and fiscal policies; the creation of the permanent European Stability Mechanism (ESM) to replace existing temporary bailout mechanisms; and improved financial regulation. But the ESM – the key element of this package that will effectively institutionalize Eurozone solidarity by serving as a permanent bailout mechanism – will not come online until 2013. By then, it may be too late.

Mitch Yoshida is the Mayme and Herb Frank Fund Research Fellow at the Streit Council.  Photo credit: The Council of the European Union (http://www.consilium.europa.eu/uedocs/cms_data/docs/pressData/Pics/photoGallery/%7B607b5f39-9938-4e44-bd24-3d46346020e4%7D.jpg)

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