Will a giant leap forward stabilise the European Union?

October 27, 2011

In this comment piece, Murdoch University Visiting Fellow Dr Heribert Dieter looks at how Europe's economic problems might be solved.

Whilst the current financial woes of some member countries of the European Union are far from being resolved, policy makers have been advocating a new round of integration measures to stabilise the EU. In order to prevent member countries from implementing imprudent fiscal policy, a common authority shall solve Europe’s problems. Centralisation of decision making, combined with strict sanctions, shall result in sustainable financial affairs. This at least is the position of those advocating deeper integration.

However, the case for centralisation is not withstanding scrutiny. A European Ministry of Finance would require a substantial transfer of sovereignty from member countries to the EU. In the current climate, the appetite for such a change appears to be almost zero in most member countries. In addition, if the mandate to check and control fiscal policy would be given to a supranational authority, the question of democratic legitimacy arises. Understandably, societies will resent being told what to spend by a non-elected EU-authority. Over time, the European integration process would increasingly be considered as a process that deprives societies of making their own choices.

Furthermore, a European Ministry of Finance would not have spotted two of the weakest EU economies – the so-called PIGS. Neither Ireland nor Spain had high fiscal deficits before the crisis. In these two economies, high levels of capital inflows led to unsustainable levels of borrowing and to a private sector induced crisis. Centralisation of fiscal policy would not have helped in these two cases.

Further integration in Europe, eventually leading to a political union, continues to be a distant prospect. For the short- and medium-term, this giant leap forward would fuel both resentment and would undermine the legitimacy of European integration.

The alternative to this panic-driven approach is to implement the Treaty of Maastricht as it was initially designed. Member countries are deciding which fiscal policy they implement, but there should be no assistance if a country becomes insolvent. However, temporary liquidity assistance for solvent but illiquid economies would be tolerable. Eventually, societies that are unable or unwilling to implement a prudent fiscal policy should be having the option to leave the monetary union and return to their national currencies. Whilst this sounds like a harsh recipe, the alternative – poorly legitimized central control of fiscal policy – is even less convincing.

  • Dr Dieter is a Senior Associate in the Global Issues Division at the German Institute for International and Security Affairs, Berlin.

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