Where will Europe be 10 years from now? This is the central question posed by many ahead of the 60th anniversary of the signing of the Treaty of Rome, to be celebrated in the Italian capital later this month. The undertaking that was conceived as a peace project after World War II is perceived to have run out of steam. After all, the continent is largely peaceful and prosperous these days.
In its recent “White paper on the future of Europe,” the European Commission proposed five scenarios for the future. The options laid out by the bureaucrats in Brussels, while useful, are rather uninspiring. They range from continuing with business as usual, via a multi-speed Europe, to “doing less more efficiently” and in extremis “doing much more together.” But the paper shows little apprehension of why certain scenarios are possible and others are not, of the deep societal constraints on some options and – equally importantly – on what would need to change in the European institutions themselves for some scenarios to become feasible.
Let me focus on three issues that will be fundamental for the future of our continent. The first concerns the geographical perimeter of “Europe.” The Commission considers the future of Europe to be the future of the EU27. Yet it is obvious that the UK and many other countries that are not part of the “27” belong to Europe. The membership of the European Union may change further in the next 10 years. In a world in which external challenges, either from the new US administration or from the rising power of emerging economies, are bound to increase, it will be vital to establish productive relations with the UK, a major European power, and other countries in the EU’s neighborhood.
The second issue concerns the different speeds of integration within the bloc. The matter of advancing integration among some countries along some dimensions raises questions that need to be addressed relating to the cohesion of the EU. For example, a policy that would advance banking integration in the euro area could reduce the integrity of the single market in banking and drive a wedge between countries inside and outside of the euro area. The challenge here will be to avoid a situation in which integration policies produce a hostile response among those not included in them. Political good-will should be used to minimize any friction.
The third, and perhaps most important, question relates to the future of the euro area itself. It is easy to dream of scenarios with much deeper and more far-reaching integration, including major steps toward fiscal risk-sharing. Yet progress on fiscal risk-sharing has been slow in recent years and this has been no accident. There is deep skepticism in many parts of the European North about whether this would be the right step, given the large divergence in productivity and the diversity in social models between different countries.
The key question in any monetary union is how the relationship between central monetary, central fiscal and national fiscal policy is structured. The most realistic option for the euro area, as a group of diverse countries with strong national histories and divergent interests, will be to increase national fiscal responsibility through a credible no-bail-out clause. This means less intrusive fiscal surveillance, but it also means tighter budget constraints imposed by markets.
To make this scenario work, banking union will need to be credibly completed and more capital markets integration will be necessary. A few investment and social funds at the euro-area level will further enhance credibility. Even this scenario will require a great deal of political capital to bring about. Vested interests will have to be tackled. Overcoming these constraints will be key. The more productivity growth can be lifted in the South of Europe, the easier it will be to create additional fiscal risk-sharing instruments. Both from an economic and political viewpoint, this scenario offers the greatest possibility to strengthen the euro.
* Guntram Wolff is the director of Bruegel, a Brussels-based European think tank specializing in economics.