The Four Unions of Europe: solution or disaster?

Opinion article by Professor Dr. Freddy Van den Spiegel (Vlerick Business School)

The next few months will be crucial for the future of Europe. The economy is again gradually slipping into recession, and some member states, especially Italy and Spain are increasingly struggling to avoid bankruptcy, which could lead to financial chaos and the collapse of the Euro. But the focus of the political agenda of Europe is not about these urgent issues. It is all about the political redesign of the Union.

End of June, the Council discussed and in principle accepted to create within the European Union four specific Unions for the Eurozone, next to the already existing monetary union. Rather confusing from the start, but this is Europe. The four unions are a banking union, a fiscal union, an economic union and a political union. The concept of a federal Europe is still politically unacceptable, but in reality, with these four unions we would almost be there. There are good reasons to have these plans implemented, but also impressive hurdles to get there.

First of all, the balance sheet of many banks, active in the Euro area, are bigger than the GDP of the country in which they are established. As soon as such a bank gets in trouble, it is a catastrophe for its home country, and when a Member state has problems, the whole Eurozone is at risk, as is demonstrated during this crisis. The contagion works also in the opposite direction: as soon as a member state gets in trouble, its banks collapse, as they have very concentrated positions in their home country, and as soon as a major bank suffers, the whole financial system can collapse. One way to get rid of this problem is to bring the banks under the supervision and responsibility of the Eurozone. The  banking union means: a European supervisor, a European deposit guarantee fund, like the FDIC in the US, and a European crisis management capability, including European tax payers money available to intervene.

That brings us to the second union, the fiscal union. Solidarity among European tax payers is only possible if all Eurozone countries agree to follow the same or at least compatible and sustainable budget policies, following the German example of austerity. Otherwise, as until now, it are the stronger countries that pay the bill for the errors of the weaker countries, and that is not a sustainable situation. The fiscal union could eventually lead to issuing common government bonds for all Eurozone countries, a kind of “federal” government debt.

But to make this sustainable, all countries should be equally competitive, which means that they should follow a strict discipline for all elements of competitiveness, including labour market arrangements,  under the control of the European institutions. That is the economic union.

The last of the four Union should tackle the so called democratic deficit of Europe. Indeed, if Member states give up their sovereignty on these four policy areas, it becomes unacceptable to leave the management of the Union essentially to non-elected technocrats, no matter how dedicated and skillful they are. The democratic support for the Euro zone has to be strengthened and the citizens have to be more involved.

While the proposal to establish the four unions is rational and the only way forward to make the Euro stable, it is also politically very ambitious, as it leads to a huge transfer of sovereignty from Member states to the European Institutions. It will be very complicated to find agreements of the 17 Euro-countries on all the issues. Doing only part of the four unions is not useful as it would provide some solution in the short run, but lead to totally unbalanced situations in the long run. For example, creating only a banking union, which is the most urgent issue now, would mean that banks all over the Eurozone would be supported, if necessary, with European money. But that would lead to distortions of markets and competition.  The four unions for the Eurozone will also create tensions between the Euro-countries and the non-Euro Member states, especially the UK, which is certainly not ready to give up its sovereignty, but is at risk of becoming marginalised within the EU. And among the Euro-zone members, there are still a lot of crucial practical issues for which there is no consensus. The process towards the four unions will therefore take a lot of time. The full realisation will probably take more than ten years if there are no unforeseen obstacles. During that time, it remains uncertain how the ECB will behave. Governor Draghi has repeatedly said that he will  intervene to support member states under market pressure, but only if the politicians take their responsibility. Is the announcement of the plans enough to convince the ECB? Germany certainly does not agree with this optimistic view.

Until now, markets seem to appreciate the plan but confidence remains vulnerable. The economic and financial situation is not under control, and markets can quickly loose their patience if progress is considered too slow.

Despite all the doubts about the four unions, it is already an achievement that the design of the solution for Europe is clear, so that the political debate can start on all the issues. That is certainly a big step towards a solution, but let us hopes that is not comparable to China in the 1950’s, when the economy was on the edge of a precipice, and  Mao announced his “big leap forward”, leading to a complete catastrophe.

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