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The EU should not be blamed for self-inflicted wounds

Euro & Finance

The EU should not be blamed for self-inflicted wounds

It’s about time that those in charge of representing European institutions, starting with the president of the European Council and the president of the European Commission, do something serious against national politicians who unjustly try to bash Europe for their own failures, writes Lorenzo Bini Smaghi.

Lorenzo Bini Smaghi is an Italian economist who was on the executive board of the European Central Bank from June 2005 to November 2011. He is a member of the World Economic Forum’s Global Agenda Council on Europe

"Looking back on the past six months in Europe, one of the most notable – and troubling – developments has been a trend in Italy and the surrounding countries to use the EU as a scapegoat for their own self-inflicted wounds. 

The simmering backlash against austerity measures, including Italy’s inconclusive elections and protests in Cyprus against its bailout, may just be opening salvos in the anti-EU movement. However, the problems these countries have experienced are primarily the responsibility of their own governments, which have not been able to implement the structural reforms required to make their economies more competitive quickly enough.

To illustrate this, it may be helpful to look this year’s World Economic Forum Competitiveness Report, which shows those European countries ranked among the lowest in terms of competitiveness are those that are currently experiencing pain in the financial markets, such as Greece (96th), Cyprus (58th), Portugal (49th), Spain (36th), Italy (42nd) and Slovenia (56th). Those that rank highest, like Finland (3rd), the Netherlands (5th) and Germany (6th) are instead favoured by international investors.

Most of the measures that are needed to make the worse performers rise in the competitiveness ranking are not in the range of powers attributed to the European Union, nor the euro area, but of the national authorities. The latter are actually keen to keep such powers, in fields such as education, judicial, local authorities’ bureaucracy, labour markets. If these powers are not used to increase competitiveness and to prevent countries from getting in trouble in the eyes of the markets, the responsibility is of the respective national policy makers and of the voters that appointed them.

This is, however, not the perception of the average citizen in countries that are currently experiencing difficulties. The general opinion is that the problems come from the austerity programmes “imposed” by Brussels, and sometimes by Germany, which strangle the economy and create a perverse loop. This sentiment is strengthened by the fact that, indeed, these economies are spiralling downwards and the debt problem gets worse.

Furthermore, the message that European authorities deliver in public is generally biased towards budgetary issues. This may be due to the fact that the European Union has a clear mandate of monitoring and sanctioning excessive fiscal policies and debt, while on structural reforms the competence is limited to peer pressure. Finally, the European institutions in charge of economic policies, such as the European Council or the Council of Ministers, are largely composed of nationally elected policymakers who find it easy to blame Europe for all the bad news, even when they have been personally part of the decisions.

If we want to make progress in helping crisis countries to make the necessary adjustment while avoiding the emergence of disaggregating anti-European sentiment, some of the above distortions need to be countered.

First, adjustment programmes have to rely more heavily on structural reforms than on budgetary adjustment. This may require in particular that the European Commission sticks out its neck in advising countries to learn from the experience of the best performers, in line with the principles of the Lisbon process. The Commission should be more vociferous against structural rigidities or measures which may increase the rigidities of labour and goods markets, such as the Italian labour market reform adopted in 2012 which discourages temporary contracts. The lack of implementation of agreed reforms should have much more prominence in the monitoring framework and in the milestones set for financial disbursement.

Second, the speed of adjustment for budgetary imbalances should explicitly depend on the ambition of the structural changes implemented by governments. More room for manoeuvre on the fiscal front should be obtained only if concrete reforms have been implemented. After all, this was the experienced gained in Germany in the early part of the 2000s.

Thanks to the additional time gained for bringing back the deficit below the 3% range, Germany was able to bring home the Agenda 2010 and turn around the economy. Even though the 2003 Decision was controversial at the time, it should be recognised – in particular by the Commission and the German authorities – that it was instrumental in making it possible for the Schröder government to have its reforms accepted at home. A more explicit trade-off between reforms and budget adjustment would also create the incentive for national politicians to implement the former, instead of the latter.

Finally, it’s about time that those in charge of representing European institutions, starting from the president of the European Council and the president of the European Commission, do something serious against national politicians who unjustly try to bash Europe for their own failures at home. Both may currently not have the incentive to do so, because their reappointment relies on the support of precisely those against whom they should raise their voice.

However, this may change in the future, especially if the president of the Commission will be directly elected by the people, being at the top of the list of the political party getting more votes at the European elections.

The president will then not have to give account to the heads of government and may actually pretend more respect from them. As far as the president of the European Council is concerned, a fixed – non-renewable – term would be preferable and provide him/her with greater independence.

These changes would not only encourage a better policy mix in the current adjustment process. They would also contribute to reduce the democratic deficit in the current European Union, which – contrarily to what many political analysts suggest – does not affect only the European institutions but increasingly the national ones, which are not held accountable by their own citizens for the relevant powers that they still have, and often misuse."