#EU2DO: Creating growth while preparing an EU treaty reform

  
Guntram B. Wolff [Bruegel]
Guntram B. Wolff [Bruegel]

EU leaders have to put forward a two-handed approach in the next five years, focusing on policy action on the one hand while framing these policy actions in a broader treaty reform context on the other, writes Guntram B. Wolff.

Guntram B. Wolff is director of Bruegel, the Brussels-based think tank on EU affairs.

In the aftermath of the European Elections, it is time to review the priorities for the new European leadership and charter a way forward. Certainly, the economic environment remains challenging with employment down and unemployment still at high levels. Inflation rates have fallen significantly in the last years and the European Central Bank has been shy to act. Its most recent decision still falls short of quantitative easing, a measure that is politically extremely controversial but would arguably be conducive to obtaining inflation rates in line with target. The current low inflation rates and low real growth rates are dangerous for the monetary union as the sustainability of debt may become illusionary. So which measures could lead the way out of the impasse?

Europe needs a two-handed approach, in which the leadership focuses on the one hand on the pressing short-term growth issues while on the other hand it prepares the EU for the future by finishing the institutional build-up and completing monetary union with a fiscal union.

For sure, the EU will have to focus on boosting growth in the short term. In fact, the EU needs to vigorously implement the kind of structural reforms that it considers central for more than ten years now but has not been able to implement. One of the most important task is to de-regulate the services sector and implement a single market, in which services can be freely offered across borders. Mobility should be improved and competition policy enforcement will have to remain true to the principles. Yet, such supply side measures alone will not bring back jobs that have been lost during the crisis in a reasonable amount of time. For this to happen, Europe will need a public and private investment push and an inflation level in line with the goals of the European Central Bank of close to 2%. Yet, many euro area countries individually do not have much fiscal space to significantly step up public spending on investment nor to give tax incentives for private investment. The ECB, in turn, feels very much constraint by the risk of making losses that could distribute fiscal burdens between different countries of the euro area.

To render the short-term growth measures effective, the EU therefore needs to equally vigorously embark on a process that will eventually lead to treaty change. Such a discussion on treaty change would allow to move many policy measures already now. The core of the treaty change discussion needs to be about creating a fiscal union. Such a fiscal union is needed for the ECB to become a fully operational central bank that could - without hesitation - start a large scale asset-purchase programme. But it is also needed in order to allow for more public investment in regions of the monetary union that are currently at the limit of their fiscal capacities. A newly created euro area budget should be devoted to finance public goods for the EU such as improved energy and digital networks - while avoiding to crowd out private investment. It should be focused on growth enhancing spending, which would also replace some of the current inefficient EU budget spending on structural funds and agricultural policies.

Such a treaty change will not be easy to achieve. The EU presidents will need to get the consent not only of the EU leaders but also of citizens. Yet, the message of citizens in the European Parliament elections is clear: the EU in its current form does not deliver enough. Only a two-handed approach focusing on policy action now while framing these policy actions in a broader treaty reform context will deliver the desired results for the EU and therefore the support of citizens.

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