Building a better Europe for all

Next year will be crucial for the EU. Citizens will elect a new European Parliament, which will vote for a new president of the EU Commission. There will be a new president of the European Council and a new high representative for foreign and security policy.

This change of personnel represents an ideal opportunity to debate what Europe stands for, and how tocreate a more stable, integrated, and prosperous union — one based on solidarity, interdependence, and enlightened self-interest.

Over the past few years, Europe has made extraordinary progress in responding to the financial crisis. But the future of Europe’s Economic and Monetary Union depends on three crucial components: Greater economic convergence, greater openness within the single market, and greater resilience to asymmetric shocks. Achieving these goals does not depend on (further) technical discussions, but on forging a new political consensus in favour of a more supranational approach.

First, greater economic convergence within the EMU requires a stronger framework for the coordination of member states’ economic policies. The new European Semester — the EU’s annual round of policy advice and surveillance of member states — is one of the main advances made in response to the crisis. This system reflects the principle that “economic policies are a matter of common interest”. A proposal now stands to extend ex ante co-ordination to major economic reforms and to introduce some form of binding contractual arrangements between EU institutions and member states, which would ensure reforms can be delivered.

If we are serious about the need to support structural reform, greater surveillance and policy co-ordination must be matched by a system of limited and targeted financial incentives. Second, a better EMU needs a real single market, which is Europe’s best means of restoring growth. But, so far, progress toward the abolition of Europe’s remaining trade barriers has been slow, and signs of resurgent economic nationalism are spreading throughout the continent.

So far, we have liberalised national markets on the assumption that private companies would merge and integrate across borders. But this has resulted only in a patchwork of interlocking national markets, rather than a true single market, which is one reason why the EU lacks industries of a true continental scale. For example, the EU has roughly 100 operators in the telecoms sector; the US has just five, and China has only three. Only if we give up our national reflexes will we be able to move the single market to its next stage of development.

Finally, a better EMU should be more resilient to asymmetric shocks. Ideally, this requires some form of risk-sharing and financial solidarity. Here, the EU is not starting from scratch; important steps were taken during the crisis. The EFSF, the ESM, and the ECB’s “outright monetary transactions” scheme are all forms of collective insurance. Yet every move toward greater financial solidarity among member states has met with resistance and fuelled a growing divide between debtor and creditor countries. Solidarity in Europe cannot be construed as a moral obligation of some to help others; there simply is no sense of community in the current EMU that could support permanent fiscal transfers from one region to another.

But this does not mean that Europe needs to abandon the search for better ways to pool its strengths. Solidarity can also be interpreted as enlightened self-interest, a form of reciprocity from which everyone benefits in turn — without permanent transfers.

Viewed from this perspective, it might be possible to create a fiscal capacity for the EMU, at least initially, that could provide the financial incentives for implementation of major reforms at the national level, expanding later to other stabilisation functions and perhaps issuing bonds to support public productive investments at the EU level. Such a fiscal capacity would be based on the principle of budgetary neutrality over time.

A purely intergovernmental approach will not work. Common EU-wide solutions are necessary, although they require member states’ willingness to pool a greater share of sovereignty. Offering a clear prospect of a better and fairer EU is the best way to mobilise public opinion and face down anti-European political forces ahead of next year’s EU Parliament election.

* Enrico Letta is prime minister of Italy