The most important reform in Europe today is that of the Economic and Monetary Union (EMU). However, one could get the impression that this reconstruction process has stalled before it even properly started.
A year and a half after the first report of the ‘Four Presidents’ (Van Rompuy 2012), today’s policy debate on the EMU’s deepening appears strikingly modest when compared to Europe’s economic woes and growing fears of a strong result for Eurosceptics and populists in the May 2014 European elections.
With EU unemployment stabilised since the summer at around 26.6 million people, annual EU GDP growth projected at 0.0% and euro zone inflation hovering below 1%, 2013 might be considered the year of pure stagnation. Such an image, however, masks growing divergence in countries’ socio-economic outcomes, particularly inside the Eurozone. The core-periphery gaps in unemployment rates, NEET rates, household income developments, at-risk-of-poverty rates or income inequalities keep widening.
After years of recession and unemployment at unprecedented high levels, it is no surprise that the Eurozone periphery’s growth potential is falling, undermining the entire Union’s growth prospects and lengthening the spell of financial sector deleveraging. But our policy response can easily be perceived as more of the same. A feeling of inertia seems to pervade the EU debate, with observers developing caricatures of an elitist ‘Brussels consensus’ allegedly as firm as it is aloof from the continent’s reality.
In fact, there is some debate, and economic policy has shifted in various ways since 2012. The timeframe for fiscal consolidation has been slightly extended, the ECB has impressed the markets with its resolve, and wages in Germany have timidly grown, which just about explains the modest GDP rebound in mid-2013. More recent examples of progress include the ECB’s forward guidance, agreement on an EU-wide Youth Guarantee backed by €6billion inside the EU budget, and the Commission’s decision to launch an in-depth review of Germany’s current account surplus as a potential macroeconomic imbalance.
However, in the absence of a manifest new policy paradigm, the small steps of the economic recovery appear to be random or improvised. Without structured and intellectually coherent thinking about the way forward it is also more difficult to identify the further measures that are needed, and choose the right speed of implementation.
In the last 18 months, we have been in a mental transition from the old paradigm which I call ‘Maastricht orthodoxy’ and some others call ‘Berlin consensus’. In the first phase of the Eurozone crisis, this paradigm delivered the software for the very incremental crisis response often associated with the Franco-German 'Merkozy' tandem. But while the approach to European economic policy has changed somewhat, it has not changed enough: the EMU construction continues to be fixed through small repairs, instead of addressing its fundamental design flaws (De Grauwe 2013).