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Way out(s) from EU crisis

The EU is in crisis. It started with an economic shock, followed by a chronic, drawn-out recession. As the European economy is in trouble, the EU has to face a political fall out as well.



The reasons for the economic malaise are multifarious. European economies are not growing, the banking sector is still fragile; and unemployment is alarming in many European countries. . European sovereign debt markets are still tense. Some top economists, such as Paul Krugman , among others, highlight that the Euro area's economies are suffering from a balance of payments crisis.

The unending economic recession brought about exasperation and EU-scepticism both inside and outside the Euro area. Far-right wing parties are on the rise in several European countries. Across Europe people are unsatisfied with their national political elite as well as with the European institutions . Anti-German sentiments are rising among Southern Europeans.

Solving the Gordian Knot of the European economic crisis would bring along the increasing popularity of the European Idea. Numerous studies and articles have been advising way outs of the crisis for years now. To get out of the woods the Euro area's banking sector should be strengthened with banking union and common rules for bank resolution and recovery. Euro area members should take measures against the balance of payments crisis. According to several studies, the Euro area should give a common fiscal answer to the economic depression. Inflow taxes should be increased by backstopping tax evasion and avoidance. Last but not least the EU has to foster growth in its economies. In order to achieve this, some measures stand out. The EU should support SMEs, investment projects, sector-specific initiatives. It should extend the single market to services and reach a free-trade agreement with the United States. And the EU should support youth employment.

About all these ideas economists have been writing and talking for years. Just as European leaders have been holding summits and making agreements for years. However, it seems as if the EU would really act only under an emergency and would always hesitate when it comes to deeper changes. Obviously, there are reasons for that. The creditor members of the Euro area do not want to finance the South. Big economies of the EU are in politically uncertain situations; Germany will hold elections in September; the French are becoming more Euro-sceptic while Hollande is faltering; Italy has a hastily-formed-, hardly-supported coalition. The UK blocked already a treaty change for a fiscal union and it won't support any deepening of the integration. Euroscepticism is growing across Europe.

Still, there is room for manoeuvre. There are initiatives which could be acceptable both for creditor countries and indebted ones; for Euro area countries and non-euro area EU-members, bearable for the German chancellor even before the election and compatible with UK's particular wishes. One thing is sure: something should be done, and fast.

The EU member states won’t agree today unanimously on a deeper integration, a fiscal union, or even on a “limited fiscal and financial integration” . However, there are fields where they could start to agree. EU leaders should “set priorities and formulate a strategy” with realistic measures. This strategy won't be perfect and complete. But if implemented, it will have a positive and spill-over effect both on the European economy and on the EU reputation.

Some of these realistic initiatives include the reduction of tax evasion and avoidance and the “liberalisation of services in the single market”.

More importantly, EU could concentrate on some of the tools already at its disposal. It should simply transform an already existing system to a more efficient one. See the EU budget for example. It offers funds. And funds are badly needed to reboot growth EU-wide. Growth would help to manage debt, would stimulate banks to recover and would increase employment.

The next Multiannual Financial Framework (MFF) will start next year. The ceiling of the budget was reduced by the agreement of member states. However, the discussions about the exact rules of application are still ongoing. The European Parliament wants more flexibility to move the funds and wants to implement a mid-term review. This would help to make the MFF a more efficient tool for growth. The EU budget, at present, has too many aims. It cannot work, especially not now. The budget needs less but more targeted aims, concentrating on growth and employment in the EU, at least in the first years of the 7-year period. Funds for infrastructural development and funds for ICT, research and innovation must have a prominent role in the budget.. These programmes will reboot growth and development. Obviously, support for these fields should be strictly targeted, it should only support projects that promise market-based development and can help employment. Regional funds should be also more effective, targeted to the most productive sectors of the specific country. Supports should target SMEs, which can turn to flexible, fast-developing businesses in a short time and help employment. European institutions should sharply cut bureaucratic cost. This could ease a bit the budget and would send a positive message to European citizens. EU funds should focus mainly on solving EU problems in the next few years. Later on, a stronger Europe can support projects in other regions of the world, but for the moment funds should concentrate on getting Europe out of the current crisis.

Maybe the first step to improve the current situation should not be a treaty change, fiscal unity or an operative, stronger bank union, even if these targets will be important in the future. On the contrary, the EU should first prioritize a more consistent utilization of some existing tools in a flexible, effective way to give proper answer to the challenges of our times.


Dora Horvath is a trainee at DG Research and Innovation in the European Commission



OECD Outlook No. 93. 04. 06. 2013. 


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