Bruegel’s Newest Painting


Last week, the European economic policy think tank Bruegel released its “Memos to the new commission”, economic priorities for the incoming EU Commission 2010-15. This is a very readable, very competent and very concise assessment of the major challenges facing the EU during the next five years and proposals for strategic priorities, subdivided into sections for the Commission President and the main economic policy commissioners (www.bruegel.org).

The memo is the joint work of 11 Bruegel authors, proof to Bruegel’s competence both as economists and as policy advisers. In what follows I outline the major proposals and comment them. On balance, the incoming commission (and also the other EU formations, i.e. the Council and the Parliament) would be well advised to discuss Bruegel’s proposals, addressing both immediate concerns and medium/term challenges.

It is Bruegel’s contention that the present dual crisis, financial and economic, is not yet over and will, indeed overshadow the EU’s economic fate for the five years ahead. While the crisis did not start in Europe, still the EU and the Commission have been at the forefront of the recent liberalization drive which enabled the crisis to spread so fast and so wide. This contributes to the spirit of re-nationalization pervading large parts of Europe, making the task of the Commission to conduct a consistent joint response to the crisis and other challenges even more daunting. If fragmentation of policy making persists, the EU will become less relevant in the future. Bruegel reminds us that in addition to the after-effects of the crisis (hard enough to deal with by themselves), both the demographic challenge of ageing and that of climate change mitigation also need urgent joint action. All this requires strong leadership, courage to go into new directions and tackle antagonistic forces. Again, if the Commission fails in these tasks, Europe’s role as a world leader will diminish and the welfare of its citizens will be mired in misery as a result of economic stagnation. According to Bruegel, threats of civil or national unrest and of disintegration might result.

The most important part of the Memo is directed to the new/old President of the Commission.

The six major challenges

–          A change in the global power balance as emerging countries (especially China and India) will continue to close the welfare gap to Europe. This will require major structural adjustments in Europe as it is simultaneously faced with a massive increase in public debt (as a result of crisis response), the incipient budgetary effects of ageing and other threats to its global competitiveness.

–          The severe crisis in some of the new member states – with the IMF having had to help Europe for the first time in 3 decades – challenges one of the major perceived successes of the past, i.e. the externally financed growth model of the transition region. This may even endanger the existing consensus over European integration.

–          The massive government intervention to save domestic banks and industries (autos) with its intention on saving domestic jobs calls into question one of the major EU achievements, i.e. the Single Market.

–          The crisis has exposed weaknesses in European governance. The most glaring example is the lacking policy integration in the financial sector which lags far behind the integration of banks and insurance companies. The lack of a European crisis management mechanism has been shown to be a major gap. Only the ECB has proven to be a truly European institution, while other mechanisms had to be developed ad hoc and outside the institutional framework. The current aborted attempts at centralizing more of banking supervision are a case in point.

–          EU progress during the past decades has been connected with liberalization. The crisis needs to lead to a re-definition of the role of markets and state, both at the EU and the national levels. The backlash against deregulation/liberalization may also be directed at the EU. Together with a re-thinking of governance, this will be crucial to address. The Commission will have to explain the new EU role to the citizens, in order to increase/maintain its legitimacy.

–          So far crisis response has led to increased international coordination and a new governance institution, i.e. the G-20 at the level of heads of state. But the EU behaves there as a “fragmented power”, i.e. each G/20 members (that includes among the original G-20 countries Germany, France, UK, Italy also – inexplicably at the invitation of G. Brown – Spain and the Netherlands) acts alone. This might lead to additional weakening of the EU, as European G-20 members might prefer G-20 coordination to EU coordination.

Bruegel’s Strategy Proposals

The first task will be to deal with the consequences of the crisis. As the guardian of the treaty, the EC will have to enforce EU rules, i.e. competition and single market rules, and the Stability and Growth Pact.

The second task will be to guide legislation for more centralized financial market supervision through the EU institutions.

Third, the G-8 promise of L’Aquila, to complete the Doha Development round in 2010 needs to be speeded up, in order to combat the daily infringements of protectionism by all countries effectively.

Fourth, a strong EU initiative for the Copenhagen Summit on Climate Change will be needed, in order to induce the rest of the world to seriously combat climate change.

In all these – and other – tasks strong and decisive leadership by the Commission President are necessary, in order to counter the hesitating and re-nationalizing forces. This must go hand-in-hand with a “new narrative” for what the EU stands for vis-a-vis its citizens, e.g. a new balance between liberalization and redistribution. Both national governments, citizens and civil society need to be addressed, consulted and convinced.

Fifth, a coherent post-crisis economic strategy needs to be put in place which strengthens EU growth potential and avoids long-term stagnation in the face of renewed global competition. To this end, a package consisting of:

– A program to restore the sustainability of public finances

– A blueprint for recovery in the new member states and for enlargement

– An exit plan from the exceptional crisis-management actions, and

– A European Growth and Employment program

are necessary.

Especially the latter must build on the previous Lisbon Agenda, but extend also to financial markets, strengthen the elements for innovation and knowledge, build on the Bologna Process and strengthen the European Research Area, as well as rely heavily on “green growth” elements.

Bruegel proposes to use the upcoming budget review (which was postponed on account of the crisis) to restructure the existing EU budget ( fixed until 2013) in such a way that the new priorities can also be financed from 2011 onwards.

The authors suggest that the new US administration’s attitudes towards global responsibility form a unique window of opportunity to strengthen EU’s role in global governance. This would require also concessions from EU members in giving up existing positions in international institutions (IMF, world Bank, G-7, G-20) in favor of a unified European voice (or alternatively, that EU members let one of themselves speak exclusively on individual points) – which would improve EU’s chances to influence future global economic governance.

Bruegel also suggests an internal reorganization of the Commission, in order to have it more “policy” oriented, instead of “process” oriented. This requires a new Commissioner for Economic and Financial Affairs, combining two previous portfolios; a Commissioner for Internal market and Industrial Affairs; a Commissioner for Climate Change Policy; a Commissioner for Knowledge Economy and a Commissioner for Enlargement and Neighborhood Policy. A reorganization of the EU civil service, in order to enable the Commission to recruit the best candidates needs to allow in more “outsiders” at the top management levels. A better permanent evaluation of its regulatory and budget matters is also recommended, as a complement to the existing Impact Assessment Board.

 

Assessment of the Strategy

This exercise is highly welcome. It is timely and sets out some of the major challenges, without being naive about their implementability. Especially welcome, in the face of the re-election of Manuel Barroso as Commission president, is its emphasis on strong leadership, since at this juncture it would be naive to expect strong EU leadership from national leaders. The proposals for an effective external representation of the EU in international fora, putting an end to squabbling and multiple seatings by various EU formations in international meetings, arelong overdue to be implemented. Their timeliness, given the new US administration, is an urgent call to action – also to EU member states’ authorities. However, going beyond Bruegel, the EU should also address the flaws in the new G-20 membership and offer 3 of EU members’ seats to least developed countries. Their inclusion into a new governance structure is a sine-qua-non, if further global divisions should be avoided and ownership of new global governance proposals is to be assured.

The daunting task of dealing with the crisis, its budgetary aftermath, the oncoming ageing implications (both for national budgets and productivity), the necessary climate-change agenda and the strengthening of the knowledge economy aspects of growth (also requested by the most recent OECD report on the EU), in addition to combating unemployment, finding solutions to mass migration is aptly named as a tall order.

Since the Memo is intended as an agenda for the new Commission it assumes that the immediate crisis will be over and “only” its after-effects are to be tackled. This, however, is a too optimistic hope. The crisis is not over yet and may still exacerbate within the next half year, while the president puts together his team. Thus it is likely that the new Commission starts its term when unemployment reaches new heights, public budgets and debt levels explode and the disillusionment of EU citizens with the EU reaches levels unknown until now. This might further strengthen anti-EU and disintegrative forces.

A major lack of the Bruegel analysis is that its strategy does not call into doubt the structure of financial markets which produced the present deep crisis. While the call for centralized EU supervision for international banks is welcome and further integration of the financial markets called for, EU authorities need to go further and cut off the lopsided inverse financial pyramid caused by speculation and trading. Their economic value-added has proven to be negative rather than positive, thus some of these trading activities need to be curtailed. Whether this is done by separating investment banking activities from commercial ones, by outlawing certain activities, by increasing capital requirements in order to reduce leverage, or other means, is secondary, but still urgent and essential. The long drawn-out dispute over boni for managers, while an important element, has been played out far beyond its actual significance and has crowded out a serious discussion on the restructuring  of the whole of financial institutions.

While the proposals mention the need to show EU citizens a new balance between liberalization and distribution, this would certainly need a more convincing agenda, connected to the growth model. Income inequality, increases in poverty also in the most advanced EU countries and lack of domestic demand have shown the limits of the “previous” growth model and its volatilities. A stronger attention to distributional questions, the quality of the labor force, its remuneration and a more general assessment of economic policies in terms of effects on equity are urgently called for, in order to counter increasing hostility to the EU.

Another disappointment is the lack of proposals for a new growth model for the new EU member states. While enhanced integration into the EU should continue, e.g. further integration into the financial markets and value chains of EU producers, these countries’ economies need to learn quickly to additionally stand more on their own feet. External financial flows will be long in coming back in the same amount, if ever. Keeping savings in the countries, developing tax bases in order to finance public goods, rebalancing their wage policies between domestic and external demand and competitiveness, developing their own knowledge base within a European Knowledge Area – and a promotion of neighbourhood trade could be such elements. None of this is outlined by Bruegel, even though the authors see the previous model as having come to a (preliminary) end.

Bruegel’s proposals for the other Commissioners are welcome: they are strongest for Economic and Financial Affairs and Single Market and Climate Change, weaker for Financial Services and Development. Still, this is an impressive and compact guideline for the New Commission. Mr. Barroso, listen!

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Filed under Crisis Response, European Union, Financial Market Regulation, Fiscal Policy, Global Governance, Socio-Economic Development

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