07 July 2015

Policy Network: Europe’s unfinished business

Alongside the risk of Brexit, Greece's possible exit from the eurozone should force a debate on how the single market might function better in the whole of the EU, not simply within the currency union.

The upcoming British referendum on EU membership that may well bring Britain out of the union – combined with the increasingly likelihood of a Greek default and a partial exit from the euro raises in a suddenly acute form the question of the relationship of the EU and the eurozone. The new acute crisis demands some innovative thinking to preserve – and extend – the central benefits of European integration, while thinking about additional areas that demand a cooperative rather than a confrontational solution.

The Maastricht treaty basically assumes that all EU member countries will satisfy the membership criteria for the currency union and stipulates that they are then obliged to join.  The opt-outs only relate to the UK and Denmark. The UK has been in a paradoxical position of championing the rather abstract case (with which probably a majority of economists agree) that a currency union requires a greater measure of fiscal integration than the EU or the eurozone currently possesses. US policymakers made very similar points. But, on the other hand, the UK made it clear that it did not want to participate in that greater fiscal integration; and (with the Czech Republic) voted in January 2012 not to accept the fiscal compact treaty (on “legal grounds”).

Brexit may thus in theory make a move to greater fiscal integration easier. At the time of the Maastricht discussions, many European policymakers, like the influential commission president Jacques Delors, simply assumed that the EU budget’s share would rise to about three percent of GDP (by coincidence, that was about the share in peacetime of the US federal budget during the 19th century). Instead, the figure remained stuck at just over one percent (it has actually declined slightly since the 1990s). Denmark on its own is unlikely to want to remain an outlier, especially since the management of the currency since the global financial crisis of 2008 has been rather precarious. There is a similarly strong case why Sweden might want to end its anomalous “out” position – for the same kind of reasons as Norway and Switzerland are finding it very hard to live with an independent currency and to devise an appropriate set of monetary and exchange rate policies. But, at the same time, the contemporary Greek experience should be a warning against thinking that there might be a new political equilibrium that shifts towards an obvious acceptance of greater fiscal federalism.

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