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First, the implementation of the first phase of Banking Union, with the transfer of supervisory authority over most of Europe’s banking system from national authorities to the ECB, involves an assessment of the banks’ financial soundness, known as Asset Quality Review (AQR). This review will probably expose previously unrecognised weaknesses in some banks, possibly requiring public intervention and restructuring, accompanied by political tensions.
Second, the Banking Union will remain incomplete. Member States are unlikely to agree on a workable design for its two other necessary components, a European authority empowered to resolve crises over troubled banks and a European deposit insurance system. The realisation that Banking Union is essentially limited to supervisory integration at the ECB may reawaken investors’ worries about the vicious circle between banks and sovereign credit that destabilised the euro area in 2011 and early 2012.
Third, the combination of the delay in restoring the banking system back to soundness, fiscal austerity, and the ECB’s continued reluctance to engage in unconventional monetary policies, suggests that the European economy will remain anaemic. Growth performance could be dampened by the failure of Italy, France and other countries to undertake structural reform.
Fourth, the European Parliament election in May 2014 is expected to crystallise citizens’ dissatisfaction with their current governance in most countries outside Germany, sending shockwaves throughout Europe’s political establishment. For example, the xenophobic and anti-establishment National Front is predicted by many to become France’s leading party in that election. Comparable trends are observable in the United Kingdom, the Netherlands and other EU Member States.
How Europe’s politicians and policymakers will react to such developments could range from further paralysis of decision-making to the jolts provoking more boldness to reform.
A renewed debate on Europe’s institutional mismatches is likely over what European jargon refers to as “political union” as a necessary complement to Banking Union, fiscal union, and economic union.
EU institutions, as currently defined by the European treaties, are too weak to deal with these problems. The European Commission has shrunk in stature during the crisis, lacking the policy leadership that had been assumed to be its defining ability, except in specific areas such as competition policy, and hobbled by a (not entirely undeserved) reputation as an overpaid and inefficient bureaucracy. The European Parliament has less control over the power of the purse than most national legislatures. Too many of its members lack dedication or gravitas. It is insufficiently representative of the European electorate: in particular, the number of parliamentary seats is not proportional to Member States’ voting populations and electoral processes vary widely across countries. The European Council of national heads of state and government is unaccountable as a collective body, even though each member is democratically accountable to national constituents. There is no mechanism to endow it with a political mandate to channel the preferences of the majority of European citizens. This lack of legitimacy has repeatedly paralysed it when decisive action was needed.
In summary, the core EU institutions – the Commission, Parliament and Council – are affected by a combination of democratic deficit, or the lack of proper representation and accountability to the European citizenry, and executive deficit, or the inability to make and implement policy decisions at the right moment. These twin deficits perversely feed each other, sapping the EU’s popularity in many countries...
Europe’s institutional mismatches will not all be successfully resolved in 2014. But one can expect, and perhaps hope, that they will become clearer and start being debated more openly and broadly. A proper diagnosis is the first step towards healing.