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Mario Draghi’s report on the state of the European economy is meant as a wake-up call. But will Draghi’s alarm be heard, or will European policymakers hit the snooze button?
The report points to three areas where Europe is economically challenged. The European Union lags behind the United States and China in innovation, especially in areas involving advanced technologies. Its competitiveness is handicapped by high energy prices. And its fragmented defense industry weakens its security. The report then argues that deeper integration is needed to address these shortfalls. Europe needs to complete its capital markets union to foster its venture capital industry. It needs fewer regulatory roadblocks in order for new companies to scale up. It must build an integrated power grid and coordinate investments in decarbonization to bring down energy costs. And Europe must undertake more defense spending at the EU level. Here the costs of failing to collaborate are reflected in the fact that Europe produces and operates 12 battle tanks, whereas the US focuses on just one. All of this implies the need for more joint decision-making, which puts Europe at another of those critical junctures where it must choose between the status quo and a quantum leap to deeper integration. It has taken such leaps before, agreeing to create the Single Market in 1986, introducing the euro in 1999, and moving to Banking Union in 2012. But will the challenges identified by the Draghi Report prompt a similar reaction?
One answer, espoused by Jean Monnet, the intellectual godfather of the EU, is that quantum leaps in European integration occur when leaders realize there is no other way to avert the worst. The Draghi Report seeks to leverage this theory by adopting the language of crisis.
But not everyone will agree that Europe’s challenges rise to the level of an existential crisis. Moreover, some quantum leaps in European integration have occurred during periods of relative stability. The Delors Report, which laid the groundwork for the euro, was followed by financial crises, rather than negotiated in response to them. Some crisis-ridden periods, such as the 1970s, did not hasten integration. Rather, they ushered in a “dark age” or lost decade of stagnant progress toward “ever-closer union.” Monnet’s theory, clearly, is underspecified.
Then there are so-called neo-functionalist theories of European integration, which suggest that if Europe can somehow get the integration process going in one domain, the progress it makes will spill over into other issue areas.
Thus, creation of the Single Market, which entailed the removal of capital controls, applied pressure to move to a single currency, which in turn created pressure for banking union. Economically, a single currency implied further efficiency advantages once the Single Market was established, as did a single banking supervisor once the single currency was introduced. Politically, the removal of capital controls created an exit option for financial interests, which used their leverage to push for the single currency and banking union....
more at Project Syndicate