It is sad, but true: Sir Karl Popper, the brilliant, down-to-earth philosopher who decisively influenced political discourse in the 1970s and 1980s – especially in Germany – seems to have gone out of style. This unfortunately also applies to the concept of piecemeal social engineering he advocated, i.e. the notion that the ills of society should be confronted through a succession of cautious, incremental steps rather than through rapid, large-scale reform or revolution. After all, small steps can be reversed should they later prove as missteps. The disregard for Popper’s approach is clearly evident in today’s debate about the future of European integration and, in particular, Europe’s monetary policy. Thankfully, the Five Presidents’ Report shows that our continent’s leading minds in the realm of European integration policy wisely distinguish between reforms that are feasible under existing European law and those that require fundamental changes in the European Treaties. Disturbingly, however, the discourse on the future of the EU, and monetary union in particular, has recently been dominated by a growing number of alarmist voices. The adopted tone ranges from dramatic outburst – as recently evidenced by the EU perspective drawn by the French economy minister in this newspaper (“rebirth or death”) – to more moderate, bureaucratic calls for an “economic government” or a “European finance minister.” Obviously, monetary union is bound to be more stable and more efficient if it is the final milestone of integration, following achievement of a political union and a common fiscal policy in particular. This was already argued by the proponents of the so-called “coronation theory” when the blueprint for European Economic and Monetary Union was first discussed, drawing from the experience of German unification in the 19th century. That said, it is equally true that a European single market needs to be complemented and stabilized by a single currency that is shared by a large number of market participants. Also true: as a “second-best” yet feasible solution, the single monetary policy is supported by clear fiscal policy rules as laid down by the Stability and Growth Pact. In the early stages of monetary union, missteps did indeed occur. In particular, the lower interest rate levels of a few southern European Member States led to excessive private and/or public debt. Though there were warning signs, i.e. massive current account and budget deficits, national and European economic policymakers reacted too late. Exacerbated by the global financial crisis from 2007, this led to dramatic developments in some countries that continue to affect policymaking in the euro area today. It should not be overlooked, however, that this crisis situation has also brought forth a series of instruments at the European level which represent significant progress in terms of crisis prevention and intervention. If these new instruments are applied in a consistent and macroeconomically responsible manner, and maybe combined with a strengthened role for market-based sanction mechanisms, the outlook for European monetary union is quite sound, actually. Calls for a fundamental restructuring of the EU’s institutional framework may well have their place in a discussion of long-term developments, but as a contribution to current political debate the “rebirth or death” approach is extremely dangerous, in my opinion.
The chances of a “big bang” reform are slim – unfortunately
Following this approach would at some point or another require far-reaching changes to the European Treaties. Granted, treaties can be changed, and instigating an informed public debate in due time it is part of the job of politicians. Claiming that the people are ready for a “re-founding of Europe,” a big bang as Minister Macron suggested in his commentary in this paper, is an interesting intellectual hypothesis, but its validity has not been substantiated by empirical analysis. In times like these when we do not know which countries will be part of the EU in two years’ time and each individual Member State has the power to block Treaty changes, the probability that fundamental changes to the existing Treaties will be adopted in the not-too-distant future is – unfortunately – very small. Against this background and in light of the sheer impossibility of fundamental Treaty changes, arguing the case for a “rebirth or death” approach means, in fact, risking the danger of conjuring up “death” – the slow dissolution of the EU and monetary union. Proposals founded on unrealistic conditions do not represent a useful contribution to the future development of Europe; on the contrary, they may even adversely affect political and economic expectations. Apart from the political and psychological risk of advocating “rebirth or death,” such an approach is not factually justifiable. Despite its much debated weaknesses, Economic and Monetary Union has proved its worth more than once in the first 16 years of its existence: Without EMU, Europe would have seen far more dramatic repercussions of the global economic crisis that started in 2007; this is true both for the members of EMU and for the EU countries outside monetary union, which, to some extent, benefited as “free riders.” As money and capital markets were breaking down and volatility was high, and swift and major action was of the essence, no national central bank – not even that of a big country – would have been able to readily provide the massive amounts of additional liquidity with which the ECB stepped in. A large central bank by global standards, the ECB must fear potential liquidity outflows much less than other central banks and was able to participate in the swap network of the leading central banks, which has the power to prevent potentially disastrous liquidity shortages in individual currencies.
Instead of invoking apocalyptic scenarios we should adopt a policy of small steps
Given the establishment of the ESM and its predecessor institutions at the EU level, we have instruments in place to tackle crises in a spirit of solidarity; this is substantial progress. The application of these instruments may be controversial. However, as the case of Spain demonstrates, we are also making progress here: Recent economic developments in the country are considered to be the success of a policy of austerity that did not coerce the government into slashing its fiscal deficit of 4.5% within too short a period of time. The substantial strengthening of economic governance in the EU over the past few years (e.g. through the introduction of the European Semester, the reform of the Stability and Growth Pact) as well as the establishment of the Single Supervisory Mechanism for the euro area marked important progress toward a more complete economic and financial market union. Hence, instead of invoking apocalyptic scenarios it seems more useful and effective to contribute to a step-by-step enhancement of economic governance under the given legal framework and to push ahead with the thorough implementation of decisions that have already been made, such as the Juncker plan for investment in Europe. There is no doubt that like any other institution, the EU must develop long-term political and economic visions. However, especially for a comparatively young organization like the EU, building a great narrative that creates an emotional connection is of vital importance. Many European countries have come to reach a form of emotional cohesion through the great narrative of the catastrophes they have gone through together or through wars waged against a common enemy. Let’s hope that emotional cohesion in Europe will be built through positive rather than negative events. It seems all the more important to me that long-term change is achieved on the basis of an evolutionary and democratic concept of gradual progress rather than by launching technocratic plans as a matter of life and death.
Ewald Nowotny is governor of the National Bank of Austria and member of the the governing council of the European Central Bank. International Süddeutsche Zeitung Photo
