Already in the decade leading up to the Covid-19 pandemic, the economic governance of the EU suffered from a series of problems. By imposing policies of austerity and structural reform, the euro area ended up being characterized by “rule by rules and rule by numbers”, with wrong rules and numbers, which did not work. This led to what I called the EU’s ‘legitimacy crisis’, in which the doubling of procedural rules led to poor economic performance and increasingly toxic politics.

Fortunately, the EU’s response to the pandemic represents a new beginning. Among the most notable initiatives are the European Central Bank’s Emergency Pandemic Purchasing Program (PEPP) and the European Commission’s EU Next Generation, focused on investing in the green transition and the digital transformation while tackling social inequalities, supported by the Resilience and Recovery Fund (RRF). provide investment funds to countries in need.

All of this constitutes a massive achievement and a major break with the past. But to ensure a better future for the European economy, much remains to be done. New ideas call for an increased role of ‘state’ actors – European and national – as public entrepreneurs to promote growth and provide investments to green the economy, digitize society and ensure greater social equity.

The Commission’s industrial policy and the European Semester

The EU has taken a big step forward thanks to the EU Next Generation and the Temporary Resilience and Recovery Fund (FRR). But this needs to be reinforced by the development of a permanent debt at EU level which could provide investment funds for all member states on a regular basis. Think of a permanent FRR as an EU wealth fund, similar to national sovereign wealth funds, that issues debt in global markets to be used to invest through grants to member states in education, training and income support; in the greening of the economy and the digital connection of people; as well as in major physical infrastructure projects.

It could also be used to invest in cross-border efforts at EU level as well as for redistribution purposes through a range of innovative European funds, including unemployment reinsurance fund, integration fund refugees (for countries hosting a larger number of asylum seekers), a European fund for fair mobility (focused on brain drain), or even a fund to fight against poverty.

The EU faces several obstacles and possible stumbling blocks in implementing some of these new ideas.

At the same time, the ECB should move from an almost exclusive focus on the primary objectives set out in its charter to secondary objectives. This could mean setting the goal of full employment in the same way as the fight against inflation; stop buying “neutral” bonds (ie stop buying the bonds of polluting industries); create green bonds for the environment; or even providing what is called “helicopter money” to provide direct support to households in need. Finally, it would be extremely useful to create a safe EU asset while solving the problem of national over-indebtedness (because debt restructuring by country is not possible) by having the European Stability Mechanism buy part of the sovereign bonds held by the ECB.

The next question is how to ensure the success of these new industrial and social policy initiatives. For this, the European Semester – the annual cycle of economic and fiscal policy coordination – is the ideal vehicle for control and assistance. But only if we rethink both its purpose and its rules. The rule of “rules and numbers” imposing austerity and reform policies should be permanently suspended, to be replaced, for example, by a set of “fiscal standards” to assess sustainability in context.

If this is not feasible, then a much more flexible set of rules needs to be developed, focused on countercyclical economic policy, with more precise assessments of the place of member states in the business cycle with regard to deficits and deficit. debt. as well as growth prospects and prospects for achieving investment objectives.

In addition, public investments (industrial and social) that are supposed to benefit the next generation should not be counted as deficits or debt (known as the golden rule of public investment). In fact, in this environment of extremely low interest rates and extensive quantitative easing, government debt itself could be ignored if it is sustainable (meaning the government can borrow at a rate lower than the average rate of GDP growth).

Obstacles to reform

The EU faces several obstacles and possible stumbling blocks in implementing some of these new ideas. Political divisions remain within the Council of the EU, in particular between the so-called Frugal Four Plus, which insisted that the RRF be temporary and had opposed any subsidy. If the FRR fails to deliver growth or if the additional investment is not put to good use in the main target countries (Italy and Spain), enthusiasm will decrease and the likelihood of creating a permanent fund will decrease. Additionally, the austerity hawks are likely to return, particularly once the pandemic is over and things return to some kind of new normal.

With an increasingly intense electoral cycle to come and major contests in Germany and then France, not to mention other countries, the future policy of the European Council could have an impact on any other positive movement on the ideas that come from. be discussed. Pandemic fatigue has set in, with growing dissatisfaction with current governments for the time being due to continued lockdown measures and the slow rollout of vaccines.

Largely because of obstacles and stumbling blocks – economic, legal and political – we need to think flexibly not only with regard to the future economic governance of the euro area, but also in terms of the future. of the EU itself. How can one of the ideas we have just discussed be made possible, given the existing political differences between the Member States as well as the institutional and legal obstacles? I cannot see the Member States advancing as a whole, towards some kind of “United States of Europe”, a deeply integrated “real social and economic union”, or even towards a “hard core” around the euro area.

However, there can be no differentiation in the EU’s fundamental commitments to the rule of law.

Rather, we must be prepared to rethink integration as more differentiated. I tend to think of such a differentiation in terms of ‘soft core“ Europe, made up of overlapping clusters of European countries participating in the many different political communities of the EU, all administered by a single set of EU institutions, with voice for all Member States in all communities, but with vote only in those in which they actively participate.

Possible paths to follow

The euro area is just one of many political communities, and even it should allow for further differentiation. For example, we could consider some Member States blocking a permanent fund, Member States keen to move forward could use enhanced cooperation to commit their own resources to an EU budget. Their representatives would then be the only ones to vote on the budget and its use, although anyone can discuss it (no separate eurozone parliament, then, but separate vote for MEPs in a deeper fiscal union).

However, there can be no differentiation in the EU’s fundamental commitments to the rule of law. And the EU must do more to strengthen the representation and participation of citizens. For the euro area in particular, this requires at the very least a greater involvement of the European Parliament through the codecision method in the decision-making process of the euro area and of the national parliaments in the European Semester. The ECB would also benefit from strengthening its accountability and transparency while democratizing the process. One of these ways could be to increase the accountability of the ECB to the European Parliament, for example, through formal requirements for ECB-EP dialogues.

Transforming the euro zone treaties into ordinary legislation would also help to break the deadlock which makes it impossible to amend this legislation (given the unanimity rule), and to ensure that they are subject to political debate and possible modifications. But the European Parliament should also find more ways to bring national parliaments into the decision-making process at EU level. And the EU as a whole needs to devise new ways to encourage citizen participation at all levels.