by Louka T. Katseli
The European project is at a critical juncture. According to the most recent Eurobarometer, 36% of Europeans are opposed “to an economic and monetary union with one single currency”, while 31% “do not feel that they are citizens of the EU”. Brexit is the most dramatic manifestation of a growing lack of trust in European institutions and their capacity to deliver observable benefits to the average European citizen. The rise of extreme political parties in many European countries is an additional indication of a deep-seated malaise permeating European societies that is associated with the de-legitimisation of political elites, traditional political parties and democratic institutions. This malaise is fed by the deterioration in living standards of large segments of the population and a growing lack of hope that conditions could improve in the foreseeable future.
Europe seems to find itself caught in a vicious circle: growth remains anaemic, investment is depressed, unemployment too high and income and wealth inequality are growing. At the same time, in many European countries, over-indebtedness, both in the public and private sector, accompanied by liquidity constraints, have caused a significant deterioration in business sector prospects. Last but not least, failures in governance, coupled with the absence of a well–articulated and credible roadmap for exiting the crisis, enhance economic uncertainty and political instability which, in turn, increase risk aversion, dissuading potential investors, most notably institutional investors, from channelling resources to new investment. Negative economic conditions in combination with political uncertainty have eroded consumer and business confidence as well as investment appetite, undermining the prospects of a sustainable upturn. As a consequence, in 2014, European gross fixed capital formation as a share of GDP was only 10% as opposed to 20% in North America and 41% in East Asia and the Pacific. Similarly, European investment in R&D in 2015 accounted for only 21% of all global R&D investment, relative to 30% for North America and 40% for Asia. The recent refugee crisis, the rise in terrorist attacks, geopolitical tensions and policy failures in managing these developments effectively at the European level have exacerbated further the prevailing social and political frustration felt by a large number of Europeans; insecure and alienated from their political representatives both at the national and European levels, Europeans are increasingly becoming Eurosceptic.
Breaking this vicious circle is a precondition for keeping the European project alive and the European Union together. This constitutes a major political challenge that can be addressed only through the implementation of a new strategic vision for Europe that rests on three pillars: a) a new positive narrative b) an effective and democratic governance structure and c) a coordinated pro-growth policy mix that takes into account differentiated capacities and needs across member states.
A new positive narrative for Europe
In response to the financial and economic crisis, the European Union has undertaken, since 2011, several important initiatives to mitigate the risks of future crises, to strengthen the solvency and supervision of the European financial sector and to provide incentives for a resumption of investment and growth. The creation of the European Stability Mechanism and of the Single Supervisory Mechanism coupled with the introduction of the Single Resolution Mechanism, supported by the creation of a Single Resolution Fund, are important steps towards securing financial stability. The revision of the Growth and Stability Pact, the introduction of macroeconomic imbalance procedures, the adoption of Outright Monetary Transactions and Quantitative Easing by the European Central Bank and the promotion of the European Fund for Strategic Investments - the so called Juncker Plan- have sought to provide powerful incentives for better coordination of policies and the promotion of investment activity.
No matter how welcome and important these initiatives are, they do not constitute a new positive narrative for Europe as they do not address convincingly and coherently some of the dominant preoccupations of the average European citizen, such as security and peace, employment, decent living standards, inequality and upward social mobility, including inter-generational mobility.
For the European project to survive, it needs to be associated and portrayed as a powerful model that can deliver important “regional public goods” that address the above preoccupations. Policy initiatives need to be presented and evaluated accordingly to mobilise support for the European project and shape expectations of consumers and business in a way that would enable general political support to be translated into sustainable commitment and long- term investment.
Markets are shaped by expectations and created by expected opportunities relative to risks and costs. So is investment activity. For investment and growth to resume therefore, the European project needs to be rebranded around a new strategic vision of Europe as a provider of valuable public goods essential for the well-being of its citizens. Such a new narrative requires a change of mind- set of political leaders and business elites from short-termism and crisis-management to timely, pro-active, coherent and strategic public policy making; it also requires appropriate changes in European governance to enhance effectiveness in decision making, transparency, accountability and democratic legitimacy. Last but not least, it requires the adoption of a pro-growth policy mix that is consistent with the proposed strategic vision and delivers the promised outcomes.
An effective and democratic European governance structure
The management of the recent financial and refugee crises has highlighted the limits of the existing European governance structure in safeguarding policy effectiveness and democratic legitimacy. Lengthy and obscure intergovernmental processes, non-transparent negotiations and decisions at the Euro-group level, limited powers vested in the European Parliament, and an even more limited engagement of national parliaments in European affairs, are perceived to leave room for discretionary decision-making based on national interests and/or the relative bargaining power of individual member states. It is no coincidence that in the eyes of many Europeans, the “Germanization” of Europe appears to be a fait accompli. Attitudes and perceptions of course vary depending on national experiences. In member states under a Financial Assistance Programme, the imposition of harsh austerity measures and the micromanagement of structural reform implementation directed and overseen by non-elected representatives of European institutions, the so-called Troika, have eroded further the legitimacy of European institutions and have weakened incentives for genuine ownership of needed reforms.
Thus, to be credible, the promotion of a new positive narrative for Europe needs to be accompanied by governance reforms that enhance transparency and democratic accountability. Making Eurogroup minutes public, electing a European finance and development minister accountable to the European Parliament, mobilising social partners in the design and implementation of policies, establishing an independent mechanism to monitor and evaluate European public policy effectiveness, curtailing the bureaucratization of European decision making processes, as well as implementing an effective communication strategy that links policy priorities to concrete outcomes, will go a long way towards re-establishing trust in and the credibility of the European project.
A coordinated but flexible policy mix
Last but not least, the third pillar of a new strategic vision for re-boosting the European project is the pursuit of a coordinated but flexible pro-growth economic policy mix that takes into account existing differences in structural characteristics, institutional frameworks, governance capacities and cultural attributes across European member states.
European economic policy making is in need of a profound “regime switch”, whereby priorities are rebalanced away from exclusive preoccupation with fiscal consolidation and financial stability towards the promotion of a sustainable economic, social and environmental transformation of the European economy.
Such a regime switch is feasible if it is driven by European investment, innovation and R&D policies that place the creation of value added and decent jobs at the centre of the European policy agenda. In a low-growth environment with disinflation, expansionary monetary policy alone cannot promote investment and growth. What is needed is the pursuit of active public and private investment and industrial policies supported by innovative financial instruments, regulatory reforms and investment in human and social capital to create incentives for sustainable technological and productive restructuring. Inserting additional flexibility in the Stability and Growth Pact by excluding, for example, public net investment appropriately defined from the relevant deficit targets, introducing different types of development bonds and guarantees for significant projects, developing suitable financial instruments to promote financial inclusion and venture capital, improving access of SMEs to financial resources, reducing non-performing loan exposure and combatting tax evasion and avoidance are important priorities for smarter and more inclusive growth. So is the timely adoption of proactive steps to address effectively external and internal over-indebtedness through timely debt-restructuring measures that would mitigate uncertainty, ensure solvency, enhance liquidity and spur investment.
At the same time, fiscal and incomes policies need to become consistent with such a new European policy agenda, taking into account the extent of national imbalances and the corresponding margins for manoeuvre that exist for individual member states. For example, the severity of austerity programmes pursued in member states under Financial Assistance Programmes, such as Greece, in conjunction with the weakening of social protection systems, have undermined rather than improved the sustainability of public finances and severely hampered investment activity, productivity growth and employment prospects.
The three pillars of the proposed strategy for re-boosting the European project outlined above are interdependent. To address the concerns and priorities of European citizens, a coherent vision for Europe needs to be put together that is delivered by a new positive narrative, is made credible by appropriate governance reforms that ensure transparency, accountability and democratic legitimacy and is implemented by a policy mix that puts Europe into a sustainable development trajectory.
Designing and implementing such a strategic vision for Europe is an urgent priority to ensure that the European project remains alive and useful.
 European Commission, Standard Eurobarometer: Public opinion in the EU, July 2015.
 The World Bank, National Accounts Data (http://data.worldbank.org/indicator)
 Global R&D Funding Forecast, Industrial Research Institute, Winter 2016 (https://www.iriweb.org/sites/default/files/2016GlobalR%26DFundingForecas...)
 Regulation (EU) No 1176/2011 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 16 November 2011 on the prevention and correction of macroeconomic imbalances
 ECB, “Technical features of Outright Monetary Transactions”, 6 September 2012 (http://www.ecb.europa.eu/press/pr/date/2012/html/pr120906_1.en.html)
 See: European Investment Bank: http://www.eib.org/efsi/index.htm
 Louka Katseli (2016), “Lessons from the Greek Crisis”, in Global Financial Systems: From Crisis to Sustainability, World Economic Forum, May (http://www3.weforum.org/docs/WEF_GAC16_Global_Fiscal_Systems_From_Crisis...)
 Louka Katseli (2014), “CPD Anniversary Lecture 2014: Recent Fiscal and Labour Market Adjustment Experiences in Europe Lessons for the Low-Income Countries”, Bangladesh.