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THE STATE OF THE EUROPEAN UNION
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of a Grand Coalition between the Christian
Democrats and the Social Democrats in
Germany has created a new window of oppor-
tunity for serious discussion of the need to re-
form EMU and how this relates to EU institu-
tions. The Paris-Berlin axis is likely to play a
crucial role in designing the pathway towards
completion of EMU, although there are subs-
tantial differences between the proposals being
put forward in the two capitals.
The need to reform the euro
The incomplete nature of the architecture of
EMU was widely recognized from the outset.
The assumption was that the euro would bring
the economies of the EU closer together, and
this was what happened for several years, until
the crisis struck and revealed the single
currency’s weakness. Since the start of the crisis,
a series of reforms and initiatives have been ap-
proved and implemented, with the aim of stren-
gthening EMU and expanding its toolkit for co-
ping with future crises. However, these measures
did not reflect an overall vision but were, rather,
a response to specific circumstances. As a result,
the architecture of EMU is somewhat chaotic,
many weaknesses persist, and the whole project
lacks democratic legitimacy.
There is little doubt that the current design is
far from optimal, and an abundance of acade-
mic literature has identified the shortcomings of
the eurozone’s architecture and highlighted a
number of major structural problems, including:
– Systemic deflationary bias, which depresses
growth and leads to low rates of employment.
– Permanent under-investment, which is parti-
cularly alarming given the need for the eco-
nomies of the eurozone to equip themselves
to cope with the digital transition and to
move towards a sustainable economics ba-
sed on renewable energy.
– Systemic internal macroeconomic and la-
bour market imbalances, leading to rising
inequality and divergence between coun-
tries, which in turn destabilizes the sociopo-
litical unity of the EMU project.
– Vulnerable banking and financial systems,
which still pose systemic risks that have not
been addressed.
– Democratic deficit due to an inter-governmen-
tal framework which, with limited transparen-
cy and weak accountability, feeds the populist
narrative of Eurosceptic political parties.
These weaknesses, which have existed since
the euro was launched, were magnified by the
recession and – despite the reforms implemen-
ted to manage the crisis – still persist. Indeed,
any package of reforms which fails to address
these issues is doomed to failure.
This means that the ultimate objective of
EMU cannot simply be to stabilize financial mar-
kets or to introduce more market discipline to
control public spending, and we should remem-
ber that it was market failure not poor gover-
nance which provoked the global economic and
financial crisis. That’s why the long-term stability
of the eurozone requires a better balance bet-
ween economic and social outcomes. This also
means consolidating the social dimension to
ensure that full employment, cohesion and co-
rrecting imbalances continue to be key policy
objectives in the eurozone. While the outcomes
and objectives of the Gothenburg Social Summit
in 2017 are a step in the right direction, they do
not appear to be sufficient to shift the dominant
paradigm, which prioritizes monetary stability
over economic and social stability.
To summarize, correcting these imbalances
will require reforms to the four pillars of the cu-
rrent architecture of EMU: