The State of the European Union. The European Parliament faces its most important elections yet

THE STATE OF THE EUROPEAN UNION 74 shocks that could arise as a result of changes in investment flows. This increased protection would reduce the attraction of leaving the euro- zone in order to devalue the national currency, and this in turn would lessen fears of members exiting the eurozone. In this view, convergence will only come about if those countries with lower levels of productivity reform both their product markets (goods and services) and their factor markets (in particular, the labour market) to make resource allocation more efficient. These reforms would increase competitivity and growth, facilitating convergence at the European level. Secondly, from this perspective, the irrevers- ibility of the eurozone would be guaranteed if measures were taken to facilitate the fiscal sus- tainability of each of its members. Countries with a high level of public debt are exposed to higher borrowing costs for the economy as a whole. According to this theory, fears about the integrity of the eurozone are due not just to falls in competitiveness but also to excessively ex- pansive fiscal policies that are ultimately incom- patible with an individual country’s long-term membership of the area. In this view, the reforms required to make the eurozone irreversible entail reducing nation- al risks, in the form of fiscal consolidation and the other reforms described above. These coun- tries argue that the shared architecture should be minimal and, in any event, should only be created after the aforementioned reforms have been implemented at national level. Only in this way is it possible to prevent the moral hazard that would arise if countries with low productiv- ity and unsustainable public finances were to receive guarantees from other members of the zone. Against this position, other countries stress the need to provide the monetary union with the shared mechanisms required to cope with external shocks. According to this perspective, in light of the absence of an independent mon- etary policy, members should use other meas- ures so that, in the event of shocks to individual countries, there are shared mechanisms that can be used to mitigate their impact. These mechanisms require additional ele- ments to be included in monetary union. To en- sure their irreversibility, measures must be taken not only at the national level but also through the development of instruments that operate Europe-wide. These instruments must enable progress towards the creation of a financial un- ion, including a banking and capital market un- ion, the creation of a fiscal union, and the de- velopment of shared governance mechanisms. Although it would seem difficult to reconcile these positions, over the last year there has been an intense debate between the countries of the eurozone, and a number of measures have been agreed to facilitate European integra- tion. These are analysed below. The rest of this document is structured as follows. The next section analyses how recent European economic growth trends demonstrate the continuing need for reform of the eurozone. The following section reviews progress towards reform during 2018, taking as a starting point the roadmap proposed by the European Commission in December 2017, and analysing the agreements reached during the year. The chapter then concludes with a reflection both on the difficulties faced by a programme of radical reforms, as has become clear during 2018, and the urgency with which such reforms are needed.