What the EU Needs Most Is Certainty

In a climate of economic uncertainty elections are viewed as an instability factor. Will France and the Netherlands respect their fiscal commitments? Will Germany trust its EU partners? Will social tensions prevent Greece, Spain and Italy from recovering? On average, there is an election every three months in a member state of the European Union. The uncertainty that derives from this situation would be of less concern if we had a better sense of how the euro crisis will unfold. We need more medium- and long-term certainties: euro bonds, a road map pertaining to fiscal policy, and a transparent decision-making process. On the other hand, European countries, in particular Italy, must be clear about what they plan to do in the years to come.

The challenge ahead of us is big. Europe, and not only the euro zone, will face a decade marked by low growth. There are several reasons behind the growth crisis: public and private debt, uneven productivity levels and population trends. With a 1 percent growth rate, income distribution becomes a zero sum game. Those who profit do so by hurting others who don’t, thus making social justice a key issue.

The issue can take the form of street protests or can be managed by politicians. Conflict can explode between those who are lucky and those who aren’t, between those with stable jobs and those with temporary ones, between those who pay taxes and those who don’t. Given the situation, growth is key to finding a compromise. That’s why it’s important to combine emergency measures with a medium- and long-term strategy devoted to increasing growth. Since Italy hasn’t implemented clear, long-term fiscal and growth plans yet, the political parties should devote their time to them as soon as possible.

We must be aware of a few alibis. First, it’s not true that markets and technocratic or supranational institutions, such as the ECB and the European Council, are a threat to democracy. Responsible politicians use such external constraints to strengthen their program. Second, while extremist movements exist, as of now they are not threatening democracy. In France, nationalists were very successful, but the recent election’s high turnout shows that the French are not rejecting democracy. The Dutch extreme right risks becoming marginal after the current political crisis. German—and even Italian—political parties are reacting to the new populist movements that are trying to take advantage of the economic frustration caused by the crisis. According to Eurobarometer, the EU’s survey service, most Europeans believe that only political cooperation between different countries will solve the current crisis. In general, politicians care about what their voters think.

The third alibi has to do with European politics. The recent IMF intervention is much broader than it may seem at first. There may be steps toward fiscal integration, and it’s possible that the EU budget will be increased. Furthermore, there are several projects under way: one is the integration of banking and insurance systems, the other the creation of euro bonds, which, according to a German source, would not be “that far.” While the projects have not been talked about to avoid interfering with the approval of the fiscal compact, starting in June they should become public.

The markets showed that they react quickly, in both good and a bad ways. It won’t be impossible to convince them that the euro zone is on the right track. The level of integration allowed by the fiscal compact was underestimated because of the strange reaction of the new Spanish government, which disavowed the agreement after signing it. To be fair, the new fiscal agreement is not well-designed. Countries have from two to five years to fix their deficit, and some flexibility is allowed to countries that need structural reform. The flexibility of the system derives from the assumption that countries are working with different partners.

The markets did not understand that Europe’s political integration is broader than it appears, because they are focusing on the short term. However, in some cases an increased debt can lead to fiscal stability in the medium term. That’s the reason the EU experiment must go beyond national rhetoric, thus allowing the markets to fix their myopic views.