Over the last few weeks, various commentators described the multiple events of 12 September (yesterday) as the EU’s D-Day, a make-or-break final assault on the Eurozone crisis.
One day on, things do seem to have gone quite well for EU stability: the ECB has announced an unlimited programme to buy bonds of Eurozone states (albeit with strict conditions); the German Constitutional Court has ruled that the European Stability Mechanism is consistent with that country’s Basic Law (while requiring that Germany’s contribution cannot be raised without Bundestag approval); the European Commission has announced a plausible (if controversial) plan for the ECB to supervise all banks in the Eurozone, and ultimately for joint guarantees of all citizens’ deposits; and in the Netherlands’ parliamentary election, the Dutch have voted overwhelmingly for pro-EU parties. In response, yields on Spanish and Italian bonds have fallen considerably.
But it’s far too early to claim victory. Just as the Normandy landing was not the end of the Second World War, the EU’s crisis is far from over. Three enormous and inter-related challenges remain:
1. The bond markets’ assault on EU sovereigns may have been repulsed for now by the ECB’s initiative, but unless all Eurozone states continue the reforms necessary for fiscal sustainability, including changes to both spending and taxation, they’ll be back. (Note here: fiscal reform does not necessarily mean targeting the most vulnerable.)
2. Given demographic trends at home and competition abroad, European states must redouble their commitment to ensuring the structural conditions for sustainable growth. Stimulus spending may help in the short term, but it must not be done in a manner that interferes with longer-term fiscal sustainability (point 1 above). What’s really needed is a robust and balanced combination of flexibility-enhancing labour market reforms (preferred by the centre-right) and national/EU-funded initiatives in education and infrastructure (preferred by the centre-left) to promote well-paid, internationally-competitive employment throughout Europe for decades to come. Without such a balanced and sustained agenda, the welfare state is just robbing future generations to make today’s citizens’ lives a bit more comfortable — not a good bargain.
3. The EU and its member states must follow through on their recent rhetoric about making the Union more transparent and accountable to its citizens. This could involve a range of measures, such as competitive elections for senior EU posts, an upper house of the European Parliament representing national MPs, and stronger national-level commitments to educating citizens about European governance. But unless something real is done about the EU’s democratic deficit, voters across Europe will rightly refuse to support the treaty changes required for a further pooling of economic sovereignty. And that would make the gains of this week rather ephemeral.