30 September 2013

Jean Pisani-Ferry: Angela Merkel's return to Europe

Writing for Project Syndicate, Pisani-Ferry says that Merkel's resounding victory in Germany's recent general election gives her a mandate of exceptional political strength. It is time for Germany to give form and substance to the concept of European political union.

Europe is in better shape than it was a year ago, but it still faces an uncertain future. The road ahead will be a bumpy one for markets, and a return of risk aversion could soon affect the EU’s most fragile countries. Some are economic: Barring a lasting (and still elusive) growth acceleration, the objectives of boosting competitiveness and achieving debt sustainability remain partly in conflict. And some are political: Though Europe’s citizens have demonstrated an extraordinary degree of commitment to the euro, in several countries governing coalitions are precarious and populism is on the rise.

Until a path back to prosperity is clearly mapped out, these risks will remain. So the question for Merkel is which risk-minimising strategy she should choose:

1. Merkel could first help to restore trust in Europe’s economic fundamentals. The single market for energy, for example, is dysfunctional; the digital market is not unified. And capital markets have fragmented in the wake of the euro crisis. There can be no trust in Europe until serious repair work is completed.
2. Second, Merkel could help to restore trust in Europe’s political institutions. The eurozone crisis has weakened Europe’s complex system of governance. The European Central Bank has emerged as a strong and bold institution, but the European Commission and the Eurogroup of finance ministers have not proved equal to challenging conditions. In these circumstances, Germany and other countries could send a strong signal by appointing exceptional individuals to the next European Commission. A strong Commission is not the solution to all problems, but it is a precondition for solving many of them.
3. Third, Merkel should help to restore hope in southern Europe. Contrary to prejudices, the southerners have largely done their part. They have delivered fiscal consolidation, and many countries have also implemented significant structural reforms. They now need capital and investment to strengthen their tradable-goods sectors. And they need foreign demand to foster export growth.
4. Fourth, reform of the euro system has not been completed. Discussions on Banking Union are still under way, and Germany is reluctant to mutualise risk. But fully separating bank risk from sovereign risk implies that the ultimate backstop must be a common one. Beyond a Banking Union, an effective and resilient monetary union may ultimately require a sovereign-debt-resolution mechanism, a common budget, partial debt mutualisation, or a common Treasury, to name only the most discussed proposals.
5. Finally, it is time for Germany, the country that invented the concept of European political union, to give it form and substance. The idea that monetary union would naturally give birth to political union proved to be wrong. But the idea that monetary union requires a degree of solidarity that can be underpinned only by some form of political union has been vindicated.

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© Project Syndicate