Ursula von der Leyen, president-elect of the European Commission, has promised to initiate a conference on the future of Europe, starting next summer. The discussion will be about voting rights for member states, future enlargement and transnational lists for elections to the European Parliament. I expect some marginal stuff on the eurozone.

What the EU will almost certainly not do is to confront the demons of the past 10 years and reflect on what has gone wrong — it would require accepting that something did go wrong. I know quite a few policymakers in northern Europe and in EU institutions who regard the handling of the eurozone crisis as the EU’s ultimate triumph.

But outside these policy circles, the perspective is very different. The EU has only recently emerged from a decade-long crisis and is now facing an economic downturn, a global currency war, a technology shock in the car sector, possibly a no-deal Brexit and an Italian government crisis.

Interest rates are at the lower bound. Fiscal policy is constrained by rules. A full-blown confrontation looms between Italy and the EU after an autumn election. The threat of an Italian parallel currency is still real.

The EU is at risk of a vicious circle during the next downturn or financial crisis. It would then become rational for voters and political parties to look at national alternatives to European integration. I would still argue that the ideal monetary system for the eurozone is a well-functioning monetary union, with a strong fiscal capacity, powers to tax and spend and a mutualised debt instrument. But I would not rank an unreformable eurozone as a second best. European integration is only the best choice if it delivers.

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Does this mixed order of preferences make me pro- or anti-integrationist, or neither? I have been trespassing across this dividing line, forwards and backwards, over many years. After the devastating experience of austerity in southern Europe, the economic argument for integration is weaker. Policies that, by design, produce poor economic outcomes will struggle — rightly — to find support.

But those who consider a break away will need to ask themselves at least two questions: at what point to conclude that much-promised eurozone reforms are not coming? And, how do we assess the counterfactual? Would economies under pressure have fared better outside the EU? Would successive Italian governments, for example, if freed from the shackles of EU fiscal rules, have produced more growth and employment?

If Italy had avoided swingeing austerity under Mario Monti from 2011 to 2013, today’s situation may well have been different: the far-right League and the Five Star Movement may not have won the 2018 election and formed a coalition; and Matteo Salvini, the League’s leader, would not be on the verge of an absolute power grab.

Mortal danger for the EU lies in the emergence of a rational, non-ideological case against European integration. And the EU itself must share the blame for creating the conditions for it.

The fiscal rules and the stability and growth pact are the eurozone’s original sin. The pact has been reformed twice, in 2005 and in 2011 and the present European Commission made it more flexible. But no matter how those rules and procedures were tweaked, they increased internal divergence, discouraged investment and acted pro-cyclically during an economic downturn.

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As in the case of Brexit, the initial costs of leaving the eurozone would be very large, possibly much larger. But in contrast to Brexit, there could be a positive pay-off if member states ended up with a better fiscal policy framework.

Leaving the eurozone, a country would no longer be bound by the 3 per cent deficit-to-gross domestic product target of the Maastricht treaty; it could introduce a sustainable investment rule; and it could allow for fiscal stimulus during economic downturns. The central bank could follow a dual target similar to that of the US Federal Reserve — to stabilise prices and employment. There would be no legal constraints on asset purchases, no rules to forbid bailouts. That must be a tempting proposition for Mr Salvini, who is no fool.

When the EU fails to deliver, arguments for or against further — or existing — integration become more finely balanced. Ms von der Leyen’s conference on the future of the EU should have, as its overriding goal, ensuring that utility-based arguments against European integration are no longer possible. This is, of course, not how they will approach it. The real threat to European integration does not come from Mr Salvini but from the EU’s voters who — like John Maynard Keynes but unlike the EU — change their minds when the facts do.


Via Financial Times