Reforming the EU and the EA: responsibility v. solidarity

During the political campaign leading to the European Parliamentary elections the balance between risk reduction (i.e. state’s own responsibilities to address country-specific risks) and risk-sharing (i.e. solidarity among member states in sharing the burden of country-specific risks) has received much attention. Although the right mix of responsibility and solidarity matters for almost any issue involving international cooperation, the debate in the European Union (EU) focused in particular on economic issues that are key for the future of the euro area (EA).

The current level of risk-sharing and the amount of pooled resources in the EA are too low for a well-functioning monetary union among highly heterogeneous countries. Due to the lack of independent national monetary policies (stemming from the adoption of the common currency) and to the limits of the Stability and Growth Pact on national fiscal policies, there is room to expand the range of automatic mechanisms able to transfer limited amounts of resources across the EA countries with a view to smoothing temporary country-specific shocks and overcoming localised economic difficulties. Moreover, due to the fast integration of the national financial and banking systems in the EU and the emergence of truly transnational banks, pooling and sharing resources is necessary to ensure that financial problems are tackled rapidly, effectively and without generating undesirable conflict between savers, borrowers, regulators and fiscal authorities across the member states.

The reason for the current impasse with regard to furthering this dimension of EU and EA integration is two-fold: first, most political parties and governments across Europe have resisted transferring additional powers and fiscal resources to EU institutions; second, significant disagreement remains about whether risk-reduction (obtained through reforms and policy measures) should be achieved before or after pooling resources and sharing national risks.

Risk-reduction efforts should include structural reforms at the national level to promote growth, policies to reduce imbalances and macroeconomic heterogeneity (e.g., sovereign debt, unemployment, …), actions to address financial vulnerabilities, and measures to foster sustainable welfare systems. Risk-reduction efforts can credibly reduce the need to use the resources pooled and shared, which then only become necessary as a result of unexpected shocks and/or temporary adverse circumstances . No surprise, citizens in the core countries (i.e., stronger and less vulnerable) are unlikely to want to commit part of her income to make systematic transfers to peripheral regions that are perceived as unwilling to reform and fix dysfunctional banking systems. Indeed, risk-sharing mechanisms and resource pooling within monetary unions are intended to help countries address adverse cyclical conditions rather than compensate for (and mask) long-lasting structural inefficiencies that local policymakers fail to address.

President Macron has recently called for a “European Renaissance” that includes the reform of the institutional framework of the EU. Implicitly, his proposal touches upon some of these issues, among other concerns and ideas. Unexpectedly but unsurprisingly, Annegret Kramp-Karrenbauer, the leader of Germany’s Christian Democrats, responded immediately by clarifying that the communitarization of sovereign debts and the Europeanization of social systems cannot be endorsed as policy objectives: risk-reduction is currently too limited, in her view, to justify the commitment of resources. Her position reflects public sentiment in various Nordic countries and Austria. The election manifestos of political parties running for the EU parliament and the various Spitzenkandidaten have also articulated differing perspectives on the issue. In fact, the disagreement on the issue is significant even among the traditionally pro-EU national parties and groups. Thus, sovranist and euro-skeptic political forces are not the only ones dragging their feet on the proposal of sharing of resources.

The risks of a very polarized debate are high. Things are not black and white. On the one hand, certain risk-sharing mechanisms help to improve the stability of the euro area, thereby reducing the probability of needing to draw upon common resources. Moreover, trying to fix every problem before risk sharing may be too big an ask and may actually increase uncertainty and disagreement. On the other hand, too much solidarity and too little responsibility might entrench territorial differences; this did happen in the past within various nation states (e.g., North and South of Italy, West and East of Germany, …). Finally, as pointed out by the President of the ECB, Mario Draghi, the distinction between risk-reduction and risk-sharing may be incorrect in a monetary union where the very absence of risk-sharing mechanisms contributes per se to increased risks of sovereign default and euro-exit.

Although risk-reduction and risk-sharing need to proceed hand in hand to reinforce each other, the political debate will continue to be polarized and heated, as political parties try and position themselves in one of the following four camps: no further sharing at all, more sharing after more risk-reduction, more sharing before more risk-reduction, no risk-reduction to achieve common objectives. Keeping these considerations in mind might help us understand political platforms and the ongoing debate.

Andrea Fracasso is professor of International Economics and Director of the School of International studies at the University of Trento. His research interests cover various areas of international economics, among which the European and Chinese economies. He loves running but when injured he writes blog contributions (especially when European elections are looming). He can be reached (when not running) via mail at andrea.fracasso@unitn.it.