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The Path Toward a Two-Speed Europe

The Path Toward a Two-Speed Europe

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This policy brief examines two possible ways forward for European financial institutions.

This policy brief examines two possible ways forward for European financial institutions.

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Categories:Types, Research
Published by: German Marshall Fund of the United States on May 11, 2012
Copyright:Attribution Non-commercial

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03/24/2013

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Summary:
Thanks to the euro,the EU has become an essentialpartner on the world scene,yet, during the euro crisis, itspowers appeared inadequate, its
nancial resources insufcient,
and its decision-making slow.
As events unfolded, the euro
problem has proven actually to
be a lack of political will at theheart of European governance.
The “power vacuums” at
the heart of the Europeaninstitutions call for remedies. To
proceed, there are two possiblepathways: either Europeans turntheir backs on integration orthey accelerate their progressiontoward it.
 The Path Toward a Two-Speed Europe
by Giancarlo Chevallard
1744 R Street NWWashington, DC 20009T 1 202 683 2650F 1 202 265 1662E ino@gmus.org
May 2012
Paper Series
 
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TheEuroFuture Project
 
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An exhausted Europe is emergingrom the acute phase o the eurocrisis. Its mood is bleak. Its economy is stagnant. Its international standinghas suered. Te European Union(EU) is uneasy about its uture.Having been the very embodimento 50 years o European achieve-ments, it is now increasingly ques-tioned. Tanks to the euro, the EUhas become an essential partner onthe world scene, yet, during the eurocrisis, its powers appeared inadequate,its nancial resources insucient, andits decision-making slow. Over thelast decade, the euro was considereda jewel o the European unicationprocess, but now that jewel seems tolost some o its sparkle.Te United States’ nancial disastero 2008 plunged the whole industrial-ized world into a painul emergency.Te new single currency, the euro,was immediately put to an arduoustest and indeed, became one o thecontributing actors to the globalcrisis. As events unolded, the europroblem has proven actually to be alack o political will at the heart o European governance.Te currency’s situation appearsparadoxical. Te deence mecha-nisms o member states have provento be inadequate. In act, it was thenew single currency that led to theirerosion because countries could nolonger count on sucient monetary reserves. o add to this problem,eurozone countries were insuciently empowered because they could notcount on resources normally availableas a lender o last resort. Tat statuswas not extended to the EuropeanCentral Bank.Tis monetary handicap has beenaggravated by the de acto power vacuum in the management o theeconomies. Te EU institutionsdemonstrated an insucient compe-tence in guiding national govern-ments in the deployment o theirtaxation, budgetary and credit powers.Despite the weaknesses o the instru-ments available to the Europeaneconomic and monetary union, itsauthorities succeeded in muddlingthrough. Overcoming the dissen-sions among the member states, they managed to exert enough pressure onthe EU to adopt minimum commonmeasures. During each summit, Euro-pean institution leaders showed theirdetermination to resist market oen-sives, essentially by making additionalresources available. So ar, the eurohas been preserved allowing or themonetary union to regain its preciouscredibility, especially in those inu-ential U.S. and British circles that hadalready sentenced the euro to death.
 
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The Pro-Europe Camp
Tese “power vacuums” at the heart o the European insti-tutions call or remedies. o proceed, there are two possiblepathways: either Europeans turn their backs on integra-tion or they accelerate their progression toward it. Te rstcourse would entail renationalizing areas o competenciesalready transerred to the EU. Te second would meanprogressively bestowing powers on the European institu-tions that are necessary to eectively manage the economy.Out o the chaos o the crisis, a divided Europe hasemerged. It appears as i the “pro-Europe” camp iscurrently prevailing. However, the “pro-national govern-ments” movement is by no means marginal. It has consid-erable support in some countries, the best example beingthe United Kingdom. Even in staunch pro-Europeancountries such as the Netherlands or Italy, the anti-Europemovement is making inroads. While the well-known Euro-barometer poll rom late 2011 shows majority support orthe “pro-Europe” camp and Europeans still see the EU asthe body best able to tackle the crisis, the poll also revealsthat there is a sharp decline in trust in both national andEuropean political institutions.Still, the underlying pro-Europe sentiment is reected inthe many decisions recently taken by the EU. In contrast,national governments seem rather passive. Te EuropeanBanking Authority, created two years ago, has closely moni-tored the nancial institutions and has established stringentnorms to this eect. Procedures or reinorced monitoringand controls o national budgets have been recently intro-duced. Financial mechanisms were set up to strengthen thedeences o member states against market pressures. TeEuropean Stability Mechanism reaty, signed in February 2012, will succeed the provisional European FinancialStability Facility. In addition, the European Central Bank has multiplied its interventions into the market.
The Unconventional “Fiscal Pact”
Te heads o state and governments — with the excep-tion o British and Czech leaders — also signed the reaty on Stability, Coordination and Governance at the end
Out of the chaos of the crisis, a
divided Europe has emerged.
o February. Te received recognition or making thebalanced budget rule mandatory. Tis rule includes anautomatic correction mechanism and a penalty systemadministered by the European Court o Justice. It is note-worthy that the reaty binds its 25 signatories and not theEU as a whole.Te crisis has triggered an expansion o the EU’s arsenalo instruments, similar to the “à la carte” approach duringEuropean integration. Accordingly, EU member states haveestablished new common mechanisms, while decidingthat not all countries are obliged to enter into them. Eachmember state has subscribed to the commitments that itwas willing or able to pursue. Tis dierentiated participa-tion has reinorced the theory o a “multi-speed Europe.Te principle whereby all EU members sit in the sameroom irrespective o their level o commitment has beenbreached. Meetings in which only euro-countries attendhave become more requent. Despite the complaints romBritain and other non-euro countries, the euro-only meet-ings have succeeded to the point that they also take place atHeads o Government level. One o the signicant eatureso this approach has been that the countries undertaking allthe commitments — the top speed league — do not enjoy special status inside the European institutions.Overall, the reaty on Stability represents a signicant stepahead. Eectively, the reaty has been accepted among 25countries acting outside the EU, setting aside the old prin-ciple whereby the “à la carte” integration takes place withinthe single EU ramework.Te reaty’s peculiarity is also highlighted by the act thatits ratication will not involve EU institutions. A limitednumber o signatory countries will suce to ensure itsentry into orce. Furthermore, the euro-countries only ormat will be boosted since the reaty stipulates that“Euro Summit meetings will take place at least twice ayear.” Te provisions concerning the majority rule deci-sion-making are particularly innovative. Sanctions againstcountries allowing excessive decits will be imposed witha majority voting procedure. Also, the president o theeurozone will be selected through a majority vote. Teserepresent momentous changes. Tey might be seen as anindicator o a new architectural design, whereby a limitednumber o EU countries can decide to act through theirown institutions and decision-making procedures, withouttaking all 27 EU members on board.
 
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Good management is necessary,
but not sufcient to protect the
euro.
It is worth noting that the ambitious reaty o Lisbonenshrines the multi-speed model by adding provisionsor making new cooperative undertakings among a ewcountries possible. Tese are the arrangements or so called“reinorced cooperation.” Te provisions have never beenactually used and were not alluded to when concluding thenew reaty. No ad hoc cooperation was launched on thatbasis, despite the act that important cooperative projectshave recently taken o. Recent “reinorced cooperationinitiatives in the economic and monetary areas have theirlegal basis in two ad hoc treaties, concluded by dierentgroups o EU countries outside the Lisbon reaty rame-work. Tis indicates that EU members wishing to pursuemore advanced integration preer to do so outside thegeneral EU ramework, leaving aside the countries notparticipating in their endeavor.
The Case for More Treaty Reform
More may come along the same lines. Te economic crisishas reopened the debate about the easibility o the EUdecision-making process. Afer ten years o laboriousnegotiations, the reaty o Lisbon came into orce in 2009.It ended a period o requent treaty changes which hadstarted with the reaty on the Single European Marketin 1986 and had accelerated in 1991 with the Maastrichtreaty. With the reaty o Lisbon in orce, conventionalwisdom held that a long period o constitutional stability could only be benecial. oday this proposition is debat-able.Te economic crisis has shown the weaknesses o thedecision-making process. It has demonstrated that theEU needs institutions able to ensure rm political guid-ance. Good management is necessary, but not sucientto protect the euro. In order to saeguard the currency,EU political institutions need to back up the authoritiesmanaging the euro.In recent months leading personalities rom a range o continental countries have repeatedly called or the transero more political and economic power to the Europeaninstitutions. German Chancellor Angela Merkel and a largenumber o the German public share this view. In conver-sations with other European leaders, Merkel has raisedthe idea o introducing a new system o EU governance,such as concrete constitutional reorms. Seeking to ndconsensus with her proposals, the chancellor has invited asmall group o government leaders to a meeting to engagein inormal discussions on the subject in June, ensuring“more Europe” is at the heart o the German initiative.Prior to the European Parliament’s spring 2014 election,this initiative is likely to have produced a new draf Euro-pean treaty. Its purpose will be to establish institutionsempowered to eectively manage the euro and its relatedeconomic union with the intention o progressing towardpolitical unity. It should also provide or new EU powersin undamental policy areas like taxation, security, andoreign policy.Te new treaty will eventually be supported and ratied by countries willing and able to pursue this more advancedstage o European integration. Tis may happen by creatinga separate union around a core o pro-integration coun-tries. Te original EU — as it was developed until today — will continue to bind the 27 member states as well asuture member states. However, it will be complementedby a union made up o a smaller number o countries. Tisgroup will have agreed to pool larger portions o nationalcompetencies and powers together. It will be the “hardcore” or “vanguard” — the nucleus o a reinorced EU. Tetreaties signed this year seem to suggest that this will be thepath towards greater integration among the willing.Te crucial question in the months ahead really concernswhich countries will be part o it. Tere are two relevantparameters. o qualiy or the more integrated group, thecountry must be, rst, willing, and, secondly, capable o adequately perorming when it comes to the new responsi-bilities. Currently, 17 out o the 27 members have proved tobe willing and able to participate to the euro. Great Britainand Sweden have declared their unwillingness, whileBulgaria or Romania have admitted to lack the capability.
 
Te euro is the most advanced EU achievement. Tereore,it would seem natural, but not certain, that the 17 eurocountries will orm the hard core, the nucleus. It is notcertain because a number o euro countries may be not be

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