EUROPE

Summer 2007

by Daniel Daianu

Daniel Daianu is a former Romanian Minister of Finance

Europe’s current failure to coordinate economic policies adequately, despite facing critical global and internal challenges, seems symptomatic of an organisation incapable of dealing with complexity. Of course, complications born of successive rounds of enlargement have fed structural stresses in EU institutions outside the economic arena. But for a Union founded on economic collaboration and the benefits of a single market, it is particularly worrying to witness incoherent macro-economic policymaking and disjointed fiscal strategies in the eurozone, plus deep-rooted discord over the socio-economic model best suited to the competing demands of EU citizens and the global market.

Economic disparities are now writ large in the EU, with its multiplicity of big and small member states at varying stages of market development and socio-economic cohesion. National, regional and personal incomes vary hugely; economic nationalism encroaches on the internal market and governments variously juggle public spending on social security and productive investment.

Today’s world economic order is also exerting tremendous pressure on Europe. Once, international competition was basically a game for westerners. Now the entry of low-wage Asian economies on global markets is causing tectonic shifts in competitive hierarchies and pressing down on wages in affluent countries. Together with the on-going revolution in information and communications technology, competition from China and India is creating a new age of uncertainty for Europe.

The solution, like the problem, is unlikely to be straightforward; there is no simple tick-list of required actions. However, certain essential elements can be enumerated. Reform of EU institutions and policymaking are both crucial for member states to manage increasingly multifaceted economic issues. Without reform, the sheer diversity of European viewpoints risks stalling the Union’s decision-making engine in troublesome yet vital policy areas such as tax harmonisation, welfare reform, pension restructuring and the Common Agricultural Policy. Recent controversies over the EU budget signal the sort of crises that will recur if current decision-making practices persist.

The constitutional treaty, in whatever form it finally emerges, is part of this endeavour. Streamlining Commission decision-making and operations is also badly needed, along with better coordination between the Commission and other EU governing bodies. The EU must also become more flexible and contain bureaucratic entanglements at national and supranational levels.

Beneath such umbrella requirements for reform, certain policy areas call for special attention. For example, if Europe is to regain a competitive edge in high-tech value-added industries, EU industrial policies must support more research and development and education policies should prioritise engineering, mathematics and physical sciences. After all, the battle for global market share won’t be won by an army of lawyers and graduates in business administration. This is a job both for national governments and the Commission to ensure targeted funding and effective coordination.

In terms of complexity, Europe’s role on the world stage is particularly tangled, as exemplified by the search for a common energy policy. Securing energy supplies is a pre-requisite for continued economic wellbeing. Yet a joint energy strategy must somehow incorporate member states’ diverse diplomatic and trade relations with Russia, EU-wide competition with the US, China and India for increasingly scarce fossil fuels, Middle Eastern politics and issues of nuclear proliferation as countries such as Iran develop their domestic technology. Aligning different national interests remains a problem in other international policy arenas too. For instance, despite the EU’s supposed united stance at world trade talks, the Commission frequently finds it hard to resist pressure exerted by EU heavyweights.

Such examples underline the importance of getting our own house in order before we attempt to resolve convoluted global challenges or improve global governance. Adopting a consistently fair approach to emerging economies and other developing nations would be a valuable step in this direction, including less EU protectionism at world trade talks. A higher EU standard of morality would benefit other international agendas too, including environmental protection, combating global warming and the fight against world poverty. By helping to alleviate these essentially economic problems, a well-coordinated and ethical EU could avert a “clash of civilisations” and might even reduce the threat of international terrorism too.

Greater EU integrity over global issues would require better and more statesman-like leadership. Indeed, this would seem imperative to improve EU economic policymaking and the functioning of democratic politics as well. Flagrant misbehaviour among the political elite − as exposed by media reports on national politicians, members of the European parliament and the Commission – cripples the reputation of policymakers and reduces the effectiveness of policy itself. I would argue that, in addition to higher personal ethical standards in public life, the adoption of economic policies that recognise the state’s role in providing essential public goods would also help to restore the moral standing of the EU political system.

Greater decency in public office needs to be matched in EU boardrooms, given that numerous corporate scandals and market failures in recent years have raised questions over the moral and social responsibility of many business leaders. Clearly, more coordinated EU actions to tighten financial regulations would help improve commercial conduct. Yet it would do little to repair the social inequalities generated by astonishing rises in the incomes of top managers in recent years at a time of modest wage rises or even stagnant pay for employees. Such income polarisation has increased in almost all western societies, with the middle classes being frequent losers. It is compounding problems that governments face when trying to shift public spending away from welfare support and towards more productive investment. Amid demonstrably unequal pay, how can states persuade wage earners to accept slower rises in their salaries, let alone a freeze or cut, to allow more investment in industry? And would capital owners accept lower dividends for the sake of more public expenditure in the current climate of corporate greed? A greater sense of fair play among economic elites would help European societies to resolve such dilemmas.

Increased pragmatism in economic policymaking is much in demand nowadays, reflected in pressure for more public spending on, say, environmental protection. Yet, ironically, just as the retreat of free market fundamentalism should be allowing green concerns to move onto the mainstream economic agenda, so global competition is making it harder for EU governments to strike the desired balance between public spending priorities. This policy conundrum has been resolved with remarkable success in Nordic countries, hence increased support for their “social model” of economic development. However, growing trade competition from Asia suggests EU policymakers will suffer from this “Catch 22” for years to come.

So countervailing internal and external forces can be expected to continue to complicate attempts to overhaul EU economic policy in future. Even if institutional reform does streamline EU decision-making, perhaps there will simply be too many uncertainties in a rapidly changing world − and too many viewpoints in an enlarged EU − to hope for any spectacular progress. In such circumstances, it would seem likely that the EU will muddle along for a while yet.

However, more ethical EU policies could help build a better world, economically, socially and politically. This would require Europe’s leaders and people to rediscover traditional values of honesty, hard work and compassion, with guilt and shame acting as social cement rather than cynicism, the lust for power and money, hypocrisy and disregard for fellow citizens. These vices have been steadily spreading and point to a decadence that has to be fought tenaciously. Some will say that virtue and vice have accompanied human history from the beginning. But you cannot sweep aside such moral malaise with complacent, self-serving arguments. In hard times, high ideals among our leaders can benefit European society as a whole.