Jean-Pierre Danthine, Paris School of Economics, CEPR, former vice chairman of the Swiss National Bank, and member of the ADEMU Advisory Committee reflects on a tumultuous time for the EU and examines the options available to strengthen the Union in the face of limited political capital.
In a recent address at the ICMB, Jean-Claude Trichet repeatedly emphasized the boldness of the early 1990s decision to move to a single currency in Europe, boldness which has been rewarded, in his view, since the Euro has survived the biggest economic stress test of the last 70 years.
Boldness can be wisdom; it can also be recklessness, like when bold moves lead to the permanent weakening and impoverishment of some national economies that were not ready for it. The events of the last 18 months, however, suggest that the difference between wisdom and temerity is not purely exogenous but is also the product of political leadership.
The insistence by European country leaders that the European construction involved no loss of sovereignty had led to a democratic dead-end where the fragility of an incomplete and incoherent institutional construct could only be remedied by more of Europe and less sovereignty in an apparent contradiction with the desire of the majority. What has changed in 2017 is the demonstration by Emmanuel Macron that more of Europe, inclusive of a decrease of sovereignty, is a fight that can be fought and won provided the terms of the deal are explained and the circumstances are right.
This is an important victory, but the war has not been won yet: the change in sentiment that can be attributed to Brexit, Macron and the economic recovery can be overturned in the absence of a fierce engagement of all pro-Europe leaders. Monetary union in Europe remains a very ambitious project, the circumstances are demanding, and completing the institutional framework to make it viable in the long run and under all, including the most unfavourable, circumstances is a tall order. Notably in the aftermath of a severe crisis that is leaving very deep scars and has generated a widespread mistrust of the elites.
Economists have the mission to propose solutions to economic problems and they have been very active since the crisis. The amount of creative ideas and solid modelling that has been proposed, for example within the ADEMU project, has been impressive. As a former policy maker, however, I cannot fail to observe that the economic profession has been less adept at taking on board the limitations on the existing political capital.
Even admitting that the political capital stock is not fixed and that it can be strongly influenced by economists’ ideas and political leaders’ actions, one should not be blind to the limitations it implies. Progress depends on finding democratically acceptable solutions or remedies. In judging potential advances in the European project the criteria of political feasibility and democratic legitimacy must be given appropriate weights.
For this reason, I continue to be of the view that the subsidiarity principle enshrined in the Maastricht Treaty should be applied with determination (Begg et al., 1993, Danthine, 2017). That is, in considering the appropriate balance of powers between the institution of the Community and those of its member states, the presumption must be that the powers of EC institutions should be limited to those functions that cannot be adequately performed by the member states.
Indeed, given the loss of sovereignty that centralization implies, delegation to Brussels is justified only in the case where the benefits of centralization can be demonstrated and generously exceed its political cost. In an extension of this principle I would further argue that a high priority should be given to effective advances in the European project that do not unnecessarily tax the existing political capital.
This is true in particular because recent developments and events plausibly reinforce the appeal of European-wide approaches to global problems. National frontiers are of little relevance when considering the fight against climate change. And there is a strong presumption that the challenges posed by security threats and immigration issues are best addressed at the continental rather than at the national level. But meeting these important challenges will require significant sacrifices in terms of national sovereignty. A corollary question then is: how much political capital should be invested in solving the more immediate economic problems raised by the need to consolidate the monetary union?
In a recent speech (Weidmann, 2017), the governor of the Bundesbank, Jens Weidmann, lays out his view that reinforcing fiscal discipline in “an overhauled Maastricht framework” is an alternative to a deeper integration. In the latter case, every member state would surrender decision-making powers in fiscal and economic policy matters to the European level. The former, on the other hand, relies on the principle of independent national responsibility. It is obviously less demanding in terms of political capital.
Mr Weidmann goes on detailing the overhaul of the Maastricht framework envisaged by the Bundesbank. It consists of three main elements, namely, strengthening the role of the ESM in matters of fiscal surveillance, abolishing the preferential treatment afforded to government bonds, and automatically extending the maturity of sovereign debt as soon as a country applies for financial assistance.
One should resist evaluating these proposals from a purely ideological perspective, notably by associating them with the traditional German bias for fiscal discipline. (Full disclosure: as a resident of a non-EU country I do not find the principle of national fiscal responsibility outrageous.) My point here is that such proposals and their alternatives should be examined also in terms of their more or less efficient usage of the outstanding political capital and thus in view of their collateral impact on the rest of the European construction; specifically, on the extra degree of freedom they may offer in pursuing the broader objectives of European integration.
Jean-Pierre Danthine is a member of the ADEMU Advisory Committee. During most of his career (1980-2009), he was a teacher and researcher in the Faculty of Business and Economics (HEC) at Lausanne University, of which he was also vice-rector from 1987 to 1991. After studying at Louvain in Belgium and at Carnegie-Mellon University (Ph.D. 1976), he taught for some years at Columbia University before moving to Switzerland, and always kept one foot in North America via many academic stays at Columbia, the University of Southern California and New York City College. From 1996, he headed the FAME (1) in Genova, and from 2005 to 2009 the Swiss Finance Institute (2), a private foundation that “supports and advances research, doctoral training and executive education in banking and finance”. He was also a fellow of the CEPR – and a member of its board of trustees – and of the European Economic Association. Within these entities and through his prolific research, Jean-Pierre Danthine developed a great expertise and an international reputation in banking and finance macroeconomics. In mid-2010, he left the SFI to join the Executive Board of the Swiss National Bank, before becoming its vice-president from 2012 to the summer of 2015. In this same period, he managed the second department, in charge of financial stability, notes and coins, as well as finance and risks. Renowned economist and experienced leader in an international environment, Jean-Pierre Danthine was elected unanimously by the members of PSE Board of Directors to become the new president of this young institution, which must now acquire the resources needed to consolidate its position among the world’s best economics research centres.
Begg, David, Jacques Crémer, Jean-Pierre Danthine, Jeremy Edwards, Vittorio Grilli, Damien Neven, Paul Seabright, Hans-Werner Sinn, Anthony Venables and Charles Wyplosz (1993), Making Sense of Subsidiarity: How Much Centralization for Europe?, CEPR, London
Danthine Jean-Pierre, Subsidiarity: The forgotten concept at the core of Europe’s existential crisis, Vox Eu.org, http://voxeu.org/article/subsidiarity-still-key-europe-s-institutional-problems, April 2017
Jean Weidmann, Monetary union – ever a work in progress? The euro area torn between the Maastricht framework and fiscal union, https://www.bis.org/review/r171212a.htm