02/04/2013 04:11 pm ET Updated Apr 06, 2013

How Europe Is Building for the Future

The Euro area, when it was finally struck by its first serious financial crisis in 2008-2009, was hit twice, firstly by the level of huge pre-crisis public and private debt overhangs and secondly by an inadequate institutional design that prevented the kind of rapid and nimble responses required. More broadly, the crisis exposed the problems in the structure of the Eurozone, which escaped notice in the good times. So measures had to be introduced to strengthen economic governance.

It is in our response to the crisis that we are building more sustainable progress for the future.

Bank Supervision & Recapitalisation

Soon there will be a new form of bank supervision in the EU, accompanied by bank recapitalisation measures.Ireland must and will benefit from bank recapitalisation. If debt as a percentage of GDP is the measure used to monitor all Member States we must have both debt and GDP measured in the same way in every Member State. You cannot measure by litres in one Member State and metres in another, so to speak. This means there will have to be a measure of retrospection in ESM recapitalisation. All of these actions are helping to restore confidence and pave the way for recovery. There remain structural problems in Southern Europe and these need to be addressed in a sympathetic way -- again solidarity across the Union is key.

The Global Potential

The Social Market Economy is based on a number of elements. It is not geared only towards performance but is based primarily on a respect for human dignity, free from unwarranted control. However, incentive systems that decouple risk and liability contradict the spirit of the social market economy. A market economy which serves exclusively the interests of capital cannot be called social. The global GDP increased by a factor of seven over the first 1800 years of the common era and, since then, has surged by 70 times, indicating that the social market economy can bring extraordinary benefits for the common good. However, this success has been possible because the free economic system has reformed constantly to meet the challenge of the day. It must reform again. It is time to put social back into the Social Market Economy.

Perfect Stock Markets?

Robert J. Schiller, Professor of Economics at Yale University, in his most recent book Finance and the Good Society, states, "It appears that stock market price changes in the United States have been mostly due merely to changes in moods or attitudes or something else unrelated to the actual changes in real underlying values." He also points out that, in fact, U.S companies fared much better in the Great Depression than is commonly suggested by embellished stories. Not a single company of the thirty in the Dow Jones Industrial Average went bankrupt. Generally, large U.S companies did well, lowering their dividend payments for a few years before resuming the trend. He continues: "Most financial writers have apparently never heard of excess volatility, and they continue to write their stories about the day-to-day fluctuations in the stock market as if the market were dominated by traders with razor-sharp minds and fast computers who have a deep understanding of the economy and grasp the import of every nuance in today's economic news."

He concludes, "Many traders do indeed have sharp minds, but the game they are playing is not generally to involve themselves in macroeconomic forecasting. They are instead playing a game against each other -- a game of guessing each other's psychology."

Schiller points to the decline in the partnership structure on Wall Street which may have contributed to the severe financial crisis that began in 2007, because it appears to have reduced the incentives to manage long-term reputation and long-term risks in favour of a structure that encourages rapid growth of the company (Lehman Brothers was a partnership until 1984, Goldman Sachs until 1999, Bear Stearns until 1985 and Merrill Lynch until 1971). So the ultimate collapse of firms such as Bear Stearns, Lehman Brothers, and others -- and the economy as a whole - may be related to the changes wrought by the end of the partnership structure," he says.

Putting our economies back in good shape is not all the responsibility of politicians; businesses and others must also step up to the plate. The markets invested against the Euro expecting to make profits and they lost; they invested against individual Member States and lost. Italy, for example, is now getting 15-year money at 4.8 percent from the markets. There are very few places for the markets to go. It is time they went back to investing in reality. The Euro is here to stay; Member States will not be left abandoned. The ECB has the firepower to take on the currency gamblers.

Then and now

Right now, most EU states need cash flow and confidence. Bringing our budget deficits under control and not continuing to add to bloating national debt is essential. This in itself is bringing, and will bring, confidence. Compare this to the 1930s when it was every country for itself and beggaring your neighbour was of no concern. Despite the recent economic crisis, the EU has been a great success. Never in our history have so many countries had such a continuous time of peace. Never in our history has the average wealth of each European country been so high. And never in our history has Europe had such good relations, both internally and with our neighbours and partners. How we act now will determine our stability and prosperity into the future.

In the first half of the 20th century approximately 60 million Europeans killed each other in two World Wars that started on our continent. Now Europe is at peace, the Berlin Wall has disappeared and 10 former Soviet-dominated states joined the EU.

To date the EU, which is still a work in progress, has shown remarkable resilience in dealing with the crisis. We have some way to go but let's at least acknowledge the progress that is being made. Together we can build what Schiller calls the Good Society. This requires intent and tenacity. It also requires institutional capacity. Markets are of course important but traders don't have disinterested razor sharp minds and psychological games are best ignored.

Gay Mitchell is an MEP for Dublin, the Leader of the Fine Gael Delegation in the European Parliament and a former Minister for European Affairs.