As a new European Commission prepares to settle into Brussels after the European Parliamentary elections, a new opportunity arises to address once again the central issue: Europe will only work for its citizens, and thus recover the legitimacy of its grand project, if there is economic growth.
This means three things:
Above all, Europe needs to finance its currency with a common fiscal policy. No common currency has ever survived without fiscal integration. The euro is no different.
It also needs to invest in its future and not just dwell forever in the doldrums of austerity. Simply, if one country grows at the expense of others, Europe will not work. Conversely, any weak member will undermine all others.
Finally, the biggest economy, Germany, needs to consume more. For the average German household to improve its standard of living, Germany cannot go on like China, just working hard, exporting and saving.
What does this imply practically?
- Fiscal Federation. It is true that the old idea of a federal super-state no longer fits the reality of today's de-centralizing societies characterized by distributed power. Certainly, the incoming commission must prudently take into account the large eurosceptic vote in the EU Parliament elections and the hesitations of Great Britain.The EU government needs to be limited, but strong; centralizing the minimum and maximizing devolution to the member states. But there can be no escaping the fact that, ultimately, finances must be federalized. There is no way around this reality as long as there is a single currency across still highly differentiated economic systems.
- On investment, Germany and the northern states should fully embrace the fresh new approach of Prime Minister Matteo Renzi as Italy takes over the rotating chair of the European Council.
To heal the political rift in Europe and bolster EU legitimacy by helping stimulate growth in the south, Germany should accommodate Prime Minster Renzi's calls for more flexibility in interpreting the Maastricht criteria of the 3 percent budgetary deficit by not counting borrowing for job-creating investment in infrastructure. Investments in the future should not be counted in the same column as debts incurred by past spending commitments.
This is the position of all responsible statesmen in the southern tier. Mario Monti, the former Italian prime minister who now chairs our Council on the Future of Europe, has long championed this case. At our town hall meeting in Madrid last March, Spanish premier Mariano Rajoy also made the same plea. These two countries have more than demonstrated their commitment to the kind of reforms Germany has demanded. Italy has reduced its deficit to the 3 percent threshold, and Spain has implemented a series of painful reforms, from labor markets to taxation. Foreign direct investment is now coming back. It is time for Germany to fulfill the quid pro quo.
Germany, in turn, is entitled to expect that Italy, Spain and other countries in the south that benefit from greater budget flexibility will not abuse it by sticking strictly to investment in the future and not seeking to fund current expenditures through greater budget deficits instead of compensating cuts or taxation.
- Germany needs to boost domestic consumption, for the good of its own citizens as well as Europe as a whole.
As Paul De Grauwe and Yuemei Ji point out in a recent study of the European Central Bank's household wealth survey, Germany has the most unequal distribution of wealth in the eurozone. They report that the median household in the top 20 percent of the income class has 74 times more wealth than the bottom 20 percent.
That same ECB survey showed that the net median wealth of German households was less than that of Belgium, Spain, Italy and France, among others. Yet wealth per capita of GDP in Germany is higher than any other European country than the Netherlands.
This gap points out a key issue that is rarely discussed despite its immense implications. As the De Grauwe/Ji study documents, a large part of German wealth is not held by households, but by the corporate sector or the government.
In this sense, Germany faces the same challenge as China: a high-export and saving economy which needs to rebalance through policies that create a greater flow of wealth to households, thus spurring greater consumption. This, in turn, can create demand for imports from Germany's European neighbors.
If Germany stands behind a new European Commission that presses the agenda outlined above, it will benefit all Europeans -- including ordinary Germans. Only then will the European Union begin to earn the legitimacy it so sorely lacks today.