New EU Integration as Basis for Stability in the 21st Century


Prof. Dr. Paul J.J. Welfens, Jean Monnet Professor for European Economic Integration; Chair for Macroeconomics; President of the European Institute for International Economic Relations at the University of Wuppertal, (Rainer-Gruenter-Str. 21, D-42119 Wuppertal; +49 202

4391371), Alfred Grosser Professorship 2007/08, Sciences Po, Paris,

Research Fellow, IZA, Bonn,

Non-Resident Senior Fellow at AICGS/Johns Hopkins University, Washington DC ,                        File prEeuWorldEconomy2015

EIIW 2015 = 20 years of award-winning research         October 20, 2014

  • EU Integration: Facing Responsibility in the World Economy
  • Bold and Broader Reforms in the European Union Needed

New EU Integration as Basis for Stability in the 21st Century

So far about 80 billion people have lived on this earth. In 2015/2016, the half billion of people in the EU28 are facing key challenges in contributing to sustained growth, stability and prosperity in Europe and indeed worldwide. The transatlantic banking crisis, the euro crisis and the Ukraine-Russia crisis represent three serious problems which have undermined the stability of the Europe. The banking crisis was caused by an overlap of highly ineffective banking regulation in the US, the UK and Ireland; by 2014 the US has overcome most of the short-term problems, but the debt-GDP ratio has increased by about 30 percentage points in the period from 2008-2013. In the UK the government debt-GDP ratio has increased by almost 40 points in the same period and Ireland stands for +80%. The European Union and the USA stood on the brink of a collapse after the bankruptcy of September 15, 2008 – that bankruptcy was allowed to happen by the Bush Jr. Administration and it brought about a massive reduction in investors’ appetite for risk. My conclusion in October 2008 (the date of finishing the manuscript of my book Transatlantische Bankenkrise) was that the euro area was going to face a crisis in Greece, Portugal, Spain and Italy, as these countries had high debt-GDP ratios, high deficits or high foreign indebtedness; and I mailed the manuscript on October 30, 2008 to the German chancellor’s chief economic advisor. While the US has partly adopted adequate reforms for the banking system, the overall reforms are inadequate as the institution, which in the Summer of 2006 wrote that Ireland’s banking system was sound, has not made any relevant reforms (the so-called FSAP update on Switzerland a few years ago also missed the point, as UBS was identified as a sound bank): Obviously, the IMF’s approach to its own Financial Sector Assessment Programme is inadequate and needs urgent reform. Have the EU countries called for any reforms here? Not at all. An IMF reform is urgent now.

The euro crisis is the next crisis in the western OECD which undermines stability in Europe and the world economy. The euro countries and some of the other EU countries – not including the UK – have accepted a new Fiscal Pact that is supposed to make sure that in future budget deficit rules are better observed than under the Stability and Growth Pact with its 3% deficit-GDP limit. The limit in the new Pact is 0.5% of a structural deficit-GDP ratio; here structural means that business cycle effects are filtered out. It will hardly be possible to implement this limit and it might even be at odds with the maximum 3% limit under the Stability and Growth Pact. The euro integration should bring about major economic benefits for all member countries, almost 1% of GDP in the long run – every year, provided that the Eurozone can provide a euro that holds a larger share in world currency reserves: a share of about 35% should be possible, up from the 28% in 2007, the year immediately prior to the crisis. Among economists and politicians there is broad confusion about the euro and the requirements for stability and long-term success. France and Italy as well as other euro countries are reluctant to stick to either the old or new limits of the deficit-GDP ratio and the EU’s rule that the difference between the debt-GDP ratio and the 60% limit for that ratio should be reduced by 1/20 every year is largely ignored. Some long-term consolidation is needed but consistent EU-wide public investment – driving economic growth – is also critical for economic stabilization, since the reduction of the debt-GDP ratio should naturally also come from economic growth; this is quite obvious in a period in which Germany and France face a real interest rate of only about 1%. The euro area cannot return to stability if three elements are not adopted:

  • A switch to a more explicit policy coordination which should go along with a supranational virtual expenditure-GDP ratio of about 6% where the main focus would be on infrastructure investment – about 2% of GDP – and military expenditures (another 2% of GDP) plus promotion of innovation and life-long learning (about 1% of GDP) plus the current 1%. The first six months of unemployment compensation should come from Brussels in the long run. A virtual joint budget of 6% of GDP could easily be introduced, but it requires in the medium term that all euro countries’ ministers of finance would use the same budget software – solving this issue should not be a matter of years (!). The supranational policy layer must be big enough that the bankruptcy of a member country of the euro area could be a valid political option: a bigger supranational government in the eurozone will make it possible to, for example, let Greece go bankrupt should politicians in Athens try a second massive deficit fraud as was the case in the election year of 2009. With a bigger supranational government, even the bankruptcy of a country will not bring about an end to all government activities in a euro member country!
  • The long-term creation of a euro political union on the basis of democracy, the rule of law and social market economy. There would be euro bonds placed in the market and based upon some discretion of the eurozone government and the respective Parliament. National governments should have the option of a structural deficit-GDP ratio of not more than 0.25% of GDP, 0.5% of GDP would be the maximum structural deficit-GDP ratio at the supranational policy layer. Assuming a trend growth rate of output of 1.5 %, the long run debt-GDP ratio in the eurozone would thus not exceed 50%. These rules must be incorporated in national constitutions.
  • There should be eurozone political parties; otherwise the natural goal of leading national politicians will not be to become the head of the respective eurozone party and the head of the eurozone government. Never would a political deficit fraud of the type of the Greek problem of 2009 occur in a US state, since notifying ¼ of the true deficit-GDP figure to Washington would mean the immediate end of a national party career for the respective representative of that state.

If the eurozone countries would shift towards such deeper integration policies, the euro countries should be able to achieve at least 2% of economic growth provided that the expansion of information and communication technology is adequately promoted. The share of real ICT investment – based on nominal ICT investment figures deflated by the relevant price index (EU Klems database) – in real GDP is more than twice as high as looking at nominal ICT-nominal GDP shares suggest (see WELFENS/IRAWAN/PERRET, 2014: For a euro area with solid growth, low inflation and full employment, there will be strong pressure on the other European countries to join; this would hold particularly true for the UK whose debt-GDP ratio is likely to exceed that of the euro area within a few years. This assumes that the current timidity in EU integration is overcome. There is not much doubt that the UK will leave the EU after a referendum in 2017 which, however, would be totally counter to its own economic and security interest. The UK can have no interest in leaving the EU with a shaky euro area in which Germany dominates economically, while military security is inadequate in both the eurozone and Western Europe. With the Ukraine-Russia crisis lingering, Western Europe has every interest in not letting the EU disintegrate. If the UK should leave, Brussels should raise the price for that non-solidarity much higher, beyond the refutation of the free mobility of labour with the EU as was the case with Switzerland in 2014.

If the EU falls apart, the blueprint for integration in other parts of the world would be damaged. Asia, Latin America, Africa and Europe need integration schemes that work, otherwise regional and global economic and political chaos will start spreading.


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