ZEW Lists Priorities for EU and Eurozone Reform
ResearchPosition Paper on the European Elections
On the occasion of the upcoming European elections, the ZEW – Leibniz Centre for European Economic Research has issued a position paper containing priorities to be addressed by the new European Parliament. The position paper is based on recent ZEW research findings and identifies critical points that need to be tackled, including the restructuring of the EU budget towards creating European added value, changes in agricultural and cohesion policy as well as the implementation of a viable insolvency procedure for highly indebted eurozone countries.
“The next European Parliament should give up on the complacent behaviour that is still all too widespread in Brussels and start with a sober problem analysis. The declining popularity of the EU is not only the result of poor communication, but also of wrong priorities being set in the EU budget as well as of serious flaws in the structure of the Economic and Monetary Union. In Europe as well, way too much significance is attributed to the preservation of the status quo, and there is a lack of courage to finally scrap outdated policies. The new Parliament should change course on the euro and the EU budget,” concludes Professor Friedrich Heinemann, head of the ZEW Research Department “Corporate Taxation and Public Finance”.
ZEW President Professor Achim Wambach adds: “Europe’s strength lies in its collaborative potential to make certain areas more efficient and effective than individual countries could do on their own. According to ZEW’s research work, such synergy effects can sensibly be exploited in agricultural, defence, climate and migration policy since European added value is created in these areas. If spending is geared to the objective of generating added value, this can strengthen the legitimacy of the EU. The new European Parliament has a crucial role to play here.”
The paper begins with pointing out that the EU and the eurozone have failed to deliver on many of their promises in recent years. Economically speaking, Europe was rather unsuccessful, which is why the integration process has lost much of its support.
Majority decisions could jeopardise political cohesion
The highest priority must therefore be given to restructuring the Brussels budget in favour of policy fields which have “European added value”. This would require the phasing out of costly direct payments to European farmers which can no longer be convincingly justified. Cohesion policy, which aims to promote the development of poorer regions and Member States, should also be put to the test. The priority here must be to target cohesion funds more carefully on poor regions in the future. In addition, the ZEW position paper states that any support payment should be conditional on an independent judiciary and a reliable anti-corruption system in the recipient country.
The paper rejects proposals to give the EU its own right of taxation and to abandon the unanimity requirement in European tax policy. The current financing system of the EU budget with its contributions proportional to the economic performance of the Member States is fair, transparent and reliable in its performance. On the other hand, majority decisions in tax policy could jeopardise political cohesion in the EU, since a majority of countries could incur high costs for the losing minority. In the worst case scenario, this could prompt other Member States to turn their back on the EU, as did the UK, if they are outvoted on important tax issues.
The paper continues that there is still a substantial need for reform in the euro area. The eurozone institutions in their current form are unable to cope with a new financial and debt crisis. Furthermore, the eurozone has become vulnerable to blackmail from uncooperative populist governments, since they are considered as being “too big to fail”. To address this issue, the new European Parliament should concentrate on four priorities.
The eurozone needs a viable insolvency system
First, it must finally endeavour to dissolve the fateful relationship between public financing and banking stability. National banks should from now on observe common large credit limits and capital adequacy rules when purchasing government bonds from their own EU country. In addition, Europe must aim to develop a credible and viable insolvency system for heavily indebted euro states. In addition, new stabilisation instruments such as a eurozone budget should only be implemented as part of an overall package including the elements already mentioned above. Finally, the position paper recommends to replace the European Commission with the European Fiscal Board as the main guardian of European debt rules due to the Commissions’ overly politicised interpretation of the Stability Pact.
Apart from the measures for a more efficient EU budget and a functioning euro area, closer attention should also be paid to the “soft” factors that contribute to a successful integration. While programmes such as Erasmus for students have a positive impact on developing a sense of European identity, they tend to only reach those people that already strongly identify with Europe. This calls for new ideas, such as exchange programmes aimed at workers who would otherwise have little chance of getting to know other EU countries.
