As Europe emerges from the crisis, it confronts three major long term challenges: rising debt levels made worse by an aging population, tension between national and community institutions, and excessive dependence on imported energy. The first two were made all the more pressing by the crisis, and the third is long standing.
Without further integration and closer coordination among member states, the EU has limited power to meet these challenges. The Lisbon Treaty, which entered into force in December, will have little impact in the short term but it does hold the promise of increased integration in the long run. In addition, the region’s recent ad hoc collaboration on dealing with the economic crisis suggests that these problems can be tackled.
Going forward, long term success will depend on the vigor with which individual countries take up reforms, as well as the strengthening of EU-wide democratic processes, such as direct election of key officials.
Long Term Challenges
Rising Debt Levels
Aging populations imply a large fiscal burden. The problem has been aggravated by the financial crisis, with average fiscal deficits deteriorating from 0.8 percent in 2007 to 6.9 percent in 2009 and debt levels projected to rise by 34 percent in the four years from 2007 to 2011, from 66.2 percent of GDP to 88 percent, according to the EU Commission.
EU members, and not the EU itself, remain largely in control of the instruments needed to deal with these long term challenges.
As the unsustainability of several members’ national pension plans becomes obvious, pressures will rise to reduce entitlements or increase taxes. Health systems will also come under pressure. An EU Commission study, published last year, suggests that, if policies are not changed, the average debt/GDP ratio of EU member states will reach nearly 500 percent by 2060, although there are wide varations across countries.
In addition, the aging of Europe’s populations may hurt worker productivity as the skills of older workers are more likely to become obsolete during an era of very rapid technological change. On the bright side, unemployment among the young will fall as the size of the working age population decreases, but the amount of work to be done does not. Jobs in the personal services sector (e.g., cooking, and cleaning), which cannot be outsourced, will be particularly resilient, but they are intrinsically low-productivity and do not pay well.
The United States will face similar challenges as a result of its aging population, only adding to Europe’s challenges because of the very close financial and trade integration between the two.
Competing Institutions
Currently, EU member states, particularly those in the Euro area, are caught between two competing institutional structures. With a common monetary policy, but without the means to follow a common fiscal one, they are unable to independently control their economies, but also have yet to develop a fully-integrated one. This hybrid structure does not have the legal capacity to tackle the great tensions that emerge from the Euro area’s diverse economic structures, governance and administrative capacities, and the shocks that asymmetrically hit countries. In its dealings with member states that are pursuing inappropriate policies, the EU must rely on naming and shaming, which can only go so far.
The EU cannot do what it needs to do on energy policy or integrate further economically until it has its own tax-raising and borrowing powers.
Similarly, financial integration is incomplete across the Euro area. Banks can—and did—borrow from one another and take deposits across borders. However, the system of cross-border financial supervision is underdeveloped, no common fund to protect depositors exists, and bank rescues remain the responsibility of individual states. If the system does not change, only banks housed in big EU countries—with big tax bases available for bank rescue—will be able to grow across the EU, and even the largest EU states will see this as a mixed blessing.
Dependence on Energy Imports
Energy policy also poses a critical challenge. EU countries already import 57 percent of their natural gas, primarily from Russia, and that number is expected to rise to 84 percent by 2030. The corresponding figures for oil are even worse, leaving the EU—or individual member states, as discussed below—vulnerable to political blackmail by energy suppliers. The situation is particularly worrisome for the Baltic States, which have a troubled history with Russia.
Role of EU-wide Institutions
EU members, and not the EU itself, remain largely in control of the instruments needed to deal with these challenges. The EU member states retain the sole power to raise taxes and control the vast bulk of public spending. Only one percent of GDP goes to public spending at the EU level, compared to 40–50 percent at the national level.
Similarly, it is the member states, and not the EU, that have the legal and practical means—including control of big energy utilities—to supply energy to citizens. The fact that not all states are equally dependent on energy imports makes forming a common energy policy all the more difficult. Some have coal reserves and others have nuclear industries, often owned by taxpayers, while others import almost 100 percent of their energy.
The Lisbon Treaty does little to promote greater economic integration for now, but it does increase the potential for closer political collaboration in the long run.
Creating a single market and opening cross-border competition would lead to real economic efficiency gains in energy and other areas, including the provision of services and government procurement.
The EU cannot establish such markets or provide energy supply guarantees to all members, however, unless it has its own tax-raising and borrowing powers to fund the necessary infrastructure. Similarly, full economic integration cannot occur until the EU enjoys some autonomous tax-raising capacity.
Lisbon and the Potential for Further Integration
The long-gestated Lisbon Treaty does little to promote greater economic integration for now, but it does increase the potential for closer political collaboration—and hence the promise of increased economic integration—in the long run.
As a result of the Treaty, some decisions will now be made by majority, making them easier to reach, though many important decisions—including all tax matters—still require consensus. The European Council will also now have a full-time President, who will chair the Heads of Government meetings, and whose powers will come mainly from his or her powers of persuasion. The fact that former Belgian Prime Minister Herman Van Rompuy, a respected economist with a deep interest in the major economic issues of the day, is the first to hold this post should help place the most important questions higher on the agenda.
Collaboration across the EU has nonetheless increased in a pragmatic response to the crisis.
In terms of economic management, the new Lisbon Treaty could increase coherence in the Euro area. It gives Treaty status to the Eurogroup—the finance ministers of the Euro area—which could grow into a kind of economic government for the Euro area countries. In addition, it provides Euro area countries with the possibility of unified representation in international forums, and makes it slightly easier to initiate action against members with excessive fiscal deficits.
However, no agreement on autonomous tax-raising by the EU—which could be limited by a treaty to some percentage of GDP (say 4 percent) and decided by a special, weighted majority (say 80 percent of the population and 80 percent of states)—was reached. Similarly, while the Lisbon Treaty gave the EU greater power to promote a single market in energy, it did not give it the power or money necessary to invest in cross-border pipelines and power lines.
Meanwhile, collaboration across the EU has nonetheless increased in a pragmatic response to the crisis. Countries have worked together increasingly, as evidenced by the crucial October 2008 Summit of the Eurogroup, to which the non-member UK’s prime minister was also invited and which resulted in the decision to recapitalize banks throughout the Union, averting a catastrophe.
The ultimate success of the Treaty will depend on the existence of the political will to exercise its provisions. To create that will on an EU-wide level, genuinely EU-wide elections are needed.
For such collaboration to continue, and for the Lisbon Treaty to reach its full potential, EU-wide democratic processes should be strengthened. The ultimate success of the Treaty will depend on the existence of the political will to exercise its provisions. To create that will on an EU-wide level, genuinely EU-wide elections are needed. For example, the president of the Commission or the new president of the European Council could be elected by the EU voters, rather than chosen by 27 heads of government at a private meeting. Such a process would give greater political legitimacy to EU-wide economic decisions.
Conclusion
By creating the conditions for a lasting peace in Europe, the European Union has already proven its immense value. Its program of economic integration has also yielded enormous dividends. However, while the program remains ambitious, it is incomplete. Europe needs to summon the courage to go the extra mile if it hopes to reduce its economic vulnerability and maintain its influence in world affairs.
John Bruton served as ambassador of the EU to the United States until 2009, and has also held the posts of taoiseach, minister for finance, and minister for industry, trade, commerce and tourism in Ireland.
