How the EU could stop the global crisis becoming a European problem

By Andre Sapir

Published in: FT.com Economists’ Forum, 23 Aug 2009

Imagine the US was facing the current crisis with the following situation: only 30 of its 50 states
belong to the dollar area; most of the southern states are outside the dollar area and so is New
York, home of the US financial centre; the seat of the US government is in Washington, but
dollar area chairman Ben Bernanke operates from Pittsburgh and secretary Tim Geithner is
mainly governor of Vermont, one of the smallest US states, with a population of roughly half a
million.

Absurd? Yet this is exactly what the European Union looks like, with only 16 of its 27 member
states belonging to the euro area; most of the eastern states and the UK, home of the EU financial
centre, outside the euro area; the seat of the EU institutions in Brussels, but ECB president Jean-
Claude Trichet operating from Frankfurt and Eurogroup chairman Jean-Claude Juncker mainly
the prime minister of Luxembourg.

The point here is not that the EU should become the United States of Europe, but simply that its
current organisation poses major problems that risk transforming the current global crisis into a
European crisis. There are at least four issues that the EU needs to address urgently.

The first is banking regulation and supervision. It has become evident that the coexistence of
pan-European banks and purely national supervision is unsustainable. As the Turner Review
commissioned by the UK government puts it, ‘sounder arrangements require either increased
national powers, implying a less open single market, or a greater degree of European
integration’. The choice will not be easy for the euro area and for the UK. Euro area members
area share clear common financial interests since they share a common central bank, but they
also have common financial interests with the non-euro area EU countries, and the UK in
particular, with whom they share a single market in financial services. The UK, however, cannot
afford to be a bystander on this matter since any remedy to the euro area’s financial governance
that did not include the UK - for instance a euro area banking supervision mechanism - would
risk jeopardizing the role of London as the euro area’s de facto financial centre.

The second is the EU’s ability to take part effectively in global efforts to reshape financial rules.
The EU institutions have a seat at the G20 table, but face a double challenge of legitimacy. One
is vis-a-vis the EU countries which also sit at the table (the four members of the G7 plus Spain
and the Netherlands) and whose leaders tend to overshadow EU institution representatives. The
other is towards the rest of the (and smaller) EU countries which fear, with some reason, that
coordination at G20 level could become a substitute for coordination at EU level. Having a seat
but little legitimacy is bound to prove untenable.

The third issue is the economic situation in some new member states outside the euro area. Their
earlier impressive growth, which relied on massive capital inflows, now looks problematic. The
potential for catching up with the old EU members remains generally good but the path towards
it is much less assured and the new member states that financed present consumption with
foreign savings will need to reassess their economic strategy fundamentally. Intervention by the
IMF inside the EU for the first time in three decades highlights the seriousness of the situation
and Europe’s limited ability to address its own difficulties. In some of the new member states,
the dramatic revision of growth prospects may even end up shaking the existing consensus in
favour of European integration.

Last but not least the crisis has once again exposed the EU’s inability to deal effectively with its
own regional backyard. With the crisis, some neighbours, like Ukraine, are facing dire
conditions. Yet, the EU is keeping a low profile, preferring instead the IMF to take the lead. In
contrast to the US Fed which has opened currency swap lines to Mexico and other emerging
countries, the ECB has refused to offer swap facilities to emerging countries outside the EU.

How should the EU respond? First, all member states, including the UK, should adopt sounder
financial sector arrangements with common EU discipline. Second, EU countries should speak
with one voice at the G20, at the very least by dividing the responsibility among EU participants.
Third, the EU should improve implementation of the criteria for adopting the euro, giving more
weight to economic logic and less to legal procedure. This would speed up enlargement of the
euro area to nearly all EU members. Finally, the EU should assume greater economic
responsibility towards its neighbours, including those with little or no prospect of joining the EU
any time soon, by providing them with balance-of-payment assistance.

Ultimately, the euro area should have its own full-time, Brussels-based secretary of the treasury
providing strategic orientations to national finance ministers. The best solution would to follow
the foreign policy template created by the Lisbon Treaty and merge the two posts of Eurogroup
chairman and of EU commissioner for economic affairs into one. This would give to the
Eurogroup chairman the economic services and expertise that he currently lacks and to the
commissioner the political weight he lacks.

Andre Sapir is professor of economics at Université Libre de Bruxelles and senior fellow at
Bruegel, the European think-tank, which is soon releasing his new volume ‘Memos to the New
Commission’