Discurs susținut la Academia Ungară de Științe (lb. engleză)

Daniel Dăianu - membru CA al BNR

We are a short time after the elections for the European Parliament/EP. A piece of good news is that political groups that question the existence of the European Project, of the Union, have not got the upper hand. But the reverse is that the EP is more fragmented while the Union is afflicted by conflicting views regarding its future, there are cleavages between North and South, between West and East, while Brexit has not been consumed and its impact can still produce much upheaval. The global economy is slowing down, the euro area is still at pain in dealing with its design flaws and tensions, there is an erosion of multilateralism in global arrangements against the backdrop of a shift of economic gravity toward Asia. A brewing economic “cold war” between the US and China is also a big menace. “Radical uncertainty”, as Sir Mervyn King put it, is very much a feature of nowadays world.

In what follows I would like to dwell on the call for “European Sovereignty”


The French President, Emmanuel Macron, produced quite a stir by asking for what he called “European sovereignty”. In April 2018 he said it in the European Parliament, after which this become a leitmotif of his European pronouncements. Other European leaders have echoed this aspiration. Arguably, this quest is to be embedded in a wide context by considering trends which have been getting steam during the past decade.

‘European sovereignty’ automatically leads to the idea that the EU needs more room of manoeuvre in world affairs, not least in economic terms. But how can one interpret such a goal in a world in which global supply chains have created powerful interdependencies? Does it mean that Europe strives to be less dependent, more self-reliant economically in this regard?

One could argue that such an objective is not devoid of common sense at a time when multilateralism is severely tested by, what an irony, the US in particular. Or, that economic and security rationales lie behind an inward-looking syndrome , that shows up in the way Europeans tackle the challenges of immigration, protection of borders, terrorism, cyber attacks, Chinese economic expansionism, etc. All these challenges would suggest that however much one is enamored of economic openness, of a borderless world, reality forces upon us tough choices and an inexorable motion toward a EU epitomized, eventually, by a sort of “fortress”.

Decades ago Richard Cooper wrote a book titled The Economics of Interdependence (Columbia University Press,1980). That was an interpretation of what underpins the transatlantic economic and political community. The Cold War was a period that reinforced the links between Europe ( EU) and the US, in economic and military affairs. In spite of inevitable economic rivalries and Europeans’ envy of Washington’s “exorbitant privilege” (as Valery Giscard d’Estaing called the US leeway to fund its worldwide ventures by printing US currency), ever deeper economic ties were a strong lynchpin for containing the Soviet Bloc and for expanding western democracies’ interests worldwide.

But the world today seems to have turned upside down. Whereas emerging economies have been traditional advocates of fair trade, currently some advanced economies, with the US in the lead, argue that global trade is not a level playing field, that unfair practices favor emerging powers – China in the main. Interestingly, this view is not to be parked strictly in the current US administration yard; even former advocates of unrestrained globalization, of “a flat world”, as Thomas Friedman put it, share this new approach, while security related motivations substantiate it.

Moreover, multilateral arrangements, that were fostered by the US after the end of the WW2, are being seriously questioned; bilateralism and plurilateralism are proliferating. Again, China is seen across the Atlantic, as a huge geopolitical rival, whose ascendancy has to be slowed down, if not averted, by all means –including trade and investment restrictions. But Europeans, too, are screening Chinese investments and transfers of know-how that regard strategic sectors, which are more or less linked with security concerns.

Europe also resents tactics and methods used by Washington, with the latter flexing its diplomatic and military muscles in unconventional ways, which do not leave friends unscathed. What some view as bullying is used frequently and real politik is much more muscular during the Trump Administration. Does it work?

Sometimes it seems that it does, for bilateral deals are taking concrete shape. By the way, the EU also tries to get into bilateral trade arrangements. Sanctions, too, are used in a more forceful and unhidden ways by Washington. The recently attempted agreement between the US and Mexico on immigration is also to be mentioned in this respect. This sea change in the way American diplomacy is articulated and pursued, and diverging strategic stances between the US and the EU (take the case of Iran), brings about a quest in Europe for more room of manoeuver; one could call it ‘policy sovereignty’, or policy space.

But does Europe (EU) has, or can it have, the policy space the US have? Nota bene: this question is not an implicit defense line of the new policy thrusts and forms across the Atlantic; instead, it does consider how security concerns may influence policy-makers when it comes to judging trade-offs between unimpeded markets and preserving competitive edges in key domains.

It may be that Europe (EU) is heavily disadvantaged in this regard, for:

It is not a federal state, and its decision-making mechanisms are much more complicated, cumbersome;

The euro is not a genuine rival for the USD in critical respects, and this is illustrated by the share of the American currency in world reserves and in world payments. More on this issue: could EU create a rival payment system in view of the US dollar dominance in financial markets? In addition, as long as the euro area will continue to be crippled by a weak design and inadequate policy arrangements, is it hard to think that the euro can be a genuine rival to the USD.

Europe (EU) is the largest trading bloc in the world, but it is also fraught with currents of fragmentation and a growing divide between the North and South in the euro area, between West and East on issues such as immigration, the ‘rule of law’, how close the ties with the US should be.

Acquiring more ‘policy space’ is a commendable aim for EU policy-makers, but this has to be defined in realistic terms. Arguably, more policy space should not cause more confrontation areas with the US. Europe is too fragmented and weak internally to afford itself to fuel tense relations with Washington.

When it comes to defense, Europe (and this is felt in the eastern EU members states in particular) needs the US. The White House is playing its own cards, better or worse, but the US means more than the current administration. Take the issue of climate change to realize that this is the case.

The bottom line is that for Europe to have more voice, power, and allies in a ‘G-Zero’ world (to use Ian Bremmer's formulation), it needs to:

  • Undertake a real reform of the euro area, with an adequate combination of risk-reduction and risk-sharing arrangements (including an adequate euro area budget).
  • Bear in mind that mutualisation of risks in the euro area leads to a huge political conundrum. Here one meets Dani Rodrik’s trilemma, namely that there can be no integration (globalisation via a ‘single market’) in cohabitation with an autonomous economic policy and democratic accountability at national level ; something must give up in this triumvirate. It is fair to argue that this trilemma simplifies things and that compromises can be found. And yet, it raises a formidable challenge to the euro area functioning unless financial integration is accompanied by policy arrangements and mechanisms that combat growing divergence between member states. For increasing divergence eats into the social fabric and fuels extremism, populism, euroscepticism.
  • Reform the functioning the Single Market, which should make the European social model more inclusive (remember the Monti Report of 2010 and the Sapir Report of 2004, or the EU Summit of Goeteborg)
  • Foster a change in the way international financial institutions function, so that these do not lose their luster due to newly formed (Asian, Chinese-backed) arrangements
  • Accept that regional arrangements are probably inevitable in a polycentric world; Europe’s weight in the global economy diminishes inexorably for demographic and other reasons. For the soft power and the EU’s voice in the world to be preserved, reforms are needed to strengthen it;
  • Spend more to support new technologies projects; in artificial intelligence endeavors, Europe lags here badly behind the US and China;
  • Enhance a robust EU budget to fund EU public goods (security, defense of borders, fighting climate change, etc); it implies more resources including a rising share of own resources, as the HLGOR (High-Level Group on Own Resources) advocates.
  • Work out an effective immigration policy that should reconcile humanitarian concerns with the reality that Europe cannot become a shelter for all those who are fleeing ravaged countries. If this is not done in a balanced way the rise of extreme right parties will continue.

The progress of the euro area, of the Banking Union, demands a reconciliation between rules and discipline on one hand, and risk sharing (private and public) on the other. And here, an understanding between Berlin and Paris is essential. Unfortunately, there is a wide divergence between the two heavyweight EU/EA members in this regard.

An adequate calibration between rules and risk-sharing, between private and public risk-sharing, is an open question. But only private risk-sharing schemes (Capital Markets Union)) would not make the euro area more robust. Financial markets are too fickle and produce systemic risks recurrently.

Unless it will get adequate risk-sharing schemes, the euro area will continue to be rigid and prone to recurrent tensions and crises. Reforms in the euro area should consist of:

  • liquidity assistance available during times of market stress;
  • schemes to cushion asymmetric shocks, such as an unemployment benefit scheme;
  • sovereign debt restructuring should not be triggered automatically (automaticity as a condition for ESM support programs), for it may cause panic in the markets, more fragmentation;
  • rules for adjusting imbalances should not be pro-cyclical (a revision of the GSP rules makes sense);
  • the macroeconomic imbalance procedure (MIP) should operate symmetrically, for both large external deficits and surpluses countries;
  • an euro area-wide macroeconomic policy that should reflect in the fiscal policy stance over the business cycle;
  • investment programs that foster economic convergence;
  • no de-reregulation of finance (as it is attempted in the US currently)
  • Having Europe (the EU) move forward along lines such as those mentioned above would help it get a larger ‘policy space’, more ‘sovereignty’.

    Sovereignty is about a common purpose, unity, common projects, social cohesion and economic strength, inter alia. Sovereignty needs to be envisaged and defined in realistic terms, be its goals ambitious notwithstanding.

    When it comes to military, defense purposes, history shows that, when it comes to heavy lifting, our American friends (and their British cousins) are irreplaceable – at least for the foreseeable future. And I would remind what Robert Gates said years ago, that Europe should not bet on an everlasting American “umbrella” unless it is pays more for its defense needs.

    Daniel Dăianu is Professor of Economics at the National School of Political and Administrative Studies, Bucharest, a Member of the Board of the National Bank of Romania, a former Finance Minister of Romania, former MEP and a CASE fellow. The views in this text are personal and do not involve the author’s institutional affiliations.