FUTURE SCENARIOS FOR THE EU

The following four scenarios were evaluated, discussed and developed by experts in 15 cities all over Europe. The stakes are high both politically and economically for Europe and the EU’s future is very uncertain. On top of the eurozone crisis, the European economy is suffering from enormous structural woes. Productivity has been declining compared to other developed economies in the last 15 years; spending on R&D remains low; European governments have grown very large relative to their economies; and there is a trend towards an increased age imbalance between working and non-working citizens. EU leaders have been introducing reforms and new instruments to address the eurozone crisis, but more integration is required to overcome the debt crisis and address structural problems. But a genuine leap forward in integration would imply massive transfers of sovereignty to central authorities, with the accompanying loss of autonomy which is increasingly unpopular with European publics.

It is up to European decision-makers and national leaders to shape the future of the EU. The scenarios presented here might serve as an orientation by showing them what kinds of Europe are possible and which ones could – and maybe should – be avoided. But the final decision lies with them.

1. The Muddling-through the Crisis Scenario

In the year 2020, the Eurozone and, with it, the EU is stuck in the ongoing crisis, which started to unfold in 2010. Most of the Southern European countries still need rescue packages and the European Central Bank keeps on buying their public bonds, as the borrowing costs for them are too high. The resources of the European Stability Mechanism are still inadequate und thus there is always the possibility of sovereign default. The Economic and Monetary Union remains incomplete, unable to ensure growth and employment and, even less, a transition to a new growth model that is greener, smarter and more inclusive. Globally, Europe remains a weak player, whereas the United States and other big powers, such as China, have managed to overcome the crisis. As a result, the EU’s dependence on financial support from external partners increases.

Following the many unsuccessful attempts at solving the crisis in the years after 2010, the crisis management of the Eurozone continued basically as a muddling-through policy. The German elections in September 2013 brought a change in government with the participation of the Social Democratic Party and this led to some changes, with a stronger emphasis on growth and a certain relaxation of the rigid austerity policy. But the basic principles of the crisis management implemented so far continued to prevail. The revised Stability and Growth Pact was still exerting pressure towards regular reduction of the public debt and the structural public deficit and left little room for supporting public and private investment. Fiscal consolidation remained difficult in many Member States because the growth rate was too low. The long-term sustainability of welfare systems was eroded. For this reason, the Euro Plus Pact and all other attempts committing the Member States to further convergence of corporate taxation and social contributions / benefits could not be implemented.

In 2014, the new President of the European Commission was elected by the European Parliament and four years later even through general elections, but he remained constrained by weak financial and policy instruments in any efforts to prevent or solve problems. His position was further weakened by protectionist reactions and national resistance to closer coordination of national budgets and programmes at European level. Together with a lack of involvement by Member States and citizens in decision making this led to a weakening of popular support for European integration and to a strengthening of anti- European and populist parties. As the unemployment rate remained high, especially in the Southern European countries – and with a very high level of youth unemployment – social unrest spread in these countries without, however, leading to fundamental regime change. In 2020, access to financial resources remains unstable.

Regulation of the financial system to reduce volatility and undue pressure is still not complete. For instance, rating agencies are still free to intervene in the political arena. The European financial system’s supervisory bodies remain weak and there are several bottlenecks in interbank lending across the Member States. Such lending is constrained by hesitant last-resort provision of liquidity on the part of the ECB. As a result, there is a chronic credit shortage.

There are neither significant changes in the European instruments for supporting investment nor macroeconomic coordination for growth. Nor is there a European industrial policy to complement European trade policy. The European strategy for growth remains limited to completing the Single Market and structural reforms. In this context, the opportunities of the Single Market and of external markets particularly benefit countries with public and private financial resources to invest. The new macroeconomic surveillance puts the focus on Member

States with low competitiveness and high external deficits and unemployment rates. It makes individualised recommendations on how they might reduce their problems..

But against the background described above it is difficult to reduce divergences between Member States regarding growth, investment and employment rates, despite efforts to optimise use of the structural funds. Some regions are trapped in recession / stagnation, triggering emigration flows, including a brain drain , exacerbating the situation.

2. Break-up of the Eurozone Scenario: The House Falls Apart and the Neighbourhood Is Affected

In the year 2020, the European Economic and Monetary Union is split up into different blocs and some countries have reintroduced their former currencies. The European Union still exists, but is reduced to a loose alliance in which even free trade is seriously hampered by protectionist measures in many Member States. In some of these countries, anti-European and nationalist-populist movements have come to power and pursue a beggar thy-neighbour policy. In the weakened economies, many strategic assets are bought up by non-European countries, reducing Europe’s control over its own production chains.

The crisis management within the EMU, which started in 2010, continued in more or less the same way in the following years, leading to a worsening of the situation. Access to financial resources remained subject to constant uncertainty. Regulation of the financial system to reduce volatility and undue pressure was confronted with substantial resistance and disagreements. The European financial supervisory bodies were weak and there were a number of bottlenecks in interbank lending across the Member States, which could not be reduced by last-resort provisions of liquidity from the European Central Bank.

As a result, there was a chronic credit crunch, deepening the recession in several countries. In the issuance of public debt, differences in borrowing costs across the Member States were too high and, since the resources of the European Stability Mechanism were too low, sovereign default or severe and disorderly debt restructuring became a reality in some countries, with contagion effects on sovereign debt and banks.

A revised Stability and Growth Pact put pressure on Member States to systematically reduce public debt and structural public deficits, leaving little room for promoting public and private investment. Fiscal consolidation became impossible in several countries because they remained mired in recession over a longer period. Welfare systems were undermined and, in some Member States, partially dismantled, leading to a major increase in poverty. In parallel, the Euro Plus Pact, involving commitments to further convergence of corporate taxation and social contributions / benefits, became impossible to implement. There were neither significant changes in the European instruments for promoting investment nor macroeconomic coordination for growth, nor a European industrial policy in connection with trade policy. The strategy for growth remained focused on completing the Single Market and structural reforms, priorities that experienced particular difficulties in countries in recession.

In this context, the opportunities provided by the Single Market and external markets benefited particularly the few countries with public and private financial resources to invest.

With these constraints on European aggregate demand, the unemployment rate and social inequalities in some countries increased to unprecedented levels.

In 2020, the divergences between the European countries regarding growth, investment and employment rates have increased, even with the use of structural funds. Some regions are devastated by deep recession, with high unemployment triggering strong emigration flows, including a major brain drain, which only worsens the situation. Hostility between European regions – for example, South vs. North – and countries based on stereotypes increased, leading to a fragmentation of the European identity. The President of the European Commission might be elected by the European Parliament, but his powers remain limited by weak financial and political instruments for preventing or solving the problems. The Commission is basically governing a fragmented and partly hostile Union, whereas the EMU has been split up into a currency zone around Germany and a Northern Monetary Union around the United Kingdom, while the Southern European countries have mainly reintroduced their former currencies and are pursuing protectionist policies. The lack of participation by Member States and citizens in decision-making further increases popular hostility towards Europe and strengthens anti- European and populist parties. In some countries, those parties and movements are in power and openly challenge the Union, looking for alternative economic and political partnerships in the East (Russia), China and the Middle East. The disintegration of the European Union seems unavoidable, followed by a large shock, leading to a global recession.

3. Core Europe Scenario: Construction of a Smaller and Stable, But Exclusionary House

In the year 2020, the Economic and Monetary Union is completed by a smaller core group of Member States within the framework of a new full-fledged Treaty outside the EU treaties and excludes the non-Eurozone Members and even some Eurozone Members (a two-level Europe). The European Union still exists, but is mainly reduced to a huge free-trade zone which even can accept new members hostile to closer political integration (for example, Turkey). The core group has implemented fiscal union and is moving towards a real political union, while some EU members on the periphery fall far behind these developments.

As the crisis in Europe deepened despite the various attempts to solve it, an antagonistic movement within the Eurozone emerged. On one hand, in the Member States trapped in a recession / stagnation with high unemployment and strong emigration flows, anti-European and populist parties came to power pursuing protectionist policies and thus resisting closer coordination of national budgets and programmes at European level. This was also due to the fact that divergences across Member States regarding growth, investment and employment rates increased, even with the use of structural funds. On the other hand, in a group of Member States there was a growing conviction that the crisis could be solved only by stronger cooperation and the implementation of a fiscal union in a smaller group of states in order to save the common currency. This latter movement was led by the new German government following the 2013 elections, including France and some smaller Member States.

Within this group, a revised Stability and Growth Pact was applied towards the regular reduction of public debt and structural public deficits. Fiscal consolidation remained difficult in the countries outside the core group because their growth was too low. The long-term sustainability of welfare systems was strengthened in the core group but weakened outside it. In parallel, the Euro Plus Pact, with its commitments to further convergence of corporate taxation and social contributions / benefits, was implemented, but only in the core group. It had to protect itself from increasing fiscal and social dumping from the other countries. New financial resources for investment, combined with a European industrial policy, the Single Market and appropriate structural reforms, fostered the transition to a greener, smarter and more inclusive economy in the core group. More organised and competitive European production chains under the leadership of the core group were better able to reap the potential of the European Single Market and global markets. The downside of these effects is growing inequalities between core and periphery, to be seen in growth rate divergences and increasing current account imbalances. In 2020, the Fiscal Union is completed within the core group with regulation of the financial system developed and providing more financial stability and focusing on the needs of the real economy. Stronger European supervisory bodies ensure sounder banking with more responsible lending and borrowing, but inter-bank lending between those inside and outside the core group remains difficult, because of diverging borrowing costs. Unconventional measures by the ECB are still necessary to provide better access to credit. A European debt agency limited to the core group ensures joint issuance of public bonds as a last resort, when issuance at national level becomes too difficult and borrowing costs become more reasonable in the core group. For nations in difficulty outside the core group, the European Stability Mechanism is equipped to provide financial assistance, albeit with strict conditionality.

While some periphery countries manage to get closer to the standards of the core group, in some others this might lead to economic disaster.

In the core group, the budgetary process is developed so that there is almost complete coordination of national budgets and a better interface with the Community budget. Outside the core group, there are no fundamental changes in the budgetary process. The EU budget remains the same size and has inadequate resources. The European Commission remains limited by weak financial and policy instruments for preventing and solving problems.

The Member States on the periphery are prone to protectionist measures, while the Core States face increasing pressure in terms of competitiveness due to their high social standards. This leads to increasing hostility and anti-European populism inside and outside the core.

But the hope prevails that in the long run the core group might serve as a locomotive, pulling the crisis-ridden nations out of the mess.

4. Fiscal Union Completed Scenario

In the year 2020, Fiscal Union is completed in the European Monetary Union, albeit with saving clauses for those Member States particularly hit by the crisis. The Eurozone, building on a more consistent Economic and Monetary Union, is coordinating its external position and there is a single Eurozone representation in the Bretton Woods institutions. The Euro has become a reference currency attracting financial resources from all over the world. On the way to political union, a two-speed Europe emerged, in which the Eurozone as a vanguard of states explores closer integration. Non-members of the Eurozone are encouraged and assisted by the vanguard to meet the preconditions for integration, which encompass more than the Maastricht Criteria.

Year after year, the different attempts to solve the crisis proved to be insufficient. The situation constantly worsened, with massive social unrest and anti-European movements gaining ground. Even countries such as Germany and the Netherlands were now affected by the crisis and ensuing social discontent. Following the German elections of 2013, political leaders came to the conclusion that only a leap forward could solve the problems. Whereas a sudden and simultaneous development of all Member States towards political union seemed to be illusionary, a vanguard of countries – including all Eurozone members and an invitation to Poland to join – emerged as a possible intermediate step for fostering European integration.

The direct election of the President of the European Commission, along with enlarged financial and policy means, dynamised the European institutions in order to prevent and respond to problems. Closer involvement of the Member States and European citizens in decision-making also strengthened popular support for European integration, weakening the influence of anti-European and populist parties.

A revised Stability and Growth Pact put pressure on Member States to constantly reduce their public debt and structural public deficits, but left room for promoting smart public and private investment. This smart culture of balanced budgets paved the way for more credible fiscal consolidation. Member States got rid of a certain level of indebtedness with implementation of a European redemption fund, sourcing out and liquidating too high debt levels with the help of joint debt management.

The long-term sustainability of welfare systems was also strengthened. In parallel, the Euro Plus Pact, with its commitments to further convergence of corporate taxation and social contributions / benefits, became easier to implement. A European debt agency ensured joint issuance of public bonds as a last resort, when issuance at national level reached unreasonable levels. This favoured lower and more reasonable borrowing costs in general. If certain countries encountered unusual difficulties, the European Stability Mechanism was equipped to provide financial assistance with a clear but balanced conditionality, deploying more effective and rapid rebalancing and recovery programmes.

In 2020, investment, growth and job creation are supported by stronger European instruments, notably Community Programmes, mobilising Community budget resources, EIB loans, guarantees and bonds, private project bonds and other available financing sources, such as pension funds or taxation sources, including a financial transaction tax. These new resources for investment, combined with a European industrial policy, the Single Market and appropriate structural reforms, foster the transition to a greener, smarter and more inclusive economy.

More organised and competitive European production chains are able to better reap the potential of the European Single Market and global markets. The macroeconomic surveillance process is also used to improve macroeconomic coordination in the European economy, taking positive advantage of spillover effects. Macroeconomic surveillance is coupled with stronger resources for catching up: not only swifter implementation of the structural funds but also a European Fund for Economic Stabilisation to deal with asymmetric shocks.

Social dialogue and bargaining are also encouraged at national and European level to better align wages and productivity. Under these framework conditions, differences with regard to investment, growth and employment rates decrease and regions lagging behind can more realistically catch up in terms of competitiveness and social and environmental standards, as well as reduce their external economic and financial deficits. Altogether, the European Union is well on the road towards real (also political) integration.