The European Union: What can it do in the current economic storm?

It is more obvious now than ever before that the European Union needs to develop a stronger political-institutional focus to complement 25 years of market integration. Two things worry me at the moment, a) the lack of media coverage/attention in Ireland devoted to analysing the need for socio-economic policy coordination at EU level to steer Ireland and the EU out of our current economic woes, and b) the absence of a coherent institutional policy  response in the EU itself to tackle Europe’s economic problems.

The best article I read on the problems facing the EU is by Paul Krugman, published in the New York Times today. The title ‘a continent adrift’ is a fitting portrayal of what is happening. Krugman does not adopt the stereotypical argument of identifying Europe’s strong welfare state tradition as a factor behind its inability to respond to the current crisis. In fact he identifies the welfare state as one of the mitigating factors in Europe against deeper socio-economic problems; “Guaranteed health insurance and generous unemployment benefits ensure that, at least so far, there isn’t as much sheer human suffering in Europe as there is in America. And these programs will also help sustain spending in the slump”.

Krugman identifies the lack of a coordinated political-fiscal response in the EU as the causal factor to deal with the current economic crisis; Europe’s economic and monetary integration has run too far ahead of its political institutions. The economies of Europe’s many nations are almost as tightly linked as the economies of America’s many states — and most of Europe shares a common currency. But unlike America, Europe doesn’t have the kind of continentwide institutions needed to deal with a continentwide crisis.

This failure is manifested in its monetary policy and fiscal policy. The European Central Bank reacted too slowly and has not cut interest rates at the speed of the Federal reserve. Fiscally there is no central authority with the political mandate to take responsibility of the European economy as a whole. Europe is just as economically integrated as the US federal states. It has a common currency and markets are just as liberal as the US.  But, unlike the US it completely lacks the political institutions to offset the effects of market integration. It is a union of market economies not a union of political communities. It lacks a political-institutional framework to integrate member states. It lacks a political constitution. This structural requirement becomes all the more obvious in a time of crisis.

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