On the one hand, a group consisting of the northern countries, led by Germany, has built its economy on competitiveness and exports. On the other hand, the peripheral countries have used the low interest rates to fuel domestic demand, and have built their economies on sectors of non-tradables, which are less subject to external competition, such as real estate and construction.
The outbreak of the Greek crisis has shed light on these structural challenges, creating a crisis of confidence in the sustainability of public debts: creditors have realized the unsustainability of imbalances in the euro zone. Interest rates have hit record highs so that a snowball effect is now operating: when interest rates exceed GDP growth, debt is self-maintained, except if significant surpluses are generated. To generate these surpluses, each country has launched drastic rescue plans, while the intervention of the Central Bank has provided a few months respite.
The uncoordinated and one-by-one approach to the rescue plans implemented in Europe make austerity policies incompatible with a pickup in growth. In addition, spending cuts, which aim at generating short-term gains, mainly target social spending and investments, to the detriment of future growth. This climate of uncertainty hinders demand, as households prefer to save in anticipation of future taxes. At the same time, banks restrict lending to the private sector to clean up their balance sheets. Therefore, the economic recovery can neither come from demand, nor from private investment, nor from public procurement. The most indebted countries are doomed to a very low growth, which further aggravates the burden of their debts. Europe cannot solve this crisis without a change of logic. If the current scenario continues, the euro will not be able to resist the centrifugal forces and the rise of populist rhetoric. Its demise will then be a matter of time.
Another way out is possible. It consists in correcting the initial imbalances of the Economic and Monetary Union project, and in completing the text of to overcome the shortcomings of the Lisbon Treaty, in order to go beyond mere coordination between Member States, as it has clearly showed its limits. It consists in denouncing, reducing and gradually cancelling the costs of non-Europe.
This requires first to circumscribe eurozone countries’ past debts by pooling part of them, as it has been proposed, among others, by the German Council of Economic Experts and the Bruegel Institute. This will lower interest rates, and give some breathing space to indebted countries. In this vein, it will be necessary to strengthen cooperation between the European Commission and national treasures within a European Tax Institute with a view to creating a European Treasury, following the example of the European Monetary Institute that preceded the creation of the ECB. This would be another step towards the eventual creation of a government of the European economy with a Federal Minister for Finance.
Then, Europe will have to boost productivity by carrying out structural reforms, in particular in the service sector, and by investing in projects that generate growth. They exist: in the transmission of energy (smart grid) and energy efficiency, in clean transport, in urban planning, in aeronautics, in nanotechnologies, in the digital industry, in cognitive research... industrialists all have advanced European-level projects like these which require funding assistance from all countries. To this end, it is necessary to create projects bonds, i.e. good debt issued only to finance future income-generating projects. The EIB can easily conduct these projects on the basis of proposals made by the European Commission.
Investors will not buy these projects bonds if the means to reimburse them emanate from a voluntary contribution of countries in the euro zone, as it would further increase the burden of their debt. Only a European tax, as part of a federal budget, will provide sufficient credibility to this new tool for growth. It could be financed by the retrocession of one point of VAT, the introduction of a carbon tax and a tax on financial transactions. With these project bonds, it will be possible to raise about 3000 billion euro to invest in future projects, boost a real and sustainable growth, offer a motivating vision of Europe and create the mechanisms needed to resolve the original imbalances.
However, no tax can be introduced without democratic legitimacy, and without overcoming the crisis of confidence between citizens and the European Union by offering Europeans a new perspective for the future. Thus, it is necessary to add a parliamentary dimension to this process: the euro cannot survive without significant political breakthrough. Federalism is the only way to avoid a major crisis that would sacrifice an entire generation. From today, MEPs from the eurozone countries must meet - being opening participation to any other MEPs who should express a desire to be associated to the debates - , and clarify the path to be followed between now and the forthcoming European elections. On the basis of their deliberations, these MEPs shall organize a summit on the future of Europe starting from the Euro zone, which will host delegations of the European Parliament and national parliaments as had been proposed by François Mitterrand to the European Parliament in 1989. This federalism of necessity will give birth to a proper political and social Europe, whose institutions will ensure a balance between fiscal and monetary policies, economic stimulation, the structural reforms needed to enhance competitiveness, and a greater social cohesion.
The survival of the Euro zone involves an economic government and a European growth budget. Federalism is the only way to avoid the disastrous consequences of its disintegration for our standard of living. It will pave the way for Europeans to Europe of justice, solidary and democratic, able to hold its place in the world.