Flexible Friends

Where next for the European Union? A team of CEPR researchers argues for significant economic, political and legal reforms to meet its many challenges.

Few can doubt that the European Union is at a crossroads. After almost forty years of incremental progress and integration, the prospects of monetary union and enlargement to the east confront Europe with options and choices that will radically change its future.

But many fear that the Union is ill-equipped, structurally and institutionally, to cope with the challenges positively and flexibly while retaining the momentum and unity of purpose that have characterized its past. Nor does the agenda for the forthcoming Inter-Governmental Conference (IGC) seem likely to provide the answer.

Finding the best way to (re)organise and structure the Union's institutions to achieve its political and economic objectives is the subject of the latest CEPR report in the Monitoring European Integration series. Its authors a distinguished group of European academics from six countries, take an explicitly political economy view of the challenges Europe faces: to continue with further enlargement; to reconcile very different views on the appropriate scope and depth of integration; and to close the democratic deficit and revive public support for the Union. without radical reforms, the Report argues, the Union will be unable to meet these challenges.

The root of the problem, identified by the Report, is that Europe is locked in a stalemate between federalists and anti-federalists with each blocking necessary reforms for fear of ceding ground to the other.

Europe needs more flexibility and choice for national governments if integration is to proceed alongside enlargement. But federalists in Europe oppose more flexibility for fear that it would lead to a 'Europe à la carte' that would unravel earlier gains from integration. So economic and political integration remains very rigid, building on the multi-speed adoption of a fixed acquis communautaire, where al members commit to the same policies; while the EU's unusual legal framework, where many different rules - from constitutional principals to administrative regulations - are all collected in the same international treaties, tends to block change.

At the same time, effective governance of Europe's markets at a European level is required to make integration successful, implying further delegation of national sovereignty and true supranational decision-making. But anti-federalists oppose such political integration for fear that it will lead to a European superstate. So lax enforcements of EU law and directives in certain countries undermines the working of the single market. The Report cites many obstacles to competition and mobility.

Breaking the stalemate, the Report argues, requires introducing more flexibility and opportunities for choice, while protecting the gains from past integration and exploiting the gains from competition and mobility through deeper political integration.

The need for more flexibility has provoked French and German proposals for a Europe based on 'variable geometry'. This compromise between the two extremes of Europe à la carte and a European state focuses on countries as the units of integration. But, the Report contends, such an approach risks dividing Europe into first-class and second-class citizens - with the prospect of a group of third-class citizens after future enlargement.

The alternative approach is to focus on competences rather than countries. The Report advocates 'flexible integration', combining an explicitly supranational common base - a well-defined set of common policies, in which all members of the Union have to participate - with the possibility for individual countries to integrate further in other policy dimensions inside voluntary open partnerships.

Within this framework, the authors discuss a series of ambitious economic, legal and political reforms that are intended to make the Union more effective and democratic:

• To ensure that European citizens can exercise the four freedoms (free mobility of goods, services, capital and people) the Union has to become more serious about enforcing the single market. This requires extending the use of majority voting; delegating specific tasks, such as the enforcement of competition policies, to newly created independent agencies; and strengthening individual rights to take legal action in order to enforce Union law 'from below'.

• To accommodate different views on monetary integration, the option to stay out of the single currency should be given to every member, not just Denmark and the UK. Macroeconomic coordination can still be achieved without the exchange-rate mechanism, by requiring that all central banks - including the European Central Bank - adopt an inflation target.

• To make its legal structure more flexible and transparent, the Union must introduce a hierarchy of European Law, with the basic principles of EU governance given constitutional status by an international treaty, and with the substantive rules that give effect to the common policies incorporated at a lower level of law.

• To ensure its political decision-making becomes more efficient and legitimate, the union needs to assign clearer responsibilities across different EU bodies; increase its openness vis-à-vis individual citizens and the media; make its decision-makers more directly accountable to European citizens; and strengthen the representation of cross-border interests by giving more power to the European Parliament - after appropriate electoral reform.

The Report calls on the 1996 IGC to set an ambitious agenda, one that aims for major institutional reforms and revises the treaty on European Union accordingly. The central point should be to combine a more flexible Europe with more commitment to the single market and deeper political integration in its governance.

Nor would such a treaty revision damage the project of economic and monetary union. In reality, the Report insists, the single currency will be introduced in 1999 only if European citizens - and particularly German citizens - still support it. And it will only be introduced in those countries where the citizens accept it. Hence the most ardent supporters of the single currency should be first to demand the institutional reforms that will address Europe's problems and the Union's lack of popularity, restoring public confidence in the whole idea of European integration.