MyVision

No.16 2015.12

Is the EU Robust?
With the acceptance of EU austerity measures by the Tsipras administration, apath now exists towards a solution to the Greek debt crisis which has threatened
the Eurozone. However, this does not resolve the systemic weaknesses of theEuro, and given that Spain, Italy, and other member nations face their own potential financial crises, the future of the EU as an entity remains unclear. What
are the issues facing the EU in forming a stable regional economic zone?

C O N T E N T S
Expert Opinions

What must the EU Do to Create a Stable
Regional Economic Zone?
The EU possesses a flexible
toughness

Controlling debt via market
mechanisms

Ambassador of Japan to the European Union

Associate Professor, Graduate School of
Economics, The University of Tokyo

Keiichi Katakami

Honing policy literacy
Sahoko Kaji

Professor, Faculty of Economics, Keio University

The difficulty of realizing
pan-European fiscal democracy

Kenichi Ueda

Priorities for euro area governancereforms
Guntram B. Wolff
Director, Bruegel

Ken Endo

Vice Dean, Graduate School of Public Policy,
Hokkaido University

About this Issue

Noriyuki Yanagawa

Expert Opinions

What must the EU Do to Create a Stable
Regional Economic Zone?
The response to the Greek debt crisis has highlighted numerous issues, including the question of thelegitimacy of the application of austerity measures to Greece, the dominance of Germany in the EU,
and the systemic weakness of the Euro. What are the issues facing the EU in forming a stable regional
economic zone, and what concrete measures should be adopted towards their solution? In this issue of My
Vision, we seek opinions from Japan’s ambassador to the European Union, the Director of a Belgium-based
think tank, and scholars in the fields of international finance, European economics, and European politics.

Interviewer: Nao Toyoda, NIRA Senior Researcher
Editor: Kazuyoshi Harada
Period of interviews: August - September 2015

The EU possesses a flexible toughness
Keiichi Katakami
Ambassador of Japan to the European Union
Tension between the centralization of authority and thesovereignty of member nations is an inherent factor in the
60-year history of the European Union. Amid the ongoing
confrontation between these two elements, the EU’s integration has proceeded two steps forward to one step back,with political and practical intelligence constantly at workseeking to strengthen its unity. The Eurozone is therefore
not inherently a finished system. The European sovereign
debt crisis which commenced in 2009 sparked moves toenhance the supervision of banks and bolster fiscal discipline, and a plan to strengthen the Economic and Monetary
Union which envisions the creation of a Eurozone financeministry, with its final stage projected for 2025 at the latest, is currently under discussion.
Nevertheless, “The Politics of Europe” took the top position in the Eurasia Group’s Top Risks 2015 rating, with thepotential exits of Greece from the euro (“Grexit”) andBritain from the EU (“Brexit”) and the rise of Euroscepticism receiving particular attention. Distrust and dissatisfaction regarding the actual utility of the EU in light of its
failure to improve the performance of European economies
has come together with factors including criticism of pressure from the EU for more stringent fiscal discipline and ofits lack of effective measures to respond to the refugee crisis to fuel rising skepticism regarding the benefits of EU
membership. Because this distrust and dissatisfaction is
directly rooted in the daily lives of the citizens of EU
member nations, it has appeared with a new severity.
The European Commission has taken adequate cognizance of the depth of these sentiments under the presidency

of Jean-Claude Juncker, which commenced in November
2014, and has responded with the Investment Plan for Europe mobilising at least 315 billion euro three years, which
will encompass a succession of measures including the establishment of a European Fund for Strategic Investments,
the creation of a digital single market, and the establishment of an energy union. Concrete projects based on theEuropean Fund for Strategic Investments are already moving towards implementation, and real outcomes are also
beginning to appear in the digital area, for example the abolition of roaming fees within the EU. I believe that thepresentation of positive outcomes to member nations andEU citizens through measures of this type will be the key
to the restoration of confidence in the EU and the creationof a stable regional economic zone. ■Mr. Katakami is a diplomat and an expert in the field of Japanese
economic diplomacy, with a curriculum vitae including involvement in negotiations towards the conclusion of economic partnership agreements (EPA) and the Trans-Pacific Partnership (TPP).

Honing Policy Literacy

Sahoko Kaji

Professor, Faculty of Economics, Keio University
The existence of voters with a low level of policy literacy
and a consequent failure of democracy to function adequately lie in the background of the crisis in the EU. As aresult, policies which would have been unpopular in the
short-term but desirable from the long-term perspective
were not adopted, and the possibility of realizing sustainability was lost. Like Aesop’s fable, in every country thereare the “ants,” who push ahead with reform and prepare forthe future, and the “grasshoppers,” who emphasize the immediate status of the economy and postpone reform. If thegrasshoppers were to give adequate consideration to thesituation and recognize the danger of continuing as theywere, they would no doubt support alternative policies
themselves. I believe that the future of the EU will be determined by the balance between the fundamentally different philosophies of the ants and the grasshoppers in the polit ical a nd econom ic i n f r a st r uct u re created f rom
confrontation and compromise between these two ways ofthinking.
In its 2000 Lisbon Strategy, the EU declared its aim todecisively push ahead with reforms, dispel social and administrative ossification, and become the most competitive
economy in the world. However, reforms did not proceed incertain European nations; for example, amid the desperatefiscal situation of Greece, the country’s key industry, maritime transportation, was largely exempt from taxation.
Greek politicians did not recognize this as a problem, andthe majority of voters chose to leave politics to the politicians; crisis ensued. The future continues to be difficult topredict in Greece, with the advent of a politically inexperienced left-wing administration creating the potential forfurther disorder. This should not be viewed as merely aproblem occurring elsewhere; it is not impossible that a crisis might occur in Japan itself in the not-too-distant future.
In order to avoid this possibility, it will be important toensure that democracy functions effectively, with citizens
understanding the costs and the benefits of policies andable to make choices based on consideration of the ultimate
outcomes of those choices. To this end, it is vital that weestablish easily accessible venues for town meetings in every location (as easy for people to reach as their local gym,say), and to increase opportunities for ordinary citizens tohone their policy literacy. ■Professor Kaji is a specialist in European economic issues. She
stresses the urgent need to reform the functioning of democracy
in Japan based on lessons learned from the EU debt crisis.

The difficulty of realizing pan-European
fiscal democracy
Ken Endo
Vice Dean, Graduate School of Public Policy,
Hokkaido University
The ongoing crisis has created divisions in public sentiment in the nations making up the EU. The correction of
intra-regional economic disparities through the cultivationof a European identity is an essential element in ensuring
the self-regulating functioning of the EU as a supranational
entity, and this is an almost impossible task to achieve in ashort period.
Intra-regional economic disparities originated in differences in the speed of structural adjustment in individual
nations following monetary union. Funds tend to accumulate in productive and competitive wealthy countries, andmonetary transfers in the broad sense of the term are es-sential in correcting this tendency. Monetary transfers canbe accomplished via the market economy, for example
through expansion of internal demand or remittances from
migrants, but this by itself is not enough. Financial transfers from rich countries to poor countries are the commonsense solution. It would be necessary to create, step-bystep, mechanisms that enhance the official redistribution ofincome between governments, for example enabling thesharing of the funds and credit won by countries such as
Germany and Holland with countries which have been
pushed aside in the competition.
What will be necessary for the redistribution of national
income within the EU is the cultivation of a feeling of solidarity that transcends national borders, and a pan-European democracy based on this feeling of solidarity. Whendemocratic checks are available to ensure the public that
their hard-won funds and credit are being used appropriately, fiscal democracy begins to function. However, at thelevel of the EU, the European parliament, the entity whichshould oversee this check function, is regarded as a Brussels elite, distant from public sentiment. Voter turnout islow, so is the public interest. The fostering of European democracy remains a difficult task. It will be up to the EU toovercome the disjunction between advancing regional unification on the economic front and the weakness of regional identity. ■A specialist in the area of European politics, Professor Endo views
the present EU as being in a type of limbo, neither a state nor
simply an international organization, but as nevertheless possessing its own form of stability.

Controlling debt via market mechanisms
Kenichi Ueda
Associate Professor, Graduate School of Economics,
The University of Tokyo
One of the weaknesses of the EU has been made clear by
its economic crisis. This is the failure of several member
countries to maintain fiscal discipline. On the flip side, European banks lent to these countries at very low interest
rates before the crisis, as they expected possible bailouts ofthe countries concerned or the banks themselves by larger
countries in the EU.
If the fiscal needs of a member country in recession,
such as unemployment benefits, were supported by a central EU authority, these fiscal needs would not cause sovereign debt crises. However, to build such a fiscal union
would require an EU-wide consensus, and this would appear to be difficult for the foreseeable future. At present,
therefore, the EU has no choice but to design an institutional setup to ensure that member countries adhere to fiscal discipline at the country level.
Naturally, the necessity for fiscal discipline has been recognized, and was embodied from the beginning, in the
Maastricht Treaty, as a condition for joining the euro zone.
However, this condition was soon rendered ineffectual,since Germany and France were the first to breach the requirement. Still, as a response to the current crisis, the EU
has strengthened its fiscal rules and maintained fiscal tar-

My Vision No.16

gets, in particular the 60 percent limit for government debt
to GDP ratio.
However, an institutional framework to implement the
fiscal rules is essential. A promising mechanism has recently been proposed by a group of leading European
scholars. In a nutshell, their proposal is as follows: Debt restructuring would be automatically triggered when thedebt to GDP ratio reached 95 percent, and then the European Stability Mechanism (ESM) would monitor the country’s fiscal condition. From the investors’ point of view, expected losses due to debt restructuring would become
clear. Therefore, investors would be likely to require higher
and higher risk premiums when the debt to GDP ratio went
over 60 percent and was increasing. This increase in theinterest rate would work as a market discipline to promote
fiscal prudence and to ensure that fiscal targets were met.
Moreover, in case excessive debts were accumulated, thismechanism would replace ad hoc numerous negotiations
on debt restructuring and thereby avoid worsening of economic conditions during such a lengthy negotiation process. Indeed, economic theories and empirical evidencessuggest that a speedy mechanism for debt restructuring isessential for the rapid and sound recovery of the economy
of a heavily indebted country. Moreover, because of ahigher growth, the required restructuring would be minimized, so that not only borrowers but also creditors would
gain from the speedy debt restructuring mechanism. ■Associate Professor Ueda specializes in the study of finance-macroeconomic linkages, including the effects of the international financial system. He points to the necessity for an international legal framework for speedy debt restructuring, which would bringquick economic recovery ex post and create market discipline topromote fiscal prudence ex ante.

Priorities for euro area governancereforms
Guntram B. Wolff
Director, Bruegel
Spring has brought signs of economic recovery to theeuro area. This is obviously good news, especially for the
millions of unemployed who need growth to increase theirhopes of finding a job. But recovery has also its dark side.
It has lowered the appetite of EU and national politicians tocontinue the process of euro area reform that they launchedat the height of the crisis. Yet euro area economic governance remains unsatisfactory. The banking union was amajor achievement, but it remains unfinished.
Besides improving banking union, two other subjects require urgent attention to calm fears about weak euro area
governance: better fiscal governance and a mechanism toensure competitiveness despite the absence of the exchange
rate instrument.
The euro area requires a fiscal governance system that
ensures two objectives: the fiscal sustainability of its members, and co-ordinates an appropriate area-wide fiscal
stance that supports the ECB’s monetary policy geared towards price stability. We propose five measures.

First, the closer a country moves toward fiscal unsustainability, the tighter European intervention should be. Ultimately European institutions must be able to completely
remove a euro area government’s ability to borrow. As
events in Greece have demonstrated, this should have been
introduced much earlier.
Second, in order to ensure an appropriate area-wide fiscal
stance, the euro area needs to be able not only to ban borrowing by some member states, but also to force others to
run higher deficits. In both instances, this means having thepossibility, during exceptional circumstances like euro area
recessions, to overrule decisions by national parliaments.
Third, fiscal governance should be organised in a “Eurosystem of Fiscal Policy” (EFP) comparable to the Eurosystem of central banks, which would also oversee thecurrent European Stability Mechanism (ESM). The EFP
would be chaired by a euro area Finance Minister. The
members of the EFP would be the national Finance Ministers of the euro area countries, plus five other members, including representatives from the European Commission.
The EFP would take fiscal policy decisions by majority –which, in times of substantial danger to debt sustainability
or a substantial euro area recession, would be binding on
the national level.
Fourth, in a reformed ESM, the EFP would have thepower to call on fiscal resources for special purposes in areformed ESM. This would include providing essential
support to member states, and backing up banks in casesof severe systemic stress.
Fifth, decisions by the EFP that overrule national decisions would need approval by a new euro area chamber ofthe European Parliament. This would be an essential element in making the new governance framework democratically accountable. An independent euro area Fiscal Council would give guidance on whether or not the EFP
assessment of exceptional circumstances were correct.
The other proposal concerns measures to prevent wage
and competitiveness divergences between member states,
which are often due to the functioning of national labour
market and social systems that are in some instances incontradiction with their membership of a monetary union.
Since the euro area cannot hope to overcome these divergences by creating a single labour market with common
rules and high mobility, national systems must produce
wage outcomes that closely reflect labour productivity developments.
The euro area needs a mechanism to prevent and correct
substantial misalignments of wage productivity competitiveness that complements the existing Macroeconomic
Imbalance Procedure (MIP) used by the European Commission to monitor competitiveness and other developments. The new mechanism would bring two innovations
to the existing system. It would add national bodies and bebinding in some circumstances. It would involve the creation of a Eurosystem Competitiveness Council (ECC),
consisting of national competitiveness councils and theEuropean Commission. The ECC’s primary task would be
to coordinate the actions of national competitiveness councils to ensure that no euro area country fixes and enforcesa wage norm that implies significant competitiveness problems for itself or others. In case coordination fails, the
ECC should be able to overrule national councils and makea wage norm binding.

Our proposals require significant powers to be handed
over to the European level by euro area countries. They
may sound radical and far-reaching, but are in fact muchless radical than proposals by some academics, or by the
Four-president report initiated by the former President of
the European Council, that propose creating a euro area
budget and call for high labour mobility to smooth adjustment. Contrary to these proposals, ours accept the notionthat labour markets and fiscal policy remain mainly national. Nonetheless, our relatively modest proposals would require changes to the European Union treaty, or at least a
new intergovernmental treaty. This may be a painful process, but in order to establish a stable basis for renewed
growth and employment, the euro area needs to continue
reforming its architecture. ■Dr. Wolff is well-known as a commentator possessing considerable influence on the European Parliament, and his opinions are
frequently taken up in international media organs, including theFT, the NYT, and the WSJ. Dr. Wolff believes that fiscal integrationof the EU will be vital to overcoming the euro crisis.

This is a translation of a paper originally published in Japanese.
NIRA bears full responsibility for the translation presented here.
Translated by Michael Faul.

About this Issue

Is the EU Robust?

The European economy has a significant effect on the Japanese economy and the world economy. Despite this, compared to the US economy, insufficient information reaches Japan concerning the actual
status of the European economy. The direction of the European Union has a particularly strong impact
on the European economy and European societies, but again, Japan tends not to receive an adequate
amount of information regarding the structure and status of the EU. Given this, this issue of My Visionoffers diverse perspectives regarding the future of the European economy and the future direction of the
EU from a group of experts in EU issues.
Discussion of the Greek economic crisis reveals a variety of unstable elements affecting the future of
the EU. It should be remembered, however, that considered objectively, the attempt to unify Europe in itself faced significant obstacles; it is only natural that the process should have been completed in a “twosteps forward, one step back” fashion, as Keiichi Katakami indicates in this issue. Nevertheless, thepresent crisis is replete with issues which possess the potential to shake the foundations of the EU, making the various prescriptions offered by our interviewees both valuable and of considerable interest.
The fact that, despite monetary unification, European fiscal unification remained inadequate and theredistribution of income beyond national borders was limited is inherently a structural issue. However,political reform can still be advanced as far as possible with these issues taken into consideration. The
direction of the resulting changes in the EU must be the subject of close attention.
The Volkswagen scandal came to light after the interviews for this issue of My Vision had been completed. More than a problem for one company alone, this represents a situation that will affect the German economy as a whole. And the effects of the situation will not only be felt in Germany, a nation
which has maintained its economic strength within the EU, but will have a significant impact on the EU
and the European economy. The future of the EU is a subject which increasingly demands our attention.
Noriyuki Yanagawa, NIRA Executive Vice President(Professor, Graduate School of Economics,
The University of Tokyo)

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