Europe: Toward a governance union?

Europe: Toward a governance union?

The European Union has run out of steam. First constructed to defuse tensions following two world wars and help create a bigger and deeper marketplace, it was then refurbished as an aspirational club to which poorer southern European and former Soviet Bloc countries could belong. Its success automatically bred legitimacy in the eyes of its citizens. However, as the financial and economic crisis brought this economic growth and convergence machine to a halt, ever more Europeans are starting to question why we really need the EU. The south feels the pain of tough austerity measures and loss of sovereignty; the north is increasingly uneasy about subsidizing Europe’s “profligate brethren,” corrupt politicians, inefficient state apparatus and unsustainable lifestyle. Its historical justification long faded, the EU project is facing an existential crisis.

Yet the current crisis is an opportunity in disguise. If the European leaders seize the chance, they can both improve competitiveness and thereby living standards in the south and east, while also increasing the legitimacy of the EU at the same time. For that, they must change the focus of their response. They need to move from a fiscally driven “prescribe and check” approach, to a truly active, on-the-ground involvement primarily focused on fixing crumbling public administrations in southern and eastern countries. This bold approach, which would re-imagine Europe as a governance union, could reignite support for the European project and give it the convincing narrative it currently lacks. The good news is that it is feasible, provided the right pockets of expertise are tapped (in the World Bank, OECD or IMF, for example).

The core of our proposal is to focus on improving governance and reducing political influence, using and adapting the EU’s potentially impartial mechanisms so to improve the public administration in countries facing structural and economic problems. Europe’s periphery can grow sustainably only if they significantly increase the ability of their economies – and ultimately their firms – to innovate, if they reduce the distorting role of the public sector through incumbent protection and needless bureaucracy and if they improve the way their public sector uses its resources. Experience suggests that most of such competitiveness-focused reforms are not actually that painful, except to some unusually vocal and well-connected incumbents. Few people in the south or east would resist a better support for entrepreneurs, improving the quality of their universities, redressing bureaucratic excesses or combating social plagues such as tax avoidance. In addition, these measures would very likely increase the willingness of the north to support and develop the continent.

However, a major practical obstacle to effective implementation of such reforms is a weak public administration, further debilitated by political intervention and cronyism. Partly as a result of the crisis, political leaders with the necessary reform vision and drive are increasingly less rare even in countries like Italy or Greece. However, the environment in which they try to pass the reforms is usually unhelpful at best. Reform-minded leaders cannot translate their specific vision into actual outcomes on their own. The actual implementation must be done at a lower level by a public administration that also has the will, as well as the technical and professional skills to do so. And here is the core of the problem. Such a public administration can rarely be found in Europe’s south or east. Yet, people there crave competent governments that would not waste much of the money they pay in taxes and would instead deliver efficient public services. If the EU could be seen as the main champion delivering such changes, it would strongly increase its popularity and legitimacy.

The EU therefore needs to “hold a mirror” to the countries facing problems and relentlessly push for administrative reforms until economic conditions improve. For that, the EU administrative apparatus must become more results-based and learn to instill better governance. Regulation-drafters must be replaced with change managers, and circulars with action plans. The north can leverage its effective public administration and competitive advantages to develop the south and east, while emphasizing the benefits for the European population. In so doing, it can develop the narrative – and create the real value added – that Europe needs.

Resistance to such a governance union will be fierce among some entrenched politicians, recalcitrant civil servants and politically connected businesspeople, who will fight to preserve their benefits from the status quo. Indeed, they might prefer to see rising extremism and nationalism, since such movements are likely to reduce transparency, accountability and competition. Still, we need to redesign the redesign effort. Achieving a governance union based on accountability, as opposed to legal formalism and mechanistic decision-making, is even more important than building a fiscal union on budgetary transfers. If we can manage that, the European population might start believing in the EU again, and Europe might finally get the opportunity to punch its considerable weight.

* Martin Bruncko is a senior director and head of Europe at the World Economic Forum. Michael G. Jacobides holds the Sir Donald Gordon Chair for Entrepreneurship & Innovation at London Business School.