Until recently, and with barely concealed anticipation in the Anglo-American press, it was fashionable to speculate about the imminent collapse of the euro. The idea of an impending implosion is not new; it has been floating around ever since the continent moved toward a single currency. It grew more common during Europe’s debt crisis; in 2011, for instance, analysts routinely speculated about whether Greece or Italy would suddenly be forced out of the eurozone. “Grexit” and other such departures failed to materialize, yet the idea of impending demise persisted. During the Brexit referendum campaign, talk of it reached fever pitch, especially once the result became clear. As the British prime minister improvised an exit, morning newspapers far and wide speculated about “Nexit” and “Frexit.”
History, however, moved in a different direction. In fact, ever since Brexit and the election of Donald Trump as U.S. president, a reverse domino effect has guided European politics. From small countries such as Austria and the Netherlands to behemoths such as France and Germany, anti-European populism has not translated into governments eager to follow the United Kingdom out of the EU or Trump into isolationism. On the contrary. Especially after the landmark election of Emmanuel Macron in France, a newfound enthusiasm for reform has dawned in European capitals.
It is evident even to the biggest euroenthusiasts that the current architecture of the monetary union is profoundly defective. It was imperfect from birth, handicapping not just the single currency but also the EU as a whole. Yet if the status quo is untenable and implosion is a red herring, Europe needs a new guiding principle for reform. That will be all the harder given that the permissive consensus that allowed European elites to integrate by stealth is no longer viable and the gradualist “methodes des petits pas” dear to EU founding father Jean Monnet is out of runway.
European leaders must look to the history of federalism around the world. As the Bretton Woods system waned the Werner Report (1970), the Marjolin Report (1971), and the McDougall Report (1977)—concluded that varying degrees of fiscal federalism were prerequisites for a common European currency, which would itself be necessary for ever closer union. A federal budget would be financed by common taxes and debt issuance among the member states. McDougall, for instance, foresaw a budget of 2.5 percent of GDP in a first, pre-federal phase, when Europe would work to absorb regional economic shocks and make progress toward income convergence across the region. That figure would grow to five percent in a subsequent federal phase.
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