With much of Europe primarily focused on enjoying their traditional summer holiday in August, the summertime recess also provides European politicians with a chance to review and reflect upon the year so far and plan what they intend to focus on for the rest of the year. One individual in particular may be using the summertime to plan a fresh stint as EU¹ president: Jean-Claude Juncker (JCJ), who has emerged as chosen candidate despite the rather acrimonious and public wrangling between David Cameron² and the rest of the EU. In view of the substantial protest vote across Europe that voiced itself in the May elections, this seems an opportune time to review the considerable challenges awaiting the new EU president in his first 100 days.
EU austerity set against the need for growth under the new Italian EU Presidency led by Mr Renzi³
It has been clear, since her re-election, that Chancellor Merkel4 has allowed an element of fiscal “legerdemain” to return to government policies, thereby allowing France, Italy and Spain to stimulate their economies through looser fiscal policies. However, it is also evident that Germany is still quietly wishing to see further structural and competitiveness reforms, the lack of which are also clearly exasperating Mr Draghi5 at the ECB6. JCJ must thus balance the need for consistent and purposeful messaging of EU policy. He needs to effectively balance the long-term need for economic growth through competitiveness with the (less popular) need to control the bloated welfare state in much of Europe.
Rapprochement with Mr Cameron
As the UK heads into a rather fraught Scottish independence vote, it is essential that JCJ creates a more positive working relationship with the UK so that he is not confronted by a “Brexit”7 in a couple of years. At the same time, JCJ needs to take decisive and positive action to show that Brussels genuinely cares about EU citizens and exists primarily to address their concerns and needs. The UK issues are merely a “tester and taster” of the far greater challenges ahead in 2017 if Marine Le Pen8 continues to gain momentum in France.
Re-establishing trust and respect in the relationship with the US
Trust in the US has been badly shattered by the NSA9 revelations, the huge fines imposed on France’s BNP Paribas and more recent double-agent spying in Germany. Together with the most senior members of the EU, JCJ must now seek to energise the relationship with the US despite the fact that Obama now looks like a lame-duck president. Although the balance of the world may be tilting back towards the Pacific, the stability and growth that the Atlantic partnership has delivered over the last century should not be undone, but used as a strong foundation for future partnership going forward.
Addressing the strategic imperatives from the Ukraine
Complications and responses to the Russian absorption of the Crimea and destabilisation of the Ukraine, now emerging as serious energy, social and economic issues, need to be evaluated and assessed. It is foolhardy for the EU to watch as Russia unsettles and destabilises the East of the EU and threatens energy security as well. JCJ will need to lead and drive forward a strong and consistent EU position, balancing the distant and retiring US perspective and cognisant of little actual desire to go to war, as well as representing the more nervous CEE10 countries.
While European bond markets have converged, disconnected and realigned in the last 14 years, real industrial production has been a one-way road, where Germany has outperformed all its neighbours and its global competitors, while France, Italy et al. stagnate and weaken on its doorstep in Europe. As recent economic data suggests, there is a summer lull unfolding that may disappoint many EU optimists. Against this background of uneven development, JCJ must inspire corporates and consumers to spend and invest with confidence across Europe. International investors have flocked to EU assets in the last year, returning circa EUR 1 trillion scared away in the euro-zone crisis of 2010. JCJ can be instrumental in keeping this capital at work, rather than allowing it to leave and cause dislocations in many credit markets and a weakening euro.
It is fair to state that Brussels, in all its EU glory, has become a behemoth of bureaucracy, distanced from and unfamiliar with the real needs and concerns of its citizens. JCJ needs to recognise the risk this represents to further progress being made on the EU journey. He therefore needs to lead an effectiveness- and efficiency-reform plan that would not only address the huge duplicate costs of the EU — which infuriate and anger many EU citizens who have suffered themselves in the face of austerity and economic downturn — but hand back authority on many local and national issues to respective national governments. This would achieve improved accountability and ease the stretched finances of the EU members at the same time.
Youth unemployment is, and remains, one of the most destructive, critical and most neglected consequences of the global financial crisis. JCJ must set up a strategic long-term plan to get Europe’s youth to work, since the longer-term issues of growth and productivity can only be addressed by offering effective training and work to all under 25 years of age. While there are local challenges to be considered, the blueprint of more flexible labour markets and immigration laws will generally create an environment where employers would be willing to increase hiring.
Europe faces significant demographic challenges that need to be faced by current welfare policies and then fought through far-ranging social and immigration ones, too. JCJ must create a narrative where Europe recognises its strategic challenges of ageing baby boomers on the one hand, and unemployed versus potentially unemployable youth on the other. Incentives to plan and save for retirement must be urgently put in place, since the long-term power of compounding investment returns is so effective, and also because these savings could be deployed to fuel the recovery and starvation of credit — so evident in the poor balance of many euro-zone banks.
The continuing strength of the euro is frustrating both the ECB and policymakers, as it is resulting in low inflation (good) but low to no economic growth (bad). However, it remains unclear to many if a mercantile strategy of using a weaker currency actually solves any of the world’s key issues, as it effectively creates deflation and trade friction. Europe needs international capital to right the wrongs caused by the convergence of the last 20 years, and a strong euro is a good way of ensuring that it stands invested in European assets.
The ECB’s Asset Quality Review must achieve several aims: first, to promote the cleansing of the euro-zone banks’ balance sheets, so palpably failed by the last two European Banking Association reviews; second, to attract new capital into the industry so that the healing process can be ameliorated; and third, to promote and encourage a deepening and evolution of EU capital markets so that the weakened banking system is not able to hinder the access to capital that European companies badly need.
The ECB’s monetary policy is still failing to ignite the much needed fuel of money velocity, without which the ECB will not get much economic traction in place.
JCJ’s critical role here is to support the policies from the ECB and to keep national governments from becoming overly focused on local interests and issues, since the end-game of closer fiscal integration requires an acceptance of a common European average — not necessarily the highest standard.
JCJ has an almost historic opportunity to move Europe into a positive and more profound direction. He can draw on all his experience and insider knowledge of the last 20 years of the EU, while appreciating the urgent and unrelenting need to change and evolve by honestly recognising what the old EU has failed to achieve. Accepting not only the need for change, but also correctly recognising how best to change, could place JCJ in the pantheon of true European statesmen. Time will tell. European citizens, on their return from summer vacation, will be expecting a visible and clear improvement on what to date, has been a disappointing track record in driving through significant, meaningful and long-lasting positive change, bringing fresh hope for their future in Europe.