The EU has lost its way. Only by reverting to its original intention – of pooled sovereignty with all members pulling in the same direction for the greater good – can it get begin to recover from the crisis that currently engulfs it.

All 17 members of the eurozone, indeed all 27 members of the EU, must now acknowledge two lessons that have emerged from the ongoing crisis in the eurozone: first, there is no substitute for timely, coordinated action when the single currency is under pressure – a stitch in time saves nine; second, all eurozone countries are effectively in the same boat. If the boat springs a leak, everyone sinks. A quicker and more concerted response would have succeeded in limiting the fall-out from the crisis and cost far less in both financial and political terms.

The European Financial Stabilisation Facility, set up in a hurry in May 2010 in an attempt to stop the rot, will shortly be able to call on some €500bn in the event of any further eurozone countries facing serious liquidity problems. From 2013 onwards, member states have also now agreed to perpetuate this financial stability mechanism, even agreeing to amend the Treaty of Lisbon to avoid any legal ambiguity.

Markets unconvinced

Despite all this, the markets are still not convinced by eurozone shows of solidarity. Greek, Irish and Portuguese sovereign debt have been downgraded to junk status and the contagion is now appearing to infect larger economies such as Italy and Spain. The unhelpful timing of announcements from (largely US-based) credit rating agencies clearly does not help struggling economies deal with their debt crises but they are essentially reflecting the concerns in the marketplace.

European governments need to get ahead of the crisis and create the structures for economic and monetary union that will put a definitive end to further speculation. In the short term these measures should include allowing indebted countries to pay back loans at an affordable interest rate – otherwise we are only prolonging their agony or a conversion of 'junk' national bonds to more secure Eurobonds.

The obvious flaw in the European Monetary Union project is that it only established a monetary union and largely omitted the economic union that has proven so intrinsically linked to the strengths (and weaknesses) of the single currency. The eurozone is the only currency area on the planet that has 17 separate bond markets, 17 separate central banks and 17 separate national economic strategies. For the long-term sustainability of the euro, there needs to be a far greater degree of unity in policy-making.

The irony is that the euro has been a hugely successful project, and brought a considerable degree of stability to participating countries in turbulent times that they would not otherwise have enjoyed. Without it, many of them would have succumbed to a negative spiral of devaluations and defaults and inevitable recourse to the IMF. 

Same direction

The real crisis facing Europe, however, is not one of currency but one of governance. We have seen an increasing tendency for member states to go their own way, even in overtly defending a more nationalist economic policy to the detriment of the eurozone as a whole.

That is not to say that what is needed is a one-size-fits-all economic policy imposed on everyone, but rather a higher degree of coordination, and convergence of the broad thrust of economic policy-making that would ensure, at the very least, that everyone is heading in the same direction, rather like cars on a motorway – some may drive slower than others but there are minimum and maximum speeds and they are all heading in the same direction. Any rogue driver attempting to drive against the main flow of traffic will soon cause a major pile-up if he is not stopped.

Competitiveness is also key to any strategy for sustainable growth. After the bailouts, the countries concerned have to learn to stand again on their own two feet. The internal market has been one of Europe's major policy successes and completing it must now be a priority. It is policed by the European Commission (EC), which draws up annual league tables and launches infringement proceedings against member states that do not implement agreed directives on time or in the correct manner. Similarly, EU competition policy has brought a coherent approach to the market place by standing firm against monopolies and abuses of dominant positions over many years where the EC plays the role of a neutral judge. 

As with the single market, the EC in future should be in charge of overseeing a convergence of economic policy around the EU within certain parameters. Straying outside those parameters would lead to warnings and sanctions but otherwise there would be some flexibility for member states to pursue the goals at a pace adapted to national circumstances. A cluster of commissioners with economic-related portfolios could even be made responsible for steering the process forward, providing direction and momentum.

Common ground

In recent summits, EU leaders have come close to identifying a number of common economic policy areas where closer coordination is desirable if competitiveness is to be improved – sustainability of pensions, wage to productivity ratios, corporate tax policy, investment in research and development or financing of major infrastructure projects. However, the same member states have consistently failed to endow the EC with the overall responsibility for holding member states to their commitments and, where necessary, imposing penalties for breaches. This intergovernmental approach lay behind the failure of the Lisbon Strategy to deliver results in making Europe more competitive and dynamic by 2010 and will bedevil the new Europe 2020 strategy too.

The same failure of governance has characterised the Stability and Growth Pact (SGP), designed (largely by Germany) to ensure compliance with basic precepts of stable and sustainable monetary policy by limiting the size of national debt and annual deficits in relation to GDP. Most eurozone members are now in breach of the Maastricht criteria, yet no one has been subject to the fine envisaged by the authors of the SGP. The revised version, that has undergone much wrangling between the European Parliament and EU governments in the first half of this year, must include as little scope for national political interference as possible if it is to be credible.

Federal approach

We should not forget that the current sovereign debt crisis was preceded by a banking (liquidity) crisis precipitated by irresponsible lending and investments, often in complex and unstable instruments, which packaged and fudged good money with bad to the extent that banks no longer trusted each other and in many cases stopped lending. The answer to that was a new governance structure with tighter supervision and oversight from independent bodies. 

In the EU, pan-European institutions were established based on existing agencies for supervising the banking, insurance and securities sectors but endowed with more powers and less prone to political discretion. The key feature in all three was more power to the EC and European Central Bank to identify and remedy signs of failing supervisory structures in member states since many modern banking practices have a cross-border dimension that was slipping through the net of national regulators. This is yet another example of where the crisis has pointed to the need for a more federal approach to policy coordination in Europe.

For European countries to emerge stronger from the current crisis and face up to the significant policy challenges of the 21st century they need to think bigger and put more, not less, faith in the collective enterprise that is the EU. It should be remembered that European unification was conceived as a project in pooled sovereignty, not surrendered sovereignty. Member state governments must not run scared of nationalist or eurosceptic parties back home who decry any closer supranational co-operation because they have a duty not just to survive the present, but to lay the ground for the future.

Guy Verhofstadt is the leader of the Liberal and Democrat group in the European Parliament and a former prime minister of Belgium

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