The financial crisis affecting banks and Governments is no more than a symptom of a deeper problem. That problem is a loss in relative competitiveness of both Europe and North America vis a vis  the emerging economies of China, India, Brazil and others over the past  twenty years. The loss of competitiveness was accompanied by an unwillingness to face up to long term problems like the  eventual  cost of ageing societies, and the ephemeral nature of some of the innovations of the so called  “new economy”.

The   boom- driven expansion of credit was like an anaesthetic that concealed an underlying loss in competitiveness from us   until 2008. Now that the anaesthetic has been withdrawn, after such a long time, the pain is acute. The human cost is all too real.

The answer to this for all European  countries  is, I believe, to work to increase what economists would call the total factor productivity of our economy, the productivity of the way in which we use all our resources, public and private,  capital and labour, tangible and intangible. We need a new  way of thinking , an enhanced  orientation towards  finding ways to earn a living  from meeting  the needs of the  rest of the world .

PUTTING THE EURO BACK ON A SOUND FOOTING

I am a strong believer in the European Union, the world’s only historical example of an entirely voluntary, and democratically sanctioned, pooling of sovereignty between different nations, many of whom  were  at war with one  another in living memory. No other part of sthe world has attempted anything as ambitious, or as successful as the European Union.

I know that there is not a little concern at the difficulties of the euro and complaints that the EU’s policy makers have been slow in rectifying what may be seen as substantial omissions in the original design of European Monetary Union.

But all of this should be kept in proportion. In January 2001, the euro was worth 92 US cents. It subsequently rose as high as   $1.59, thereby affecting euro zone exports as anyone living along the border with Northern Ireland can confirm.  It has recently fallen back from that to a lower, and perhaps more sustainable, level. But that is a level well above where it was in 2001.

The arguments that are now taking place in the EU now about bail outs, about surveillance of national budgets,  ECB bond  purchases,  about supposedly pro cyclical  budget cutting,   about moral hazard,  about the need to devise  a workable resolution  mechanism for large but insolvent entities,   and about the exact amount solidarity  which  member states of the euro owes one another,  are all real arguments, concerning real choices ,on which there are  legitimate grounds for disagreement . There is nothing wrong with the fact that there are vigorous arguments between countries about these issues at EU level, just as there are at national level. That is normal politics.

The criticism of the EU that has the greatest validity, in my view, is that it has waited for foreseeable  problems to become  acute before tackling them.

It is not so much the EU’s decisiveness, as its foresight, that has been open to criticism.

It was  foreseeable that the combination  of a single centralised monetary policy, with  divergent and decentralised  fiscal policies would  create contradictions.

We must not make the same mistake again. We must  show foresight, and intellectual rigour, in  regard to the problems  looming on the  horizon.

THE GERMAN CONSTITUTION AND THE EURO

There is one matter affecting the  euro, and the solidity of the European economy  generally, on which  foresight is now needed. That is a decision the German Constitutional Court might take on whether the proposed  closer fiscal policy integration in the euro  zone is compatible   with the  German  Basic Law or  constitution.  For understandable historical reasons, German Courts take  democratic norms and the sovereignty of the people very seriously.

Issues that may be at stake before the German Constitutional Court  are  whether

1.       The increased EU surveillance of the German budget, or

2.       The large new German contribution to the  special vehicle being set up to  help  euro member states with  funding difficulties,

  run  afoul of the German  constitution or Basic Law. It is important for  markets ,and for the economic stability of Europe  and the world ,that  the EU not be taken by surprise by any decision the German Court may take on these vital matters that are now underpinning the euro.

The Court   has already addressed this sort of issue in 2009, in its judgement on the Lisbon Treaty. So we have a  preview of its thinking.  It  emphasised its belief that   the sovereign   state is still the main vehicle presently available for  democratic governance.

DEMOCRACY THE KEY TEST

It said then that

             “an increase in integration(in the  EU) can  be unconstitutional (in Germany)l if the level of  democratic legitimation (in the EU) is not  commensurate to the extent and weight of the supranational power or rule”  at  EU level

And it has  added that, for it, the  test of democratic legitimation is whether “the allocation of the highest ranking political offices”takes place  by means of  “competition of  Government and opposition” in   a free and equal election . Essentially the question it posed was ..can the people vote the EU  government out of office?  Even though the European Parliament is directly elected, it  not believe that the  EU yet passed that  democratic test. And they are right, the people of the  EU  do not have an opportunity to vote the  EU  government out of office.

The Court was  therefore very reluctant  to agree to further  EU integration, beyond that proposed in the Lisbon Treaty, without a qualitative improvement in  democratic  governance at  EU level. Otherwise it  favoured keeping power at the  level of the states because it  argued that the states of the EU have a more developed democratic  practice than the EU does ,at the moment.

 I am certain this issue of whether there is sufficient democracy at EU level will arise again in any appeal to the Court against the proposed closer integration of Germany in responsibilities to, and for, the rest of the euro.  Such an appeal will take place and has the potential to destabilise financial markets unless something is done to forestall the problem.

I have long advocated a simple remedy to this problem.

ELECTING AN EU PRESIDENT DIRECTLY

The Stability and Growth Pact, governing the euro, was finalised at the  Dublin Summit of 1996 during the Irish Presidency. During that same Presidency, I commissioned a study on the possible direct election of the President of the European Commission by the people of Europe in a free and equal election of the people of the EU. 

I really  do not believe that it would be wise for EU leaders  to sit and wait  to see what the  German Court might say . Its jurisprudence  is already published in its judgement on  the Lisbon Treaty.

That judgement should now be studied carefully, and urgently, by  The European Council, the Commission ,and the Eurogroup. 

The European Union must  further improve democracy at EU level,   to an extent that  would make whatever further EU integration is necessary to underpin the  euro, acceptable to the German Constitutional Court. It is as simple as that.

This could, for example, be achieved by  providing for a electoral competition, among all the people of the EU,  for the posts of highest ranking political actors in the EU.

The European Council could decide, without changing the Lisbon Treaty, that in future it will only nominate as President of the European Commission,  as  President of the European Council, and/or as President of the Eurogroup, a person who has  won a majority of votes in an EU wide  election for that post, held  on the same day as the  European Parliament election.

That would  create a similar level of democracy at  European level to that  we each enjoy at national level.

Finally, the idea of a direct EU wide direct election is not as radical as it might seem.  In December  2002, the Laeken  European Council  specifically asked the  European Convention to  examine this matter, but that never happened . All the emphasis was put on increasing the powers of the European Parliament, but direct election of a President by  people themselves was never seriously considered. Nor was any change in the electoral system to the European Parliament itself. 

The present crisis is an opportunity ,not only to  deal with long hidden  fiscal problems, it is also an opportunity to make  the  European Union even more democratic.

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John Bruton is former Taoiseach, former Ambassador of EU in the USA and member of the Academic Council of the Centre for European Studies