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The new headquarters of the European Central Bank (ECB) is seen during a guided media tour in Frankfurt, April 29, 2014. (© Ralph Orlowski / Reuters/REUTERS)
The new headquarters of the European Central Bank (ECB) is seen during a guided media tour in Frankfurt, April 29, 2014. (© Ralph Orlowski / Reuters/REUTERS)

National reform: a fix for anti-EU sentiment Add to ...

It used to be that citizens of the European Union would put up with a lot of shabby, sovereignty-robbing economic management, and absurdities like regulating the bends of bananas and cucumbers, because the EU wasn’t really about putting extra francs, pounds, lire and German marks in their pockets. It was about preventing the users of those currencies from exterminating one another.

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The theory was that democratic countries with melded economies were unlikely to send the tanks rolling across borders because doing so would be rather damaging to house prices and stock portfolios, and could make you rather dead too.

The theory largely holds true; a pre-election Pew Research Center survey found that 70 per cent of the respondents in seven of the EU’s biggest countries agreed that the EU “promotes” peace.

But if the results of Sunday’s EU parliamentary elections are any indication, the theory has become a bit less credible. About 30 per cent of the vote went to parties that could be considered “Euroskeptic” – that is, they believe the EU is either offering false promises of better livelihoods or is an outright failure. Some of the parties, like the far-right Front National in France, which placed first with 25 per cent of the vote, promote a striking combination of xenophobic and nationalistic policies that are the antithesis to the EU’s founding principles. In Britain, the EU poll was won by the UK Independence Party, whose overriding goal is to yank Britain from the EU.

It comes as no surprise that countries that are hurt economically tend to lurch toward nationalism (Italy was the exception, where the Euroskeptic Five Star Movement placed a distant second to the centre-left Democratic Party, though, at 21 per cent, its popularity is only somewhat diminished). If the EU election had been held three or four years ago, when the crisis and the recession were at their miserable height, you can bet the anti-EU vote would have been higher.

The EU leaders will no doubt take heart that 70 per cent of the voters who bothered to vote – 57 per cent did not – broadly endorsed the status quo, that is, more economic and political integration, fewer bent bananas. But a stay-the-course strategy would be a huge mistake on their part. While Italy, the euro zone’s third-largest economy, no longer seems to be a euro zone exit candidate, France does. France is the region’s second-largest economy, behind Germany. While the EU just might be able to survive Britain leaving the EU, there is no way it could survive France’s departure. France and Germany were – and remain – the foundation of the EU, the marriage of German industrial might and postwar democratic passion with French agriculture and cultural sophistication.

So what can the EU and its 28 national governments do to prevent the populist surge from gaining momentum to the point that the EU, or the euro zone within it, collapses?

The natural reaction would be to throw money at the problem: Job creation programs, road building, tax cuts and the like. But governments are tapped out. Most of the EU countries are still running fat budget deficits. France’s forecast 2014 deficit, at 3.6 per cent of gross domestic product, is bigger than Italy’s. Its debt-to-GDP ratio is 90 per cent and rising. In spite of low borrowing costs, France, Italy, Greece, Spain, Portugal and Ireland have no capacity to spend big.

They may look to the European Central Bank for help, but there, too, they are bound to be disappointed. The ECB has made all its big moves, from propping up the banks with cheap loans to keep them alive and lending to inventing an unlimited sovereign bond purchase program for any euro zone country in danger of losing its access to the debt market (the program has never been used but its mere existence has crunched bond yields). The ECB may yet cut rates one more time, or announce a form of U.S.-style quantitative easing, but the effect is bound to be muted compared to the previous save-Europe programs.

That leaves structural reform, and that’s up to the national governments. The close professional shops will have to be broken up, labour markets freed up, judiciaries streamlined, rampant tax evasion snuffed out, patronage appointments in state-controlled companies ended, bloated bureaucracies slimmed down. Doing all this would be a lot less fun for any government than writing cheques. But it’s the only way out.

Reform on the national level would not only juice up economies, it would help defuse the arguments of the anti-EU parties that the EU is taking over the show at the expense of national sovereignty. If the governments don’t embark on reform, the EU institutions will naturally try to fill the reform vacuum themselves.

The powerful anti-EU and anti-euro sentiment could gain momentum if France and the other hard-hit countries don’t improve their economies and create jobs. Seventy years after the end of the Second World War, the EU needs a narrative besides just “peace” to keep the listing old battle cruiser afloat.

Follow on Twitter: @ereguly

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