A Reform Agenda for Post-Brexit Europe

By Andrea Montanino, Lilac Peterson, & Álvaro Morales Salto-Weis

Following Brexit, it is even more important that the European Union focus on further integration. It can do this by completing the Digital Single Market and the Capital Markets Union, concluding the Transatlantic Trade and Investment Partnership (TTIP), pursuing a larger European budget, and introducing Eurobonds.


Although it is highly uncertain which direction a European Union without the United Kingdom will take, we will lay out two possible scenarios. The first scenario will leverage European citizens’ fears that free movement of labour will limit job opportunities for locals, that free movement of people will increase terrorist attacks and destabilise local communities, and that free movement of capital will lead to foreign acquisitions of domestic companies. All these fears will induce voters to elect representatives who will work to curtail European integration and the role of EU institutions, which may not break up the Union per se but will render it ineffective.

A second scenario is that EU member states realise that they can only create more jobs and play a larger role in the globalised economy by enacting more coordinated policies. We focus on this second option, which may not be likely in the medium term, but we are convinced will create better conditions for sustained economic growth. Completing the single market and advancing the fiscal union are two milestones for a more efficient Union.

The Digital Single Market (DSM) was introduced in 2015 and is designed to remove regulatory barriers and market fragmentation while supporting e-commerce and intellectual property rights. If implemented properly, it could add as much as €415 billion to the EU economy each year. Key challenges facing this process include ending “geo-blocking”, which restricts user access or charges extra to use a website based in another EU country; and reforming European copyright law so that products made in different EU countries can be used and shared across borders. For example, online education regulations should be harmonised across Europe so that teachers can provide quality education without running into legal snares.

While integrating, the EU should avoid overregulating. In such a large Union of sovereign states, regulation is essential to guarantee evenhandedness and provide a common framework across countries.

On his very first day as the new Commissioner for financial services, European Commission Vice President Valdis Dombrovskis spoke at the Washington-based Atlantic Council about the relevance of creating a Capital Markets Union (CMU), a goal European Commission President Jean-Claude Juncker has also made one of his key priorities. Integrated capital markets will strengthen cross-border risk sharing through the deeper integration of bond and equity markets. This results in a broader range of funding sources, which can become a sorely needed shock absorber. CMU can also develop financing tools to fuel growth of small and medium enterprises (SME), infrastructure projects, competitiveness, and long-term investment financing to foster economic growth.


Compared to the United States, the European Union’s financing options, especially for high-growth SMEs, are not nearly as diverse: bank loans comprise more than three-quarters of external credit to non-financial companies in the European Union, compared to less than a third in the United States. According to New Financial, there is a shortfall in capacity of more than $1 trillion per year between what European companies raise in the capital markets and what they could potentially raise if capital markets were as developed and deep as American capital markets. In addition, 60% of the recent economic shocks the US experienced were absorbed by the private market, whereas the EU’s equity markets are not nearly as large nor well-equipped to handle this kind of responsibility.

In addition to the CMU, a major component of European integration will be conducted through the Transatlantic Trade and Investment Partnership (TTIP). According to the independent Centre for Economic Policy Research (CEPR), TTIP will increase the size of the EU economy by around €120 billion (or 0.5% of GDP) and the US by €95 billion (or 0.4% of GDP), and would lead to a permanent increase in the amount of wealth that the European and American economies can produce every year. It will increase exports for numerous sectors, including motor vehicles, metal products, and processed foods. It will also cement the transatlantic relationship, whose importance cannot be overstated.

While integrating, the EU should avoid overregulating. In such a large Union of sovereign states, regulation is essential to guarantee evenhandedness and provide a common framework across countries. However, citizens and companies can feel disaffected towards EU institutions when some of them have to follow duplicative and complex regulations.

Only by restoring trust in its institutions can the EU pursue the needed larger European budget, which is necessary for a closer Fiscal Union. I suggest increasing the budget from the current one percent to three percent of EU GDP. This is still a very slim portion compared to the United States, where the federal budget is 22.5 percent of GDP. However, this is a complicated task. On one hand, increasing the tax burden seems difficult, as most member states already face high fiscal pressure. An alternative would be to transfer competencies to the EU, in areas like public funds for R&D, infrastructure plans or some social assistance programs (an EU unemployment benefits program, for example).

We will likely move toward a Union resembling concentric circles, in which a core group of countries pursues the closest integration possible while maintaining their status as independent nations.

Integration should take place at an EU-wide level for the internal market and at the Eurozone level for fiscal policy. The completion of the internal market is a must, and should be done quickly. The European Union has the largest internal market in the world and among the world’s wealthiest citizens. Completing the internal market, finalising a free trade agreement with the US, and allocating more funds to an EU budget will show the economic benefits of the Union more clearly, and will likely prevent other “-exits” from the EU.

While completing the internal market, Eurozone countries should work for a closer fiscal union to complement the single currency. A rather revolutionary idea related to this that has been floating around is to issue Eurobonds. Eurobonds can be targeted to finance European projects for infrastructure, R&D, and human capital. If necessary, they can also provide resources to mitigate large and unanticipated shocks. A supranational European agency resembling the European Stability Mechanism (ESM) following some necessary legislative changes could issue up to five percent of Eurozone GDP in European debt to finance large projects. This can have a short term effect on jobs and a more structural long term effect on potential growth.    

Eurobonds will likely receive a AAA credit rating and, given the current market conditions, will have close to a one percent yield on a ten-year bond. Such an issuance will not crowd out other sovereign debt and it is difficult to imagine that the costs will be higher than the return. Eurobonds can serve as a practical alternative to higher government spending, which isn’t viable for most EU countries due to their already high levels of public debt.

Integration is not for everybody, as the British referendum showed. It is probably time to forget the “two-speed Europe” which allows member states to choose when to join a common EU currency. We will likely move toward a Union resembling concentric circles, in which a core group of countries pursues the closest integration possible while maintaining their status as independent nations. Meanwhile, the other states can agree on a lighter form of integration. It is imperative that the three largest founder countries, Germany, France, and Italy, are part of the core. It is unclear, however, whether all 19 Eurozone countries will have the ability and the willingness to enter into the closest circle.


About the Author

andrea-montaninoAndrea Montanino is the director of the Global Business & Economics Program at the Atlantic Council. He leads the Council’s work on global trade, growth, and finance. Montanino formerly acted as executive director of the International Monetary Fund (IMF), representing the governments of Italy, Albania, Greece, Malta, Portugal, and San Marino.

Lilac Peterson is an intern with the Global Business & Economics Program. She previously worked at the US Treasury Department. Peterson is a junior at the University of California, Berkeley, where she studies Economics, Chinese, and Public Policy. She has published two books in China.

Álvaro Morales Salto-Weis served as a Program Assistant with the Global Business & Economics Program. He now works at the European Commission. He received his Master’s in public economics from the Universiteit van Amsterdam.


The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.