Europe's economic paths

Britain vote at EU election 2014 Image copyright AFP

The French prime minister Manuel Valls has described the votes won by the far-right National Front and eurosceptic parties as a "political earthquake."

The gains made by anti-EU and anti-euro parties in the European elections in countries ranging from Britain to Denmark to Greece will generate debate over the European project and Europe's economic future.

But, the pro-Europe mainstream parties - the centre-right European People's Party (EPP) and the centre-left Socialists and Democrats (S&D) - retain about a two-thirds majority. They had worked toward further integration that had been challenged during the euro crisis that erupted in May 2010 when Greece was rescued.

Although the crisis has raised the prospect of a euro break-up as economists wondered whether the peripheral countries belonged to the same 'optimal currency area' or OCA as Germany and its northern European neighbours, the reaction from Euro Zone leaders was 'more Europe.'

Eurozone institutions

For instance, the euro crisis revealed the fragility of a monetary union without a banking union as banks had lent large amounts to peripheral countries such as Greece and Ireland.

Rescuing the banks led to the need for Ireland itself to be rescued. So, a banking union has been created but it has also raised operational questions for non-euro EU countries like Britain and Sweden with large banking systems.

That wasn't the only institution that was seen to be lacking. Eurozone leaders reinforced the need for member countries to have fiscal discipline.

Before the crisis, Greece borrowed at the same rates as Germany, as bond markets seemed to view the eurozone as one entity. That contributed to too much borrowing. Though that is unlikely to happen in the future, Eurozone leaders came up with additional reforms to try and enforce fiscal restraint.

The outcome was the European semester, where there was greater monitoring of national budgets by Brussels to ensure that countries that shared a currency didn't run large deficits. It continued the transfer of economic decision-making power toward supra-national bodies.

For instance, other institutions that were created include the Single Supervisory Mechanism (SSM) that gave the Frankfurt-based European Central Bank (ECB) more powers to oversee banks and the European Stability Mechanism (ESM) - a permanent rescue fund that is like an European IMF based in Luxembourg.

Optimal Currency Area?

Going back to the OCA, it also raised the question over whether all euro countries, and the EU countries that are slated to accede - should share a currency.

Have the criteria of trade integration and convergence in business cycles and incomes been met?

European countries trade a great deal with each other but convergence is a different story. If a country isn't converging with the rest of the member countries, then it is a high cost to lose control over its interest rate and currency.

Could reforming the euro institutions improve the prospects of convergence?

If the cost isn't worth the gains of being in a monetary union, then it raises the prospect of euro semi-breakup.

Then, there is a middle path - a European single market that doesn't share a single currency.

Deeper integration and linking markets could happen, but without giving up a country's currency.

Image copyright AFP

Britain, Denmark, and the other non-euro EU countries are examples. This is an old debate that has come to the forefront, particularly for those outside the single currency that have watched the euro crisis.

Aside from the UK and Denmark that have an 'opt-out,' the rest are slated to join the common currency eventually.

Right now, the rise of both anti-EU and eurosceptic parties will lead to debates on all these possible paths. These elections won't be determinative since the in/out question depends on national legislatures.

But, the economic future of the European project will surely be discussed in the coming weeks and months.

Politics vs economics

For some time, the growing influence of Brussels has led to debates over the 'democratic deficit.' Now, we have a glimpse of the views from the voting community.

I was told once of Juncker's curse - that eurozone leaders know what to do but can't work out how to get re-elected afterwards.

After stepping down as prime minister of Luxembourg for 19 years in 2013, he has now claimed his position as the EPP candidate for president of the European Commission. The leaders of the EU will decide whether he or one of the other candidates will succeed Jose Manuel Barroso, subject to approval by the European Parliament.

Jean-Claude Juncker's tenure as head of the Eurogroup of euro finance ministers between 2005 to 2013 may affect his chances, as there could be those around the table who are concerned about his ability to work with eurosceptics given his prominent role during the euro crisis.

On the other hand, he certainly knows the importance of politics, perhaps more so than economics, in governing Europe's economic future.