Is the EU failing ? We all know that it would be too easy and simplistic to answer : yes. But the call for criticism, especially self criticism for those engaged in building the Community, is very appropriate and inspiring. I think the relative failure has to be thought in the face of the tasks to come. Getting out of this global crisis is a huge task to come. So my choice is to understand the question “Why Europe fails” when looking from the future, and considering the changes we have to achieve. Doing this, I will stress at the same time the projects and virtualities of success.

Before the crisis, there were remarkable successes : launching the single market and the euro, integration of new member states. But these realisations are not complete, and as regards economics, from decade to decade the growth potential of Europe has diminished. There is no need claiming victory for jobs creation : their growth in the years 2004-2007 was not sustainable.

Facing recession, the reaction was fast and successful. All the States adopted Keynes’s remedies and the social amortizers functioned. The recession has abated due to the massive monetary and fiscal support of states and central banks. However, as regards cohesion and solidarity, there is a failure. Clear divergences still exist between member states. Germany has lifted itself out of the crisis through investment, France has bet again on consumption ; Ireland, Spain, and the Baltic States are still in recession.

Now the question is : do we understand and do we share adequate views as it comes to sustainable recovery policies ? Yesterday there were people and renewed economists that anticipated the crisis, but politicians did not listen. Nowadays most of them know that “this time is different”, as Kenneth Rogoff writes. But that does not mean that conception and preparation of the reforms is well advancing.

Several concerns are apparent.

First of all, we must consider the question of where are the engines for growth ? Public institutions are highly indebted. The private sector is far from safe. The process of deleveraging promises to be long. Liquidity and capital is there, but it finances public debt and feeds recapitalization of balance sheets. Whereas new speculative bubbles appear, productive investment in the West, which sunk drastically during the crisis, has not returned.

The United States will no longer be a locomotive for Europe ; obliged to save more and spend less, they are going to attempt to recapture the role of a major exporter.

Can Asia pick up the slack ? Chinese growth is and will remain strong, but its weight in the global economy is not yet sufficient to hold up the entire world. Additionally, China will only slowly begin to reconsider its growth model, which is still based on exportation. German and Chinese trade surpluses have decreased, but this does not signify a change in their growth models, but is instead a symptom of weakened global demand. Thus, there is no obvious driving force of global demand, which means that Europe will have to look into how to stimulate its own demand, and reinforce its role in production and global competition.

Under these conditions, competition will continue to intensify. There is a wide fear of a war of currencies in the future. Carry trades spark currency adjustments. Europe would be the victim of a global adjustment, with the Euro becoming too strong. The dollar started again to decline in 2009, because investors no longer needed to keep dollars in reserve.

This indicates a fragmentation of globalisation, and at the same time the need to develop strategies of regional consolidation. Even if a return to protectionism, the old reflex of the 30s, seems to have been avoided, it is undeniable that the level of coordination of national policies is insufficient. The crisis has exposed the weakness of our international institutions and of the European Union.

At the same time, we will have to change our growth models : it will be necessary to pay the cost of the struggle to limit climate change and the violence of its impacts - at least if we persevere with our intentions, both here and at the global level. This means reducing energy consumption, and prioritizing investment (see Dieter Helm). And it will be necessary to pay the costs caused by an ageing population : the increasing expenditures of social security, health, and dependency. Developing countries are right when they tell us, “your commitments for climate and environment will only have value if you consume fewer natural resources and transfer technologies.” We can do it, while avoiding intolerable regressions, only by changing our production, our networks and our housing basis in Europe. It’s a new type of growth : producing more, better ; consuming less ; and recycling waste. And a fairer growth, where the value work is recognized and workers are not impoverished, thus by reconnecting wages with productivity, and discouraging economic rents and speculative revenue.

A major concern is the explosion of public debt. Political leaders and central bankers are in a dilemma : should they extend public support, or tighten the screws ? In each case, there is a risk of a relapse. The risk of inflation in the price of goods has been pushed aside ; but once again the risk of asset price inflation is of concern.

There seems to be a general consensus that governments do not have a choice : they must continue to support the economy. The private sector is in too weak a state to drive economic growth. The announced long recapitalization and the toughened prudential standards to prevent new systematic risks provoke a raise in the cost of credit. Industry is therefore highly uncertain of the support that it can receive from the financial sector.

Three conditions are necessary to lighten the relative weight of debt : strong growth, low interest rates, and increased taxes and/or tolerable decreases in public spending. More easy to say than to get.

The questions are : can we achieve all this with national only policies ? Can we neglect the necessity of new cohesion and stimulus at European level ? Are we prepared to it ? If we don’t Europe could look like Japan since the nineties : stuck in stagnation and unemployment.

Building potential growth, sustainability and cohesion should be a common imperative. It calls for a profound reform of the Union Strategy combined with the implementation of a genuine macro-economic policy, and a creative transformation of European capitalism.

I/ Reforming the Union’s Strategy to increase potential growth and achieve sustainable development

After launching the making of the Single market, and the Euro, the Lisbon Strategy marked a first agreement in the search of a European common interest in the globalized economy. It set forth good objectives, such as raising the employment rate, forming a knowledge-based economy, and completing the Single market. The pressure exercised on member-states for structural reforms, through guidelines and effort comparisons, is useful and must continue. But all together you can speak of a failure. Why is this ? We have bet principally on the dynamics of the interior market. And yet it has remained fragmented, notably due to rival national interests on the issue of regulation and financial supervision, and to the lack of common infrastructures. Furthermore, the pseudo-theory of “efficient markets” has dissuaded efforts of coordination, which require incentives and public policies based on investment and cohesion. The knowledge-based economy… was never truly embraced by European societies ; it ran up against the balkanization of the areas of national research and education, and against the extreme difficulty of changing the content and conduct of education. The Euro has not been accompanied by the ability to form a common economic and budgetary policy. As to the open method of coordination, it had no incentives nor teeths : the cooperation hoped for between states has never materialized. The citizens never adopted the Strategy, which moreover was introverted, without an exterior dimension. The Lisbon Strategy did not anticipate the rise of emerging countries, the global disequilibrium and their impacts.

Will the new strategy for growth – EU 2020 – mark a radical change or limited adjustments ? We don’t know yet. But it is a pity to see that the time for deliberation will be scarce. Commission launched a consultation very late, end of November 2009 ; but it will propose to Council as early as March 2010, for decisions in June 2010.

The need for a social investment focused on training and jobs Good news is the top priority given by Commission in its consultation paper for Education and skills. Renewed potential growth will be achieved through the combination of a higher employment rate and increased productivity. What a formidable challenge in the context of an ageing population ! Germany lacks young workers, France has an accelerating retirement rate, and eastern European countries suffer from a haemorrhage of their working populations. Everywhere, the shortage in quantity and quality of skills is a drag and a handicap on the recovery. It is an illusion to think that a European advantage in knowledge is still an irrevocable asset in terms of global competitiveness. We must, then, draw on our reserves of human resources (under-employed women and youth), re-employ seniors, integrate immigrants, and train or re-train everyone with the necessary qualifications.

During the crisis in Europe, firms kept workers more than they laid them off, following the injunctions of the states. They favoured partial unemployment measures accompanied by stronger and longer benefits. Even if these measures are extended, they will only act as buffers, and we still lack a policy for the medium and long term.

Yet, massive industry restructuration is ahead of us. Large firms are investing and will invest mostly in China, Brazil, and elsewhere, and will abandon our region if it does not offer new developmental perspectives. And for this, a central question is that of human capacity for technological creation and innovation.

Re-qualifying human capital and developing skills are essential pre-conditions for an economic recovery, a fact recognized by Mr. Sellière, former president of BusinessEurope.

The logic of “excellence” advocated by the Lisbon Strategy has quite simply forgotten the fact that the majority of workers in industry and services fields need to boost their qualifications. Yet, our systems of professional training and lifelong learning programs are desperately feeble, youth are giving up the study of science and technology, and there is a deficiency of vocational and lifelong training. Only through a massive co-investment by public institutions, corporations, and the population will we be able to remedy the situation.

On the other hand, training without employment would seriously disillusion and dishearten the workforce. Companies must therefore anticipate restructuring and discuss their strategies with local and social partners. Together, they can take up the challenge of a new, industrial as well as social Europe. The European Union must serve as a catalyst. It will be especially concerned with transnational restructuring, by putting in place sector-specific industrial policies, incentives for long-term investments, support for small businesses, and grouping financial investors dedicated to long term growth in a renewed Europe.

Public aids and loans must be pooled in order to better serve this policy. The EU must equip itself with such tools, and thus reform its structural Fund, which could be used as incentives, and monitors the proper use of these funds. As for the European globalisation adjustment Fund, it must be replaced by a fund dedicated to restructuring.

Industrial policies

Mr. Barroso is committed to building industrial policies.

Of course, the Commission is going to continue to bet on innovation. Innovation is bringing ideas to markets. It touches, therefore, all aspects of the chain, from research and development to the spread of knowledge, the development of skills, the industrial organisation, and downstream services. But in Europe, these chains are fragmented. The efforts of the EU to establish a common research, post-higher education, and innovation space, have been remarkable, but the results are insufficient. The EU must act at the regional level, by helping regions form transnational networks, achieve greater mobility for researchers, teachers, and students (which is currently much too weak), develop common technological platforms, and propose shared educational curriculums. It must encourage partnerships and co-investments, stimulate an increase in the currently insufficient mixture of public and private financing, and create investment funds.

Needless to say we need R & D and training to drive better and greater levels of production in Europe, and not only abroad. The EU must, sector by sector, help conceive and manage an intelligent industrial transition. It should support European actors’ pooling and partnership agreements which currently exist. There cannot be industrial policy without strategic choices of specialisation and investment, so these choices must be made. This includes, of course, the green economy, but also healthcare, digital economy, defence, space and aeronautics, and we cannot forget agriculture, a global strategic domain.

In the framework of the fight against global warming, the EU has recently become aware of the need for an energy policy. However, this objective is tied to another objective : access for all to an essential good, energy, which translates into a protection of its supply. This implies a production-side policy : the development of domestic, carbon-free energy production, the development of infrastructure networks, and security of supply for a diverse set of foreign sources. Currently, there is no common energy mix for the choice of sources. The nuclear question is still a debate. There can’t be a level playing field with a taboo, whereas other sources are subsidized by nation States. Either we do manage to go forward in EU27, or we will have to build an enhanced cooperation between the European nuclear states. Moreover, if the price of energy must increase, we should try to prevent consumer’s bills from increasing, and therefore prioritize investments in saving energy. The internal policy must be coupled with an external policy : there is need for a global carbon trading scheme, and a unified policy for technology transfers with developing countries.

More and more, industrial choices will no longer solely be private choices for private consumption, but instead will have to incorporate collective choices for common goods shared by all Europeans. Energy and transportation are typical examples of this evolution.

Reforming the Single market, public goods and a European “base camp” in the context of globalization

Far from moving aside market policies, the common policies that I have just spoken of require, on the contrary, reinforcement and an achievement of the Internal market. The market sphere must be a sphere of common life : therefore it must offer public goods as well as a basis for entrepreneurs / initiatives and synergies susceptible to trigger investments. Common infrastructures are to be built – they are still greatly lacking for energy, transportation (freight rail, for example), logistics, and even finance (payment systems and financial transactions). Transnational infrastructures would encourage regional cohesion and would give the EU a major competitive advantage in the face of globalisation. Some projects exist, but we have not used finance and its innovations to develop them. Another obstacle to the achievement of the internal market is, of course, the free circulation of workers and service providers, which is not yet achieved. In order to move transfrontiers, people need incentives and even infrastructures, such as cooperation building between national services for access to labour markets and training facilities. They need to keep their rights when the move and have their skills not only mutually recognized on paper, but effectively by national bureaucracies.

Another obstacle is the intensified fiscal competition. There are, in fact, two factors that compel us to implement fiscal coordination : the defence of the single market, but also the ability of states to restore their finances by reasonable tax increases. Coordination will notably deal with savings taxation, corporate profit taxation, and the implementation of a carbon tax. Of course, the rivalry between states, each defending its own national « champions, is another obstacle.

Jean Gandois, a renowned French industrialist, emphasises that all businesses need a base camp ; even the most global depend on political relationships. So far, truly European businesses do not exist ; there are only nationally-based businesses that have “Europeanised” or globalized themselves. They compete on a European level, while still keeping their privileged relationship with their home nation.

We must spark the formation of European companies through alliances. But more important : large European companies will have to acquire a common identity in the face of global competition. We need companies whose goal is to increase the potential growth of the EU, instead of pure inner competition, and who will enter into globalisation while taking care of their base. They should no longer be under the thumb of controlling shareholders, but instead their governance will be a partnership, they will practice an extended environmental and social corporate responsibility and will co-invest for the common good. It will be particularly necessary to offer small businesses better access to the Single market, research, and skills, and to provide them with adequate financing.

Mario Monti is in charge of a report on the reform of the internal market : he could touch on these questions, including the adjustment to competition law that this implies. A major and unresolved problem is that of the Internal market of banks, insurance, and funds management. If large European banks are emerging, it is still nonetheless competition between different national markets that is pre-dominant. Finance contributes little to real investment, and, more generally, to growth. Building a European financial supervision, as stated in the report by Jacques de Larosière, is a good purpose, but supervision under which rules ? And member States – UK first – do not wish to abandon any “sovereignty”, which would mean supervision without power.

A serious reform of governance for the European strategy

Currently, the EU’s strategy is carried out through the combination of national plans for reform with very little coordination, and scattered EU action programs that do not have significant resources and readability. It’s time to take the bull by the horns : we must demand actual commitments that go along with actual cooperation. This implies greater interaction between the EU and the member states, and between the European Parliament and national parliaments, publically shown to an informed public opinion, with a call to participation, and an evaluation of the acts and the actual results.

As to the integrated guidelines of the open coordination method, they must make way for some differentiation of the national objectives. We have to stop telling Bulgaria to invest 3% of its GDP in R&D when they need to redevelop their educational system, and are crying in vain for assistance. As for the community program, it must be focused on a few clear and substantive objectives, backed with budgetary levers for incentives and investments.

As Jérôme Vignon points out, the Lisbon Strategy suffers from a major problem of social appropriation. The organisation of the reporting structure (guidelines, national Lisbon programs, recommendations) does not take into account domestic debates. The appropriation of the EU Strategy by national forces (parliaments, social partners, or public opinion) must still be managed. State leaders and national parliaments do not feel responsible to their citizens regarding the EU Strategy. This means that what should have been a strategy based on mobilization is still too often a strategy driven by Brussels and for Brussels. By getting bogged down in too many details, one forgets the essential and the public opinion ends up getting only a blurry vision.

Reforms have to be made at the national level : it is necessary to create an entity within each member state and to give it the task of leading the debate on national and European objective. (European Strategic Committees). There would be national consultations based on the outlines of the Commission, and then proposal by Commission and adoption by the European Council and the European Parliament. These committees would then elaborate on their national Plans.

An EU 2020 strategy that is not closely tied to a common macroeconomic and financial policy would be ineffective. This is my next point.

II/ Building a macroeconomic and financial policy

Did the Union fail ? The ECB maintained low interest rates, and it gave the adequate liquidity to fight recession. But previously it was inactive when the financial bubble grew, that is why it is now called for a role in financial stability supervision. The Stability and Growth Pact was totally inadequate in the face of a systemic risk and had to be suspended. The European budget only took up a very small part of the economic recovery effort (5bn at most). Member states with major difficulties only found little support from the IMF. As to coordination of national economic policies, apart for a go for Keynesianism it was superficial. Something has got to change !

Need for a macroeconomic policy at EU level

In the future, it would be madness to keep on dealing with structural reforms and macroeconomic financing issues separately. We would then get neither lasting economic recovery nor cohesion. Indeed, state support appears to still be necessary at least in 2010-2011. Later however, if we want to bring down the level of public debt below 60% of GDP, it would cause a true depression.

The ECB should not fear a return of price inflation but rather of inflation in financial assets. We need to ask it to keep low interest rates and to participate in financial stability. A limit to global debt/Gdp looks necessary. In the ascending phase of the cycle, the ECB will have to fight speculative bubbles in the price of financial assets, using a contra-cyclical financial regulation.

Asking member states to provide a medium to long-term road-map to bring down public debt to an acceptable level (but which one ?) will be necessary, but politically very difficult. Today, at the end of 2009, a SGP review is not on the agenda, tomorrow, in 2 years time, it will be. It does not mean suppressing budgetary discipline, but adapting to a brand new situation. Without stronger European cooperation, it would most likely be impossible. An interactive governance EU-MS, integrating national parliaments, is needed towards a macroeconomic cooperation between both levels. I propose to set an annual European Conference in order to give macroeconomic cooperation some visibility before member states vote their budgets. In addition, coordination also implies solidarity with member states in difficulty and to consider tensions that might threaten the Euro-zone. This implies coherence between SGP and Budget reform. A better dynamic in the European budget would render national budgetary discipline easier. Interactive governance would allow us to redefine subsidiarity and solidarity : it would clarify what States do and what the EU does. The importance of such cooperation is also perceived in its external dimension. Macroeconomic governance at the level of the 27 States is not contradictory to a reinforcement of the Euro-zone. On the contrary, Heads of states could deliberate the state of the zone and the decisions to make.

The creation of an increased and better-performing European budget will be necessary, along with a borrowing capacity for the Union in order to mutually manage public debts and finance projects of common interest. This would alleviate the relative burden of public support and State debt. What the Union would do on its own would facilitate discipline at national level and would provide solidarity for growth.

The ECB, I have said, will have to integrate the exchange rate question. Along with it, it could be useful to create a kind of European Monetary Fund, as was proposed in the worst moments of the crisis. Moreover, a strategy for cooperation among the different regions of the world and a reinforcement of the IMF will have to put in place.

A reform “from scratch” of the European budget

M. Barroso has declared his will to reform the European budget from top to bottom, in order to introduce new principles so as to better fulfil the objectives of common policies. Let us seize this opportunity.

Old propositions from economists will have to be discussed and improved. The 2003 Sapir Report was calling for increased spending on R&D and lower amounts for the CAP and structural funds. However, efficiency of R&D funds is low, and agriculture remains a (global) strategic issue. And I think that the overlapping between public goods like R&D and energy and redistribution is inextricable. The common public good cannot be dealt with without considering the immense inequalities between countries. The external action, which should a priori be a European public good, remains almost in full a national sovereignty business ! Regarding the notion of “public good” itself, it cannot be specified without a democratic revolution in the procedure. Finally, a community budget method, which would not take into consideration national spending, could not be rational : it would mean forgetting State responsibilities. Whether it is in R&D, defence or any other functions, community spending cannot be either substantial or efficient if State spending is fully independent.

My proposition for a European Budget reform hinges on the following ideas. Member states and the EU will name the fields considered of common strategic interest that justify common policies. The choice has been made for Energy and Climate ; it needs to be made for other fields. In those fields, votes with a qualified majority will be needed on both the community and redistribution aspects. The latter is likely to receive incentives according to the guidelines of the growth strategy. The CEPS proposition to include a chapter on capital operations for projects would be accepted. This could particularly concern energy. Who would be in charge of the borrowing capacity ? Commission or Agencies ? The guaranties should be pooled. As there are no purely cross-border projects, state’s participation in the financial burden will be needed. Why not create a mutual-assistance fund and European Investments Funds ?

It is necessary to raise the level of discussion on EU own resources. The European Parliament proposes to raise the share of resources calculated according to the GNP. We could also envisage gaining resources on consumption (petroleum products, carbon tax, euro vignette…), but we cannot elude the question of the participation of the financial and banking system.

III/ Transform financial capitalism

Is the Union failing as regards financial regulation ? It is too early to say, but their is room for preoccupation. First Commission, under M. Mac Creevy’s management of the internal market, was clearly passive. Is it better prepared know ? It needs a vision and a will, backed by a coalition of member States. In my opinion Adair Turner, chair of the FSA, puts forward the right questions : can we accept to keep the same volume of the financial sector and the predation on the productive sectors and the populations that went with it ? Can we yet rid of the efficient markets ideology and redirect innovation to make it useful for the common good ? How can we responsabilize the financial actors and institutions ; and reduce the enormous implicit public bailing out that was given to them (including a fiscal policy openly in favour of general indebtness) ? This is are not questions on how to keep a competitive advantage for the City, neither on how to avoid an excessive regulation : on the contrary we must concentrate on how will the States be able to lean against the excessive market strength and pressure.

The Union has been in the forefront when the G20 was created. However, it would be dangerous to count on the global agenda for regulation and disregard the need for our own financial reform. The supervision of its establishments and market actors, the needs to choose new structures and management models are extremely difficult intra-European tasks, due to the conflict of interests between MS and the stubborn (and sometimes ridiculous) culture of national sovereignty.

If financial regulation is drawn up in a context already judged as post-recession, we will not draw the necessary teachings of the financial system crisis. Everything goes on as if we wanted to maintain the fundamentals of the system by looking for corrective measures only. The sole axis of regulation is prevention and the treatment of systemic risk. However, the problem of today’s financial system is not only this risk, but also its contribution to a better growth and solidarity.

The Long-term investment issue

The focus of financial actors on short-term profitability was a major cause of the crisis. Long-term investment was deeply undermined. Since the 1980’s, a shift in power within corporations took place, it was marked by the predominance of financial investors and based on the shareholder’s value principle. This brought objectives of return-on investment that were completely disconnected from the intrinsic economic capital return. This led to leverage abuses. Accounting norms – the dictatorship of the mark-to-market and fair value – have structured our behaviour.

The development of short-termism can also be explained by the intrinsic characteristics of the financial industry. Banks, but also institutional investors were caught in the short-term logic. The massive transfer of pension funds from defined-benefit plans to defined-contribution plans, the development of hedge funds, the explosion of securitisation and derivative markets are among the many factors of the drift.

This review allows for an understanding of the positive and stabilizing role of long-term investors for the economy and for the financial markets. These long-term investors are those with social commitment liabilities : contractual commitment funds (Insurance companies, defined-benefit pension fund plans) or non-contractual commitment funds (sovereign funds, reserve funds, endowment funds). Their governance is an essential challenge. The delegation of their management to hedge funds or other short-termist operators should be reconsidered. They will need to gain increased expertise by creating internal teams, and get out of the dichotomy between strategic allocations (too static) and dynamic allocations (too much delegated).

The capacity of investors to worry about the long-term does not only come from internal efforts, it also relies on political action. Reform of rating agencies, reinforcement of information obligations, adaptation of prudential and accounting norms for long-term investment, are all necessary public regulations in order to limit short-termism. It is desirable to build a specific European framework for long-term investment that could get support from a public devoted to prospective.

Beyond ten years, the private sector is not able to fund the long-term alone. It is necessary to build a large cooperation between public and private investors. The development of public-private partnerships (PPP) is essential. A European framework needs to be created along with a community guarantee system. For heavier long-term projects, we are in need of a solid capital base, says Philippe Maystadt, President of the European Investment Bank, who took the initiative of creating a Pool of long-term Investors.

Financial and banking regulation

Where does the main problem lie in terms of financial regulation ? Let me repeat that : the efficiency of the market financial innovations was largely an illusion. The contagion of risks through the enormous growth of market transactions should now be obvious. And, as underlined by Martin Wolf, when the system collapses into crises, the taxpayers are called for help. The big cartelised banks have taken huge risks for high profitability, knowing they could count on the socialisation of the losses when the time came. Very few European leaders have publicly acknowledged that. They defend “their” national banks, which were said to be sound not long ago ; and now they fear social reactions if these things were known. Transparency remains to be constructed.

The US will want to impose their concept and their governance in terms of regulation. Their priority is to reinforce the capital requirements levels for big financial institutions and to reduce leverage. This seems well-grounded, as the root of the crisis, in particular in investment banks, rested on the artificial increase in profitability caused by levels of credit and the surreal transfer of risks.

The problem related to the fact that the Americans want to impose their own ideas in terms of prudential norms, is that it would give them a comparative advantage over the European banks, which have very different characteristics than their Anglo-Saxon counterparts. In France, for instance, banks have kept intermediary functions and public participation in their capital. If Americans impose their norms, the obligation to recapitalize the European banks could be enormous and we would have a tremendous competitive disadvantage.

Which is the good concept ? The capital requirements should not hamper the credit necessary for the economy ; however, we should toughen capital requirements specifically for high-risk and speculative activities, and make them contra-cyclical.

The scope of regulation is another central question. The Americans want to focus on too big to fail institutions, i.e. those which present a systemic risk (17 June Obama’s plan with increases in the capital requirements/liabilities ratio ; a restriction of credit facilities with a transfer of risk to the markets ; an obligation for these institutions to establish “testimonies”, i.e. to take over some responsibilities in case of failure). These institutions were at the heart of the crisis, especially in the Anglo-Saxon world. But we know about the rapid proliferation of quasi-banks, of alternatives funds and of off-balance-sheets activities : it would be best, as the Europeans from the continent wish, to profoundly improve market regulation, notably to avoid the propagation of the drifts.

The EU can go forward in these directions without waiting for the rules that the Financial stability Forum will propose, according to the G20 mandate, which should be in any case be accommodated to each specific regional space.

A first step in the EU is the adoption of the Larosière report by the Council and the Commission. But between intention and actions, there is a long way to go. On one hand, the common vision on the root of the problem is blurry ; on the other side, national interests put up hurdles.

One major transverse issue that is unresolved is accounting standards. The Americans have softened theirs a couple of months ago ; whereas Europe still waits for the agreement of the IASB, to which it stupidly gave all powers. The generalisation of mark-to-market to all situations even when there is no market is intolerable, and the fair value only offers a short-sighted short-term view of the real value.

The comeback of finance in society

The financial system reform targets a prudential objective : to make it more stable and to prevent the most severe crisis. It has little concerns for another objective : to improve its efficiency in favour of sustainable development and social cohesion. Stability is, however, not the only public good finance should care about ! Gillian Tett is right when she writes : “if we don’t find a way to demystify finance and to integrate it back into society, it will be difficult to build healthier banks.”

Finance has allowed profitability and property values to increase well beyond the real return on investment ; it created acute short-termism to the extent that every investment became liquid, to the detriment of long-term commitments. It became the symbol of enrichment without justification, contributing to the loss of meaning of the value of work. Let us be courageous to lean against these deviations and aim a different system.

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Finally, the central question is the ability of our fragile and conflicting democracies to assume such transformations. At all political levels, we need to combine an enlightened vision, an unfailing will and adequate governance. We also need to dispose of the necessary legitimacy, to face the considerable social problems and the tangible anger expressed against the leaders. Without managing to share the responsibilities and to set public opinion in motion, the task will be difficult.

Europe needs a “New deal”. The Community method remains good in principle, but as it failed to involve citizens, changes in responsibilities and in governance are badly needed.