Economic prosperity and social progress are key European Union goals. But for the past five years it has delivered neither. It has been in a double-dip recession since mid-2011, with unemployment now at a record high of 11% and no tangible improvement in sight.
The crisis has lasted longer in Europe than in the US or the rest of the world mainly because of poorly designed monetary union, without an appropriate framework of rules for banks and other financial institutions or sufficiently robust budgetary instruments.
So far the EU has only deployed the minimum collective response necessary for the euro's survival: conditional emergency loans to troubled countries, conditional bond-buying by the European Central Bank, tougher economic policy co-ordination, and tighter restrictions on governments' debts to assure markets of countries' responsibility.
However, the reality of today's eurozone is far too many people out of work, falling internal demand, increasing polarisation within societies – and a yawning chasm dividing relatively prosperous core countries from a periphery destined for depression. Without boosting macroeconomic demand, making labour markets more flexible in troubled EU countries – while often necessary – will not in itself create sufficient jobs.
Moreover, the pressure to make far-reaching "adjustments" often means that there is limited time to discuss reforms with trade unions and employers' organisations before they are introduced, undermining reforms' sustainability and sometimes leading to social unrest. Many citizens feel increasingly disconnected from national politics, and even more so from European decision-making, over which they feel they have little influence.
The real economy is being stifled by debt incurred by poorly regulated and supervised banks and other financial institutions in the pre-2008 age of easy money. As banks need to shrink their balance sheets, they are reluctant to lend to companies in the real economy. Meanwhile, the recession is pushing more households and companies into serious financial difficulties. All in all, Europe has not yet succeeded in eliminating uncertainty, and its people have paid a high price for this. The conclusion is clear: we will not recover through incremental steps that just appease the financial markets for a few months.
In the past year the EU policy debate has rightly shifted towards growth, as opposed to "austerity only". But we still lack a robust recovery strategy worthy of the name. Such a strategy would require a new policy mix based on the following elements.
First, we must urgently set up an EU-level banking union to restructure or close down failed banks. Companies need access to more credit, under better conditions, to invest and grow. Europe's financial sector must cut its debts faster, including through greater debt write-offs and shaking up banking structures.
Second, consolidation in weaker member states needs to be balanced by higher consumption in stronger EU countries. The monetary union cannot rely solely on squeezing troubled countries, which depresses overall demand. "Symmetrical rebalancing" requires structural measures in stronger countries, such as allowing wages to catch up with productivity and adequate minimum wages to prevent in-work poverty.
Third, if weaker member states are to regain competitiveness while keeping the euro, they need investment in the real economy. This must be based on sophisticated industrial policy and support for entrepreneurship, so that restructuring produces sustainable business models. If used wisely, EU funds such as the European social fund can be a major source of financial support, together with the European Investment Bank.
Fourth, Europe's monetary policy must become more expansionary. The ECB has bought Europe time through its bond-buying pledge, turning itself into a conditional lender of last resort. That is to be welcomed. But it is becoming increasingly clear that Europe's financial crisis cannot be overcome in a deflationary environment, so a different inflation outlook is necessary. We must rethink the ECB's role and powers.
Fifth, Europe must invest in human capital – creating opportunities for people. EU ministers have agreed a youth guarantee, to ensure that every young person gets a job, apprenticeship or learning opportunity within four months of becoming unemployed. Now individual member states must put it into practice. Similar "social investment" must be boosted across the board – for example, through the provision of quality childcare and the re-skilling of older workers. The target must be full employment.
European leaders should focus on finding a systemic, long-term solution to the crisis, restoring each country's growth potential and convergence within the monetary union. Europe should convene a Bretton Woods-type conference to put in place an economic and monetary arrangement for the coming decades.
For such a lasting arrangement, a grand bargain between surplus and deficit countries is needed, ensuring a sustainable economic future for each. Some pooling of government debt, and cross-country automatic stabilisers (where, for example, the costs of cyclical unemployment are shared between the member states by using common European funds) should be seriously considered for Europe's monetary union.
Rebalancing through aggressive reduction of government spending and similar measures in deficit countries (under the euphemism "internal devaluation") is, without higher domestic demand in the surplus countries, a recipe for long-lasting recession and disintegration. There is no solution to the crisis without reconstructing Europe's economic and monetary union, and without shifting the focus on to people's needs and potential. Austerity could only ever bring us so far. We must now move to the next stage.