The EU's economic and monetary union (EMU) needs urgent reform. The choice is clear: fix it or citizens will nix it. The euro's skewed architecture, the unconditional bailout of insolvent banks, as well as austerity in response to the financial crisis, have taken things from bad to worse.
Growth in the eurozone is particularly weak and millions of citizens have lost their jobs. A bold reform of the EMU needs to focus on smart public investment, balancing intra-European trade and taxing unproductive wealth.
A common currency deprives member states of the possibility of adjusting exchange rates. It can therefore only work if wages against productivity (unit labour costs) - the dominant determinant of inflation - follow the central bank's inflation target.
However, the extreme wage restraint in countries such as Germany between 2000 and 2010 fuelled trade and capital account imbalances and undermined the effectiveness of a single monetary policy, since real interest rates diverged and displayed pro-cyclical patterns.
Consequently, excessive private sector leverage in peripheral countries, which was the flip-side of the German trade surplus, imploded in the financial and banking crises, and the respective governments had to shoulder massive bailout programmes.
Colossal austerity packages then killed investment demand altogether. The stability and growth pact (SGP), the fiscal compact (FC) and the European central bank's (ECB) initial reluctance to act as governments' last resort lender, restricted member states in their ability to absorb private slack and recycle abundant liquidity on financial markets through higher public investment.
This is bad economics in an environment of record low interest rates. An EMU which deprives member states of two of the three most important economic policy tools - fiscal policy and exchange rate policy - while rendering monetary policy ineffective is doomed to fail.
What should EMU reform be about? Instead of focusing narrowly on public debt, we should address total and therefore also private debt in macroeconomic supervision. The macroeconomic imbalance procedure has to address current account imbalances symmetrically instead of punishing deficit countries.
In addition, the SGP should at least exclude public investment from deficit and debt criteria since investment creates assets (golden rule of investment). Furthermore, the ECB should address economic divergences such as regional or sectoral asset price bubbles via discretionary asset-based reserve requirements, rather than the blunt use of the interest rate. While raising interest rates can swiftly burst a bubble, it can also choke off the whole euro economy.
The EU needs a comprehensive Roosevelt-style new deal to break the vicious cycle of austerity, sluggish demand and a general lack of confidence. At the core of this should be public investment by the member states and the European investment bank (EIB) in the event of limited access to capital markets.
The expansion of EIB activities should be backed by ECB bond buying. Such a joint effort would not only recycle large amounts of unused liquidity from financial markets, but also be much more targeted than the current quantitative easing programme which injects ever more liquidity into financial markets without unlocking substantive real-economy activity, therefore feeding new asset price bubbles.
Simultaneously, public debt has to be reduced via growth enhancing policies and a coordinated wealth levy for Europe's millionaires.