There are two paradoxes hidden beneath all of the debates about “democratising the EU” and “repairing the Eurozone (EMU)” and so on.
The first paradox concerns what our Union is supposed to be:
The paradox is that in search of the ideal solution, we have ended up with a mish-mash of the whole lot. Why? Because, in order to entice/persuade/placate the founder member countries, compromises had to be made. Each of these countries had differing ideas of what the end result should be, but in order to enter into a “partnership” for immediate and sometimes selfish reasons, the political leaders at the time were prepared to gloss over this lack of consensus. The problem is not so much that the end result is not a pure political entity according to one of the definitions. The problem is that many of the mechanisms required to ensure the proper functioning of the entity either were not or could not be established properly to satisfy all of the member countries.
But I suppose, in good faith and hoping for the best, they carried on with the project, regardless. Perhaps it was thought that, over time, the union would miraculously transform itself into what it should have been at the outset.
The European Economic Community (EEC) was established with the signing of the Treaty of Rome in 1957 by the founder member countries of Belgium, France, Italy, Luxembourg, the Netherlands and the Federal Republic of Germany (West Germany).
Here is a link to read a detailed account of the historical events leading up to the establishment of the European Economic Monetary Union and the European Union. The history really does explain a lot of why we are today, where we are.
Then in 1973, Great Britain, Ireland, Denmark joined the EEC. Greece joined in 1981 and Spain & Portugal joined in 1986. The EEC gained new powers and responsibilities with the signing of the Single European Act in 1986. Together with the original “Bix Six” countries, these additional six countries participated in the drafting (1991 to 1992) and acceptance (1993) of the Maastricht Treaty. This marked the start of the European Union (EU).
In 2004, Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia joined the EU and Romania and Bulgaria joined in 2007. The original member countries and the new member countries all participated in the drafting (2004 to 2008) and acceptance (2009) of the Lisbon Treaty.
The last country to join the EU was Croatia in 2013. This is what the EU looks like today:
The second paradox concerns the countries that have been admitted into the EEC/EU.
This concerns the wide disparity between the countries that make up our “European clubs”. Even at the inception of the EEC, there were three distinctive “groups”. At the top were France and the Federal Republic of Germany. In the middle were the Netherlands, Belgium and Luxembourg and in the third group was Italy. As things turned out, the scope and direction of the new Community was largely decided by the two countries in the top group, according to their needs and desires. The rest just had to fall in line.
At the time, the differences that existed made minimal impact and all the countries were able to obtain the benefits of the EEC, without being very affected by any negatives. Then, when the next six countries were admitted, the disparity issue was further compounded. It is difficult to say today that this disparity was not observed and understood. It appears that it was thought that the disparity would disappear over time since it was expected that the top tier countries would “drag” the lower tier countries up to their level.
And even if there were genuine problems to be overcome, for better or for worse, the architects of the EEC side-stepped the awkward questions in order to keep the project on track. By the time the next batch of countries joined the EEC and the foundations of the EU were being laid, it appears that so many conflicting objectives were being pursued that the disparity issue was ignored and it was not seen as being a hindrance to achieving a “greater European union”.
As it turned out, the disparities did not disappear and, subsequently, their very existence now seems to be creating a major problem for the smooth functioning of the EMU and EU.
Today, after much investigation and analysis by the experts, the theories of what should have been done in the past when the institutions of the Union were created and, in order to correct those shortcomings, what now should be done, are widely accepted to be correct and what is required. This is an example of some of their proposed solutions. However, considering the wide range of difficulties that we now face with this unwieldy monster, can the EU actually be reformed?
Generally speaking and perhaps understandably, most people are putting the cart before the horse. The focus is on the symptoms of the shortcomings of the EU and the Eurozone. For all of the talk about closer integration being the answer to all of our problems, it is not the solutions that elude us, but the consensus of what end result is really desired.
It has become more common now to hear the term “two speed” Europe being used to describe the disparate grouping that exists. However, the real situation is probably worse. A clearer and more honest analysis would indicate that a “four speed” Europe actually exists.
For a “fourth tier” European country, there were distinct benefits in joining the EU. Therefore, it is not too difficult to understand why they were eager to join. And, on balance in the past, the positives definitely outnumbered any negative factors that could remotely be anticipated. In addition, when a smaller, weaker, poorer nation joins a “club” of nations, there is always the implied understanding that the bigger, stronger and richer nations would help out in case of any difficulties. And this is largely what has happened, except the outcome is not necessarily what is really desirable.
The politicians in power and the citizens of these struggling “fourth tier” EU countries are finding this stark realisation very difficult to acknowledge and accept. There is a large degree of denial going on or maybe just wishful thinking that, somehow, a miracle cure will be found.
First of all let’s look at the ramifications for the “fourth tier” EU countries regarding proposals to address some of the problems.
Strengthening the role of the European Parliament has often been proposed to address the problem of the EU’s alleged democratic deficit. Sergio Fabbrini writes that while there are legitimate criticisms to be made about the intergovernmental model of European integration, any attempt to create a system approximating national parliamentary democracy at the European level would be counter-productive. He argues that what the integration project requires is a new theory that moves beyond the standoff between intergovernmental and parliamentary approaches.
“The tyranny of the familiar: why we should be wary of proposals to ‘parliamentarise’ EU decision-making“
(10 August 2015)
It seems that the only viable alternative to the current ‘intergovernmentalisation’ of the European Union (EU) continues to be the latter’s ‘parliamentarisation’: that is, the gradual evolution of the EU towards a system of government resembling parliamentary democracy in a nation state. However, would the EU actually benefit from further parliamentarisation? Would the system produced by such a move really be more democratic?
Far from being a positive development, I would argue that the ‘parliamentarist’ model of European integration constitutes little more than the tyranny of the familiar. The scholars and politicians who support it base their opinion on the assumption that the EU is not fundamentally different from a nation state. The argument is largely that what has worked in London or Berlin should also work in Brussels. Yet this perspective is both politically unrealistic and analytically wrong, for it fails to acknowledge the key difference between a nation state and a union of states.
This is the difference between a federal state (emerging from the disaggregation of a previously unitary state) and a federal union (created by the aggregation of previously independent states). Empirically speaking, federal states like Germany, Austria, Belgium, Canada and Australia have all adopted a parliamentary system of government, but none of the federations by aggregation (or federal unions, such as the United States and Switzerland) have done so. Federal unions have adopted, at the horizontal level, a specific brand of separation of power, given their need to prevent the formation of a strong and centralised decision-making centre – a need genetically less relevant in federal states.
Although parliamentarisation has not been the only road to democratisation in federal political systems, in the case of the EU a particular mantra has come to be repeated, namely that the European Parliament should become like national parliaments in order to make the Union democratic. As national parliaments elect national governments, the European Parliament should thus elect the Commission and its President. Indeed, the election of Jean-Claude Juncker as Commission President was hailed by parliamentarists as the closest approximation to that view, given his status as the so called spitzenkandidat of the European People’s Party (EPP), which received a plurality of seats in the 2014 European Parliament elections.
Juncker’s candidature was imposed on the European Council. Addressing the European Parliament in his speech on 15 July 2014, Juncker noted that:
“for the first time, a direct link has thereby been established between the outcome of the European Parliament elections and the proposal of the President of the European Commission… (This link) has the potential to insert a very necessary additional dose of democratic legitimacy into the European decision-making process, in line with the rules and practices of parliamentary democracy” (italics added).
Nevertheless, the Juncker Commission has not become a parliamentary executive. Its composition was decided by the heads of state and government of the European Council, who nominated the highest number ever of previous national Prime Ministers and Ministers as Commissioners. One might even argue that the Commission has been ‘intergovernmentalised’, rather than ‘parliamentarised’. Moreover, the deepening of the Greek crisis has shown that the true decision-makers have been sitting in the Eurogroup and the Euro Summit, not at the Berlaymont building hosting the Commission.
To make matters worse, the Parliament has been excluded from the main decisions over euro-related economic policy, given its role in representing all EU citizens, rather than simply those of the Eurozone. The present situation has even given rise to a suggestion that the national parliaments of Eurozone states should be involved in some direct way in decision-making at the European level – a proposal that could further weaken the European Parliament’s role in economic matters.
Even when the European Parliament and the Commission have appeared to gain influence, things have not changed as expected. Look at the ‘Five Presidents report’ on ‘a more genuine economic and monetary union’, submitted to the European Council in June, with the aim of updating the ‘Four Presidents report’ of 2012. Although the document was formally drafted by Jean-Claude Juncker, with the European Parliament President Martin Schulz finally accepted as a member of the presidential team, it turned out to be a much less supranational-oriented document than the one written by the then President of the European Council, Herman Van Rompuy, in 2012. Thus, in the Eurozone, the opposite of parliamentarisation is happening, regardless of the parliamentary election of Jean-Claude Juncker.
The key factor underlying this is that the EU cannot adopt a parliamentary form of government due to structural, rather than contingent, reasons. Regardless of the parliamentary rhetoric celebrated in the Treaties, parliamentarism cannot give a feasible answer to the two main systemic constraints within the EU: the demographic asymmetries between its member states and the national differentiation between the latter’s citizens. Given these systemic constraints, it would be unacceptable to recognise only the European Parliament as the source of governmental authority in the EU, if not as the source of the EU’s democratic legitimacy.
If this were to occur then the representatives of smaller member states (currently around three quarters of the total) would consistently be in a minority, given the national differentiation between citizens cannot be regulated through the same ‘left vs right’ axis that exists at the national level. It is no coincidence that federations by aggregation have adopted a decision-making system based on separation rather than fusion of powers. Separation of powers offers a mechanism for guaranteeing multiple access points to the decision-making process: a setup that protects small member states and prevents the formation of permanent hegemonies by larger ones.
Certainly, in systems that fuse powers, it is much easier to take decisions, as long as the government enjoys the political confidence of the majority of the legislature, and it is also much easier to identify who is responsible for what. This is not the case in systems based on a separation of powers, where the government is a process, not an institution. However, a union of states is not a nation state. In complex situations, simple ‘solutions’ can worsen the problem, rather than solving it.
The EU is presently stuck between the views of intergovernmentalists (who prioritise the decision-making role of national governments) and parliamentarists (who stress that the European Parliament is the only institution capable of representing European citizens). A union of states and citizens should indeed represent the interests of both in its decision-making system, through an institutional architecture based on a separation of powers and checks and balances. Between the intergovernmental union and the parliamentary union, there is an ocean to sail. Because of a lack of comparative knowledge and an abundance of intellectual indolence, the partisans of parliamentarism have become prisoners of their own rhetoric. A rhetoric that is not sufficient for unmasking the fallacy of intergovernmentalism. Without a new political theory, it will be impossible to find an original solution to the dual nature of the EU.
In October last year, in an article written for openDemocracy.net, Thomas Fazi drew our attention to a paper written by Guido Montani, professor of international political economy at the University of Pavia and former secretary general and president of the European Federalist Movement. The title of the article was:
In the first part of the paper Montani analyses the current state of play in Europe. He does so without attempting to downplay the seriousness of the situation or to sugarcoat the facts. On the contrary, he states in no unclear terms that ‘the dramatic Eurosummit of 12-13 July 2015 marked a turning point in the history of European integration’: by threatening to expel Greece from the monetary union, ‘core Europe’ – essentially Germany and its economic satellites, led by German finance minister Wolfgang Schäuble – broke the original pact for the EMU. ‘Monetary union is no longer seen as irreversible, and neither is the EU’, Montani correctly assesses. ‘If Greece, and other overspenders, can be pushed out of the euro area, monetary union becomes similar to a system of fixed exchanged rates: the only difference is that it is more difficult and expensive to get out’.
…..in the first part of the paper Montani concedes the following:
a) that Germany and the other self-appointed members of Kerneuropa (‘core Europe’) no longer see the monetary union as irreversible, and actually view the expulsion of non-compliant countries as a feasible political choice for the building for a two-speed Europe centred around a ‘core EMU’ restructured along even stricter ordoliberal lines;
b) that since the introduction of the euro, Germany has emerged once again as a geo-economic semi-hegemonic power with a strong belief in the supposed superiority of its economic model (‘Exportnationalismus’), and that this process has dramatically accelerated since the outbreak of the crisis, leading to the resurgence of ‘a new German question in Europe’;
c) that ordoliberalism – an economic doctrine similar to that of the modern neo-classical school of supply-side economics, and based on the radical rejection of Keynesian macroeconomic policies – is deeply engrained in Germany’s major political parties and public opinion;
d) that Germany’s current monetary and political establishment (or a significant part of it) – along with that of the other core economies – believes that monetary union can function just fine without political union – all it needs is tighter rules and strict punishment for non-compliance.
In light of this, one would expect the second part of the paper to be dedicated to an equally lucid analysis of the implications of these worrying developments for the prospects of European integration, especially considering Montani’s federalist vocation. Instead, what we get is little more than the same old shopping list of reforms needed to ‘complete the EMU’ and ‘build a supranational federal union’: a federal budget, a central fiscal authority with real spending power, a supranational economic policy aimed at keeping the balance of payments of the euro area in equilibrium, a public bonds market based on federal bonds, a reform of the role of the ECB, a democratic European government, etc.
King Canute and a very different tide
I found this very disappointing. What I take issue with are not the proposals per se – which I generally agree with – but rather the complete lack of political strategy. Montani offers no insight whatsoever into how we are supposed to achieve these noble objectives, especially in view of the fact that the current European trend – so accurately described by the author in the first part of the paper – appears to be moving in the exact opposite direction. Instead, he seems to rest all his hopes on a pseudo-materialistic faith in the fact that sooner or later – if we simply keep stating our case – the ordoliberals will come to their senses and ‘accept that Europe’s aggregate demand must be managed to ensure growth, full employment and social cohesion in the European economy’ and that ‘all the member states of the euro have a common interest in abandoning a decision-making system that causes national rivalries among them’.
Unfortunately, seventy years of federalist thinking prove the contrary: in the political realm, simply stating over and over again that something – in this case a European democratic federation – is possible and desirable does not make it more likely. Moreover, underpinning Montani’s entire analysis is the assumption that ‘without the EU and the euro area, Germany would be nothing but an old, declining European power’, which is dubious to say the least.
The problem is that while an approach that favours idealism over pragmatism may be justified in ‘normal’ times – i.e. times of economic growth and relatively low unemployment –, since progress appears, often deceivingly, to be moving forward (though maybe not at the speed or in the direction we desire), or at the very least not to be moving backwards, it is debatable whether that same approach can be justified in times of economic and political turmoil, such as we one that we find ourselves in today, in which the clocks of history are clearly starting to turn backwards (with nationalism and xenophobia on the rise again).
The EU is a great case in point: while a generalised pro-European sentiment was common before the crisis – thus providing a fertile terrain in which to sow the seeds of European federalism – the opposite is true today. In today’s Europe, the old ‘enlightened’ approach – making impassioned appeals based on reason and logic, like Montani does in his paper – simply isn’t going to cut it. As mentioned, we face a situation in which the general tide appears to be moving in the exact opposite direction of the federalist cause – and where an exogenous shock, such as a breakup of the EU/EMU, risks relegating the very notion of European federalism to the dustbin of history. Surely such a dramatic situation warrants a change of strategy?
…..Personally, I believe that we should simply acknowledge that the political conditions are not ripe – and will not be for quite some time – for a move towards a fully-fledged fiscal and political union, and that it would be in the long-term interest of the federalist cause to take a step back in the integration process by demanding greater flexibility at the national level, as advocated by Philippe Legrain, thus slowly recreating the conditions for moving towards a true solidarity-based and democratic fiscal and political union.
Then to add a large dose of reality into this debate, Thomas Fazi looks at what lies ahead for these “fourth tier” EU countries and what their options might be:
(20 March 2016)
“In recent weeks, Germany has put forward two proposals for the ‘future viability’ of the EMU that, if approved, would radically alter the nature of the currency union. For the worse.
The first proposal, already at the centre of high-level intergovernmental discussions, comes from the German Council of Economic Experts, the country’s most influential economic advisory group (sometimes referred to as the ‘five wise men’). It has the backing of the Bundesbank, of the German finance minister Wolfgang Schäuble and, it would appear, even of Mario Draghi.
Ostensibly aimed at ‘severing the link between banks and government’ (just like the banking union) and ‘ensuring long-term debt sustainability’, it calls for: (i) removing the exemption from risk-weighting for sovereign exposures, which essentially means that government bonds would longer be considered a risk-free asset for banks (as they are now under Basel rules), but would be ‘weighted’ according to the ‘sovereign default risk’ of the country in question (as determined by the fraud-prone rating agencies depicted in [the film] The Big Short); (ii) putting a cap on the overall risk-weighted sovereign exposure of banks; and (iii) introducing an automatic ‘sovereign insolvency mechanism’ that would essentially extend to sovereigns the bail-in rule introduced for banks by the banking union, meaning that if a country requires financial assistance from the European Stability Mechanism (ESM), for whichever reason, it will have to lengthen sovereign bond maturities (reducing the market value of those bonds and causing severe losses for all bondholders) and, if necessary, impose a nominal ‘haircut’ on private creditors.
The second proposal, initially put forward by Schäuble and fellow high-ranking member of the CDU party Karl Lamers and revived in recent weeks by the governors of the German and French central banks, Jens Weidmann (Bundesbank) and François Villeroy de Galhau (Banque de France), calls for the creation of a ‘eurozone finance ministry’, in connection with an ‘independent fiscal council’.
At first, both proposals might appear reasonable – even progressive! Isn’t an EU- or EMU-level sovereign debt restructuring mechanism and fiscal authority precisely what many progressives have been advocating for years? As always, the devil is in the detail.
Regarding the proposed ‘sovereign bail-in’ scheme, it’s not hard to see why it would result in the exact opposite of its stated aims. The first effect of it coming into force would be to open up huge holes in the balance sheets of the banks of the ‘riskier’ countries (at the time of writing, all periphery countries except Ireland have an S&P rating of BBB+ or less), since banks tend to hold a large percentage of their country’s public debt; in the case of a country like Italy, where the banks own around 400 billion euros of government debt and are already severely undercapitalised, the effects on the banking system would be catastrophic.
We know for fact – despite the feeble reassurances of the eurozone’s finance ministers – that the banking union’s bail-in rule – for reasons that I have explained at length here – is already causing a slow-motion bank run on periphery banks, with periphery countries experiencing massive capital flight towards core countries (almost on a par with 2012 levels), as bondholders and depositors flee the banks of the weaker countries for fear of looming bail-ins, confiscations, capital controls and bank failures of the kind that we have seen in Greece and Cyprus. Extending that same rule also to sovereigns would simply mean doubling down on a measure that is already exacerbating core-periphery imbalances and increasing (rather than reducing) the risk of banking crises. The risk is not limited just to periphery countries, of course, as the recent panic over Deutsche Bank testifies.
Moreover, the proposed measure, far from ‘severing the link between banks and government’, would almost certainly ignite a new European bond crisis – of which are already witnessing the first signs – as banks rush to offload their holdings of ‘risky’ government debt in favour of ‘safer’ bonds, such as German ones (as the German Council of Economic Experts report acknowledges, ‘as a result of the risk-adjusted large exposure limit, there is more leeway for holding high-quality government bonds than with a fixed limit’). The report estimates that banks will have to divest around 600 billion euros of government debt. As Carlo Bastasin of the Brookings Institution writes:
Sovereign bonds have a unique and pivotal role for the financial systems of the euro-area. So, once sovereign bonds in some euro-area countries become more risky, the whole financial system might turn frail, affecting growth and economic stability. Ultimately, rather than exerting sound discipline on some member states, the new regime could widen bond rate differentials and make debt convergence simply unattainable, increasing the probability of a euro-area break-up.
As noted by the German economist Peter Bofinger, the only member of the German Council of Economic Experts to vote against the sovereign bail-in plan, this would almost certainly ignite a 2012-style self-fulfilling sovereign debt crisis, as periphery countries’ bond yields would quickly rise to unsustainable levels, making it increasingly hard for governments to roll over maturing debt at reasonable prices and eventually forcing them to turn to the ESM for help, which would entail even bigger losses for their banks and an even heavier dose of austerity (which is the main reason that periphery banks are in such a terrible state in the first place).
It would essentially amount to a return to the pre-2012 status quo, with governments once again subject to the supposed ‘discipline’ of the markets (what Merkel calls ‘market-conforming democracy’), as if the 2011-12 sovereign debt crisis hadn’t made clear that financial markets are just as incapable of efficiently assessing and managing the public finances of countries as they are of disciplining or correcting themselves (which, of course, is why Draghi was ultimately forced to intervene with his bond-buying program). ‘We can’t allow a regime where markets are masters of governments… It [would be] the fastest way to break up the eurozone’, says Bofinger.
As it turns out, the scenario foreseen by Bofinger is arguably already under way: in recent weeks the yields on Italian, Spanish and especially Portuguese government debt have started surging again for the first time since 2012, reviving fears of the sovereign ‘doom-loop’ that ravaged the region four years ago. As Wolfgang Münchau writes, we are witnessing ‘the return of the toxic twins: the interaction between banks and their sovereigns’, which the journalist blames squarely on the bail-in mechanism contained in the Bank Recovery and Resolution Directive (BRRD).
As for the proposed ‘eurozone finance ministry’, it has been argued that an effective fiscal union would require tax-raising powers at the EMU level in the order of at least 10 per cent of the EMU’s GDP; fiscal transfers from richer to poorer countries; a federal authority with the capacity to engage in deficit spending; the support of the ECB in the operation of fiscal policy; a proportionate transfer of democratic legitimacy, accountability and participation from the national to the supranational level; etc.
Unfortunately, the fiscal union proposed by Weidmann-Villeroy, and by Schäuble-Lamers before that, is very different: it revolves around the creation of a European ‘budget commissioner with powers to reject national budgets if they do not correspond to the rules’, in Schäuble-Lamers’ own words, but doesn’t foresee the creation of a federal institution with legislative and spending powers. This would subject the EMU to an even tighter deflationary, contractionary and mercantilist straitjacket, effectively depriving member states of whatever small leeway they would have left under the current rules to respond to another (likely) financial crash. It’s not hard to see why such a development would be not only economically self-defeating but politically destabilising as well.
Which begs the question: why is Germany pursuing so vehemently two proposals that are bound to increase the likelihood of a break-up of the monetary union? One possible explanation is that the German political establishment does not believe in the viability or desirability of the currency union any more (in its current form at least) and is therefore either (i) planning for what it considers to be an inevitable outcome (by inflicting as much damage as possible on its potential competitors, for example) or (ii) deliberately creating a situation so unsustainable that periphery countries will have no choice but to exit.
Of course, this scenario implies that in the unlikely event that a proposal for reform of the EMU in a more Keynesian, progressive direction were to gain traction among member states, Germany would simply drop out of the monetary union (leading to a possible collapse of the entire currency system). Another theory is that Germany is so enamoured with its own economic model – Hans Kundnani in his book “The Paradox of German Power“ speaks of the rise of a new form of German economic nationalism, which he dubs ‘export nationalism’ – that it is blinded to the fact that it is sowing the seeds of its own demise (since it is the country that benefits the most from monetary union). According to this view, Germany would be erring ‘in good faith’, so to speak.
A third hypothesis is that Germany is pursuing an explicit strategy of continental domination in the knowledge that, “ceteris paribus”, monetary union will almost certainly not implode, regardless of how bad the situation gets in the European periphery. Partly because the EMU establishment will always be ready to do ‘whatever it takes’ to save the euro, partly because periphery countries continue to be governed by parties wedded to the euro ‘whatever the case’. This is arguably the most disturbing scenario of all, since it implies the economic desertification (or mezzogiornification) of the entire Southern bloc, reduced to the hinterland of Germany’s new economic empire.
All of the above scenarios hold rather grave implications for periphery countries: the unforeseen implosion of – or ‘forced exit’ from – the monetary union on one hand; endless suffering within the EMU on the other. Does this mean that periphery countries should prepare for unilateral exit? Not necessarily. Why precipitate a scenario that, given the current balance of power between capital and labour, could prove disastrous for the workers of the weaker countries of Europe (and for the Left)? But it does mean that the Left, especially in the periphery, if it wants to remain relevant, desperately needs a post-euro strategy, whether it’s to deal with the effects of an unforeseen break-up or to navigate a country through the uncharted waters of a unilateral exit.”