From Rome to Rome
The Political Economy of the 60th Anniversary
European politicians are concentrated while signing the treaty for the European Common Market and the Euratom, Rome's City Hall, Italy, March 25, 1957. Seated from left to right are: French Foreign Undersecretary Maurice Faure, German Chancellor Konrad adenauer, German Foreign Affairs Underseretary Walter Hallstein, Italian Premier Antonio Segni and Italian Foreign Minister Gaetano Martino. (AP Photo/Stf) © AP
By László Andor
The European Union arrived to the 60th anniversary of the Treaty of Rome with more soul-searching than determination. The long crisis has weakened the EU not only economically but also politically. Looking ahead for another six decades is entirely illusory in this situation, when everything seems to depend on what happens in the next six months.
Ever-closer union has been replaced by ever-shorter cycles of political survival. In 2014, various euro-skeptic forces increased their representation in the European Parliament at the expense of the centre-left and the centre-right as well as the liberals. More recently, the UK referendum triggered the first case of a departure from the EU. Finally, the US elected a President whose language and behaviour runs contrary to the key principles of European integration, as well as against the liberal world order in general.
Out of the two earthquakes of 2016, Brexit requires more urgent actions. But for the long run, the wind of change from Washington signals the greater shock for Europe that necessitates deeper structural adjustment. With Brexit, the EU and the UK still have the chance to replace a controversial membership with a beautiful friendship. Both sides have yet to realize though that this would be in their best interest. With the rise of Donald Trump, on the other hand, the EU would need to do what has not been done in the last 25 years: to find out how the US could be allowed to diminish its presence in Europe and establish new structures to guarantee security, prosperity and sustainability.
The American question: leadership and relative decline
The 20th century was once dubbed as an American Century, given the outstanding role the USA played in two World Wars and especially the extraordinary capacity it gained in the post-war years to design an international order along its principles and economic interests. The US was also seen as the country with the economic and social model, invented as a response to the Great Depression, to be exported to the rest of the world.
When Wold War II ended, the US produced about one half of the global GDP. In addition to economic power, Franklin Roosevelt also left behind the principles and designs on which the post-war global order could be built. In Western Europe, post-war reconstruction and economic integration would not have been possible without an effective involvement of the US. Initially, the US provided support for Europe in both security (NATO) and economy (Marshall Plan).
While structures of security have lasted long, giving the impression of being here for eternity, there has been a gradual withdrawal of US support for European economies. Experiencing growing deficits and faster growth in Europe than in America, President Nixon decided to give up the gold parity of US dollar, which also eliminated exchange rate stability for Europe. The fall of the Bretton Woods monetary system created the need, and resulted in the first experiments for intra-European monetary arrangements, leading to the European Monetary System that was functioning in the 1980s.
However, US involvement in European monetary affairs remained important after the creation of the single currency as well, and played a role in the recent crisis too. Under Obama, the US has been instrumental in keeping the Eurozone together. Initial readiness of the IMF to finance intra-EU bailouts (and ease terms subsequently) required decisive position from US in the board of directors. Secondly, Obama and his treasury secretary, Tim Geithner, repeatedly encouraged EU leaders to keep the Eurozone together and reinforce the single currency by establishing a banking union and moving towards greater leniency and even debt relief for Greece. Arguably, withdrawal from monetary expansion (tapering) under Jenet Yellen also became slower in order to give time to Europeans to get their act together and embark on their own quantitative easing.
After decades of uneven growth in the world economy, and the impact of the Great Recession of 2009, the US is a country producing a quarter of the global GDP (as opposed to half in 1945). Obama replied to relative decline by creating the G20 for global economic governance, and by abstaining from costly military adventures that go wrong more often than not. TTIP was another experiment in creating a new form of joint global leadership by two regions in relative decline. But this approach was not convincing for many on either side of the Atlantic.
Today, and probably also tomorrow, the White House is more inclined to challenge rather than support the EU and specifically Germany as an economic powerhouse. Current US policy (and perhaps a new US/UK partnership) aims at surplus countries like Germany and China but it is driven by a misunderstanding of the origin of German and Chinese surpluses (manipulation of currencies and exploiting a liberal world economic order in general). US and UK trade deficits are rather due to having too much finance and military and not enough industrial policy. Besides, rampant inequality is doing more harm than good for their economic performance.
The US today does not have an economic or social model to be exported to the rest of the world. And after the Brexit launch and under Donald Trump, the new US/UK position vis a vis the eurozone bilaterally and through the IMF will be entirely different. Should a new crisis come, external support would be far from obvious, contrary to the times of Dominique Strauss-Kahn at the IMF and Gordon Brown in Downing Street. Making the euro self-sustaining is a lot more urgent than most people would believe.
The European question: sharing costs of unity
The nobel goal of the European Union is to create unity out of diversity. Achieving this goal, however, has become increasingly difficult as the community became not only much larger than originally but also more heterogeneous and imbalanced.
Despite growing diversity, the EU, which is to say that ever deeper economic integration among nation states holds the key to peace and prosperity. Probably very few question the most fundamental principle of the union. However, what form of economic integration is best in the circumstances of a given period and a given composition, is not so obvious. With a shared vision, the EU is an integration through incremental steps.
Euro-enthusiasm can change with time but also country by country. But most EU citizens probably prefer an integration which can be reconciled with national sovereignty and autonomy. Attempts to federalise the EU, and to adopt a Constitution have failed for this reason. Not only in the last few years, but also at the time of Maastricht leaders only wanted to make steps at EU level that were absolutely necessary, and thus achieve European gains without national costs. This approach has its limits, especially at times of crises and shocks.
The EU’s mode of integration created a gap between ambition and capacity. Paul de Grauwe very well explains the common origins of the two main European crises of our time: the Eurozone paralysis and the incapacity to handle the refugee situation. The Maastricht model as well as the Schengen/Dublin system both date back to the early 1990s. In both cases free movement was established between countries (for goods and money on the one hand, and for people on the other hand), but without safety and security infrastructure or instruments for crisis response and stabilisation. What concerns the Economic and Monetary Union (EMU), fiscal capacity and financial regulation, remained within the member states. In the area of migration and asylum, the agencies of common internal security, asylum policy and border management are missing.
The long financial and debt crisis gave reason to the skepticism of Anglo-American economists about the feasibility of an EMU that hardly goes beyond currency board arrangements. The recent book by Nobel prize winner Joseph Stiglitz leaves no doubt that at Maastricht the EU introduced the wrong model of a monetary union. Most ironically, this has been recognised by high level documents like the Four Presidents’ Report (2012), but repairing the euro and preparing it for the next economic downturn turned out to be just too difficult in practice.
In expert communities, a lot of progress has been made in recent years and we can speak about a new consensus. In politics, this seems to be an uphill struggle. Wedded to the wrong narrative, leading politicians of "surplus countries" still cannot sell what would be needed to make monetary union sustainable: risk sharing instruments and a counter-cyclical fiscal capacity. In the absence of those, the Eurozone is still swimming naked towards the next economic crisis. The only thing more dreaded than another eurozone crisis is the return to national currencies.
Neither a forward nor a backward movement is possible, so Europe is "entrapped", according to Claus Offe. At the same time, the political base for status quo is constantly shrinking, and leaders slowly fall into either of two camps: either complete or dismantle the euro. Completing the euro is the politically correct answer and one that also enjoys a wide range of scholarly support. Dismantling it is politically incorrect and those who represent it use a different language. They may say "give Greece 5 years holiday”, while knowing that this would likely produce a domino effect because there is always a weakest link in a system which is not reinforced. They may also suggest "shrinking the Eurozone”, without the explicit recognition of a need for an exchange rate adjustment or real substitutes for those (pretending that model is good but some countries are too weak to have it).
Drifting towards more and more technocratic forms of governance at both national and EU levels, it is often forgotten that the EU has been built on a social contract. This was crystal clear for the great architect of the EU, Jacques Delors, who introduced a charter of social rights, elevated social dialogue to the EU level, and launched a cycle of social legislation. For Delors, the social dimension was not a side-show, it had to be embedded in the economic model.
In the Treaty, the EU is committed to the concept of a "social market economy” which is social not only in name, but effectively helps member states upholding and developing social standards and cohesion. The social dimension is served by all three arms of governance: policy coordination, legislation, and budget. Beyond setting common social standards within the Single Market, the EU has also developed a focus on social outcomes (Lisbon Strategy and Europe 2020) in order to promote social investment, tackle imbalances and facilitate upward convergence.
The importance of the social contract is highlighted by debates like the one on posted workers. Around two million employees fall into this category, which is less than one percent of the EU total. Nevertheless, in the last decade, this grew up as a key controversy involving major political forces debating social justice and equality.
While Delors managed to develop the social dimension of the Single Market, he did not have enough time or support to do the same for the EMU.
Through cohesion policy and a commitment to minimum social standards, the Single Market can be seen as sufficiently balanced. The wide income gap (East-West) does pose a challenge to the Single Market, but convergence is slowly happening and the related imbalances are bound to ease. On the other hand, the social dimension of the EMU is not developed at all, which generates divergence and drives North and South apart.
Monetary Union is a different ballgame than the Single Market. The absence of appropriate built-in stabilisers cannot be compensated purely by more EU level social policy (e.g. setting more minimum standards). A policy without resources remains ineffective. Even in the Single Market, transfers have to play a role, and the high income regions have to support the low-income regions, which is happening. On the other hand, in a Monetary Union, the surplus countries would need to provide short-term support to deficit countries, which is not happening and this also undermines the long-term growth and job-creation potential of the EU.
The EU has launched a timely social policy review in order to upgrade its legislations to the 21st century, with a particular focus on the digital revolution. However, it is equally important to reconcile Monetary Union with the social contract. Citizens cannot be expected to support EU governance if it is seen to be working against democratic welfare states and for a fistful of euros Greece or another country can be knocked out from the European social contract.
The bad experience of the recent period can only be defused if leaders clarify what went well and what went wrong during the Eurozone crisis. Time alone will not heal the wounds and the political impact cycle is very long. For example, in 2015 at the Greek elections, mainstream parties had to pay for the mindless conditionality of the 2010 bail-out. And since the late 2015 regional elections, French Socialists have been paying for the rapid withdrawal from their anti-austerity election promises in Spring 2012.
The EU still needs to be stronger to stabilise itself, while facing the task to invest more in the stabilisation of its neighbourhood. This does not simply require more spending in the areas of defence and migration, but an integrated agenda of security, mobility, economic reconstruction and development. A renewed policy would redefine Turkey as part of the EU neighbourhood (especially if the current slide into an authoritarian regime turns out to be irreversible), and keep the focus of enlargement negotiations (and reality) on the Western Balkans.
The East European question: the long transition
Enlargement rounds have been a very important parts of EU policy and these should be seen as historic achievements. However, as some aspects of deepening have to be reconsidered, enlargement has not been problem free either.
In 1993, the EU member states set out the so-called Copenhagen criteria in order to define what needs to be performed before joining the EU. However, there are no mechanisms or guarantees for upholding those criteria when a country is already a member. This problem has to be addressed for the credibility of enlargement negotiations, and requires attention in both economics and politics.
Today not all EU countries would be seen as competitive economy. There is at least one country that is de facto an economic protectorate and lacks the instruments as well as resources to return to an economic position that can be called competitive. Similarly, there are at least two member states that openly challenge established principles of the rule of law and pluralism, which would be a problem had they been only candidates.
What concerns the East European question, one should not forget that, for these countries, EU accession was a continuation, and in a sense a fulfillment of a transition from planned to market economies, from one-party rule to pluralism. However, this transformation took place at a greater than expected cost, especially what concerns social dislocation in the early 1990s as well as controversial practices in business and politics. In some cases, consequences of this transition are laid down to the door of the EU, not because the EU caused them, but because it was unable to provide remedation .
It is worth remembering the long essay published in 1990 by Ralf Dahrendorf about the democratic transition in Eastern Europe (Reflections on the Revolution in Europe: In a Letter Intended to Have Been Sent to a Gentleman in Warsaw). In this volume, Dahrendorf famously suggested that political regime change requires only six months, while economic transition requires six years, while social and cultural transformation would require six decades. At the beginning, this might have been seen as a bon mot, later as an insult, and now it feels like an understatement.
But the Eastern problem is primarily is not one of maturity. The point is that EU accession turned these countries from one type of periphery into another type. As discussed before, this is not something that could not be dealt with inside the EU, but that requires a new approach to cohesion policy and a different design of some of its instruments. For example, a lot more should and could be done to boost the quality of investments out of the EU budget, not simply by establishing a state prosecutor to fight abuse of EU resources but also to reduce the scope of shared management and thus lower the risk of waste and corruption. New forms of management and other innovations would help both older and newer member states, and help preserving the integrity of the EU budget and developing confidence in the EU itself.
The British question: Europe or open sea
The irony of Brexit is that the UK fought for both the Single Market (1980s) and Eastern enlargement (1990s), and at the end many English people turned against citizens of Eastern member states arriving to the UK under Single Market rules. UK political leaders went with the flow instead of confronting myths, stereotypes and outright xenophobia, and managing migration better with available tools.
Brexit is widely and rightly seen as an outcome of a reckless political gamble that failed. However, British membership in the EU has been well-known for being controversial, not only from the start but even before the start. Coming from EFTA, with a Protestant legacy and a being a net contributor to the EU budget, the UK ticks all the boxes that reduce the degree of EU-enthusiasm in a Member States.
Being a former empire and maintaining Commonwealth bonds have always helped preserving a feeling that the UK has another option, and perhaps even a lost paradise which could be rediscovered. However, turning to the Churchillian „open sea” instead of the Single Market today may turn out to be more chilling than expected. Brexit is also emerging as an experiment of politics sidelining experts.
Contrary to clichés peddled by some tabloid newspapers, the EU did its best to accommodate the UK and its special demands. There has been no other example of a taylor-made membership. However, whenever Brussels answered the British question, the British came back with another question, which at the end would have amounted to privileges that no other member wanted to tolerate.
The crisis and the incapacity of the EU to put an end to it also made an impact on British attitudes and there is truth in the mantra of British politicians that the EU needs reforms. However, it is a British delusion that the Brexit vote would have been about the European question rather than the British question itself. A union requires permanent friends or allies. The remaining 27 members need to see each other that way.
Conclusion: dealing with simultaneous crises
In Brussels-speak we often call a shock a “wake-up call”. Surely without intention, this implies that the normal functioning in the EU is sleeping, unless something extraordinary happens. It has also been observed that quite many in European politics have a remarkable ability to fall asleep again after any size of a “wake-up call”. This has been demonstrated in the last one year after the UK referendum and the US presidential election.
At this stage, EU leaders have to be fully awake to see the simultaneous challenge of a new global reality and the trends of internal weakening. Consolidaiton and improved functioning require not just minor repair work but bold innovation and a complete overhaul in some areas, like the EMU. The Union can live with imbalances but it cannot live with sustained divergence. Resorting to "managing expectations”, and selling a long lasting crisis as a " new normal” can only reinforce the trends of disintegration.
If muddling through remains the preferred mode of operation for the centrist political forces, they will continue to lose support which by definition erodes the confidence in the European project as well. Only an EU that engages better with its citizens, protects them from global risks and helps improving economic perfomance together with social standards will regain the trust that is required.
Lessons have been learned and there are many signs that progress is possible. On stage recently at Hertie School, and in the company of Jürgen Habermas, Emmanuel Macron and Sigmar Gabriel again committed to a Franco-German investment partnership, calling it an European New Deal.
The expression might be overused, but the idea and its implementation are absolutely vital. Though security is a legitimate concern as well, the biggest mistake the EU could make this year is to simply replace the New Deal with a War Deal. If fiscal constraints have to be reformed for more investment, growth and jobs, this should indeed be a priority.
There is such thing as Treaty fatigue but the Treaty does allow for improvements and innovations. It has allowed already for some initial steps to establish a Banking Union or to implement an Investment Plan. The EU can move ahead without Treaty change in the short-term, but it cannot move an inch without vision, leadership and determination.