Europe’s Stalemate

The causes of the present crisis of the European Union trace back to the past phases of the integration process.  In the 1980s, the series of agreements and common policies of “mutual advantage” among the EU members came to an end. Most economies of scale had been exploited by the EU countries, as an effect of the access by firms  to a single and large market after the end of tariff and non-tariff barriers. From then on, any progress on the road of further integration was done at the cost of difficult compromises. Sometimes, the “zero sum” equilibrium of the game entailed negative pay-off for some countries. Eventually, a structural break happened: the completion in Europe of the liberalization process of capital movements in 1990. In the words of Tommaso Padoa Schioppa, the “impossible quartet” consisting of free trade, free capital movements, monetary policy autonomy,  fixed exchange rates.  The choice was to give up monetary sovereignty to keep the other “public goods”. Yet, in signing the Maastricht Treaty in 1991, it was a mistake to take it for granted that the single market and the single currency would guarantee more integration and less disparities at the same time. Starting from the ERM rules of the EMS, and the stringent guidelines to be fulfilled for the admission to the Monetary Union, the rising conflicts of interests have been geared in the perspective of the hegemonic solution. The German dominance over the monetary integration process substituted for any plan to set-up a cooperative macroeconomic governance opposing the decisive role gained by financial markets as the judges of the national governments’ fiscal stances. With the launch of the euro, and the ECB as the sole common economic institution (though with limited power), the submission to the same “rules of the game” of very heterogeneous productive systems despite the nominal convergence, made the integration strategy to exclusively rely upon the “levelling of the playing field”, that is the idea to give full allowance to harsh competition among countries. But relevant mutual externalities created by the different competitive instruments of national firms and governments did not favour convergence to “virtue”, but magnified real divergence within the Euro Zone. A common house among unequals strongly needs a governance to compensate for disparities which may arise from the functioning of market forces. Since counterbalancing institutional tools were absent, Europe failed in the ambition to provide a growth engine for every member state, further aggravating divergence across the growth – and the well-being – paths of countries participating in the Monetary Union.

As for today, European integration looks very different from the overall “renaissance project” – on the civic, economic and social grounds – envisaged by the founding fathers. The definition of “negative integration” has been coined. The turn-out of the European Parliament election demonstrates that the economic governance deficit represents the pendant of the democratic deficit of the EU. An increasing number of European citizens – surely much larger than the sum between no-vote and the 20% voting for the euro-sceptical and nationalist parties – is highly disappointed by Europe. To this lack of attractiveness contributed on an equal basis the shaky democratic underpinnings of the EU decision process – tightly in the hands of the governments of the leader countries (eventually, only Germany, after France’s crisis) and of techno-burocracies – and the economic stagnation, with even negative, and persistent, growth rates, rising unemployment and contraction of the productive system. These severe shortcomings of the European integration generated the feeling – widely spread across the European population- that the promise of the benefits of the euro were nothing different from cheating.

From the “Impossible Quartet” of Padoa Schioppa we find ourselves today in the European version of the  “Impossible Triplet” sketched by Dani Rodrik to describe the dilemmas of globalization. On the three vertexes of a triangle, we can place the three constitutive dimensions of the EU: “European integration”, “National sovereignty”, “Democratic consensus”. Each of them is incompatible with the other two dimensions.  One out of three must be given up.

“European integration”, as it has developed over the last decades, reveals itself – or is perceived – as conflicting with the autonomy of members in deciding on matters which may penalize the national economy  (the vertex “National sovereignty”), and with national institutions which are direct expression of people’s will (the vertex “Democratic consensus”).  The Euro Zone’s fiscal rules, largely blamed for the negative consequences of austerity, are emblematic. In the triangle, Europe’s stalemate corresponds to a point situated  at an equal distance from the three vertexes. This stalemate is at the same time the result of the weaknesses of the EU institutional design and of the confused idea that the public opinion has of Europe.

Which one should be waived among the three goals? Which will governments point to? Provided that the European Parliament will be able to use the wider powers gained with the Lisbon Treaty, which policy strategy could it put forward and with what political majority? The multi-faceted group of “No Euro” parties is far away from the others for its harsh opposition to European integration (or at least to the euro). On the one hand, we do not think that a majority could be set-up favouring a process towards “National sovereignty + Democratic  consensus” on the bottom side of the triangle, that is the end of the EU as we know it now. On the other hand, also the groups which proclaim themselves pro-EU are a patchwork of parties pointing to different directions. The Centre-Left/Left parties advocate an accelerated move towards a full-fledged democratic and – at least ideally – federalist Union, that is they point to the left side of the triangle. The short-term objective is a change, possibly even the abrogation, of the system of automatic fiscal rules. The Conservative/Moderate parties, led by Angela Merkel, are of course very suspicious about this perspective. As the election winners, will they lean towards the right side of the triangle through the strengthening of the “intergovernmental method”? That is, integration in small homeopathic doses filtered through “National sovereignty”. Nobody can foresee the future with confidence. However, we just offer our forecast of the likely outcome, and a proposal aimed to change a risk in an opportunity.

1. The newly elected President of the Commission, Junker, is, and will be, weak. He seems part of the stalemate problem, not of its resolution. For Junker is obviously on the opposite side  for the Centre-Left/Left, but he is also too “communitarian” (up on the right of the triangle) for the Conservative/Moderates who are very “intergovernmental” (down on the right; hence Great Britain’s opposition).

2. Be as it may, for the moment we do not see greater chances to go towards the left side of the triangle either. Also because a gap can be perceived between the Centre-Left/Left leaders (oriented up to the left) and their electorate (oriented down to the left).  To give an example, high in the agenda of governance reforms has appeared since many years the creation of a supra-national fiscal authority. How appointed, with what powers and with which degree of compliance with decisions not agreed on by single countries?  In other words, the electorate (until now) in favour of the EU is really ready for a leap to a genuine federalism? We are quite dubious. Anyway, the time needed for such a structural change is much longer than we can reasonably afford today

3. In case Europe would fall in some place along the right side, would it be possible to limit the damages and move beyond the status quo? Our – admittedly provocative – idea, is to seek to reach the top of the triangle  along the path Democratic consensus ® National sovereignty ® Integration  (which, we are glad to note, is not so different from what Jurgen Habermas has said in the interview appeared on the Italian newspaper “Corriere della Sera”, on June 18). As highlighted by the crisis, the integration dimension to which priority should be assigned is a common fiscal policy vis-à-vis the common central bank. Very bluntly, the way is to accept  the “intergovernmental method”, but without the pseudo-technocratic screen of automatic and rigid rules. In practice, a sort of “upgrade” of Ecofin to become the (seed of) European fiscal authority, endowed with full autonomy and independence. After all, Ecofin consists of a council of ministers legitimated by democratic elections. In this phase, this appears as the sole expediency to achieve common decisions which are proximate to the source of democratic legitimacy, which is, and will remain for long,  at the national level.

4. The point is neither to fully abolish the fiscal rules, nor to get rid of the general principles of responsible fiscal policy as stated by the Treaties. On the contrary, they should remain in place as reliable indicators to help the policymakers in reaching the fiscal decisions affecting the member states. These decisions should however stem from transparent negotiations and be compatible with overall macroeconomic contingences, which may change and require flexible, and sometimes “unconventional”, responses. This “new Ecofin” should set up effective decision rules (e.g., majority voting, with no veto power). Will the minority governments accept the decisions of the majority?  Let us reverse the question: Do national governments, and their electorates, really think that more cooperative fiscal policy could be obtained in the present regime? Here are some advantages of this new design.

a) The idea of substituting rules for the discretion of governments, although it was motivated by the absence of a true European government, has been a complete failure, not only in the management of the crisis but also – and worse – for the structural damages caused to the foundations of the common house. Furthermore, the present fiscal rules are by no means “technical” (if purely technical rules exist on earth). Their technical quality and integrity have been largely disputed ever since the beginning. Indeed, they are the hibernation of  the equilibrium of powers among the governments that gave birth to the euro. In particular, the role of Germany as dominus on fiscal matters.

b) If the German governments are willing, and have the strength needed, to exert this role in the fiscal decisions of Europe, they will have to act under the sun light, by negotiating with the other governments, without the screen of rules which were established twenty years ago.

c) This will make it transparent “who wins, who loses” and dispell the false myth of a technocratic dominance, which is in fact the dissimulated dominance of the hegemonic government/s.. As a matter of fact, when the rules were not acceptable by sufficiently powerful governments, they were not applied. In this perspective, much more than in the present impasse, it is likely that coordination solutions could emerge.

d) Not least, if it is clear where and how “my voice matters”, offering authoritative and credible governments and political personalities on European matters will gain much higher value in  political and electoral competitions at the national level.

5. What we envisage is actually akin to the modus operandi of the ECB transferred to an institutional body with the (indirect) legitimacy to make decisions with political fallouts. The ECB is respectful of statutory rules and of the general giudelines established by the Treaties, but it does not apply mechanical rules.  Under the rethoric of the technocratic cover, the ECB decides in full autonomy in every contingency, through discussion and balancing of different views (and interests) among the members of the board (in fact, sometimes it happens that the German view does not prevail). As a matter of fact, so far the ECB has been the sole European institution “thinking European”, and which  has been up to the task in front of the storm.