October 16th, 2015

Eurozone’s road to political union looks like a mirage

by Michael Wohlgemuth It is commonly argued that at its heart, […]

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It is commonly argued that at its heart, the European Union’s Economic and Monetary Union is a political project. Many therefore claim that its difficulties stem from a lack of political union, since EU officials have offered no coherent view on how to achieve one. Paris and Berlin both have ideas, but they ignore the fact that giving greater powers to Brussels is unpopular and, in the case of Germany, unconstitutional.

The EU has laid out plans to strengthen its monetary union, but the official documents are ambiguous at best. Member states have their own preferences: France wants a voluntarist ‘economic government,’ while Germany favours a rules-based ‘economic constitution.’ Both ideas would lead to a more federalised EU – a change that member states and their citizens would certainly reject. These plans would also require amendments to EU treaties, a procedure that experience has shown is next to impossible to manage politically. With so little appetite for political integration, major steps towards a European federal state are unlikely to occur for decades.

Three years ago the EU’s four presidents – of the European Commission, the European Council, the European Central Bank and the assembled finance ministers of the Eurogroup – presented a ‘blueprint for a deep and genuine economic and monetary union.’ The 51-page report was meant to serve as a road map for the bloc over the next five years.

The EU has reached some of the road map’s destinations on schedule, notably introducing the banking union’s new supervisory and resolution mechanisms under the auspices of the ECB. Other recommendations have been deliberately avoided. These included instruments for the EU to influence national budgets, including ‘reform contracts’ between eurozone member countries and the European Commission and a ‘fiscal capacity’ for the euro area to provide either insurance against economic shocks or incentives for reforms. Proposals to give the EU powers to issue joint euro bonds and manage a common debt redemption fund were also ignored, even though they were on the four presidents’ agenda.

Modest proposals

This past summer five EU presidents (this time including Martin Schulz, the president of the European Parliament) took up the subject again. Their report is shorter – only 24 pages – but also more equivocal and less ambitious. As with the previous road map, it sets out four areas where the eurozone should deepen its integration: ‘economic union,’ ‘financial union,’ ‘fiscal union’ and ‘political union.’ Each process is to go through three stages and be completed by 2025.

In the section on ‘economic union,’ the five presidents note correctly that the EU has not yet completed its single market in such key areas as services, energy, the digital economy and capital markets. There is plenty of potential here for stimulating economic growth. The idea of ‘reform contracts,’ in which member states would have pledged to make specific institutional and regulatory changes in return for financial incentives, is no longer on the agenda. Instead, the report recommends that each euro area member state create a national body responsible for ‘tracking performance and policies.’

The presidents’ recommendations for ‘financial union’ focus on developing a common deposit insurance scheme, something which is fiercely opposed by Germany. They also call for launching a ‘capital markets union,’ which would open up more diverse sources of financing to small and medium-sized businesses. Ultimately, the report concludes, this will require a single European capital markets supervisor.

Proposals for a ‘fiscal union’ are much more cautious than in the 2012 report. Even so, this section of the report may become the most controversial, since it envisions establishing a ‘fiscal stabilisation mechanism’ and a ‘European Fiscal Board’ to ensure better compliance with the eurozone’s budget rules. In other words, more bureaucracy.

Dodging questions

With common euro bonds and the debt redemption fund having been shelved, the five presidents are reduced to musing that ‘a pool of financing sources’ would prove useful. Such a pool, the report speculates, would be ‘tapped into according to the business cycle’ – whatever that means.

The ‘political union’ chapter is even more vague. It states that ‘greater responsibility and integration’ at the EU and euro area levels should come with ‘greater democratic accountability, legitimacy and institutional strengthening.’ It also hints at the establishment of yet another new institution: a ‘euro area treasury,’ which – perhaps, someday – should be empowered to take ‘some decisions’ in fiscal policy.

The report conspicuously avoids discussing which steps would require changes in EU treaties. There are two reasons for this. Firstly, Prime Minister David Cameron wants to achieve major EU reforms, preferably via treaty change, before the United Kingdom votes in a referendum on its membership in the bloc. Brussels does not want to do Mr Cameron the favour of putting treaty change on the table.

Secondly, negotiations on amending EU treaties would open a Pandora’s box of endless disputes. Any new treaty that transferred more power from national governments to Brussels would run into trouble in the national parliaments and fail in almost any referendum.

French discretion

Nevertheless, the discourse on political union has intensified among the elites in Paris and Berlin. While officials on both sides of the Rhine agree that greater integration is needed, their ideas about how to go about it are far apart.

The French want an ‘economic government,’ a concept which boils down to the mutualisation of public debt, more fiscal activism from the ECB, a common EU or eurozone tax authority, a common eurozone budget, common eurozone unemployment insurance and common deposit insurance. They also want EU industrial policy to focus more on picking European (read: French) industrial champions and protecting (French) losers from global competition.

France favours an EU political authority with discretionary powers to perform acts of political will – legitimised or initiated by a eurozone parliament – which would include deciding on how to spend money raised from common taxes or mutualised eurozone debt instruments.

German rules

The Germans prefer an ‘economic constitution’ to ‘economic government.’ Berlin wants binding rules that would be enforced through automatic sanctions or by independent agencies following strict criteria. It would follow the ideal of Ordnungspolitik – a governance structure that aims to bring both governments and market actors under the rule of law.

To be sure, the Germans also want to install a eurozone finance minister. However, under their plan, raising and spending European taxpayers’ money or issuing joint euro bonds would not fall within this official’s remit. Instead, he or she would have the power to override national finance ministers – and even parliaments – if they break the fiscal rules.

Both the French and the German proposals go far beyond those contained in the five presidents’ report. Instead, they come close to radical visions of a European federal state, each of a very different kind: an interventionist planned economy in the French version, or a legal framework for an open market economy, according to the Germans.

A key weakness of both proposals is that they require changes to EU treaties that member states would have to approve unanimously. It is inconceivable that either one could win support from all 28 EU countries, or even the 19 eurozone members, now or in the foreseeable future.

Tax block

Both models would also require states to approve not just a treaty change, but a substantial transfer of national sovereignty to Brussels. Here the German Constitutional Court (GCC) has erected formidable obstacles. It has repeatedly stated that the EU cannot become a federal state while the German constitution remains in effect.

In other words, for the EU to become a ‘true political union,’ Germany would have to replace its 1949 constitution. Germans were never asked if they wanted to give up their Deutschmark. One of the few things they would be even less inclined to abandon, if asked, is their cherished constitution.

At the core of the legal argument is the link between democracy and the sovereign power to tax. The GCC has frequently insisted that taxpayers’ money cannot be raised and spent by third parties beyond the control of German parliaments.

‘No taxation without representation!’ – the American Revolution’s most famous slogan – embodies values that are also deeply enshrined in the German constitution. Reference to the European (or a new eurozone) parliament will not help move the red lines drawn by the court.

Unlikely visions

But if a European parliament with the power to raise and spend money were to be created, another core democratic principle would be endangered: that of one man, one vote. The vote of a Maltese citizen carries more than 11 times more weight than that of a German in European elections. In a parliament with such far-reaching powers, this imbalance would no longer be sustainable (another point already made by the GCC).

In order to construct a truly democratic, ‘one-man, one-vote’ EU parliament that mirrors the current party proportions in national parliaments, the number of MEPs would have to increase by a factor of 10, to over 7,500 deputies.

Even EU federalists would find that ludicrous. A true European parliament would require a pan-European party system in which voters cast their ballots for parties whose leaders are from different countries and speak different languages. Parties would also have to offer coherent, Europe-wide political platforms. It will take decades to build that sort of system, together with its prerequisites: pan-European debates, pan-European media, pan-European public opinion and even pan-European identity. Present trends point very much in the opposite direction. Trying to implement a radical vision of political union in this environment, hoping that a European ‘demos’ miraculously appears, is putting the cart before the horse.

For both legal and political reasons, visions of political union are extremely unlikely. What we can expect is more lofty debate and little substantive change. For better or worse, no major steps towards a ‘United States of Europe’ are likely to be made for decades.

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