Saving the Euro without Losing the Europeans

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Summary
The gap between the efforts to deepen integration in order to save the euro and what most people really think should happen is wider than it has ever been before.
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The euro crisis struck at a time when the traditional driver of European integration—enhancing opportunity for people and businesses—was running out of steam. Stepping into the breach, the need to avert an economically catastrophic breakup of the eurozone has become the new dynamic force in the European Union. Necessity is a powerful integrating factor indeed, and in an effort to save the euro, the EU is intruding deeply into core areas of national decisionmaking that were considered taboo just a few years ago.

All this has happened with too little political discussion. Worse, it actually runs against the prevailing mood of the European population. The gap between the technocratic imperative of deepening integration in order to save the euro and what most people really think should happen is wider than it has ever been before. Unless this problem is addressed through a comprehensive and inclusive political process, the EU will remain on a crash course.

Integration Fatigue

Most of the dynamics of the first five decades of European integration were about enhancing opportunity. Ensuring freedom of movement for goods, services, capital, and people; reducing obstacles to trade and mobility; harmonizing norms; and eliminating border controls—all these steps conformed to the logic of the expanding European economy of the postwar decades. Obviously, entrenched interests resisted this process and crises occurred time and again. But the forward momentum of integration based on increasing opportunities continued well into the early years of this century.

Initially, the attitude of the majority of the European population was vaguely positive, as they expected that bigger markets and more mobility would continue to improve the quality of life in Europe. Driven by technocrats and facilitated by decisions of the European Court of Justice, most of the concrete progress made on integrating Europe took place outside the limelight and with little public discussion.

However, in the 1990s the first cracks in this “permissive consensus” in favor of European integration appeared. The new projects in European integration such as the monetary union or cooperation in justice and home affairs became more “political.” A number of failed referenda on treaty reform showed that the readiness of the population to follow the elites toward “ever-closer union” had declined significantly. The process had never been accompanied by huge popular enthusiasm, but the tide of public opinion was now beginning to turn.

Demographic change and the relative slowdown of economic growth in Europe compared to other regions of the world contributed to a gradual change in the public mood. An aging population became less confident about the future and more security minded. The inherently liberal, free trade orientation of the EU institutions disappointed those who had hoped that the union would somehow shield the population against the perceived adverse effects of globalization.

The gap between the technocratic imperative of deepening integration in order to save the euro and what most people really think should happen is wider than it has ever been before.

This changing mind-set translated into important shifts in the political spectrum. The old social democratic and conservative “people’s parties,” which had been traditionally staunchly pro-European, lost ground, and in a number of countries populist rightist parties rose to prominence. The new Right combines a vehement rejection of immigration and a particular hostility toward Islam with strong criticism of the EU, which it sees as promoting globalization and multicultural values. Rather than further European integration, it would like to see the return of strong, protective nation-states.

The new generation of European leaders includes few visionaries and mostly pragmatic politicians, whose tendency to blame Brussels for unpopular decisions while claiming successes at the national level has only increased as the economy has worsened.

The EU also developed a bit of an identity problem. Public disenchantment with European integration was aggravated by the failure of governments and Brussels institutions to communicate what the EU was about. The traditional rhetoric about the EU as a peace project lost relevance long ago; peace in Europe is today taken for granted. The vision of a “Federal Europe”—never more than a dream of a minority—almost disappeared altogether, as the enlarged EU was seen as too big and heterogeneous to fit this concept.

The new generation of European leaders includes few visionaries and mostly pragmatic politicians, whose tendency to blame Brussels for unpopular decisions while claiming successes at the national level has only increased as the economy has worsened. Hardly any prominent political leader is taking a strategic perspective and making the case for a stronger EU as the only way for Europe to hold its own in today’s globalized world.

This is thus a difficult context for progress toward deeper European integration. Europeans have not turned against the EU as such. Eurobarometer polls show that in almost all member states clear majorities remain in favor of belonging to the union. But significant portions of the European public believe that the development of the EU over these past decades has gone too fast and too far, and there are increasing doubts that there should be even more of it.

A Monetary Union in Crisis

Until recently everything pointed toward a long period of consolidation if not stagnation in European integration. Reform efforts were muted given the prevailing public sentiment. The Lisbon Treaty, adopted after the fiasco of the Constitutional Treaty, was modest in reach and was generally expected to be the last major reform project for many years. The European Commission—long the motor of European integration—lost influence over the last decade and launched few far-reaching initiatives. And the EU’s annual budget—a good measure of the ambition of European integration—actually declined in relative terms to about 1 percent of the EU countries’ total GDP.

But then the sovereign debt and euro crisis struck and almost everything changed. The EU has never experienced anything like this. Past crises were typically about one or more member states blocking progress toward deeper or broader integration. After a few months—sometimes years—a compromise would normally be found allowing the EU to move forward.

The EU’s monetary union has significant structural flaws and an overly wide membership. By creating such a union, the EU leaders planted a bomb that was bound to go off at a time of serious economic stress.

This time, the stakes are much higher. The risk is the breakup of the eurozone and the catastrophic economic and political consequences that would ensue as a result. For the first time in its history the EU faces a threat to its very existence—it is not at all clear how much of the union’s overall construction would survive the collapse of the common currency.

The EU’s monetary union has significant structural flaws and an overly wide membership. By creating such a union, the EU leaders planted a bomb that was bound to go off at a time of serious economic stress. There are indications that at least some of them were aware of what was going on. The then president of the European Commission, Romano Prodi, said in the Financial Times in December 2001: “I am sure the Euro will oblige us to introduce a new set of economic policy instruments. It is impossible to propose that now. But some day there will be a crisis and new instruments will be created.”

Prodi agreed with many economists that a sustainable currency union would require a higher level of fiscal and economic policy coordination than was foreseen in the Maastricht Treaty. But, resigned to the fact that this was not politically achievable at the time, he believed that the necessary instruments could be added later when required in a crisis. Thus, the need to consolidate the monetary union would in itself become an engine for the further economic and political integration of Europe.

Ten years later, Europe found itself in precisely that situation. The new instruments created by the EU in the context of fighting the crisis—including huge bailout funds, highly innovative European Central Bank interventions to save the banking sector, new stringent rules for fiscal discipline, and steps toward much closer economic and fiscal coordination—would have been unimaginable just a few years ago.

The Downside of Integration by Crisis Management

Given all the EU has been able to achieve in a relatively short time and against the backdrop of a skeptical public climate, the record is quite impressive. Fear and necessity seem to be at least as effective as opportunity had been in driving European integration. Still, there are several reasons to doubt whether Romano Prodi’s recipe for integration by crisis management can work in the longer term.

The euro crisis resembles a hair-raising roller coaster ride. As the institutions and processes of the EU proved unsuited for dealing with the new challenges presented by the euro crisis, the Community method was short-circuited. French-German initiatives took the lead. Improvisation and brinkmanship ruled the day. The much-fought-over stabilizing measures adopted by European Councils provided just moments of respite only to be followed by the next attacks in the financial markets. This type of emergency-driven policymaking is clearly unsustainable and must sooner or later result in a train wreck.

All the steps taken so far have allowed the EU to add time to the clock but have not solved the monetary union’s problems. Debt levels remain too high, macroeconomic imbalances continue, and the prospects of recovery in some of the Europe’s southern countries look dismal. Opinions diverge on how much fiscal and economic coordination, and how much financial solidarity, will ultimately be necessary to sustain a monetary union in the very suboptimal currency area that is the eurozone. With efforts so far focusing on the short term, it is very likely that the process of structural adjustment has only just begun and the really tough decisions still lie ahead.

Beyond the basic solidarity of seeking to avert a catastrophic, uncontrolled breakup of the eurozone, the stabilization process has actually been divisive. The risk that saving the euro might weaken and even destroy the EU’s overall coherence cannot be discounted. If policy coordination is intensified among the members of the eurozone, the other EU member states risk becoming marginalized. Deepened integration within this group could make it more difficult for others to join, and it is not clear whether the emergence of an EU “hard core” based on the current eurozone is a plausible proposition. Complicating matters further is the UK, which appears to be drifting away from the European mainstream.

The crisis has also greatly accentuated the unequal distribution of power among the member states. Though Germany’s rise to an undisputed leadership position among the 27 is much discussed, the real story is how little resentment and fear leadership from Berlin has produced. Polish Foreign Minister Radoslaw Sikorski’s much-quoted statement that he feared German power less than German inaction well expresses that today’s Germany is not perceived as a potential hegemon but as an indispensable partner for securing Europe’s future.

Far more problematic, however, has been the German-French domination of decisionmaking in the course of the crisis, which has left the EU institutions and most member states largely sidelined. While the “Merkozy” method was tolerated in an acute emergency situation, it did create considerable resentment. The costs and risks of these decisions are borne by all no matter the amount of say each state has in the process.

From the perspective of the debt-ridden countries in the south, the perception is inevitable that there are those who prescribe the therapy and those who have to swallow the bitter pills. This divide is inherent in any creditor-debtor relationship, but it runs against the concept of a community of equals, which has been the foundation of European integration and—as recent developments in Greece have shown—can produce massive public resentment.

Euro crisis management has been essentially driven by technocratic considerations, such as how big the bailout fund should be, how much liquidity the European Central Bank should provide, what level of fiscal discipline should be demanded of debtor countries, how much fiscal and economic coordination will be required, and what the appropriate mechanisms are. All this turns around the core question: How can financial markets be convinced that the EU is capable of dealing with the debt crisis in a sustainable manner?

Notwithstanding the necessarily technocratic character of the debate, the fact remains that many of the decisions in question (apart from the independent action of the European Central Bank) eventually require support by the parliaments of the member states. So far the extreme seriousness of the situation has ensured that parliamentary decisions have been adopted when they were needed. However, some of these decisions had all the democratic quality of a “shotgun marriage”—there was no real alternative to a positive vote given the risk of a disintegration of the eurozone.

Market pressure determined the speed of decisionmaking. Political considerations were left far behind. And the tensions between the technocratic imperative of urgent crisis management and the need to ensure legitimacy through a proper and serious democratic process have been growing throughout the crisis. The danger those growing tensions pose was quite clear in the recent Greek parliamentary elections, in which a majority rejected both the political establishment and the austerity policy it had drawn up with Brussels.

Addressing the Democratic Deficit

Sheer necessity is a powerful integrating force. It brought new dynamics into an integration process that was running out of steam. It has enabled the EU to avert (so far) the collapse of the euro and accomplish a number of steps to address the deficiencies of the monetary union. It is conceivable that the need to ensure the long-term sustainability of the monetary union will bring about a further significant deepening of European integration, possibly in the smaller circle of eurozone member states. However, this is unlikely to be achieved in a context of quasi-permanent crisis management, in which disintegration might well be the more likely outcome.

Compared to the earlier opportunity-driven period of integration, the risks are now of a different level of magnitude. The situation could reach an intensity that simply overwhelms the crisis-management capacity of the EU. It could lead to even deeper divisions and resentment between member states. And particularly, if it turns out that consolidating the monetary union will require significantly more centralized decisionmaking on sensitive economic and fiscal matters such as taxation, pensions, or the labor market, the resistance of major parts of the European population might just become too strong and the process will flounder.

Underlying all this is persistent popular skepticism. The euro crisis has not changed the overall attitude toward a rapid further deepening of European integration.

Underlying all this is persistent popular skepticism. The euro crisis has not changed the overall attitude toward a rapid further deepening of European integration. If anything it has increased resistance to move in this direction. It is certainly not a coincidence that EU leaders have been reluctant to tackle the core structural problems of monetary union—discussing further transfers of sovereignty to the EU runs against the zeitgeist. The recent French presidential election campaign, in which the majority of candidates catered to the anti-European sentiment, has shown the extent of the trend very clearly. It is not just that extremes on the right and on the left have become stronger and will mobilize against greater powers for the EU; the traditional pro-European mainstream has become more cautious as well.

The argument that further deepening of European integration is the only course of action to avoid economic catastrophe is a powerful one. But in the longer term, one cannot build the future of the EU on fear alone. A stronger and more coherent EU with a solid currency will not come about solely as a result of market pressure. A European system, in which the markets insist on solidarity while more and more people dream of renationalization, cannot hold together.

Those who believe that “more Europe” is necessary to confront the challenges of the financial crisis, to safeguard the values of Europe, protect its interests, and ensure that it can share in shaping the future global order must make the political case for their beliefs. Economic emergency can provide a strong impetus, but it cannot serve as an alternative to building the necessary support through a broad and in-depth political process.

In engaging in such a process European leaders should focus on four factors in particular. First, the original driver of European integration, the prospect of enhancing opportunity, must be brought back into the picture. The negative integration-to-avert-economic-catastrophe argument is effective, but it needs to be complemented by a coherent narrative about the positive potential of European action. The current shift in political rhetoric in Europe from an exclusive focus on austerity to strengthening prospects for growth is a welcome and long-overdue step in the right direction. But a convincing case still has to be made that debt reduction is only one element of a coherent European economic strategy along with measures that support structural reforms, stimulate investment, create jobs, and thus lead to a return to prosperity.

Winning the confidence of the markets is essential for the survival of the euro; regaining the confidence of the citizens is certainly no less important.

Second, the EU’s leaders have to overcome their “firefighter” approach to the crisis. There is a need to get ahead of the curve, confront the situation in a more comprehensive manner, and find answers to the core questions—how much debt mutualization will be necessary, to what extent will banking have to be supervised on the European level, and how much fiscal and economic coordination will be needed. Drawing up yet another EU reform package requires political courage and entails risks, particularly if further treaty change should become necessary. But if European citizens are to be brought back on board, they will need a much clearer and fuller picture of what is at stake. Only then can a proper political process take place.

Third, European leaders should also tackle much more forcefully the other great concern of the population: migration. Rather than follow the populist Right into the dead end of “renationalization,” they need to explain that dealing with this issue primarily on the national level will ultimately be self-defeating. Common European policies on migration and asylum, more effective efforts to safeguard the EU’s borders, and better engagement with the countries and regions that are the sources of migration to Europe are in the longer term much more promising ways to manage migration flows successfully. What has been in recent years one of the main drivers of anti-EU sentiments can—if handled with vision and energy—be turned into a new source of confidence and support.

Fourth, the further deepening of European integration must be accompanied by efforts to strengthen the democratic legitimacy of EU decisions. Whether this is done by granting additional powers to the European parliament, giving a greater role to national parliaments in EU matters, or making further arrangements to facilitate the direct participation of citizens in the EU’s dealings, increasing public accountability is certainly an indispensible part of building a stronger Europe.

Winning the confidence of the markets is essential for the survival of the euro; regaining the confidence of the citizens is certainly no less important. As becomes clearer month by month, neglecting the political dimension of the current crisis is a certain way to disaster. Reengaging the public in a substantive dialogue on the meaning and future of European integration might offer the union a fighting chance.

End of document

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Source http://carnegieeurope.eu/2012/05/23/saving-euro-without-losing-europeans/banm

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