by Frank Schnittger
Mon Sep 29th, 2014 at 10:48:55 AM EST
In Booman's continuing absence through illness, I have written another diary primarily for a US audience at the Frog Pond. However it deals with a complex subject which I really need help in elucidating. I would appreciate if readers here would point out any errors of fact, or needlessly contentious interpretations, in the comments, as I do not wish to mislead our US readers.
Having written a piece on American Exceptionalism I thought it might be appropriate to turn my attention to the EU, and to try to define what makes it a unique constellation of notionally independent states today. There are many misconceptions about what the EU is and is not, so perhaps some clarification from a citizen of a relatively enthusiastic member state (Ireland) may be helpful in understanding the phenomenon.
The first thing to be said about the EU is that it is in a state of continuous evolution, with different member states pushing that process along at somewhat different speeds and in sometimes quite different directions. That it hasn't all fallen apart (yet) may be regarded as quite an achievement in itself, especially given the the European propensity for fractious nationalism leading to regional and world wars.
But what, positively does the EU stand for?
Ideas of European Union have been around for a long time but generally involved the creation of one empire or another by military force and rule by one dynasty or another. Even after the horrors of the First World War, the Treaty of Versailles essentially involved the subjugation of the defeated powers by the victors. When that led to the economic crash of the 1930's followed by the Second World World war, there was a determination that this should never be repeated.
History of the European Union - Wikipedia, the free encyclopedia
As distinct from ideas of federation, confederation or customs union the main development in Europe depends on a supranational foundation to make war unthinkable and materially impossible and reinforce democracy [as] enunciated by Robert Schuman and other leaders in the Europe Declaration. The principle was at the heart of the European Coal and Steel Community (ECSC) in the Treaty of Paris (1951), following the "Schuman Declaration" and the later the Treaties of Rome establishing the European Economic Community (EEC) and the European Atomic Energy Community (EAEC). Both the ECSC and EEC were later incorporated into the European Union while the EAEC maintains a distinct legal identity despite sharing members and institutions.
The main realization was that new technologies and, in particular, nuclear weapons erased the traditional distinctions between combatants and civilians and would lead to the wholesale destruction of societies unless extremist nationalist tendencies could be reined in within a supranational entity and authority. The second main insight was that economic integration would lead to increased interdependency between nations and thus make war increasingly unthinkable. These developments also had the support of a USA concerned at the rise of a Soviet superpower and the danger that it could over-run a weakened and divided Europe.
Judged by these original aims and objectives, the European Union has been a spectacular success, having expanded gradually from 6 to 28 member states, having withstood the dangers of Soviet expansion (with US led NATO support), having maintained almost 70 years of peace between those member states, and having achieved a generally increasing level of economic integration and prosperity over those years, the current Euro area crisis notwithstanding.
However eaten bread is soon forgotten, and the achievements of a previous generation tend to be taken for granted. The recent European Parliament elections last May showed increasing disillusion with the EU elite and with nationalist parties of various ilks generally making gains at the expense of establishment parties. There were perhaps two main drivers for this:
- The ongoing tensions between UK led calls for greater neo-liberal market "reforms" (also supported by some eastern European members) clashing with the more political integrationist and social democratic "social market" orientated policies and institutions of the EU founders and founding member states. Many would argue that the UK joined the EU, and supported the rapid accession of eastern European members, to prevent the too rapid and too deep integration of the original "European core" member states into effectively a European superstate - an aspiration the UK has never shared - continuing to see the EU as more of a "Common Market" than as a "Political Union" even though the latter aspiration is written into the more recent European Treaties.
- The asymmetric impact of the economic crisis arising from the financial crash of 2008, which effected European peripheral states much more dramatically than the European core. Central to this asymmetry was the adoption of the Euro as a common currency by 18 EU member states which meant they no longer had the option of devaluing their currencies as a means of mitigating the deflationary effects of the recession on their domestic economies.
The Euro had been adopted as an essentially political project - as part of the process of ever increasing economic integration - without there being prior agreement to the other factors which are generally required for a stable currency regime. These include:
A) Fiscal transfers between richer to poorer areas of the Eurozone: In the USA for example, if (say) Georgia experiences a severe recession, this tends to be mitigated by greater Federal transfers in the form of unemployment insurance, health care subsidies, and federally funded infrastructural development, not to say direct transfers to State level Governments. Except for policies such as the Common Agricultural Policy (which stabilizes and controls market prices and farmer income) the total EU budget is relatively tiny (c. 1% of EU GDP) compared to the US Federal Budget (c. 40% of GDP) - so much for the vast EU bureaucracy and profligate spending myths of the Eurosceptics! The EU simply doesn't have the resources to help (say)Greece when its economy implodes, and, as part of the Eurozone, Greece can no longer devalue its currency as a means of mitigating deflation and restoring competitiveness.
B) A central bank which performs the functions of Lender of Last Resort, regulator of Eurozone wide banking institutions, resolver of bankrupt financial institutions and setter of interest rates in line with unemployment as well as inflation criteria.
Some of these deficiencies are in the process of being addressed, but it is in many ways a case of too little, too late. A great deal of damage has already been done.
Thus Ireland experienced a housing bubble and bust partly because the European Central Bank (ECB) kept interest rates at much too low a level for the Irish economy (then booming and at full employment) because the German economy was in recession due to the costs of German re-unification. When that bubble went bust, the Irish citizenry were held to be accountable for those losses, even though they were incurred by private banks operating within an EU common financial services area and often involved transactions in other EU member states. Whilst the Irish Financial Regulator was clearly also at fault, there is a fundamental problem with - on the one hand promulgating a single European market in financial services - and on the other expecting a national regulator to be able to regulate transactions in other national member states.
The result was that the Irish people bailed out banks resident on their territory to the tune of 41% of GDP. To put that in perspective, the US bank bail-out amounted to about 5% of GDP, most of which has been repaid, whilst it is doubtful the Irish bank bail-out will ever be repaid. As a result of these bail-outs and the resultant recession, the Irish debt to GDP ratio rose from a very modest 25% of GDP in 2008 to 125% of GDP in 2014. A rather severe price to pay for the failings of a bank regulation system, and understandably, it has led to some disillusion with the EU and Eurozone project as well as with the Irish Government which was unceremoniously cast out of office with record losses at the ensuing election.
And herein, perhaps, lies part of the problem with the EU as it is currently constituted. The ECB continues to fail abjectly in achieving the one target it sets itself - maintaining inflation at or just below 2% - with the result that the Irish debt mountain is not deflating as fast as it would were inflation rates of around 2% being achieved. But there is no way the ECB Board can be fired, even if it fails to achieve its one and only major target.
And it gets worst than that: the ECB, unlike the FED, doesn't even set itself an unemployment target, and so it takes no responsibility for the ruinous unemployment rates in southern Europe, in particular, and sets rates and policies largely in line with what its main constituent member - the Bundesbank - wants from a German point of view. Not surprisingly, net creditor countries, like Germany, want tighter monetary policies, even if this increases the debt interest load and unemployment rate in net debtor countries. And so the regional economic inequalities in the Eurozone are exacerbated, not mitigated by central policies as in the US fiscal and monetary system.
The central problems here are the twin German obsessions with having export surpluses (forgetting that these can only be achieved if other countries run deficits) and inflation phobia which means that the ECB has not followed the Quantitative Easing policies of the FED, even though, as Krugman never tires of pointing out, these are not inflationary when interest rates are at the zero bound. As a result, the Eurozone as a whole remains mired in recession, and even the German economy is suffering because of the lack of demand from peripheral Eurozone states.
So is the Euro threatening the success of the EU as a whole? Many previously enthusiastic supporters of the European project think that this is precisely the case and now advocate the abandoning of the Euro experiment. In doing so, I think they forget the purpose of the Euro in the first place, and that was precisely to force the gradual ever deeper monetary, economic and fiscal integration of the Eurozone as a whole. Despite staunch German resistance, the ECB has gradually been expanding its role in Bank supervision and has pushed it's monetary easing policies to the limits of what current treaties will allow. The problem is that monetary policy can only go so far in enabling economic growth and stability, and, without greater fiscal transfers and an EU budget big enough to enable them, the Euro will always be a monetary experiment on the brink of failure.
And this brings me the first tension I instanced above, and that is the continuing UK led drive for neo-liberal reforms with the implicit threat that the UK will withdraw if it doesn't get its way. The UK only ever joined the EU to obtain favoured access to its markets and to prevent a German French duopoly gaining control of a nascent European superstate. Not surprisingly, it has indulged in considerable schadenfreude at the continued failure of the Eurozone to lift its members out of stagnation and recession.
But if the only solution to that failure is increased political, economic, and fiscal integration between member states - as provided for to an insufficient extent in existing treaties - then the UK and the Eurozone are on a collision course with respect to the future reforms required: Is it to be the British model of independent member states with their own currencies sharing markets but little else, or the original vision for the EU which was to create an ever deeper political and economic Union with gradually increased powers vested in the European Council, Commission, and Parliament?
If popular discourse is to be believed, the UK is ever on the brink of leaving the EU, although it is my belief that the British elite ambition is to run the EU, not leave it. However - as the Scottish referendum almost showed - the British elite can also miscalculate, and could well lose a referendum on EU membership should it be so foolish as to call it. In the short term, at least, that might well be a relief both to many Britons and to many Europeans. Both parties could then get on with pursing their different visions, although I believe the British elite could be sorely disappointed if they think that a departing UK would be granted the same access privileges to EU markets as say Switzerland. Why would Berlin agree to giving the City privileged access to EU markets on a par with (say) Frankfurt when it is not subject to the same regulatory supervision as Frankfurt and doesn't contribute to the costs and Governance of the EU as Germany does?
In reality, I don't believe the UK will ever seek to leave the EU - it risks renewed pressure for secession in Scotland and the implosion of its financial services industry if it were to do so. But this means the battle over the future direction of the EU will run and run to the exasperation of many.
One of the amazing successes of the EU has been the degree to which consensus decision making is still the norm - even as the membership has increased from 6 to 28 states with only a little overhaul of the decision making process - the introduction of "qualified majority voting" instead of the requirement for unanimity for many Council decisions, and with increased powers devolved to the European Parliament.
In this sense the EU Council (made up of Heads of State or Government) is coming to resemble, more and more the US Senate, the Commission's reach is extending a little more to resemble the US Government, and the EU Parliament is beginning to resemble the powers of the US House of Congress. If only the ECB were to achieve a broader mandate (like the Fed) but with more democratic accountability.
But the EU is still a long way from a United States of Europe and should not be confused as such. It has very little military power which is still vested mainly in member states (most of whom are also members of NATO). It is an outstanding example of what is possible through soft power and by negotiation and comprise - even if, to the frustration of Kissenger et al - this means it is often not possible to lift the phone to one person and get a quick decision on anything. Most decisions still require an exhaustive round of consultations and negotiations involving 28 heads of Government and their ministers, even if Merkel is, more and more, a cautious Primus inter Pares.
But the British have had their victories too. English has replaced French as the main working language of the commission and neo-liberalism has pushed back the boundaries of traditional social democratic state driven policies of the European core. If the Euro is deemed essential to the future of the EU project, then further fiscal, economic and political integration is unavoidable, even if different states, increasingly, integrate in different areas at different speeds.
It will remain a convoluted and messy process, unsuited to the demands of a military superstate like the USA, and perhaps unsuited to respond appropriately to quickly developing regional crises like the Ukraine. Many welcome its lack of military and surveillance capabilities even if it comes at the cost of a lack of influence over world events relative to its economic and political power. As many Americans know only too well, developing a military, industrial and surveillance complex comes with huge costs for political culture and civil liberties.
Despite its many limitations and failures, I believe the EU (and the Euro) project is here to stay, as it has shown a capacity to grow and develop to the benefit of the vast majority of its citizens, most of the time. The EU has contributed enormously to the maintenance of democracy and civil liberties throughout the EU and the gradual development of a secular European identity which makes war almost inconceivable again.
In particular, it has contributed enormously to Ireland's economic and social development, and to the gradual diffusion of tensions within Northern Ireland and between Ireland and the UK. Despite the banking fiasco, many Irish citizens hold their own Government even more accountable for the regulatory failures and subsequent Bank guarantee even if the EU was also culpable and subsequently acted almost entirely in the interests of creditor rather than debtor nations. Some hard lessons were learned, but the Irish economy is recovering largely in consequence to our membership of the EU. In an increasingly globalized world, a small country like Ireland would be hostage to global corporations which only a large superstate like the EU has the scale to regulate and control.
In today's world, the choice is not between state regulation and personal freedom, but between state regulation and corporate control. Ireland's membership of the EU, whatever its faults, at least means we still have a choice.