I have attended a number of conferences in
the past few weeks where the future of the European Union has been discussed.
Where previously the EU’s continuance was complacently taken for granted, now
there is much more uncertainty, but also much more interest.
The European Union has been a remarkably
successful institution building project. It is the first ever voluntary coming
together of sovereign states, pooling some of their sovereignty, so that they
could do more together, than they could separately.
Almost every other political unification or state building in
history has involved the use of force, including the creation of the UK and the
maintenance of the USA. The EU came together peacefully and voluntarily.
Some might argue that the EU was necessary only
in order to cement a post war reconciliation of Germany and France and that,
now that that is achieved, it has done its job and needs no further development.
This is wrong for two reasons.
WHY THE EU IS STILL AN ASSET
1 . AN ASSURANCE OF MUTUAL SECURITY,
Firstly, the fact that there is a queue of states still
lining up to join the EU shows that the EU still provides a necessary political
and economic umbrella under which reconciliation and mutual security between
states can be assured in the twenty
first century.
This was why the Baltic states, Poland and other
central European states joined, and it is the reason several Balkan states, and
even Georgia and Ukraine might like to do so. It is also the reason why Greece,
much to the surprise of many, has favoured Turkish membership. While the United
States of America is remarkably successful in many ways, there is no queue of
other American states lining up to join. Even Puerto Rico has not done so after
more than 100 years of Washington rule
2. A WAY TO MANAGE GLOBALISATION DEMOCRATICALLY
Secondly, the EU is the most advanced effort
in the world providing a measure of democratic supervision into globalisation.
Unlike other efforts to supervise globalisation, like the United Nations and the
World Trade Organisation, the EU has a directly elected Parliament which co
legislates for the EU alongside the 27 Governments, who often decide issues by
majority. Other international organisations operate on a purely
intergovernmental basis, which means that there has to be unanimity to get a
decision, and democratic involvement only arises when a deal already negotiated
in private, has to be ratified in national parliament without possibility of further negotiation or amendment.
As a result, other organisations, like and the WTO and the UN,
can do much less, and have to do
much more of what they do behind closed doors, than is the case with the EU.
My view is that the EU provides a unique model for democratic
rule making, at supra national level, something which will become more, not
less, necessary as we proceed into the 21st century.
Indeed the
failure of the world to deal with climate change is a good example of the
weaknesses of present intergovernmental models of global governance. If the
different regions of the world had Unions, like the EU, which could negotiate
seriously, and with genuine political legitimacy, as the EU can, the failures
of Copenhagen and other climate change summits would not have happened.
If the EU were to break up, either because
of the collapse of the euro or because a major country like the UK feels it has
to exercise its right to leave the EU, and either event were to set off a
breakdown of the trust that keeps the EU itself together, we would have lost a
unique instrument for security building in Europe, and for problem solving in
the wider world.
I would now like to analyse those two
potentially existential threats to the EU, the euro crisis, and the UKs
possible desire to leave.
Of these, a break up the
euro is undoubtedly by far
the more serious existential
threat to the EU, because the scale of the economic losses is potentially much
greater, and the means of
controlling those losses, are much
less.
THE EURO CRISIS IS NOT SOLVED
The euro crisis has become slightly less
acute in recent weeks. The announcement of a new bond buying policy by the
European Central Bank has calmed the markets. But there is no doubt that the
markets will test the ECB’s will power at some stage.
Meanwhile the link between the solvency of
European banks and the solvency of European states has not been removed.
A default by any EU state would wreck the banks of that state,
because each state’s banks tend to be big purchasers of the bonds of that state.
Similarly a potential collapse of a bank in
a state would force that state to inject capital into banks, if it did not want
a run on banks generally to take place, and contagion to other countries.
The confidence loss caused by a
major bank getting into difficulty could lead to a dramatic collapse in state
revenues, leaving it with a much increased budget deficit, at the very time it
was also having to find the money to recapitalize the bank.
FOUR THINGS THAT MUST BE DONE TO SOLVE IT
If these problems are to be resolved, four
things will have to happen, more or less at the same time.
1. Greek Government debt will have to be
forgiven.
2. The ESM will have to be seen to be big
enough to stand behind Spain and other countries that might get into difficulty,
on a contingency basis,
3. The new mechanisms to supervise, and if
necessary rationalize, Europe’s banks will have to be put in place.
4. The already agreed reforms to reduce
deficits, and to promote growth by opening up the job and service markets to competition
will have to be demonstrated to be being fully implemented, in letter and
spirit, to show creditors that, if one forgives debt or creates enlarged the
ESM, one is not throwing good money after bad.
At the moment, the Greek debt issue is not
being tackled, and seems to have been postponed until after the German election
in September. The delay may not be the worst thing in the world, if it allows
time for Greek reforms to begin to establish credibility. It also allows time
to educate public opinion in creditor countries like Germany, and in countries
sitting complacently on the sidelines, of the true consequences for themselves
of a euro break up. Greece also need immediate help to finance itself to the
end of 2013, and that bridging finance cannot await elections in Germany or
anywhere else.
The EU has already enacted a raft of
legislation, including the Fiscal Compact Treaty, to ensure that countries
reduce their deficits, and liberalise their labour and service markets. . One
of the reasons growth potential has been low in Greece, Italy, and Spain is
lack of competition or flexibility in key sectors
But Germany is not yet satisfied. It wants to have an EU
Commissioner with the power to veto state budgets, and enforceable contracts on
reforms between states and the EU.
But not enough attention is being paid to the fact that Germany, France
and other core countries could also be doing a lot more themselves, to open up
their own digital, financial, energy, retail and professional service markets. While
Germany has set a good example in labour market and pension reform, there are other reforms it could
initiate, that would help other EU countries to sell more goods and services
into the German market, and thereby trade their way out of their problems.
There is understandable political
resistance in Germany to any further debt forgiveness for Greece. But debt
forgiveness within the euro is one thing. Greek exit from the euro is an
entirely different matter. It would be far more dangerous, and that needs to be
explained to German public opinion.
WHAT WOULD HAPPEN IF THE EURO ZONE BROKE
UP?
Even a disorderly default by a country within the euro, no
matter how severe its consequences for its own people and for its creditors,
would have far less severe consequences for the euro, and for the EU itself,
than an exit of a country from the euro would have.
I have heard a view from some Northern Europeans that an
orderly exit of Greece from the euro could be contemplated, if it was accompanied
by building up a huge fund, much bigger than the existing ESM, to stand behind
all the other euro area states, so as to prevent a Greek exit leading to a loss
of confidence in the financial position of the rest of the euro zone.
I believe this view, that Greek exit from the euro can be
managed, is profoundly mistaken.
The whole edifice of the EU rests on law.
The EU has no police force to enforce its will. It relies on member states
freely respecting the interpretation of EU law by the European Court of
Justice, and implementing the Court’s decision, however unpleasant that may be.
The exit of a country from the euro is, quite simply, a breach of their Treaty
obligations, and treaty obligations have the force of law.
The euro was established on the basis that it was
irreversible. A Greek exit, particularly if it was condoned or encouraged by
other members, would say loudly that the euro is not irreversible.
That would lead to constant speculation in
the markets as to who would be next. And as speculation increased, so too would
the size of the funds or guarantees needed to check it, increase. That in turn
would then lead heightened risk that some of creditor countries, who would have
to provide these funds and guarantees, might decide that they themselves should
exit the euro, and re-establish their own currencies. That would be the end of
the euro.
Breakups of currency unions have happened before, in Austro Hungary
after the First World War, and in Eastern Europe in the 1990s when the rouble
zone broke up. As described in a recent article by Anders Aslund of the
Peterson Institute of International Economics, the consequences of this were
disastrous.
A SCENARIO THAT MIGHT LEAD TO THE END OF THE EU ITSELF
New currencies would have to be established. The relative
value of these currencies would be unknown and unknowable. Some would lose
value very quickly and others would shoot up in value.
Exports would become dramatically
uncompetitive in some cases, and in others they would become so cheap that there would be accusations of dumping, currency
manipulation, and calls for
immediate reintroduction of
import duties to level the playing field. Such duties, if imposed,
would end the Single Market. And that would be tantamount to the
break up of the European Union itself. Open markets, the assumption on which
Ireland built it entire economy over the last 50 years, would be gone.
In some countries the banking system would
break down, and people would have no access to credit for even the most basic
transactions.
In others, people would cease to trust the value of their own
money, and money, after all, is based on a promise and if people can no longer
trust the states standing behind the promise that underlies their money, the
basis for money itself is gone.
This is not fiction. It is what happened
when the rouble zone broke up in the 1990s and explains why incomes fell by 50%
in the former rouble zone countries. And the exporter nations within the rouble
zone, like the Russian Federation, suffered just as much hardship as the
importer nations, like Latvia and Estonia.
The political stresses that this scenario
for the 500 million people of the EU, and their Governments, would be such that
trust between European nations would easily break down completely.
We see signs of that happening already, but it is being held
in check by the hope that problems can still be resolved on a collective basis.
A break up of the euro would show that that was impossible to resolve matters
on a collective basis, and it would then be a case of every nation for itself, with
particularly severe consequences for smaller countries, like Ireland.
............AND MEANWHILE IN THE UNITED
KINGDOM
As if Europe did not have enough problems,
one important EU country, the United Kingdom of Great Britain and Northern
Ireland, is preparing to renegotiate the terms of its own membership of the EU,
and hold a referendum on the outcome, which would potentially decide whether
the UK would stay in the EU or leave.
The first thing to say is that the UK is
entirely free to do this. Unlike other Unions, like the United States or the
United Kingdom itself, the European Union is a Union which states are free to
leave, so long as they fulfil their normal obligations under international law,
which arise when any country withdraws from any international treaty.
The UK has been an uneasy member of the EU
from the outset. While Churchill envisaged a United States of Europe, he did
not envisage the UK, which still had a global Empire at the time, being part of
it. The UK did not attend the 1955 conference in Messina which led to the Treaty
of Rome. When it eventually joined the Common Market, a decision endorsed by a
referendum, the idea was sold to the electorate as an economic arrangement,
whereas even the most cursory reading of the Treaty of Rome would have shown it
to be much more than that.
A THREAT TO VETO THE EU BUDGET
The United Kingdom is now threatening to
veto the entire EU budget, something it is legally entitled to do, unless there is an
absolute freeze on the size of the budget. The difficulty with this stance is
not legal, it is political.
The EU Single market, which guarantees free movement of
people, goods and services, was created as a political deal.
Weaker economies opened up their markets to stronger ones,
and removed protection from local businesses, on the basis of a promise that
they would qualify for structural funds to modernise their economies. These
funds are what the EU budget provides. (Some of the EU budget also goes on
agriculture, but that has fallen from almost 80% of the total originally, to
only 30% today.)
The political difficulty with the UK stance
is that of fairness.
In the past, when countries like Ireland,
Spain, Greece, Portugal, and even the UK itself, joined the EU, we all
qualified for very substantial EU structural funds, in the form of aid for
agricultural modernisation, general infrastructure, training, communications
etc.
Now, when the EU has taken in 12 central European countries
who are almost all relatively far poorer by comparison with the rest of the EU,
than we were when we joined, these 12 are to be told, if the
freeze the UK wants is to go into
effect, that they are not to get even a fraction of the help Ireland, Spain,
regions of the UK and others qualified for as of right after we joined. This is
causing resentment.
I heard an Estonian Minister complain recently that, under
the existing EU budget which is already an unfair compromise, his farmers have
to compete in the same EU market with west European farmers who are getting three
times the subsidies. Unless there are to be drastic cuts, this sort of anomaly
can only be put right by an increase in the EU budget.
The problem is that the UK Government has
made the size of the budget a red line issue without getting into any informed
debate about what the money is actually spent on, or about what sort of EU
budget is necessary to ensure that the
EU Single Market, to which the UK itself is very much attached, works
fairly and is preserved.
The UK wants access to the single market, but is not prepared
to pay any entry fee.
AND A DEMAND TO RENEGOTIATE THE ENTIRE
BASIS OF UK MEMBERSHIP OF THE EU
The same problem arises in the
renegotiation of the terms of UK membership for which the current UK Government wants. In preparation for
this renegotiation, the UK Government is now doing a comprehensive audit of all
EU laws, to identify areas of activity that could be taken back from the EU to
be administered exclusively under UK law instead. There may be some good ideas
emerging from this, on which all other members could agree, but there may also
be a lot of problems.
The difficulty is that the UK wants to take
back, yet to be specified, powers, but also to retain full and unfettered
access for all its goods and service exports to the EU Single market. 50% of UK
exports go to the euro zone, whereas only 15% if euro zone exports go to the UK,
so this is important to the UK.
The difficulty is that the EU Single
Market, like any market, is a product of common rules, regulations and
conventions. A market is a political construct. Without common rules or
understandings nobody could rely on what they were buying.
That is why, for example, there have to be common EU quality
standards to construct a common EU market. Otherwise one country could impose
peculiar quality standards, designed to exclude competitors from its market and
to enable its own producers to make monopoly profits at the expense of its
consumers. Any rulemaking power that could be abused in this way, cannot be
handed back to national level without endangering the Single Market. That is
the problem that the proposed UK renegotiation of its EU membership terms will encounter.
And the competition in any market also has to be fair, and
someone has to regulate that. If competitors have different environmental, or
product liability standards, or if some firms are operating monopolies or
cartels, the competition will not be fair. These matters cannot be handed back
to be decided by national authorities without also endangering the Single
Market.
If the UK were to draw up a list of EU rules it would like to
make in Westminster rather than Brussels, the other 26 could also do the same,
but they might come up with a very different list. The process could become
bogged down in serial reopening of
compromises, made years ago, on issues that have little relevance to the urgent
existential threat the EU faces
today.
One gets the impression that many in the UK
do not really care about that.
The EU is still regarded by many in the UK as a foreign
country, not a Union of which the UK itself has been an integral part for the
past 40 years. Membership of the EU is seen as a convenience rather than as a
commitment. If the price of satisfying UK voters is to cause more problems for
the “foreigners”, in “Europe”, that is not seen by some UK political leaders as
such a bad thing.
The difficulty is that the “foreigners” in
Europe may not see it like that.
With so many genuinely urgent things to do,
such as safeguarding the very existence of the EU itself, the other 26 member
states may just not be inclined to devote time to a painstaking case by case
analysis of a series of requests for new UK opt outs from some bits of some
rulemaking authority, with UK opt ins to others, and to a judicious analysis of
whether each one of these decisions might affect the integrity of the Single
Market, either now or at some time in the future.
And the European Court of Justice would certainly have
difficulty interpreting the consistency of a special EU menu for one country
with the basic freedoms for all on which the EU is based.
There is also the old question of whether UK Ministers and
MEPs should continue to have voting rights on things they are opting out of. As
it is, one has to say that it is distinctly odd that the present Chairman of
the Committee of the European Parliament that deals with euro currency matters,
represents a constituency in the UK, which has no intention of joining the
euro.
If, as is likely at the end of its proposed renegotiation, the UK
is dissatisfied with the result, because not enough powers are being handed
back to Westminster, it will have little option but to recommend that the UK withdraws
from the EU.
It is setting itself up now, to find itself in exactly that
position, in 2016.
THE UK’S OPTIONS OUTSIDE THE EU
This will require careful handling because 50% of UK exports
go to the EU, and London is Europe’s main financial centre, for the time being
anyway.
How is the UK to protect these interests if it is outside the
EU?
One possibility is to join Norway, Iceland
and Liechtenstein in the European Economic Area, which would guarantee full
access for UK goods and services to the EU market. But the price for that would
be having to implement all EU legislation that was relevant to the Single
Market, and contribute to the EU budget, but without having any say in EU
decisions.
That would be worse from a Euro sceptic point of view than
the UK’s present position, even though it would guarantee continued access for
the UK to the EU market for both goods and services.
The other possibility is to follow
Switzerland and negotiate a series of bilateral trade deals with the EU. The UK
would not be entering such negotiations from a position of strength, because it
relies more on the EU market, than the EU relies on the UK market.
Switzerland has negotiated full access to the EU market for
goods, but not for services. Services are the UK’s key export sector, so a
Swiss style deal would not be attractive.
If Britain negotiated a Customs Union with the EU, like that
of Turkey, it would find its trade policies with the rest of the world were still
being determined in Brussels, but with less input from London than at present.
Again it would also only have a guarantee of access for goods exports but not
for services.
Finally, the UK might simply leave the EU,
without negotiating any special deal. That would leave it paying tariffs on its
exports to EU member states, including Ireland, and would necessitate the reintroduction
of customs posts on the border in Ireland. It would undermine years of peacemaking
by successive Irish and UK
Governments, and would cost thousands of jobs in export firms in both the UK
and Ireland.
CONCLUSION
My sense is that the pressures that cause
fracture in the EU derive from a lack of understanding among the general public
of the extent to which their livelihoods
depend on economic developments in other countries and of how unrealistic, in modern conditions, is
an “ourselves alone” policy.
Political leaders make little effort to explain this, because to do so would undermine
the nationalist myths which brought
most states into being in the first place, and also because it is often
convenient to blame the EU for the
effects of decisions that were necessary but are unpalatable. For these
reasons, little effort is made to forge any form of patriotic pride in the EU
or its achievements.
No venue has been created in which an EU
wide public opinion might be formed.
This must be done, if sufficient mutual
understanding and support is to be created to allow the EU to create the degree
of burden sharing and mutual supervision that is necessary to guarantee the
long term robustness of the euro,
and thus of the EU itself. In a
word, the EU needs more democratic cement to hold itself together.
European Parliament elections are not truly European. They
are 27 different elections, in 27 different countries, in which national issues
predominate.
The European Parliament itself has refused to contemplate the
election of some of its members from EU wide party lists, which would begin the
process of creating an EU wide debate because it would necessitate an EU wide
political campaign on behalf of the rival EU wide lists of candidates.
The President of the European Commission,
and the President of the European Council, are selected in private meetings of
heads of government. They do not have to win the votes of EU citizens, and
consequently EU citizens do not have the feeling that they can vote the government
of the EU out of office, in the same way that they can vote their national government
out of office.
Thus the EU does not enjoy democratic legitimacy in quite the
same way that national governments do.
As a member of the Convention that drafted what eventually
became the Lisbon Treaty, I urged unsuccessfully that the EU should have a
Presidential election on these lines. I suggested that the President of the European Commission
should be selected in a multi candidate election in which every EU citizen
would vote, rather than be selected, as at present, by 27 heads of Government, meeting
in private, to be approved in a single candidate vote in the European
Parliament.
This proposal received almost no support at the time,
although it has since been adopted as policy by the German CDU. If that had
happened when it was proposed, the EU would now be in a much stronger
democratic position to devise a more coherent response to the euro crisis, and
to find a solution to the UK’s difficulties. The UK press would not be able to
argue that EU leaders were “unelected”. The Commission, headed by a President
with a full EU wide democratic mandate, would have more authority to propose
solutions. The council of 27 heads of government would still play a vital role,
but the EU would be less
constrained by the electoral timetables of individual countries, as is the case
with the German election of 2013.
