Monday, October 20, 2014
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A Rest Stop for Europe

PRINCETON – Last week, in a highly anticipated speech, German President Joachim Gauck cautioned against the blind pursuit of an “ever-closer” European Union, acknowledging that the growing inequality among member states is generating “a sense of unease, even unmistakable anger,” and increasing the risk of national humiliation. He pointed out that, in addition to the economic crisis, there is “a crisis of confidence in Europe as a political project.”

While Gauck made clear that he remains decidedly pro-Europe, he highlighted the need for closer reflection about Europe’s future – and especially that of the eurozone. Standing on the verge of greater integration, Europeans are hesitant, “unsure whether we should really stride out on the onward journey.” Addressing this hesitation, he declared, will require a thoughtful, nuanced understanding of what “more Europe” actually means.

Gauck may not have gone far enough: At this point, an ever-closer union may be a political mirage. Any meaningful progress toward stabilizing the eurozone would require a significant – potentially open-ended – financial commitment, and the EU is not politically ready to cross that threshold. Repeatedly pretending to move forward, then pulling back at the critical point, exacerbates political uncertainty and economic vulnerability.

Rather than indecisively pursuing more unity, this may be the moment to restore effective sovereignty to national authorities in eurozone countries. Such a move would alleviate anxiety in the short term, thereby giving Europeans the opportunity to regroup in preparation for future steps toward a more integrated Europe and a more resilient euro.

To this end, eurozone leaders must take three key steps. The dysfunctional system of European fiscal governance should be dismantled; fiscal responsibility should be returned to member states; and, to minimize the risk of excessive future lending, private lenders should be required to bear the losses implied by unsustainable sovereign debt.

The case against European fiscal governance is straightforward. Before the crisis, the single-minded emphasis on reducing national budget deficits to less than 3% of GDP led to extensive abuse. Either the target was openly flouted, as it was in leading economies like Germany and France, or the data were manipulated to obscure problems (a common practice throughout the eurozone, not just in Greece). And the belief in economic growth as a fiscal panacea led to unrealistically optimistic GDP forecasts.

When the crisis struck, the 3% deficit target became the focal point for unrelenting austerity – a form of what anthropologist Clifford Geertz described as “involution,” which occurs when a process intensifies rather than changes in response to external or internal pressure. In other words, EU leaders began to complicate fiscal governance, ultimately creating an inefficient, inescapable labyrinth of regulation and bureaucracy. As fiscal metrics become increasingly intricate, monitoring efforts will become ever easier to undermine.

The case for returning fiscal responsibility to national authorities is also strong – and not only because centralized fiscal authority has proved to be so inefficient. With citizens of distressed countries bearing the fiscal burden of the crisis, the enduring presumption that they will not act responsibly is patronizing, at best. And the current strategy of exchanging goodies for good behavior encourages game-playing and dilutes responsibility. While the risk that governments will succumb to fiscal temptation remains, citizens’ current suffering is likely to deter future excesses.

National fiscal sovereignty would facilitate the final crucial step: building a more mature relationship with private lenders. The eurozone was founded on the “no bailout” principle: if member states could not repay their debts, lenders would bear the losses. But lenders chose – correctly, as it turned out – to disregard that threat. Instead of enforcing the no-bailout principle and establishing a precedent, debtor countries used official loans to repay private creditors.

As a result, these countries have condemned themselves to continued austerity, low growth, and high debt, while diminishing any future incentive for private lenders to impose fiscal discipline on sovereign borrowers. Only by shifting the burden of responsibility back onto private lenders can debtor countries escape this quagmire.

In the United States, each state is responsible for its fiscal management, without being forced to comply with a single, overarching template. The states are not regulated by the federal government; they are disciplined by the knowledge that no one will repay their debts for them. And the system seems to work: entering the crisis, US states had significantly lower deficit and debt ratios than the eurozone’s vulnerable member states.

So far, European integration has largely been a process of “falling forward,” with each stumble serving as a lesson from which a stronger union emerges. But, while this uncertain approach may suffice as a basis for declarations of good intentions, it does not inspire the confidence required for countries to make the profound financial commitment that is now needed.

Europeans should have the chance to regain their footing. Transferring fiscal responsibility back to national authorities would not only mean the end of counterproductive efforts to manage fiscal affairs centrally; it would also diminish the sense of frustration and lack of control that is fueling Euro-skepticism.

In short, taking a step back would provide an opportunity to reset, to reflect, and to plot the best course toward a more stable, more integrated Europe. For a fiscal union to function – however unlikely that outcome may be – a solid foundation is crucial. As Gauck explained, Europeans “are pausing to… equip [themselves] both intellectually and emotionally for the next step, which will require [them] to enter uncharted territory.”

Giving Europeans the time and space to choose more Europe would reinforce the core values upon which integration has rested for more than six decades. Continuing to stumble forward, however, would inevitably lead to a debilitating, if not fatal, fall.

Read more from our "Zone Defense" Focal Point.

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  1. CommentedZsolt Hermann

    A rest stop is good.
    Both leaders and the public have understand what the situation is, what the options are, people have to be fully aware before they make the next step.
    In terms of the global system humanity has evolved into we do not really have a choice, in a natural, interconnected, organic, interdependent system only full integration is capable of adapting humanity into the existing system.
    But people need the information and the positive motivation to enter such a system, otherwise it will fail, as communism, or similar mutual, seemingly altruistic experiments failed in the path.
    That is why the first step needs to be a global education program, where each and every human being gets the necessary, open, free, transparent information about the global world system, its laws, about human nature, and how this human nature needs to adjust to settle into the system like a cogwheel in a well oiled machine.
    We already have all this information multiple times, but we haven't put the complete picture together yet.
    Inherent differences, unique talents, cultures are not a problem, in a mutual interconnected system they beautifully complement each other as soon as the main intention, attitude is toward the well being of the system.
    The differences give the system its colors, flavors, the capability to cope with any forthcoming stage.
    A truly mutual, complementing, natural system can never fail, it is "perfect".

  2. CommentedMarco Cattaneo

    "Fiscal responsibility should be returned to member states" sure, but monetary responsibility as well. Without monetary autonomy the whole system is never going to work. It can be done without breaking the euro up. http://bastaconleurocrisi.blogspot.it/2013/02/tax-credit-certificates-to-start-up.html

  3. CommentedAntónio Correia

    I agree that "Giving Europeans the time and space to choose more Europe would reinforce the core values upon which integration has rested for more than six decades. Continuing to stumble FORWARD, however, would inevitably lead to a debilitating, if not fatal, fall."

    In these days, an increasingly wider consensus on the major flaws of the EU construction, over the last two decades, has emerged and can no longer be ignored: just remember the sinking of Titanic - a huge, record-breaking construction - one century ago...

    The Maastricht Treaty was announced as a "great leap FORWARD". Since then, only "FORWARD moves" have been allowed in the Maastricht-born "European Union" - mainly the creation of the "single currency" and the birth of a Eurozone with more and more states involved, according to their will and their capability of meeting the doubtful set of "Maastricht criteria" when joining the "single" currency area. Any move which may be seen as a "backward move" has been strictly forbidden, even if nobody can take for granted that this disunited "European Union" is moving forward to something that looks like the promised land. In fact, it is increasingly clear that this road is a "road to nowhere", besides being increasingly painful for more and more member states to go ahead, under the approach which has been adopted to "keep the markets calm" and "save the Euro" - while avoiding the appropriate fiscal transfers and resorting to lending under AUSTERITY constraints. In these days, the European Union has been repeatedly following the recommendation: "Keep moving FORWARD, either slowly or rapidly, either jointly or at several speeds!".

    Yes, as Paul Krugman recently said, "The Euro is a shaky construction". Besides ignoring the macroeconomic imbalances within the EU, in the "Maastricht criteria" for Eurozone membership as well as in the subsequent "stability" pacts, the Euro has been designed and confirmed – by Delors et al and followers – as a "single currency" instead of a (much more realistic) "common currency". Now, it is very clear that this was an IRRATIONAL choice, namely because other components of Delors's dream are missing - such as a European budget amounting, at least, to some "3% [!] of the European GDP".

    Two decades after the Maastricht Treaty, a COMPLETELY NOVEL EU TREATY is mandatory - not a mere set of "positive" , incremental amendments -, so as to avoid a sad situation, in the near future, where the foreseen "European common home" becomes replaced by a true "European house of correction", not compatible with essential democratic principles. We need to build a true, democratic European Union through a cooperative European disunion, where the Euro survives as a "common", parallel currency - INCLUDING FOR THE UNITED KINGDOM and the other "non-Euro states" - but no longer as the "single currency" for a fraction of the EU (currently 17 out of 27 member states)

    [ http://building-a-true-european-union.blogspot.com ]:

    ” – The Euro should be a COMMON currency within the future EU – including the EU27 members outside the current ‘Euro Area’ – but not necessarily the SINGLE currency.
    - In this context, the coexistence of TWO parallel currencies should be allowed in each EU member state (under certain conditions, established in a novel European Treaty), within the framework of an appropriate “Cooperative European Disunion” .
    - Besides the “Common Euro”, the complementary currency in each member state could be either a “national currency” (…) or a completely new currency, shared by that member state and some other “compatible” EU member states, taking into account both the relevant macroeconomic issues and appropriate geographic, historic and cultural issues."

    We believe that this concise proposal can be a good basis for the required, flexible and realistic, "Plan B" - jointly saving the Euro and the European people.

  4. CommentedJoshua Ioji Konov

    Dear Mr.Mody, you are very much correct about the needed decentralization and maybe dismembering of the European Union as a better prospective for national economies, particularly for the less developed members, however, you suggested strict fiscal and leave the banks on their own approach has been totally ignored by the US, Japan and China, because it it could have brought possible economic brakeup, therefor to consider such for saving the EU countries economies is at the least not realistic, The diversity of more than the Euro currencies and less centralized policies would allow national policies more freedom and flexabilities, the getting rid of the VAT and constand dependence on centrally subsidized EU programs would bring better destribution of wealth, however it may also bring far-right or far-left governments so wellknown from the mid 20th Century.

  5. CommentedFrank O'Callaghan

    Comparing the EU to the US in terms of the component states debt ratios is invalid. There is a Federal entity in the US for which there is no comparison in the EU. The US govt spends twice the States amount. This acts as internal transfer.

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