Saturday, September 20, 2014
5

The Euroless Union?

BERKELEY – Europe’s crisis has entered a quiet phase, which is no accident. The current period of relative calm coincides with the approach of Germany’s federal election in 2013, in which the incumbent chancellor, Angela Merkel, will be running as the woman who saved the euro.

But the crisis will be back, if not before Germany’s upcoming election, then after. Southern Europe has not done enough to enhance its competitiveness, while northern Europe has not done enough to boost demand. Debt burdens remain crushing, and Europe’s economy remains unable to grow. Across the continent, political divisions are deepening. For all of these reasons, the specter of a eurozone collapse has not been dispatched.

The consequences of a collapse would not be pretty. Whichever country precipitated it – Germany by threatening to abandon the euro, or Greece or Spain by actually doing so – would trigger economic chaos and incur its neighbors’ wrath. To protect themselves from the financial fallout, governments would invoke obscure clauses in EU treaties in order to slap temporary controls on capital flows and ring-fence their banking systems. They would close their borders to stem capital flight. It would be each country for itself.

Would the European Union survive? The answer depends on what one means by the EU. If one means its political organs – the European Commission, the European Parliament, and the European Court of Justice, then the answer is yes. These institutions are now a half-century old; they are not going away.

As for the single market, the EU’s landmark achievement, there is no question that a eurozone breakup would severely disrupt its operation in the short run. Trucks would be halted at national borders. Banking and financial systems would be balkanized. Workers would be prevented from moving.

But what would happen then? There has always been a debate about whether it is possible to have a single market without a single currency. Critics of the euro have always asked: Why not?

Under this scenario, the Single European Act, signed in 1986, would remain in place. Member states would be obliged to restore free movement of goods, capital, services, and people – the EU’s “four freedoms” – as quickly as possible. Given the clear benefits that Europe has derived from the single market, they would have every incentive to do so.

Proponents of the single currency object that if Europe has separate national currencies, it will have separate banking systems, each with its own lender of last resort. So much, then, for a single market in financial services, or for harmonizing regulation and removing trade barriers behind the border. Free trade in goods and free movement of capital and labor would not survive the euro’s collapse, these diehard Europhiles warn. We may yet find out if they are right.

And what about the acquis communautaire, the body of law that enshrines member states’ obligations not just in terms of economic policies, but also in terms of democracy, the rule of law, and fundamental human rights? The intent of the acquis is not simply to make Europe more prosperous, but to make it more civilized. Spain, Portugal, and Greece had to establish functioning democracies before applying for EU membership. Even now, Hungary and Romania feel peer pressure and face sanctions from their EU partners when they engage in dubious electoral practices, compromise their courts’ independence, or discriminate against minorities.

The cooperation needed to make that peer pressure effective might conceivably survive the euro’s collapse. But finger-pointing about which country was responsible for Europe’s damaging financial disruption would make it difficult for the members to maintain a common front. It seems likely that the acquis would lose much of its force.

A final way of thinking about the EU is as the “ever closer union” referred to in the Treaty of Rome and echoed in the Maastricht Treaty. “Ever closer union” means an EU that moves ineluctably from economic and monetary union to banking union, then to fiscal union, and finally to political union. This is what European leaders had in mind when they created the euro. They hoped that establishing a monetary union would generate irresistible pressure for the creation of an EU that functioned in all respects as a cohesive economic and political bloc.

Europe’s leaders were right about the pressure. Monetary union without banking union will not work, and a workable banking union requires at least some elements of fiscal and political union. But they were wrong about the irresistible part. There is no inevitability about what comes next.

Europe can either move forward, toward deeper integration, or it can move backward, toward national sovereignty. Its leaders and, this time, its people need to decide. It is on their decision alone that the future of both the euro and the EU depends.

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  1. CommentedAndré Rebentisch

    The Acquis Communautaire is the corpus of European law. What we are suffering from in banking and eurozone is too little emphasis on "Ordnungspolitik" and regulatory prudence. Germany holds the keys for the future, a nation with an ordoliberal tradition of economical thought. It cannot waste its time with arm chair debates about a "move forward, toward deeper integration, or it can move backward, toward national sovereignty." but has to craft a stable order.

  2. CommentedRoman Bleifer

    n Europe there is no third way. Either the EU will take the path of further integration, including the creation of a soft form of confederation, or turn into a second-rate province of the 21st century. This is not a question of lack of political will or wishes. This is dictated by the law of development ( http://crisismir.com/analiticheskie-materialy/ekonomika/13-mirovoj-ekonomicheskij-krizis-prichiny-i-posledstviya-quo-vadis.html ). Unfortunately European politicians are aware of this very slowly. The current lull did not last long.

  3. Portrait of Christopher T. Mahoney

    CommentedChristopher T. Mahoney

    For the eurozone to have single financial system, it will need a single entity to act as the system's guarantor. As long as bank solvency is tied to the rating of the local government, there cannot be a single system. Today, without a single guarantor, a euro deposited in a Finnish bank is worth considerably more than one deposited in a Cypriot bank. Indded, it could be argued that the eurozone no longer has a single currency, since markets discriminate between a deposit in one country versus another. Would you invest your life savings into a deposit at a bank in Greece or Cyprus?

  4. CommentedZsolt Hermann

    I would like to comment on two paragraphs:
    1. "Europe can either move forward, toward deeper integration, or it can move backward, toward national sovereignty. Its leaders and, this time, its people need to decide. It is on their decision alone that the future of both the euro and the EU depends."
    The truth is there is no free choice here, and I suspect the current leaders already know this that is why they keep on trying, even if with only half hearted "solutions" to keep the Union together.
    There is overwhelming evidence from scientific publications and the daily events of the crisis itself how much humanity evolved into a single, global, interconnected network. And in this network each individual and nation, regardless of size and "importance" depends on each and every other element. Thus solution to any problem can only come as a result of a deep, and fully mutual cooperation, considering the state and well being of the whole system for each and every plan and action. Fragmentation, isolation goes completely against the present conditions, resulting in a much worse and potentially volatile scenario.
    And this leads to the second paragraph:
    2. "“Ever closer union” means an EU that moves ineluctably from economic and monetary union to banking union, then to fiscal union, and finally to political union."
    This is exactly the problem, everything was done backwards like building a house starting from the roof. Without strong foundations there is no building, but because everybody only cared about markets and profit, nobody cared about building the foundations first. This is why the whole world economy is collapsing, this is why we all live in bubbles that are ready to burst because we created this illusion that by overproducing, over consuming for infinite profit, without caring about what happens "on the ground" we can run away and cheat the system.
    As we learn the painful way it is impossible. We have to go back to the drawing board and first of all build a truly mutual, global, interconnected system that is based primarily on sustaining the whole network the best way possible and only then catering for individual needs. After all the well being of the individual fully depends on the well being of the whole.
    We are all sitting around a table where everybody has everything they need, provided nobody takes more for himself than his necessities. If someone takes more, immediately the whole system breaks like with the game of "musical chairs", leading to competition, exploitation, wars and other catastrophes.
    In order to make this global, integrated system work decision making has to involve everybody in a structured, layered manner and take the whole system into consideration every moment.

  5. CommentedShane Beck

    For the European Union to become a full union would require a huge amount of sacrifice- not only from nation-states ceding large amounts of power and sovereignty to the centralized bodies of the European Central Bank, European Commission, European Parliament and European Court of Justice above and beyond what they have already ceded away, but it is going to take an enormous amount of sacrifice from the people of the southern state already suffering under severe austerity budgets and crippling high unemployment but also an erosion of democracy where fundamental decisions affecting their lives will be made in Brussels with only limited or no accountability to the people affected. Also the European project depends upon how far northern states like Germany and France are willing to underwrite the project. The upcoming German elections will be good indicator of how far the German people are willing to go.
    It would also be a bit late for controls upon capital flows- a fair proportion of the elites in Greece and Spain already have their Euros in German or Swiss bank accounts.

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