Sunday, November 23, 2014

European Exceptionalism

PARIS – The creation of Europe’s economic and monetary union is unique in the history of sovereign states. The eurozone constitutes a “society of states” of a completely new type, one that transcends the traditional Westphalian concept of sovereignty.

Like individuals in a society, eurozone countries are both independent and interdependent. They can affect each other both positively and negatively. Good governance requires that individual member states and the European Union’s institutions fulfill their responsibilities. Above all, economic and monetary union means just that: two unions, monetary and economic.

Europe’s monetary union has worked remarkably well. Since the euro’s launch in 1999, price stability has been maintained for 17 countries and 332 million people, with average yearly inflation of just 2.03% – better than Germany’s record from 1955 to 1999. Moreover, the eurozone has created 14.5 million new jobs since 1999, compared to 8.5-9 million in the United States. This is not to say that Europe does not have a serious unemployment problem; but there is no obvious inferiority in Europe: all advanced economies must boost job creation.

Likewise, on a consolidated basis, the eurozone’s current account is balanced, its debt/GDP ratio is well below that of Japan, and its annual public-finance deficit is well below that of the US, Japan, and the United Kingdom.

The euro per se thus does not explain why the eurozone has become the sick man of the global economy. To understand that, one has to consider the weakness of Europe’s economic union.

For starters, the Stability and Growth Pact, intended to ensure sound fiscal policies in the eurozone, was never correctly implemented. On the contrary, in 2003 and 2004, France, Italy, and Germany, sought to weaken it. The European Commission, the European Central Bank, and the small and medium-sized eurozone countries prevented the SGP from being dismantled, but its spirit was gravely compromised.

Moreover, eurozone governance did not include monitoring and surveillance of competitiveness indicators – trends in nominal prices and costs in member states, and countries’ external imbalances within the eurozone. (In 2005, long before the crisis, I called, on behalf of the ECB’s governing council, for appropriate surveillance of a number of national indicators, including unit labor costs.)

A third source of weakness is that no crisis-management tools were envisaged at the euro’s launch. For much of the world at the time, “benign neglect” was the order of the day, particularly in the advanced economies.

Finally, the high correlation between the creditworthiness of a particular country’s commercial banks and that of its government creates an additional source of vulnerability, which is particularly damaging in the eurozone.

Fortunately, much progress has been made, including significant improvements to the SGP and the introduction of surveillance of competitiveness indicators and national imbalances. New crisis-management tools have been put in place. And there is a consensus that the EU’s stability and prosperity requires completion of the single market and obligatory structural reforms for all 27 members. A proposed banking union would help to separate the commercial banks’ creditworthiness from that of their government.

But none of this is enough. Instead of imposing fines on countries that transgress rules and ignore recommendations, as the SGP was supposed to do, the European Commission, the European Council, and – this is essential – the European Parliament should decide directly on measures to be immediately implemented in the country concerned. Fiscal and certain other economic policies should be subject to activation of a eurozone “federation by exception.”

The idea that sharing a single currency also means accepting limitations on fiscal sovereignty is not new. A “federation by exception” merely draws the logical consequences from the ineffectiveness of the fines envisaged by the SGP, and is fully consistent with the concept of subsidiarity that has been applied since the SGP’s introduction: as long as national economic policy complies with the framework, there are no sanctions.

Perhaps the most important element of the “federation by exception” would be its strong democratic anchor. Its activation would be subject to a fully democratic decision-making process, with clear political accountability. More precisely, decisions to implement measures proposed by the Commission and already approved by the Council would require a majority vote by the European Parliament – that is, those representatives elected from the EU’s eurozone members.

In such exceptional circumstances, the parliament of the country concerned should have the opportunity to explain to the European Parliament why it could not implement the recommendations proposed, while the European Parliament could explain why the eurozone’s stability and prosperity are at stake. But the final word would belong to the European Parliament.

In the past, I have suggested establishing a eurozone finance ministry, which would be responsible for activating economic and fiscal federation when and where necessary, and for managing new crisis-management tools like the European Stability Mechanism. It would also be responsible for overseeing the banking union, and it would represent the eurozone in all international financial institutions and informal groupings.

But, most important, “federation by exception” would ultimately cease to be an exception. The finance minister would be a member of the EU’s future executive branch, together with the other ministers responsible for other federal departments.

From this perspective, the Commission presages a future European democratic government, as German Finance Minister Wolfgang Schäuble, who has proposed instituting an elected president, has suggested. The Council, meanwhile, appears to anticipate the European Parliament’s future upper house, with the lower house already elected by all EU citizens.

I am fully aware of the boldness of what I propose. But Europeans must learn the lessons of the recent past. We must clarify the nature of what must be done to secure governance that is both democratic and as effective as circumstances require.

Read more from our "Sticking with the Banking Union" Focal Point.

Photograph of Jean-Claude Trichet: (c) European Central Bank/Andreas Böttcher

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    1. Portrait of John Cioffi

      CommentedJohn Cioffi

      Mr. Trichet describes his modest proposal as “bold.” That is hardly adequate to convey how radical and troubling it really is. A brief consideration of the provenance of this appalling idea of government “by exception” will more fully illuminate its character and potential consequences. Whether or not Mr. Trichet is aware of it (and I hope he’s not), the notion of rule by exception is hardly new. In fact, it was central to the explicitly and unapologetically authoritarian political theory of Carl Schmitt. Notorious for his personal and intellectual support of German fascism, Schmitt famously asserted, “Sovereign is he who decides the exception” to positive law and normative constraint on the exercise of state power. Ultimately, rule by exception becomes unexceptional and the authoritarianism emerges from the ruins of democracy and the rule of law. Mr. Trichet’s “federation by exception” confers this authority on the EU—and even foresees its institutional entrenchment. This proposal is a not only an attack on the member states’ sovereignty (at least those within the Eurozone and albeit unequally), it is also profoundly anti-democratic. And what motivates this bureaucratic rolling back of the democratic nation state? It is all for the preservation of dysfunctional monetary union and the single market agenda. Mr. Trichet correctly criticizes EU-Eurozone institutions and governance as gravely dysfunctional, yet refuses to confront the monetary union’s fundamental structural flaws that made the Eurozone crisis both inevitable and intractable by eliminating both monetary and fiscal policy as effective adjustment mechanisms.
      Leaving aside economic criticisms of the Euro regime, Mr. Trichet apparently fails to grasp the deeply disturbing political ramifications of “federation by exception.” Mr. Trichet’s proposal exemplifies the rigid commitment of the EU political class to a neo-liberal finance-centered vision of the EU and its imposition on recalcitrant member states. I do not think that Mr. Trichet seeks to establish the EU as a nascent authoritarian regime, but at the same time his proposal is symptomatic of an elite more than willing to subordinate or circumvent democratic politics whenever it poses a threat, or even an obstacle, to the market liberalism and economic financialization the EU has come to embody. The fig leaf of democratic accountability provided by the European Parliament in the Trichet proposal would hardly suffice to legitimate the reallocation of sovereign power to Brussels, or redress the democratic deficit of an emergent technocratic Eurocracy. Nor will it render economic and social impoverishment accompanying austerian fiscal policies more palatable to the increasingly resentful and dispirited citizens of the Eurozone’s member states.
      Mr. Trichet’s “federation by exception” threatens a denigration of democratic rule that even Carl Schmitt wouldn’t like. This points to an even more disturbing implication of EU governance by exception. Schmitt envisioned the authoritarian state as embodying, and enforcing, the unity of the nation as a political community. Rather than pre-sage a pan-European democratic super-state, Mr. Trichet’s “federation by exception” likely would amplify the centrifugal forces threatening the EU by casting anti-EU sentiments and interests in national, and in the end anti-liberal nationalistic, terms. Given the current absence of a coherent and effective political left, right-wing nationalism is now the path of least resistance for political mobilization against the EU status quo. By valuing a common currency and market over democracy, he may have stumbled on a way to hasten the fracturing of the EU and resurrect, on the nationalist right, the specter of a pathological and atavistic form of politics that European integration was supposed to have eradicated.

        CommentedJohn Brian Shannon

        Hi John,

        While I agree with much of your post, I do differ briefly on a few points.

        I quote you; "Mr. Trichet correctly criticizes EU-Eurozone institutions and governance as gravely dysfunctional, yet refuses to confront the monetary union’s fundamental structural flaws that made the Eurozone crisis both inevitable and intractable by eliminating both monetary and fiscal policy as effective adjustment mechanisms."

        I do agree with you that in the broadest possible way monetary and fiscal policy are effective economic levers, the U.S.A. and other countries which do have "both monetary and fiscal policy as effective adjustment mechanisms" have suffered similar economic fates in recent years.

        If you blame the economic crisis in EU-Eurozone nations on dysfunctionality and "the monetary union’s fundamental structural flaws" why did other countries without those flaws suffer almost exactly the same fate?

        Point #2) What you see as "rolling back of democracy" I see as an enhancement to better democracy and the drive to leave behind obsolete feudalism.

        "This proposal is a not only an attack on the member states’ sovereignty (at least those within the Eurozone and albeit unequally), it is also profoundly anti-democratic."

        Unchecked, all government leads to plutocracy, especially democratic governments, which is why all democracies need strong checks and balances.

        An elected upper house, is merely another set of checks and balances within a democracy.

        For me, Mr. Jean-Claude Trichet's proposal is barely bold enough.

        I would have the end of feudalism and independence replaced by full-on interdependence between EZ states, the further checks and balances afforded by an elected upper house, more and better European integration and full SGP compliance. Fiscal and monetary levers must be applied by a strong central structure for the economic health of all, as well as EZ debt mutualization.

        Building anything is a messy business, building a democracy (all democracies are a work-in-progress, by definition) is very messy, but worthwhile. We must not confuse messy with ineptitude, indifference or evil intent, but rather, we must work towards a common good for the benefit of the largest number of citizens, which in the largest possible context is the basis of democratic thought.

        "It has been said that democracy is the worst form of government except all the others that have been tried." - Sir Winston Churchill

        Best regards, JBS

    2. CommentedStefan Schuetzinger

      I am convinced, that the EU and the Euro are the right strategy for all European countries. However, when I read the words from Mr. Trichet about how many jobs the EU created over the last decade, I'm getting doubts, that we have had the right leaders on board of this project. Under the leadership of Mr. Trichet, billions of cheap ECB money was pumped into the Spanish real-estate market and "created jobs". Today the world is in trouble, because we have difficulties to find a way out of this mess.

      The longterm solution for Europe and particularly for the countries in the periphery is, to become more competitive. In these days we can read a lot of wise articles about higher inflation and similar "artificial" solutions. But as long as the "product" is not competitive in terms of quality, price,.... there will be no real solution.

    3. CommentedKevin Lim

      The dream behind the European project was to make the common market so wonderful and integrated and mutually beneficial to the states involved that the voting public would slowly come around to the idea of greater political integration. That dream is dead. Now its the threat that if there is no further political integration, the euro project's inherent contradictions will cause it to collapse, and take down most of the euro economies with it. We've gone from enticing the euro voter with the honey of growth, to now putting a gun to his head and saying "Hand over your political sovereignty or your economy gets it"

      Further political integration was always going to be a hard sell in a region where no shared political identity has existed at least since Roman times. Its going to be an impossible sell now.

    4. CommentedBurak M

      As a recently qualified lawyer specialisng in international public and trade law, and aspiring macro investor, and a fan of Mr. Soros (and no not for the purely cliche reason of his shorting of the pound and hence 1 billion trade as genuis as it were) but rather his comprehension of the global financial system and the the causes which he invests heavily in, I once again applaud Mr Soros for his I'm sure simplied version of the current situation in Europe and the responsibility that falls onto predominantly Germany. As much as Northern states blame irresponsible debt piling while same time decreasing competitiveness on southern states for the current crisis, one need not go futher than the mirror if your the northern states on who to blame for providing such finances for the piling of this debt. Europe once and for all by force must either integrate beyond just being merely monetary union or go their own ways hence the devaluing of currencies ie Greece, Spain, Portugal to increase some sense of competition(after an initial knee jerk massacre in global financial markets no doubt). However better the massacre earlier than later one must assume. Clearly even in the currently urgent atmosphere of the crisis, Europe is suffering contradictions in a sense of continued and increased unification such as Merkels approving of Draghis recent bond buying pledges on one hand which was although delayed positive none the less vs domestic populism such as the Dutch PM pledging that Holland will abstain from anymore potential assistance to Greece no matter the Troikas eventual conclusion of Greece's austerity implementations which is evidently negative. If the grand dream which Europe so self righteously promoted of a first ever unified continent is to materialise than it must act up on it. As the current dilemma of a supposed unified continent could be construed as California seeking Federal government assistance and New York saying "nope, you won't be getting a cent out of our tax payers". When viewed in this sense, apart from a four letter word that starts wit an E and ends with a O, the unified continent dream seem to have stalled at the dream phase.

    5. Commentedsrinivasan gopalan

      With due deference to the scholarly former Chairman of the ECB, let me differ from him that the concept of common market and one-size-fits all strategy for the whole of the Europe appear passe now after the crisis in the southern part of Europe made a formidable Northern Europe Germany a bit tetchy. No country in the current context is willing to surrender its sovereignty to a supra-national authority-- be it European Council or European Parliament. In fact, the incomplete monetary union of Europe with Britain out of the euro a few years back itself presaged the weakness of the concept. In today's context when national economic policies have wider ramifications and across the boundaries through transmission or contagion effect of the crisis, it requires exceptional skill on the part of each nation to manage its house better than what it is otherwise doing in bringing about the crisis in the first place! Creation of a Eurozone finance ministry would render each country's finance ministry a round whole in a square peg and unnecessarily being hobbled by a higher bureaucracy. It is time scholars thought out of box to extricate the shambles the Europe is in today, instead of investing existing institutions with more executive powers that would be followed more in breach than in practice by nations when the chips are down. G.Srinivasan

    6. CommentedCher Calusa

      You've pointed out that monitoring and surveillance of competitive indicators wasn't carried out but you've also shown here that the relationship of states and institutions is interdependent. I think we're seeing what happens when motives and desires outside the common good overtake what is supposed to be a well functioning system. Since, we as humans are creating imitations of true systems, we don't consider all phases of activity, from top to very bottom, including all the human intentions, desires, emotional decision making, etc. A system denotes the interactions between all parts and a certain cooperation between all parts of the whole for the overall health of the entire functioning system. If we modeled our prototypes after true functioning systems we would find ourselves busy making the necessary improvements and constant changes instead of having to collapse periodically until the "machine" is repaired.

    7. CommentedZsolt Hermann

      1. What we learn today, especially in a painful way through the crisis, that we evolved into a global, interdependent human network not only in Europe but all over the world.
      2. In a global, integral system the connections are full, they cover the whole network, there are no partial connections, as some economic experts said it we are all sitting on the same boat.
      3. The European Union and moreover the Eurozone was a pioneering concept when this global integral network was not so apparent as it is today. But they made the mistake believing they can create a partial union only on financial, economical grounds, leaving everything else separate and fragmented.
      Based on the laws of integral, analog systems no partial connection relationship can work.
      This is the big question today for the Eurozone, which politicians still try to cloud as they do not dare to put the whole picture in front of the electorate as they only care about personal legacies and re-elections: either the Eurozone countries move into a full democratic but supra-national integration, or they will explode.
      And since the whole world is in the same system, this will show an example how the global economy, global human system will unfold in a immediate future.
      Thus Europeans have a huge responsibility on their shoulders, as option B, the explosion would bring very unpredictable and volatile events with it, since the conditions around us necessitate union, integration, if we go against it, we go against unbreakable natural laws.

    8. CommentedFrank O'Callaghan

      A somewhat confusing work. Does this refer to the Eurozone or to the EU? The European institutions are not a clear fit to solving the problem.