Thursday, November 20, 2014

Federalism or Bust for Europe?

BRUSSELS – August was quieter than feared on the European bond markets. So, while resting on Europe’s beaches and mountains, policymakers could take a step back from the sound and fury of the last few months and think about the future. Is the eurozone sleepwalking into becoming a United States of Europe? Is it exploring uncharted territory? Or are its constituent nation-states drifting apart?

To answer these questions, the best starting point is the US. The model of a federal union that emerged from its history consists of a single currency managed by a federal agency; closely integrated markets for products, labor, and capital; a federal budget that partly, but automatically, offsets economic disturbances affecting individual states; a federal government that assumes responsibility for tackling other major risks, not least those emanating from the banking sector; and states that provide regional public goods but play virtually no role in macroeconomic stabilization.

This model served as a template for the European Union’s architects, notably for the creation of a unified market and a common currency. But, in several respects, Europe has diverged significantly from the American model.

First and foremost, Europe has not established a federal budget. Back in the 1970’s, there was still hope that common spending would eventually amount to 5-10% of EU GDP, but this dream never materialized. The EU’s budget today is no larger than it was 30 years ago: a meager 1% of GDP.

Unlike in the US, where federal public spending grew as a consequence of the creation of new expenditure programs throughout the twentieth century, public spending was already high at the national level when Europe began to integrate. Significant federal spending programs could have emerged only from the transfer of existing national programs to the European level. Not surprisingly, such transfers were strongly resisted.

More recently, the eurozone has begun to create a system of mutual insurance among member states. Since 2010, assistance has been extended to Greece, Ireland, Portugal, and now Cyprus. Spain may soon follow suit, with a particular focus on support for its banking sector. So a specific pattern is emerging: states help each other.

But solidarity is not free. It is conditional on beneficiaries’ having signed on to a fiscal treaty that commits them to budgetary responsibility and makes them liable to quasi-automatic sanctions. Moreover, assistance requires that beneficiaries implement negotiated measures and accept close external monitoring of policy developments. In other words, the price of solidarity is limited sovereignty.

Unlike in America, however, EU member states’ governments – and, increasingly, their parliaments – are calling the shots. Because assistance does not rest on federal resources, but rather on the pooling of national resources, creditor states inevitably demand more power in exchange for providing more support to their neighbors. As a result, currency unification has not brought Europe closer to the US; on the contrary, it has pushed Europe further away.

In the US, the federal government acts as an overall shield against common risks and provides automatic, unconditional support to states in trouble; but, in the end, it does not come to the rescue of a defaulting state, nor does it take over its government. In Europe, by contrast, there is almost no aggregate shield and almost no automatic support for member states in trouble – better-off states simply extend a conditional helping hand to prevent default. So, while US states compete with the center for power, in Europe they increasingly compete with each other.

This inter-state rivalry – at times bordering on acrimony – is what makes the politics of European integration difficult. All federations have experienced periods of tense relations between the federal and state governments. But to accept that your neighbors look over your shoulder and tell you what to do is one degree more dreadful than to accept oversight from the center.

Indeed, a major problem with the current state of affairs is the weakness of EU institutions that are in charge of advancing the common interest and that are accountable to Europeans as a whole. Common European direction cannot emerge from the calculus of national interests by governments and parliaments that are accountable only to national voters.

The big question to which nobody has a clear answer is whether Europe is in the process of inventing a model of its own, or has only taken a detour from the inevitable choice between disaggregation and convergence on the standard federal template. One solution could be to provide national representatives a venue to convene for European-wide debates. Another would be to transfer the insurance role to a federal institution accountable to the European parliament.

Whatever route it takes, Europe in the coming years will have to address the weak representation of the common interest – or else admit that no such common interest can justify remaining on the path of integration.

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    1. CommentedAndré Rebentisch

      Your premise is that the United States are a model for European Unification. That premise is flawed. The difficulties of US federalism to win support for universal health care demonstrate the limits of their paradigm for regional governance. US federalism never reached the balance and public support needed and looks increasingly unstable and blocked by constitutional legacy and partisan non-cooperation. It is sufficient for the EU to focus on fierce market organization and principles, no need for excessive spending on the EU level.

    2. CommentedPaul A. Myers

      The "weak representation of the common interest" seems to be the phrase that sums up the European challenge. Growth seems to be hugely in the common interest, but parochial interests at the national level seem to hobble growth at every turn. The attitude seems to be that someone else should take responsibility for growth such as an alphabetized Euro agency.

      Let's see where the common banking regulatory policy goes in the coming weeks. That is one big fat canary in the coal mine!

      What will a federal Europe look like? That's when the minister of culture will be the most powerful minister in Paris! Everything else will have decamped to Brussels.

    3. CommentedPieter Keesen

      I find it amusing how an institute named after a Flemish painter advocates an American Federal Model as the end game of European integration. It lacks understanding of European history to believe for the forces of globalization to transform the old continent after a split image of the USA. Besides, the introduction of federal legislation was always piecemeal. While the US federal government only managed to take control over macro and financial policy by means of the US civil war.
      So it is foolish to think for a meeting or debate to introduce a pan-European legislative body. There will be no constitutional congress in Europe.
      Instead Europe is to look at its own identity, not from the enlightened ideals of statehood fashionable in the late 18th and 19th century. The European notion of State is much older, much more complex and paradoxal. European politics is first and foremost defined by privileges. Sovereignty is a privileged earned. Towns, courts, states, all earned the right to exercise law, to be free from the laws of others. This process has been continuous from the high Middle Ages onwards. Slowly Europe had emerged out of a nearly Hobbesian state of feudal society, into a complex modern world tight together by a balance between the rights and privileges of the individual and the believes and the interest of the community and its neighboring localities.
      Today we have an abstract European community that resides in Brussels. Yet European communities have existed before, transcending language and cultures, economic and political interest. Christian Europe united by a common gospel and Roman law exists for nearly one and a half millennia. The Latin speaking world survived the continents darkest hours. The renaissance was a cultural and intellectual movement that inspired the entire continent. Humanism facilitated and articulated the first modern notions of statehood, formalized justice, codified the right to govern once own community; the freedom of interference by foreigners or higher princes. While ironically, the aristocracy was the foremost European community if there ever was one.
      The US model is relatively new. Its evolution runs parallel to the advent of modern ideas since the French revolution onward: the rediscovery of democratic ideals, the introduction of purely civic law, the understanding of the state as an absolute abstract authority, the embodiment of the people in flags and songs, the emergence of the national identity, centralized taxation and industrial and economic development.
      By stressing the antiquity of the European of statecraft, I want to exemplify how the state is defined and understood differently all the time. It is wisdom to understand there can be no consensus on what constitutes the ideal government.
      Europe. Europeans govern themselves, and call their governments many different names. Most Europeans also have very bad experiences with a government that pretend to be a fair arbiter between the various localities that harbors the various communities that represent the European spirit. The papacy failed in its attempt to bring the universal peace. Charlemagne was but an anomaly. Charles the V wisely split the Habsburg Empire into two spheres of influence. His contemporaries considered napoleon the anti-Christ. The totalitarian states devised by communist and fascist leaders are the one single reason Europe started European integration in the first place.
      If you look for a European community, do not in Brussels. There is no shared interest to be found. Yet this does not mean there are no communities in Europa that share a continental interest. For example, the cities of Europe share a common ideal of what a European city constitutes, the European farmer has a shared interest, labor unions cooperate, the world of finance constantly share information, industrialists negotiate resource allocation, environmentalists are not national in scope, religious communities worship the same deity. These communities need a platform to facilitate cooperation, but as citizens, these people that comprise these communities, do not generally want a European government.

        CommentedZsolt Hermann

        I agree with you on multiple counts.
        Europe cannot be compared to the USA since there the different nationalities built a new country working out their cooperation along the way.
        In Europe any cooperation, federalism should be built above the century long differences, hatred, prejudice which simply did not exist in the USA when it became a single federal state.
        I also agree with you that whatever cooperation Europe decides on cannot happen in a top down manner, as all those attempts failed in the past regardless of their ideology.
        The only way a deeper integration,, a true cooperation can be built is by positive motivation, by showing the people that it is in their best interest to combine their forces, balance their positive and negative attributes in a way that together they become much stronger, and can prosper better than staying alone.
        If such positive motivation can be found and proven to the people nobody would oppose it and people would happily accept a supra national governance structure, since their everyday life would not be affected much anyway. Even today most of the important economical, financial, cultural decisions, various influences reach us from outside of our own countries, both physically and virtually we are totally intermingled, nationalistic issues come to the fore mainly due to political manipulations or during sporting events.
        The bottom line is that today we evolved into such a global, integral, interdependent human network that local, fragmented and self calculating governance does not make sense any longer and it only contributes to the deepening of the global crisis instead of solving it.
        We have multiple scientific studies, publications around us proving the nature of our global, interconnected system, and that in such systems only full integration and mutual responsibility and consideration can achieve long lasting results and sustainable future.
        Thus the next phase of human development starts with a global education program creating the basis for the necessary positive motivation helping us to build the single unified human system that is adapted to the global world of the 21st century.