Friday, November 21, 2014

The Risk of European Centralization

FRANKFURT – For many European leaders, the eurozone crisis demonstrates the need for “more Europe,” the final aim being to create a full-fledged political union. Given the continent’s history of war and ideological division, and today’s challenges posed by globalization, a peaceful, prosperous, and united Europe that wields influence abroad is surely a desirable goal. But major disagreements about how to achieve that goal remain.

Historically, monetary union was regarded as the route to political union. In the 1950’s, the French economist Jacques Rueff, a close adviser to Charles de Gaulle, argued that “L’Europe se fera par la monnaie, ou ne se fera pas” (Europe will be made through the currency, or it will not be made). Germany’s President Richard von Weizsäcker echoed this view almost a half-century later, declaring that only via a single currency would Europeans achieve a common foreign policy. More recently, German Chancellor Angela Merkel asserted that “if the euro fails, Europe will fail.”

But the crisis confronting “Europe” is not so much about political union as it is about European Economic and Monetary Union. If anything, efforts to hold EMU together may have taken us further from the goal of a common foreign policy by re-igniting within member states (regardless of whether they give or receive financial aid) nationalist resentments that we hoped had died long ago.

Politicians launched monetary union in 1999, despite warnings that the constituent economies were too diverse. It wasn’t long before several states violated the Stability and Growth Pact. Later, the eurozone’s “no bail-out” principle was abandoned. The response to these failings, however, was a demand for greater economic integration, including such intermediate steps as the creation of a “European finance minister” or an EU commissioner with sweeping powers to facilitate closer integration.

Such ideas, of course, ignored the central issues of national sovereignty and democracy, and specifically the privilege of nationally elected governments and parliaments to determine their own taxes and public spending. The fact that sovereign member states did not deliver on their European commitments is hardly a convincing argument for giving up sovereignty now.

In short, all of the measures that would implicitly support political union have turned out to be inconsistent and dangerous. They have involved huge financial risks for eurozone members. They have fueled tensions among member states. Perhaps most important, they have undermined the basis on which political union rests – namely, persuading European Union citizens to identify with the European idea.

Public support for “Europe” depends to a large degree on its economic success. Indeed, it is Europe’s economic achievements that give it a political voice in the world. But, as the current crisis indicates, the best-performing EU economies are those with (relatively) flexible labor markets, reasonable tax rates, and open access to professions and business.

Moreover, the impetus for economic reform has come not from the EU, but from national governments, one of the most successful examples being “Agenda 2010,” launched a decade ago by then-German Chancellor Gerhard Schröder. Numerous academic studies, following the work of the American economic historian Douglass North, support the notion that it is competition among states and regions that lays the groundwork for technological progress and economic growth. The total failure of the Lisbon Agenda, launched in March 2000 to make the EU “the most competitive and dynamic knowledge-base economy in the world” demonstrated the weakness of a centralized approach.

Arguably, in earlier centuries, it was competition within Europe that generated unparalleled dynamism and prosperity across much of the continent. To be sure, this was also a time of wars. However, this does not mean that centralization is the best – much less the only – way to guarantee peace.

But, once again, EU leaders responded by concluding the opposite: the Lisbon Agenda’s failure was interpreted as justifying still more harmonization and centralization of national policies. True to form, in his “State of the Union” address to the European Parliament in September 2012, European Commission President José Manuel Barroso called for a more powerful Commission.

This approach – harmonization, coordination, and centralized decision-making – continues to be regarded as a panacea for Europe’s problems. It is the sort of pretense of knowledge that the economist Friedrich von Hayek denounced as a recipe for constraining freedom and ensuring economic mediocrity. Indeed, the European project should start from the premise that appropriate institutions, property rights, and competition, together with a growth-friendly tax system and solid fiscal policies, are the basis of economic success.

The dangers of a centralizing approach can also be seen in the relationship between the 17 current eurozone members and the 11 non-eurozone EU states. As the former press on with greater integration, the adverse economic consequences of doing so are likely to deter the latter from EMU participation (which may be another sign that institutional competition cannot be suppressed forever).

There are plenty of areas in which common action at the EU level is both appropriate and efficient. Environmental policy is clearly one. But centralization of economic decision-making, as an end in itself, cannot underpin a prosperous and powerful Europe.

Jean Monnet, one of the EU’s founding fathers, once said that, given the chance to start the European integration process again, he would have begun with culture – a dimension in which we neither need nor want centralization. Europe’s cultural richness consists precisely in its diversity, and the basis for its finest achievements has been competition between people, institutions, and places. Its current economic malaise reflects European leaders’ prolonged efforts to deny the obvious.

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    1. CommentedJosé Malpica

      The weakness of the author's argument of "regional competitiveness" is shown when taken to its logical consequences: we should break e.g. Germany into smaller regions to compete against each other, giving them full "sovereignty" to set their taxes and their public spending. Following the same logic, we should further break up these regions into city-states and give them sovereignty and so on, until each citizen competes against each other citizen in a "sovereign" way. Competition is a necessary element of well functioning markets characterized by profit-seeking enterprises and individuals, not when applied to regulatory frameworks (or, at least, the author does not prove this). Competition does lead to wars though, as History has repeatedly shown.
      That the "impetus of reform" in Europe has more effectively come from national governments results from this fragmented sovereignty and the great latitude governments have to avoid EU-directed reform when it damages their short-term, nationally-focused political interest (e.g. Germany and France breaking the Stability and Growth pact in 2003).
      Providing the EU with legitimacy through directly elected officials and with greater power to steer reform and strengthen the common regulatory framework (including taxes) would indeed foster economic growth by removing some of the many remaining administrative barriers that still exist in Europe. It would also increase competitiveness by decreasing some of the overhead and the corruption associated with the many thousands of profligate national/regional politicians and bureaucrats making a mess of regulations and taxes.
      National sovereignty is a relic of our tribal past. Together with the unimpaired goodness of subsidiarity, it is treated by some as a revealed truth. It is time we Europeans challenge it to leave behind the narrow-minded nationalism that has plagued our continent.

    2. CommentedJim Neuhaus

      At first I thought there were good points in this article until I reached the end. After all it mentions tricky issues such as the balance between sovereignty at different levels.
      There you find references to von Hayek and the apparently limitative list of factors driving economic success : property rights, competition, together with a growth-friendly tax system and solid fiscal policies.
      There is not a hint of justification or how these might apply in a troubled but shared economic environment.
      I think it would even be hard to explain germany's success with this limitative list.
      This is just a pure example of neoliberal idelogy masquerading as discussion.
      The problem is that we have already seen what skewed competition does in a shared economy with a common currency : Germany adjusted its costs unilaterally in 2001 just as it exported vast amounts of liquidity in booming southern European nations, fueling a huge cost differential and balance of payment imbalance.
      We know how it ended.
      This is what uncoordinated competition gives in a common currency area, we've seen it at work and this is not a solution, it is a problem to be solved.

    3. CommentedAndré Rebentisch

      Good article. The failure of the Lisbon agenda was rooted in its process and high level deduction of unmeasurable objectives. A lack of Ordnungspolitik is the cause of the current shortcomings. First comes the order, second the policy within the framework.

    4. CommentedFriedrich Böllhoff

      Great article!
      I think the creation of the Euro was already a step too far in the direction of centralization. Further moves would increase the distance of understanding between elites and the people even more.

    5. Portrait of Pingfan Hong

      CommentedPingfan Hong

      "Competition", or "cooperation", which one is the most foundemental defining force for the international relations among countries, or even for the relations among individuals? This philosophic issue is far more general than for discussion about the fate of the euro project; it is about the fate of the humankind.

    6. CommentedPaul A. Myers

      Portugal shows how courts protecting "contracts" and powerful public and private unions can deflect "adjustment" away from their economic interests, leaving the process of adjustment to fall on the private sector, and in particular the most dynamic sectors of the private sector. But it is only the dynamic sectors of an economy that can re-start "growth." So growth remains stillborn as each troubled economy sleepwalks through austerity with the public increasingly disillusioned as the realization sinks in that there is no payoff for the sustained sacrifice; the doom loop becomes an iron constraint.

      Across Europe, national governments sustain their political power by clientelist politics with powerful unions, citizens groups, monopolies and oligopolies, huge banks, and large state entitlement systems. The whole point of these arrangements is to avoid competition. The only way to restore competitiveness to such an entity is through devaluation, but that was the tool given up.

      Further bureaucracy and policy making at the EU level will probably perversely strengthen the protectionist politics of the national governments.

      To work at the EU level, real power has to be transferred from national governments to Brussels, not another layer of ineffectual power layered in at the EU level.

      For the euro zone to work, some process that can effectively substitute for devaluation must be constructed. Wading through years of austerity does not seem to be the way forward.

        CommentedJose araujo

        Paul, Portugal doesn't show nothing, quite the contrary. We have improved in transparency, corruption and tax evasion. We have privatized most of our industries, yet before we were growing and now we are in a recession.

        This adjustments are a myth, Germany is much less flexible then Portugal, with higher union power, yet they grow we don't.

        But I agree that free markets are important, I just don't understand how the biggest attempt one free markets, namely the existence of fixed exchange rates and the euro gets a pass from most of the libertarian thinkers.

    7. Commentedhari naidu

      So Otmar Issing, ex-Chief Economist of ECB, is finally admitting his Libertarian ideology. Weidmann of Bundesbank is also a member of the same school...all students of their former Bundesbank boss, who ressigned from ECB Council and moved to Switzerland.

      And, since Issing is indulging in EMU debate, let it be made clear that then Bundesbank didn't support EMU and introduction of Euro under Maastricht Treaty. They're dragged to the table by Chancellor Khol (CDU) and politically forced to accept the EMU.....

      Under no circumstances, these Libertarians will have a chance to derail the EU Project whatever the current deficit of the EZ.

    8. CommentedJose araujo

      Europe is an impossibility, Northern chauvinism and the deep believe they hold that they are a part of a superior race led us to several wars and has risen to the surface once again on this crisis.

      We don't have the same culture and we don't share the same believes. Some hold deeply to the notion of freedom, democracy and the principles of the french revolutions. Others wan't order at all cost and deeply believe in gene superiority and the high moral grounds of their own beliefs.

      Europe is a continent, not a country. We can be friends but we don't have to be family, and we don't wan't to be family. Stop this terrible experiment and move towards the separation of Europe.

      You don't have to resort to a minor thinker like Hayek or quote Atlas Shrugged to know that the Eurocrat Dictatorship they wan't to impose on Europe is not the way to go.

    9. CommentedAdam Harper

      We could go back to Ancient Greece and beyond and still find the rewards competitive rivalries have on a society. The trick is to maintain the competitiveness while eliminating the wars.

      Eurpope didn't need, and has not truly benefitted from such a large fixed currency regime, but a collection of smaller such regimes within the EU would be more ideal. Economies based on similar resources, and with similar cultures could coexist in a monetary union, so long as factors of production can (and DO) move freely across borders.

      Great article.

    10. CommentedZsolt Hermann

      Although the ideas about an integral, mutually cooperating, influential Europe are good, it seems we try to get to it from the wrong direction.
      When we build a house we do not start by putting the roof on, and even building the walls is only at a later stage.
      First the house needs a foundation.
      And the foundation for every human structure, human society is the human being itself.
      We cannot force a monetary, economic or fiscal union, not even a political union on people if they are not prepared for it, if they are not choosing such structure, willingly, understanding it is in their best interest.
      Only through positive motivation, by people who clearly understand what and why they are doing can a structure be sustainable.
      This is why the whole European Project should have started with a clear purpose of achieving an fully integral union, with clear and honest reasons why it was beneficial for all.
      This chance was missed, and to be fair at that time we did not know much about global, interdependent world, the whole idea was financial, economical, when the world was still "loose" with seemingly "unlimited potential".
      But even now we still have a chance to turn the events around, to prevent the inevitable breakup and prevent unpredictable nationalistic, protectionist states many extremist political forces, who are gaining strength and support aspire for.
      We still have a possibility to introduce an objective, transparent eduction system for all ages, cultures and social layers, helping people understand that in today's global, integral human network only full integration, mutually responsible and complementing decision making and action can provide a safe and sustainable future for all.
      Today's public is open, have all the information at their fingertips, and they are fully connected virtually all over the world. Such a positive information sharing, educational program through all the mass media channels, instead of the present dumbing and consumer oriented brainwashing could achieve positive results within weeks.
      And then a political process would have no problems achieving the necessary results, provided it is lead by hones, transparent politicians who are truly serving their voting public, and not serving their own self interest and personal legacies.