Feb 7, 2011

The Involuntary Union: European Economic Governance and the Union State

European cooperation is no longer a jolly vocational exercise, argues Cornelius Adebahr, but a hard and necessary grind: today’s economic policy shows how previous political shortcuts to integration require a laborious tidying up exercise. This doesn’t mark an end to the European dream but is rather the path to true Union.

The political reaction to the economic crisis shows two things: First, in moments of great crisis, the nation-state is the first port-of-call. With economic stability at stake and large quantities of taxpayers’ money needed to save the financial sector, no one asked for help from ‘Europe’. Instead, everyone – from bankers to carmakers to citizens – counted on their respective governments to intervene. Second, national governments all too soon find out that, on their own, they cannot do much. They have to turn to ‘Europe’ – to their collective government institutions at the EU-level, the European Commission and the European Central Bank (ECB) – to manage the crisis.

The initial prevalence of national governments in the resolution of the economic crisis was decried in some quarters as a ‘re-nationalisation’ of the EU. Yet, the second reflex actually points to a much stronger Europeanisation of economic policy in the mid- to long-run. Because what the ongoing Euro crisis shows is that the process of European integration has long ceased to be a matter of choice. Rather, it has become an urgent necessity. Joint action to save individual economies like Greece’s and Ireland’s is vital for the survival of the Eurozone as a whole and with it for European integration. National politicians know this, and it is in fact the only thing that makes them ponder transfers of sovereignty in the field of economic policy that were unthinkable only a few years ago.

From ‘integration of choice’ to ‘integration of necessity’

Until the fall of the Iron Curtain, European integration was above all a matter of choice. The member states joined forces voluntarily, without being compelled to do so by external forces. The main military threat – nuclear confrontation – was held in check by NATO, to which most of the states of the then-European Community belonged.

This ‘voluntary union’ was founded on economic opportunity, and was later supplemented by a desire to establish an external political identity and finally by the ambitious foundation of a European citizenry. The three pillars of the 1991 Maastricht Treaty reflect these three fields of integration:

1. Initially motivated by the need for reconstruction following the war, economic integration has made the creation of a Common European Market its rallying cry. This goal has seen the EU member states cooperate deeply on a whole range of policies from abolishing tariffs and harmonising production standards to promoting economic and social cohesion to, eventually, establishing a monetary union.

2. The gradual development of an external political identity was initially based on Europe’s desire to demarcate itself from the United States in the context of the Cold War. With the beginning of the ‘new world order’ after the Second World War cooperation on foreign policy became institutionalized because the Union now wanted to assume a greater international role.

3. The freedoms accorded to European citizens and the collaboration between police forces and judiciaries were initially constituted in positive terms, namely with the realization of the last of the Four Freedoms: free movement of people. The Schengen Agreement concluded in 1985 already laid the foundation for the disappearance of internal European borders. The Maastricht Treaty in turn introduced the concept of EU citizenship, which was automatically accorded to all EU citizens.

By the end of the ‘golden age’ of the 1990s, the general conditions governing European integration had dramatically changed. The EU members’ voluntary efforts to integrate themselves and to create common goods had left them collectively vulnerable to international pressures that arose from the end of the Cold War.

1. The pressure of international competition now drives the Union’s economic integration, not least because the creation of a free movement of goods as well as internal market liberalisation expose the economies of member states both internally and internationally. Thus, when the Lisbon Strategy was launched in 2000, the EU set itself the goal of becoming the most competitive knowledge-based economic area in the world – on the one hand to win the race declared with the United States and rising powers such as China, India, Brazil, and Russia, and on the other to overcome the Union’s economic weaknesses.

2. In the area associated with the second pillar, acute crisis management has become the major driving force of integration. For one thing, it is previous cooperation on foreign policy as well as the EU’s declared desire to be a global actor that have given rise to international expectations that the member states will act collectively. For another, the EU does of course face genuine (new) threats, as defined in the 2003 European Security Strategy, such as international terrorism, the spread of weapons of mass destruction, and failed states. This puts pressure on the EU to engage more intensively with regional conflicts in areas around its frontiers and beyond – from Central Africa to the Middle East to Central Asia.

3. Finally, it is the protection of citizens that dominates development in the former third pillar. The EU’s previous desire to create a common good at the European level (free movement) left the member states vulnerable to transnational criminality and migration. Now, the vast majority of the measures being taken in this area are directed at ensuring security – from increased collaboration between police forces and judiciaries as a means of countering terrorist threats to the provision of consular support for EU citizens in non-EU countries. Rather than an increase in freedom, it is the issue of increased common security that motivates further integration, even at the cost of reduced freedoms for EU citizens.

Today, integration can no longer be seen as a matter of choice, but of necessity. Of course, member states remain free to accept or reject steps toward greater political integration, but they do so at their own peril. Increased integration is now in the vital interest of all (and not merely a preference of some) member states. In this respect, the next steps toward a more strongly integrated Union will not be based on federalist wishful thinking but on member states’ interest in their own survival. The resulting Union state will nonetheless clearly differ from the kind of federal state that exists at national levels. Despite all the gloomy statements about the EU’s imminent end, the developments throughout the economic and now Euro crisis indicate the potential for precisely this kind of increased consolidation.

‘Economic governance’: From wish-list to to-do

Although the EU has been a global economic power for more than half a century, it does not have a competence to set economic and employment policies. This responsibility has been retained by the member states, which merely coordinate their policies within a commonly agreed framework. The Union does have exclusive responsibility for other areas affected by the crisis, such as trade and competition policy, and (for those member states in the Eurozone) currency policy. With regard to the internal market it shares responsibility with the member states.

The drawbacks of this incoherent division of authority were clearly illustrated by the EU’s initial reaction to the economic crisis. Badly coordinated stimulus packages and strictly national rescue plans for stricken industries painted a sufficiently confusing picture of the Union. This did not come too much as a surprise, however, as there were neither the mechanisms in place obliging more economic cooperation, nor the money available at the EU level for decisive joint action (e.g. through a European-wide stimulus financed by the Commission). Moreover, the member states simply did not (yet) feel the vital need to coordinate their policies better.

Just like the crisis originated from the financial sector, it needed a financial crisis in Europe for member states to agree to more binding rules on economic policy. During the first culmination of the debt crisis in May 2010, member states agreed on immediate rescue measures (for Greece and for the Eurozone as a whole) as well as to set up a working group to develop further reaching proposals for new governance mechanisms in the Eurozone. The options considered by the so-called ‘Van Rompuy task force’ under the guidance of the President of the European Council ranged from a ‘reinforced status quo’ (an eventual observation of the rules of the Stability and Growth Pact) to much more advanced rules requiring a Treaty change (like the temporary suspension of voting rights of a member state in violation of Eurozone rules).

Ironically Germany, one of the most vocal opponents to any form of ‘economic governance’ until then, was now the one making the most far-reaching proposals. Its motivation was clear: to receive assurances of stricter and better-coordinated economic policies in return for the budgetary help provided. As long as the ‘no bailout’ clause of the Treaty could be taken literally (i.e. no financial transfers of any kind between Eurozone members), governments refrained from integrating their economic policies. Now that national taxpayers’ money has been put to guarantee or directly support other member states, those on the giving end want to make sure to curb the irresponsible policies that led to the near-collapse.

In short: The price of the rescue is stronger control over the economic and budgetary policies of the country applying for help. Importantly, this control is exercised by member states collectively (together with the ECB and the International Monetary Fund) – it is not communitarised. This points to an important change in the constitutive balance between member states and the Union. After all, the development of the EU does not take place on a continuum from intergovernmental cooperation to full and unreserved integration which can be set by the member states. Such thinking is a thing of the past, when integration took place by choice and not by necessity.

The European Union State in the Making

Under the crisis, the idea of a Union State emerges as the third way of integrating Europe. It is not the federal state that some fear and others seek. Rather, it is the extension of the ‘Union method’ (stipulated in the wake of the signing of the Lisbon Treaty) to a broader principle complementing the process of European integration. This would elevate the member states, via the European Council, to an integration driver in crisis-prone policy fields from outside the community competence such as public finances and energy security. Once government leaders have agreed on a course of action, they can choose the intergovernmental or integrationist route, involving the Commission – and, consequently, the Council and the Parliament – as they deem necessary. This way, a stronger involvement of member states does not end up as ‘re-nationalisation’ but instead creates the necessary buy-in from governments for more integration.

This next step in European integration does not come without Treaty change, though. Rescuing near-insolvent member states through a mixture of Community and nationally pooled funds and including severe austerity plans negotiated with the government in question, has already tested the legal and political limits of all actors involved: Of members states (think of the Greek or Irish governments, or the German Constitutional Court) and the ECB (think of the unorthodox monetary policies pursued in the crisis such as buying government bonds) as much as of the Union itself (think of how the Lisbon Treaty’s provision on emergency assistance needed to be stretched to fit the case of potential sovereign default). That’s why, regardless of the Lisbon ratification drama or the current turmoil in some of the member states, European politicians do not come around adjusting the EU’s legal basis for this new internal balance.

The next Treaty will almost certainly not be formally ‘establishing a European Union State’ given the sensitivities among governments and citizens alike about state-like qualities of the EU. Yet at current trends, it is likely to implicitly have this effect. Either way, member states have one crucial task – beyond accepting their own new role: They urgently have to explain to their citizens why ‘more Europe’ does not represent the end of the nation state but that further integration of this kind is instead vital to their very survival.

Dr. Cornelius Adebahr is a political scientist and entrepreneur based in Berlin, working on European and global affairs.