Little Guide to the European Union
On the specifics of the European polity
Table of Contents
- Politics of the European integration process
- “EU arrangements for forming and making rules”
- European integration and the role of the nation state
- The brand of EU federalism
- The distribution of competences in the EU
- “The euro and Europe’s economic governance”
- Accountability and independence of the ECB
- “European demos and sovereignty mismatch”
The Little Guide to the European Union is my second book on European politics. It follows the publication of A Handbook on the European Union, as well as a series of articles and seminars from mid-November 2015 to early April 2016.1 They can all be summarised as attempts at gaining a better understanding of the specifics of the European integration process and the legal-institutional arrangements it has delivered.
There are, as I see it, two reasons for studying the EU:
- General. European citizens qua citizens have a duty to learn about a political organisation that affects their everyday life. An informed public is better prepared to hold the authorities accountable.
- Particular. European studies are my area of specialisation. In carrying out such independent research I improve my expertise and refine my views.
The present book is written with an academic mindset, follows a blogging style, and partakes of a hacking spirit. The first consists in the method of analysis of the themes covered herein. It is descriptive to the extent possible, rather than prescriptive. The second is made manifest in the overall approach to the book’s writing. The Little Guide is meant for a wide audience. Technical terms and professorial palaver are either explained in their context or omitted altogether. As for the third, it permeates the coding techniques used to present the book on this website. It also informs the choice not to charge any fees for its delivery.
The Little Guide to the European Union is not the definitive opus on the subject. It rather is an entry-level publication for those who want to learn more about the EU or deepen their understanding of it. The chapters are ordered in such a sequence as to provide for a gradual progression from the basic to the more advanced issues. The content covered does not address every single aspect of the EU architecture, though it does capture the main topics and most important items in European politics.2
My hope is that you will find this book useful and informative.
Politics of the European integration process
European integration is the process by which nation states in Europe proceed to harmonise their legal order through decisions adopted at the supranational level.
That is a sentence conveying a lot of information. We will spend the rest of this chapter analysing its parts:
- “is a process”
- “nation states in Europe”
- “harmonise their legal order”
- “decisions adopted at the supranational level”
The European Union (EU) has not been created outright. What is now in place is the latest version of an ever-evolving set of legal-institutional arrangements. The first European Communities were founded in the 1950s. Their scope was limited to only a handful of policies, while their membership included six countries, namely, France, West Germany, Italy, Belgium, the Netherlands, and Luxembourg.3
The first instance of integration was the European Coal and Steel Community (ECSC).4 This was a regional cartel, established for the purpose of boosting trade between its member states in the two major industries of the time. The ECSC also provided for a common management of those industries, thus preventing any one government from using them for its own ends, as they had done during the two World Wars.
The predecessor of the EU is an organisation established in the late 1950s: the European Economic Community (EEC).5 From its very name we can infer a change in scope. The EEC was not supposed to focus on specific items of trade and/or industries thereof. Its purpose was to create a common market among its member states. To that end, the Community-level politics were focused on dismantling barriers to trade between the states, while establishing a common approach to customs and tariffs towards third countries.
With the establishment of the European Economic Community, the integration process shifts from a cartel to a regional trading block.
It took decades for the EEC to deliver on its objective. Its powers were limited. Member states had veto rights. Each could jeopardise any attempt at a common position. Eventually progress was achieved, oftentimes courtesy of important rulings from the European Court of Justice. National trade impediments were being abolished and the EEC seemed to be gaining momentum.
It can be argued that the EEC was a success in terms of what it sought out to achieve.6 The single market was instituted, while the way was paved for proceeding to the next phase of economic and political cooperation: monetary union.
The conception of Europe’s Economic and Monetary Union coincided with the transition to an ever more ambitious project: the European Union. The EEC gave its place to the EU.7 Here too we witness a change in name that signifies a broadening of the organisation’s scope, even if tacitly so. The EU is not just about trade. It is an all-encompassing polity, a peculiar kind of constitutional order. Its ultimate telos, if only an implicit one, is to politically unify the European nations.
What is important to draw from this brief historical overview is the triptych of (i) consensus politics at the European level, (ii) the gradualism of the integration process, and (iii) the overall incompleteness of the polity. In particular:
- Consensus. Integration proceeds in a stepwise fashion. No radical changes are made. Every instance of progress tends to be the end-product of broad agreements on several fronts, both among European institutions and national governments.
- Gradualism. Major steps forward come in the form of Treaty law. The European Treaties are the Union’s primary legal corpus, its “constitution”. When they are amended, the European polity sets on a course of reform. The European Treaties are flexible enough to allow sufficient space for policy-makers to promote a common EU agenda through legislation. Seen from the perspective of a national government, EU secondary law is as semi-permanent as a constitution, since it can only be repealed or otherwise amended following widespread consensus at the European level.
- Incompleteness. The EU, the latest iteration of the integration process, remains “in the making”. There are several areas of policy that still need to be harmonised, such as taxation or the pertinent issues of migration and asylum.
The European Union is not a state in its own right. It derives its authority from its constitutive nation states. As is stipulated in Article 1 of the Treaty on European Union:8
[the European nation states] establish among themselves a EUROPEAN UNION, hereinafter called “the Union”, on which the Member States confer competences to attain objectives they have in common.
The EU is an extension of its Member States’ collective will. National governments hold the view that through cooperation at the European level they can best promote their national interests and, perhaps inadvertently, contribute to the overall good of the Union. They see integration as a win-win situation.
The Union features several platforms for deliberations between the Member States. In fact, intergovernmental politics are central to the European project. There are two EU institutions in particular where national governments form their collective position on the specifics of European integration:
- the European Council, which consists of the heads of state or government of the Member States;
- the Council of the European Union, which comprises ministers from national governments and meets in various formations depending on the area of policy.
The role of the Member States is such that virtually no European policy can be forwarded without their involvement.
Europe as a whole is a largely heterogeneous continent. There are many nations, cultures, languages. In terms of political organisation, these manifest as divergent constitutional traditions and historical path dependencies. What applies to one country may not hold true for its neighbours.
It is against this backdrop that European integration unfolds as a systematic effort to bring about a convergence of legal-institutional traditions and norms. For Europe to work, its laws need to have a system-wide consistency. The peculiarities of its constitutive nations are respected but must be balanced against the need to harmonise legislation.
Heterogeneity of this sort can offer an explanation as to why European politics are characterised by the aforementioned triptych:
- Consensus is needed because no one nation’s constitutional identity can be considered superior to another’s.
- Gradualism is necessary to allow sufficient time for convergence to be achieved, also at the level of formulating a common view on the best way forward.
- The incompleteness of the EU reflects the very fact that at this stage in the process the nation state understood as sovereign remains relevant and, hence, authority between it and the EU is to be distributed in accordance with a series of agreements.
Decisions at the supranational level
The “supranational” or else the “European” is the level of decision-making above the nation state. In the context of the EU, it is often referred to as “Brussels”. What we describe with this is a couple of phenomena:
- the actions of the EU institutions, typically in the form of the ordinary legislative procedure (standard law-making process) or preparatory work towards that end;
- the congregation of national governments as European Council or Council of the EU and the policies adopted therefrom.
Five out of seven EU institutions have no direct connection to the national level. They are purely supranational entities that represent the interests of the Union at-large. Those namely are:
- European Commission, with one Commissioner (the political leadership) per Member State;9
- European Parliament, though its deputies—the Members of the European Parliament or MEPs—are elected in accordance with national lists, with whatever implications that may have on the representation of interests and their impact on policy (e.g. Germans can only vote for candidates running in Germany, French for those running in France, etc.);10
- European Central Bank, though its Governing Council consists of the governors of the national central banks plus the Executive Council (the latter is Member-State-independent);11
- Court of Justice of the EU, with the General Court consisting of one judge per Member State;12
- Court of Auditors, with one member per EU country.13
The remaining two EU institutions—European Council and Council of the EU—can be considered formalised intergovernmental formations. It is where the interests of the national governments are fully represented.
There are cases where national governments meet in ad hoc or quasi-formal arrangements, such as with the case of the Eurogroup which is made up of the Finance Ministers of the Member States whose currency is the euro. The Eurogroup is mentioned in a protocol to the European Treaties, but is not a proper formation of either the European Council or the Council of the EU. Its decisions are, strictly speaking, not legally binding. However since the very same ministers meet together with a few more of their colleagues at the Ecofin, the formal Council gathering for economic issues, the Eurogroup’s conclusions are eventually incorporated in the official EU agenda.
Future prospects of European integration
The key phrase that denotes the reform of the EU is “Treaty change”. With it the scope of the EU can be broadened. Given how recent crises have revealed certain shortcomings in the existing EU architecture, there are at least three areas of policy where future integration may focus:
- EU-level fiscal policy, in the form of the capacity of the European level to raise taxes, issue debt instruments (“eurobonds”), and perhaps exercise some form of investment policy to balance out the effects of fiscal discipline enforced through Europe’s system of economic governance;
- migration and asylum, which will consolidate whatever legislation will be introduced over the coming months, in particular as concerns border management and the distribution of asylum seekers, as well as allow the supranational level more power to enforce its decisions;
- security and foreign policy, perhaps in the form of a proto-European army or else a “defence capacity”, a greatly empowered police and intelligence framework of cooperation between EU nations, and an outright European foreign policy that is not complementary to that of national governments.
As of now, this list is pure speculation based on ideas being floated around by various credible sources or officials. Under the current conditions, a Treaty reform does not seem likely, at least not before 2020.
If there is one thing to remember from all of the above, is that European integration is a process. Views that were taken for granted a few years back, such as fiscal policy being a near-sacrosanct national prerogative, have been profoundly reconsidered under the weight of the circumstances and the pressing need to adapt accordingly. Today it may seem far-fetched to suggest, for instance, that economic governance should be conducted by a European [economic] government. Over the medium term that may become the new normal.
What remains constant throughout European integration, is the ongoing development of the supranational level—now the EU—into a fully fledged polity.
EU arrangements for forming and making rules
In a typical republic, the state’s functions are divided in at least three: (i) executive, (ii) legislative, (iii) judiciary. This is also known as the principle of the separation of powers, commonly referred to as “checks and balances”. The EU partakes of this principle in that its institutions enjoy operational independence from each other and/or from national governments. No authority can interfere with their internal affairs so long as they work within their remit.
The European Commission is the executive, the European Parliament jointly with the Council of the EU are the legislative, the Court of Justice of the EU is the judiciary. Additional functions are performed by the European Central Bank, which is the monetary authority, and the Court of Auditors, which is the auditory authority.
Where complexity is introduced is in the case of the European Council. This institution is where the heads of state or government of the EU Member States meet to decide on the future of European integration. The European Council adopts conclusions on all policies concerning the EU. These typically are in the form of “guidelines” towards the European Commission, asking it to implement a given plan, initiate the legislative process, or conduct some relevant background research.
Two recent pieces of diplomacy that are crucial to the European Union are (a) the agreement between the EU and the UK concerning the latter’s renegotiated position in the former,14 and (b) the EU-Turkey deal regarding migration and asylum.15 Both were agreed upon at the European Council.
Given the importance of the decisions it adopts, one would be justified to think that it acts as an effective “EU government”. Indeed the European Council is the single most important institution in terms of determining the actuality and future prospects of the EU. It sets the policy agenda. It however falls short of qualifying as a “government” since it does not get to implement its will. That is the role of the European Commission. The heads of state of government of the Member States will agree on a common position. The Commission will elaborate on the details and the specific requirements for its realisation.
The bifurcation of the EU executive
To this end, perhaps it is best we qualify our understanding of the European polity’s executive. Rather than it being uniform, it consists of two parts each with a distinct role:
- Deciding executive. The European Council gets to decide on the direction of European integration and to shape the EU in accordance with the collective will of its constitutive nation states.
- Implementing executive. The European Commission deals, among others, with the day-to-day workload of actualising the conclusions of the European Council. It also makes sure that the Member States comply with European law. It is the “guardian of the Treaties”.
The EU’s bifurcation of its executive branch consists in the institutionalised distinction between its deciding and implementing roles. We could argue that the Commission acts more like a public service than a ministerial cabinet, even though it is headed by a group of Commissioners that tend to be prolific politicians in their own right. It still is an “executive” though, especially as concerns its capacity to initiate—and then enforce—legislation.
The most common procedure for making European laws is the ordinary legislative procedure.16
The Commission presents a draft to both the European Parliament and the Council of the EU. The legislative institutions, here standing on an equal footing, follow their internal procedures for formulating their position towards the Commission’s proposal.
Once both complete their work on the draft legislation, typically in the form of introducing amendments to the text, they come together to compare their results and agree on a final document.
The finished article is promulgated as a new law. It is imperative that Parliament and Council reach an agreement. Without it the draft will not become law of the Union.
Outlining and substantiating rules
Couched in those terms, we can begin to better understand how the EU Member States shape the European integration process and set out to pursue objectives they have in common. Their collective will at the European Council provides the impetus for new legislation or a series of actions on a given front, while their involvement in the legislative procedure ensures their input is incorporated, at least in part, in secondary law.
Given this two-fold influence we may introduce another distinction emanating from the bifurcation of the executive. Rules in the EU are not produced outright. They are first agreed upon in outline—they are “formed”—at the European Council. Then they are rendered concrete—they are “made”—through a series of negotiations that unfold within the context of the legislative procedure.
The Union’s deciding executive is, in other words, the entity responsible for rule-formation, for identifying the abstract features of future steps in the integration process. Whereas the EU’s implementing executive is involved in rule-making, to ensure that flesh is added to the bones of the European Council’s “guidelines”.
The EU’s factors of differentiation
In this chapter we introduced a couple of qualifications to our understanding of (i) the separation of powers, in particular as concerns the executive function, and (ii) the method of formulating rules for the system at-large. The terms we employed describe phenomena that differentiate the European Union from a ‘typical’ republic.
While the words themselves can be changed, the constant is the overall indirectness germane to the institutional arrangements of the EU and to how their interplay contributes to the integration process.
Complexity, the multitude of interlocking variables, is not unique to the European Union. Many types of polity have their peculiarities. This is not a matter of finding the “right” or “wrong” approach. Our task here is to point out those characteristics in an effort to comprehend how the EU works and who gets to do what.
Ultimately though, it contributes to our understanding of “Brussels” as something other than a monolithic, homogeneous whole.
European integration and the role of the nation state
The European Union is, by its very design, a multilateral organisation. Many parties are involved. Decisions are the end-product of negotiations on multiple fronts. What is good for the Union as a whole may not necessarily be in the best interest of any one national government.
An overview of the European integration process reveals an inexorable, albeit gradual, transfer of sovereignty from the national to the supranational level. The first European Community was only concerned with the industries of coal and steel. Then its scope was broadened to cover everything peculiar to a common market. With the establishment of the European Union in the early 1990s, it has further expanded into the realms of monetary and fiscal policy, while it has the potential to affect, in some way or another, almost every area of policy.
The European polity gets its power from the Member States, not as an addition to theirs. The EU may, for example, act on behalf of its Member States in negotiating a trade agreement. This very capacity has been delegated to the supranational level and, thus, been removed from the direct control of national governments.
If, for the sake of conceptual analysis, we adopt a macro view of sovereign authority in Europe, we will think of it as more or less constant and heteroclite (since it is distributed among a multitude of nation states). What the European integration process does is to alter the balance of power by, essentially, redistributing sovereignty, typically in the form of concentrating an ever growing portion of it to the supranational level.
The government of an EU Member State of the present is far more limited in its options for unilateral action than a government in the mid-twentieth century. On the face of it, the overall success of the integration process is correlated with the relative enfeeblement of the nation state.17 From the national perspective, a new executive willing to introduce a set of reforms must be able to operate within constraints that are exogenous to it. The rules of the EU or the prevailing political conditions in Europe may hamper a national impetus for reform, even if that were the desire of the corresponding demos.
There are plenty of examples of such power relationships. In the summer of 2015, when Greek citizens voted in a referendum against further austerity measures their government could not deliver on their mandate. National sovereignty is not absolute and, most importantly, it is not morally superior to that of other nations. Given the circumstances, the result of the Greek referendum could only lead to an unrealisable course of action, as was ultimately the case. Similarly, the debate on the forthcoming “Brexit” referendum focuses on the presence of these EU-generated constraints on the national government. Those for exiting the Union see the EU legal corpus as a net negative, while those in favour of the continued membership of the UK in the EU see it as a net positive.
The bigger picture of integration
Even though the EU introduces certain limitations to unilateral action at the national level, these cannot be judged solely from the micro perspective of the nation state. One needs to account for the overall effects on the macro scale. The reason national governments have hitherto been willing to transfer part of their sovereignty to the supranational level must be, based on their revealed preferences in the form of EU Treaty law, that they think of it as a prerequisite to the creation of a win-win situation.
The criteria may be different in each case, but the conclusion seems to consistently be in favour of further integration or, at the very least, of preserving what has been achieved thus far. Developed states may greatly benefit from their access to the European single market. Developing countries stand to gain from the support of EU funds for their convergence with the developed economies of the Union. Nations that prioritise the consolidation of their independence, defence and concomitant foreign policy may see the EU as the de facto political branch of NATO on the European continent: an additional layer of security.
Given that the EU has exclusive competence over such items of economic policy as trade agreements with third countries, we may entertain the view that national governments see the EU as an amplifier of their collective bargaining power in a globalised or globalising economy. Europe negotiating as a block is thought of as preferable to multiple nations engaging in uncoordinated negotiations with trading partners from outside Europe.
Understandably, the normative value of European integration is relative to the context. Value judgements can be made and are being made, though so far the majority of national governments seems to be in favour of the EU or at least of the status quo.
The EU and the nation state
The constitutive nation states of the EU have agreed to transfer part of their sovereignty to the European level. They have provided their assent to their relative disempowerment, at least in the immediate sense. One may even argue that they have agreed to render themselves largely irrelevant. Rather than having the first and final say, the argument would go, they perform the ancillary task of transposing European law into national legislation.
Whatever the speculation on the future prospects of the nation state, the European Union is not designed to usurp its Member States or compete with them over legitimacy.18 The EU is the functional extension of the collective will of European nations. It is the nation states that formulate, sign, and ratify the European Treaties; the primary law of the Union. The intergovernmentalism inherent to the EU, manifesting in the multitude of input conduits in decision-making available to Member States, is meant to promote and, in a sense preserve, the vital interests of European nations.
It is true that in a multilateral setting any one part is but a fraction of the whole, even if an important one. That a given government has a narrower scope in its capacity for unilateral action is to be attributed to the very nature of inter-state politics. Except perhaps in the instance of total war, relations between states necessarily entail a mutual diminution in their relative power over policy, in exchange for the goods that may derive from their cooperation.
The inescapable trade-off of European integration is this:
- maximisation of national sovereignty, which may be externalised as adversarial attitudes towards other states and diminishing potential returns from alliances;
- sharing of sovereignty, which translates into more preferable conditions for concerted international action and the emergence of “economies of scale” on a cross-border basis.
The constitutive nations of the European Union qua Member States have thus far opted for the latter path, without however forfeiting the claims on their sovereignty. They continue to play a vital role in both forming and making European rules. They remain the only source of EU funds as the EU cannot raise its own resources. And, above all, are the units that will ultimately formulate, sign, and ratify any future amendment to the Union’s primary legal corpus. The specifics of such a reform are solely contingent on their collective will.
The brand of EU federalism
In academic circles or as part of esoteric commentary on what the European Union “actually is”, the EU is often referred to as a polity sui generis. It is in a class of its own. The argument is that the EU does not conform with other models of state or political organisation, in particular those of a federation or confederation. The modal features of the supranational decision-making arrangements peculiar to the EU present us with something new; a polity that has yet to be properly defined.
This discussion is not entirely without merit. Indeed the European Union exhibits all sorts of peculiarities and deviations from the norm. But that is true for every instantiation of a model in every field of scientific inquiry. The model is meant to be an abstraction from the specifics. It captures what is common in a multitude of phenomena and, hence, must remain generic. An “abstraction” of the whole that only applies to a fraction of cases, exalts the particular to the general, and propounds a range of assumptions about reality, is not the most valid choice in an epistemological sense.
The claim that the EU is not a “genuine” federation or confederation can only hold if the definition of these entities is precise, descriptive, and enumerative. That tends not to be the case. Furthermore, these forms of polity are by their very design tailored to the specific cultural-historical needs of their peoples. The United States of America is a federation. So is Russia, Belgium, Switzerland, etc. Each has its particularities and may thus qualify as a “false” or “pseudo” federation, as an exception to the norm, if we are to follow the line of reasoning that emphasises the factors of differentiation rather than trace the patterns.
The veil of obscurity surrounding European politics is in large part the product of miscommunication, not of the EU being intrinsically incomprehensible. Indeed, the European Union is complex. So is virtually every federation and, perhaps, every modern unitary state that decentralises authority. Rather than single out the items that distinguish the European polity from other multi-level political organisations, let us elaborate on the specifics of its underlying federalism.
The EU as a federal system
The term “federalism” is polysemous, at least in a European context. It may denote an ideology and be treated as largely positive or progressive. Examples are political groups, especially at the European Parliament, that promote “more Europe”, a “United States of Europe”, or variants thereof at every given opportunity. Federalism may be used as a derogatory term, especially by those who consider themselves eurosceptics or opponents of the EU. For them a federalist is an apologist or cheerleader of everything that is wrong with the “Brussels” apparatus.
These labels are loaded with the significations and ideological predispositions of the group using them. A more objective term, the one we employ herein, is the ideology by which a polity is to be instituted as a multi-layered, decentralised whole, featuring both a vertical and horizontal separation of powers.19
The architects of the European Union—the governments of the nation states that sign and ratify the European Treaties—are guided by such [tacit] federalism while adapting it to their evolving needs.
They do not envision the EU as a “United States of Europe”, hence the ubiquity of intergovernmentalism and the robust restrictions to the power of the supranational level on cardinal expressions of statehood such as taxation, police and secret services, the military and the defence of national territory.
They believe European politics should be separate from national politics, though influenced by them, thus the presence of supranational institutions that labour for the general good of the Union while receiving input from the national level, be it from governments or citizens.
And they most certainly abide by the principle of the separation of powers, underpinning the operational independence of all EU institutions and enabling each of them to function independently from the influence of either their peers or national governments.
The European Union is a federal system. Unique in some of its secondary features, just as virtually every federation. Its legal-institutional order, the arrangements for rule forming and making, remain conceptually above the construct of the nation state though never in opposition to its normative achievements.
The EU draws its legitimacy from its constitutive nations. It is not a separate constitutional order. It functionally extends the collective will of its Member States, also by fleshing out the legal-moral standard by which they all abide to and strive to perfect.20
In this regard, the EU is not a distinct state or a detached bureaucracy. The European and national levels are, on a macro scale, an organic whole.
Politics at the European level
All politics within the context of the European Union take place at a level above the nation state. Yet not all of them follow the exact same procedures. The modalities of the various EU processes and methods for making decisions do vary.
And here is the tricky part that perhaps contributes to the exaggerations about the EU being sui generis. Intergovernmental affairs are between the Member States. But their end product is not national politics or variants thereof. These are international relations engendering international policies. Since they unfold within the framework of EU law, are permeated and defined by it, their outcomes are European or else supranational.21
In the EU there are two categories of political process:
- the national, which concerns the internal affairs of the state and conforms with the constitutional traditions of the nation in question;
- the European, which covers all areas of policy that have a cross-border dimension and where more than one national government are involved or where EU institutions provide their input in some meaningful way.
The first category is straightforward. The second is subdivided into two types: (a) intergovernmental, (b) supranational. These vary in terms of their directness as seen from the national level:
- intergovernmental are those EU politics where national governments are directly involved, such as within the context of the European Council or the Council of the EU;
- supranational are the affairs of EU institutions with no direct connection to national politics, such as the operations of the European Parliament, or the European Central Bank.
When we, therefore, comment on the intergovernmentalism of the EU we are implying a certain disposition towards its specifics. We may, for instance, condemn intergovernmental politics on the grounds that they always result in a compromise between competing national agendas, without the interests of the EU at-large being considered.
Whatever the case, intergovernmental affairs are but another facet of European politics, a peculiarity of the immanent federalism of the European integration process.
Federal system ≠ federal republic
Lastly, by treating the EU as a “federal system” we are distinguishing between two parameters of political organisation closely related to our present inquiry:
- Federalism. The form of the polity, in this case the multi-level structure.
- Republicanism. The content or quality of everything pertaining to the political process and interpersonal experiences thereof.
That the EU exhibits a brand of federalism does not necessarily mean that it also delivers on all the public goods peculiar to a modern republic. The structure and the quality of a polity are not connatural. They are separable, even though they certainly influence each other.
More practically, there are federations that operate in accordance with republican norms. There are other federations that leave much to be desired in terms of democratic standards. The EU aspires to be a republic, to institute or otherwise enhance democracy on a supranational scale, but typically falls short of its much-vaunted ambitions.
In a nutshell, the EU is not a “federal republic”.
The distribution of competences in the EU
The European Union is the functional extension of the collective will of its constitutive nation states. Whatever powers it has are given to it by common accord incorporated in treaty law. The EU is created by its Member States for the sake of strengthening and promoting their collective interests as well as for pursuing objectives they have in common.
The European Treaties, the Union’s primary law, inter alia specify the distribution of competences in the Union.22 They provide for the vertical separation of powers between the national and European levels. This is about what area of policy belongs to which government. Whether it is a local, national, or European issue. In doing so, they formalise a key aspect of a federal system: clear delineations between the scope of authority of the various administrative strata.
There are three criteria that guide the distribution of competences in the EU. These namely are:
- the principle of conferral;
- the connatural principles of subsidiarity and proportionality;
- the inferred principle of delegated sovereignty (shared responsibility).23
The three-fold distribution of authority
The principle of conferral is the single most important item in this context. In essence, it is an exhaustive list covering areas of policy where the EU has a role to play. The underlying rationale is that powers explicitly given to the EU—in the way and extent to which they are—are no longer specific to national governments and, conversely, any area of policy that is not mentioned in the Treaties remains a national prerogative.
The division of competences has three permutations based on the degree of power conferred to the European level:
- those that are exclusive to the Union;
- those that are matters of shared competence between the EU and the Member States;
- those where the EU can only be supportive of the actions of national governments.
Exclusive competence confers supreme authority to the EU.24 European institutions have the first and final say over the specifics of policy. National governments must abide by supranational decisions. An example would be the European Central Bank (ECB), which gets to conduct monetary policy against the backdrop of the Union’s exclusivity over monetary affairs in the euro area. The eurozone’s National Central Banks cannot deviate from the supranational agenda to exercise a monetary policy that is good for the economy under their jurisdiction. They can only implement the decisions of the ECB, even to the detriment of the domestic economy.
Another example would be trade agreements with the rest of the world. It is the European Commission, the Union’s implementing executive, which gets to negotiate them. The controversial proposed deal between the EU and the USA, formally known as the Transatlantic Trade and Investment Partnership (TTIP), is a case in point. Should it enter into force, it would have a profound effect on the European economy and the standards upheld therein, much to the dismay of civil society. Popular protests notwithstanding, and courtesy of the EU’s exclusive competence, it is only up to the Commission to make the judgment call on whether to proceed with finalising TTIP or not.
In general terms, exclusive competence means that the European interest, defined in terms of what EU institutions consider the best course of action under the circumstances, takes precedence over any national interest in the area of policy concerned.
Shared competence confers a degree of sovereignty to the EU institutions while entailing a high level of responsibility from the Member State towards its peers.25 This is sometimes referred to as “shared sovereignty” which is not the most useful of descriptions. Sovereignty is not really shared. The legal framework is outright supranational, i.e. outside the scope of national unilateral action, and the European level gets to have the first and final say over the implementation of decisions. What is mutualised is the accountability of the national government, which is no longer limited to its citizens but extends to the other national governments.
Put simply, in areas of shared competence no national government can act on its own accord, nor can its initiatives prejudice or otherwise undermine the position of the rest of the Union. The reason some speak of “shared sovereignty” is that the accountability part gets to be negotiated between national governments, typically at the European Council or the Council of the EU. They neglect the fact that in such negotiations Member States are already bound by European laws and, hence, have already outsourced much of their decision-making power. The sovereignty to be shared, if thought of as absolute, was not there to begin with.
Supportive competence for the EU leaves authority to the national level.26 However, the very fact that it is being mentioned under the principle of conferral implies that the Union can still issue its recommendations and, potentially, exert a degree of diplomatic pressure when and where necessary.
This could be the case especially on issues where the lines can be blurred. For example, industry is supportive competence, yet it could be considered in conjunction with some other item, say, energy, which would introduce an element of shared competence. Speculation aside, national governments have the first and final say. This provision is likely meant to be a fallback option for the EU in case where it would absolutely need a residual legal basis to promote some European policy.
Criteria for balancing competences
The principle of conferral is not enough to draw clear delineations between the various levels of government. The enumerated areas of policy are generic and subject to diverging interpretations. With multiple actors involved, in the form of EU institutions and national governments, there needs to be a canonical method for guiding policy-makers. To this end, the Treaties envisage two principles: subsidiarity and proportionality.
Subsidiarity stipulates that power should be exercised as close to the citizen as possible. Its scope should always be commensurate with the task at hand. If a matter can be properly addressed locally, then only the local authorities should be involved. Phenomena that have a national reach must fall under the control of the national government. Policies with a cross-border dimension require action at the supranational level.
This bottom-up approach cannot automatically define the degree to which the authorities can exercise their power. Hence the principle of proportionality to ensure that actions pursued are always limited to the sought ends, while never creating conditions for the expansion of control. For instance, even if a European institution were supposed to tackle a given issue, its policies should not grant it additional powers, nor should they have that objective. Furthermore, they should not prejudice the capacity of other political entities to pursue their mandate.
Subsidiarity and proportionality can be perceived as distinct categories. Their functions are different. These however are not ultimate functions but only instrumental for a greater end, a common objective: to set the normative parameters for the application of the principle of conferral.
Subsidiarity and proportionality substantiate a bottom-up method for distributing competences in accordance with the vertical separation of powers, and for limiting the scope of the authorities’ discretion to the sought ends within their remit.
Delegated sovereignty (shared responsibility)
A nation state can gain accession to the European Union only after it complies with the European legal order, the acquired level of integration known as the Community acquis, acquis communautaire, or just acquis. The state in question needs to harmonise its legal order with that of the Union, typically by transposing into national law the EU’s legislation.
Rule harmonisation is not a mere exercise of matching distinct sets of legal documents. It rather is kind of a constitutional reform, for it ramifies to key areas of statehood and implies a diminution in the sovereign authority of the nation state.
By virtue of the aforementioned principles, EU Member States commit to divide their sovereignty and to transfer a portion of it to the supranational level, either in the form of an exclusive EU competence or as a matter of shared competence with the rest of the Union. Whatever the specifics, they agree to bind their fate with that of the EU: to considerably limit their scope for unilateral action, acknowledge the shared responsibility intrinsic to membership and the conditions it entails, in exchange for the benefits of European integration.
The transfer of sovereignty is a negotiated result agreed upon in functional terms. Powers are given to the EU so that it may be in a position to pursue objectives common to its Member States. There is no normative aspect to it. The European level does not make claims on sovereignty. Legitimacy is firmly rooted in its constitutive nations and in their common will, manifesting as the European integration process and constitutional order thereof.
European Member States do not forfeit their right to sovereignty. They only provide assent to its redistribution within the framework of EU law. A nation that would consider its position in the Union to have become detrimental to its interests could engage in a predefined process of reclaiming its sovereignty, with the ultimate effect of exiting the Union.27 As the acquis currently stands this trade-off cannot be circumvented. Full national sovereignty and EU membership are mutually exclusive.
The repatriation of sovereign authority is no mechanistic procedure nor is it dependent solely on the will of the nation concerned. Joining the EU means delegating competences to the supranational level. Doing so creates a certain bond between the nation state and the Union; a bond that cannot be severed unilaterally. For that to happen, the rest of the Union, mostly the other Member States, must offer its consent. EU-exit and its modal features will have to be thoroughly negotiated at the level of the European Council.
Thus while EU Member States do not forgo the claims on their sovereignty, they do, nonetheless, outsource or mutualise at the supranational stratum the decision over its possible repatriation. This is, in and of itself, a clear indication of the shared responsibility attached to EU Membership.
De facto European sovereignty
The EU is seldom referred to as “sovereign”. The historical evolution of this term carries significations that are intimately linked with the construct of the nation state. Only nations qua states are meant to be sovereign. The EU is not a nation, nor is it a state in its own right, at least not properly so called.
While there may be good reasons for maintaining that approach, we cannot afford to obfuscate the fact that the European Union does exercise sovereign authority over a range of policies. Whether this qualifies as “sovereignty” in a technical sense within the framework of international law is of secondary consideration. What matters is the more immediate effect: in areas of policy where the EU has exclusive or shared competence, no national government can pursue a unilateral course of action. In other words, a Member State cannot appeal to its sovereign right as a nation state in an effort to deviate from the agenda forwarded at the European level.
Perhaps the only legitimate reason for not considering the EU as sovereign is that its authority is conferred to it by nation states that reserve the ultimate right to reclaim control over any area of policy. Should the Member States choose to proceed with a Treaty reform that would roll back much of the integration process, the EU’s sovereignty would necessarily be diminished.
The problem with this line of reasoning is that it goes both ways. It also holds true for nation states. In their case a legal or constitutional reform could equally impact their sovereign authority, such as when they first complied with the European acquis for the purposes of joining the Union. Yet we tend not to think of the possible reformulation of a nation’s legal order as sufficient reason for withholding judgement on the effective features therein.
Rather than predicate our concerns on the potentiality of things, let us consider their actuality: as things currently stand, the EU enjoys sovereignty over a number of policies. Furthermore, its constitutive nation states have forged a supranational bond between them that they cannot cut without the approval of the rest of the Union. The EU’s authority cannot be undone by any one national government and must therefore be considered robust in that regard. European sovereignty—in the way and extent to which it is—will remain present for as long as the European Treaties and concomitant secondary law foster the necessary conditions for its existence and enforcement.
The euro and Europe’s economic governance
The euro is the European Union’s official currency. All Member States will eventually have to adopt it, save a couple of exceptions.28 The euro area, also referred to in the media as the “eurozone”, currently comprises 19 of the 28 EU nation states.29 Europe’s single currency was introduced in 1999, as envisaged by the Treaty of Maastricht which was signed a few years earlier. That Treaty established the European Union as the successor organisation to the European Economic Community.30
What this concatenation of key events has in common is an underlying paradigm shift in European politics. The scope of the integration process was no longer to be limited to the abolition of trade barriers and other impediments to cross-border economic activity. European leaders wanted to turn their Community into something more than a common market or regional trading block. They saw Europe as a rising power boosted by the collapse of the Soviet Union. To that end, they set out to deepen the ties between their nations in an effort to pursue political unification. The European Union with its single currency signals the formal beginning of that change in focus.31
Monetary means to political ends
The euro, just like all fiat money, is a political project. An instrument for increasing the economic interconnectedness of its member countries and a catalyst for their coalescence into a unified monetary, fiscal, financial, and ultimately political whole.
By joining the euro, nation states opt to transfer their sovereignty over monetary policy to the European level. In so doing they deprive themselves of a major instrument for macroeconomic control or, put differently, of a powerful means of indirectly protecting the domestic economy from foreign competition. Without the ability to engage in such practices as adjusting the money supply or fiddling with exchange rates, nations can only rely on structural factors (e.g. labour and investment policy) and careful budgetary planning to enhance their outlook and competitiveness.
Member States further agree to delegate substantial powers over fiscal policy and economic coordination to the supranational level. Europe’s Economic and Monetary Union (EMU), of which the euro is the ultimate stage of integration, entails much more than uniformity of monetary policy. It is an elaborate system of rules and institutional arrangements for regulating and aligning the fiscal and economic policy of all national governments, with additional restrictions for those whose currency already is the euro.
What countries lose in terms of flexibility and the capacity for unilateral action on the economic front, they gain in the form of stable prices, increased trade with their European partners as well as the political advantages of being part of the “European core”.
The assumption is that at least over the longer term, the presence of the euro as well as the shared responsibility enforced by the EMU contribute to the stability and robustness of the European architecture. No Member State is allowed to engage in unfair competition with its peers. In principle, there is no “beggar thy neighbour” practices within the EMU. Besides, the euro is an international reserve currency. Adopting it is an appealing proposition for nations that want or need to increase their [collective] bargaining power on matters of global trade. While the specifics may vary, the euro provides incentives for countries to continue to cooperate and to pursue further integration.
Understandably the case for the euro may appear implausible under the circumstances, especially given the EU’s recent economic woes. For many the perception of it is that of a failed venture; a flawed currency area that is, according to some vociferous critics, teetering on the verge of its collapse.
Opinions on the actuality and future prospects of the euro notwithstanding, the policy choices of European decision-makers reveal the kind of resolve and commitment that will not allow the euro to fail. The Economic and Monetary Union has gone through some profound reforms in recent years, largely as a reaction to the “euro crisis”.
In terms of its legal-institutional arrangements, the EMU appears as much more of a complete puzzle today than it was less than a decade ago. What is in place is markedly different from what was envisaged in the 1990s, especially in terms of the powers transferred to the European level for the purposes of fiscal discipline, governance, and economic coordination.
The incompleteness of the original EMU
The Economic and Monetary Union is an advanced stage in the integration process that expands upon the achievements on the single market. The single market is a rather decentralised system. Member States agree to mutually abolish trade restrictions between them and adopt common standards. They do so by means of implementing supranational legislation. The single market is little more than a free trade area. There is no EU-level authority for regulating economic policy as such. That is left to the discretion of national governments.
Whereas the EMU ramifies to constitutional issues and matters of sovereignty. Power is delegated to the European level either in the form of an exclusive competence, as in the case of monetary policy in the euro area, or in a shared competence between the EU and the Member States.
Whatever the case, the result is the same from the perspective of a national government: unilateral action on economic policy is no longer an option. All key issues become part of the policy-making process of the EU and of the multi-faceted negotiations that characterise it.
All EU Member States are part of the EMU, yet only the euro countries are bound by a subset of legal provisions on fiscal policy. The difference here is one of degree. The euro area requires closer checks on national budgets due to the uniformity it imposes on the monetary front.
The rationale for prohibiting unilateral action is rooted in economics. A monetary union unites economies in such a way that negative spill-over effects can easily disrupt the entire system. Frivolous spending by one government can result in losses for the rest of the area. If anything, the recent financial crisis revealed the extent to which euro countries are interdependent.
Back in the 1990s the architects of the EU and the euro did not foresee the implications of monetary uniformity across diverse national economies. They did not anticipate a multitude of concurrent crises unfolding on fiscal, banking, and macroeconomic fronts. The original EMU lacked both the tools and the laws for coping with such a set of challenges as those generated by the euro crisis.
On fiscal issues, the original EMU was over-confident in the viability of a generic rules-based governance model. Monetary policy was trusted in the hands of the European Central Bank while each national government was to pursue its own fiscal path provided it followed a handful of rules as per the Stability and Growth Pact (SGP). Most relevant among them are the two rules of 3% budget deficit and 60% public debt.
The approach was mechanistic and excessively optimistic in its underlying assumptions. A Member State was thought to be contributing to the optimal functionality of the EMU if it was operating within the SGP’s constraints. There was next to nothing concerning macroeconomics in general, such as the trade balance, capital flows, and the like. The effects of monetary integration on a cross-border, systemic basis were not considered to their full extent. As for the very rules enshrined in the SGP, the European level lacked credible mechanisms for enforcing them, hence their de facto obsolescence in the build up to the euro crisis.
On the financial front, the original EMU remained divided along national lines. The rules that would create a level-playing field were either inadequate or insufficient. Bank supervision remained a national prerogative, while banking risk was not monitored in the context of monetary union but as yet another domestic affair. The cost of a failed bank would be incurred by the respective national government.
The rationale was that every EU Member State had to put its own house in order. Under the SGP it had the obligation to do so, while it was granted the freedom of deciding on the specifics thereof. Implicit to this order was the assumption that nation states indeed preserved the necessary sovereign authority to fully control their economy. With EMU membership limiting the scope for independent macroeconomic planning, this was proven to be a largely false and misguided belief.
Overall, the original Economic and Monetary Union was a rather incomplete edifice. It could go on working during the good times, but it would most certainly disintegrate under the duress of the financial crisis. In terms of governance, such incompleteness meant that economic coordination was predicated on inter-state politics. The single most evident weakness therein is that the implementation of the rules becomes a matter of contest and of negotiating the results. One national agenda contradicts the others without the systemic economic good—the interest of the EMU at-large—ever being considered.
The EMU was reformed courtesy of the Great Recession. The new financial environment forced European decision-makers to reconsider their assumptions. Many of the tenets that underpinned the pre-crisis EMU were either proven fallacious or irrelevant. More specifically:
- The inadequacy of the no-bailout clause. The European Treaties have a provision that prohibits either the Union or the Member States to incur the debts of another government.32 The thinking is that losses should never be mutualised at the European level. Every nation state should be held responsible for its own fiscal position (hence the SGP). While that may be good in theory, it seldom works in practice. As a matter of fact, the spirit of the EU’s no-bailout clause has been effectively rendered void. Member States did take losses whose origin was external to their domestic economy. They did so in the form of contributing funds to the bail-out programmes that were provided to the crisis-struck countries (Greece still is one), while they also reserved resources for the European Stability Mechanism, the de facto fiscal backstop of the EMU.
- The ineffectiveness of a generic SGP. While the budget deficit and the public debt are important metrics, they cannot shape the prospects of an economy. Not every economic factor is a function of both or either of these two. In the case of the EMU, the problem is compounded by the fact that Member States have dismantled direct trade restrictions between them while they have given up their monetary sovereignty. Phenomena with a cross-border reach cannot be tackled by any one government operating on its own accord, and are certainly not contingent on a couple of fiscal indices.
- The futility of national oversight over banks with cross-border activities. Financial institutions are among the greatest beneficiaries of the single market. For them the EMU means that they can engage in operations abroad without having to worry that the government of the country in which they operate suddenly decides to radically change the economic environment, say, by imposing trade restrictions. Reforms to the EMU can only come from the supranational level. In practice, this means that capital gets to move almost totally unencumbered within the system. But the same was not true for bank oversight. There was a need for institutions that could perform that role at the European level. Originally these did not exist. Each national government had to supervise financial institutions on its own. Systemic risk on a EMU-wide scale would thus go unchecked.
The reformed EMU
What triggered the reform of the EMU was the euro crisis. It exposed the design flaws of the system. Policy-makers had to address them or risk annulling decades of integration. The euro would not be allowed to fail at the first series of obstacles.
The policy response to the crisis focused on two areas: (i) bank regulation, (ii) state finances and economic coordination. Existing rules were tighten up while new legislation and a couple of treaties were introduced that turned economic governance into a matter of shared competence between the Union and the Member States.
Regarding banks a set of laws were passed that aimed at improving their robustness to economic shocks. This body of legislation is also known as the Single Rulebook. It regulates capital requirements, deposit guarantees, and bank resolution.33 Its objective is to create a certain uniformity in bank regulation, which is a prerequisite for effective prudential policy.
By “prudential policy” we refer to the supervision of the financial sector. It consists of two functions, both of which ultimately rest with the European Central Bank:
- Macroprudential. The macro perspective examines aggregates across the financial system in order to assess the presence and degree of systemic risk. It also evaluates the compliance of the sector with the Single Rulebook. This policy is exercised under the Single Supervisory Mechanism (SSM).
- Microprudential. The micro level is for singling out a troubled bank for special measures. Provided certain conditions, the authorities may intervene in its internal management for the sake of its recovery, force its orderly restructuring or even lead to its breakup. The Single Resolution Mechanism (SRM) is in place to perform this function.
The SRM has another component to it: a common fund to cover the costs related to bank resolution. The idea is that the nascent banking union consists of three pillars: (a) macroprudential policy to enforce the uniformity of financial oversight, (b) microprudential policy to tackle any irregularities in the system, and (c) a common deposit insurance scheme meant to bring all of the system’s banks under a common denominator of trustworthiness. As of now, the third pillar remains a work in progress. The relevant legislation is still in the drafting phase and is expected to be put forward over the near-to-medium term.
All the legal-institutional arrangements for financial supervision were introduced amid the euro crisis. In 2011, the European Supervisory Authorities were established, whose ultimate task is to formulate the prudential rules. These bodies are: (i) the European Banking Authority,34 (ii) the European Securities and Markets Authority,35 and (iii) the European Insurance and Occupational Pensions Authority.36 The European Systemic Risk Board at the European Central Bank, was also established at around the same time.37
Prior to the crisis, the EMU had no effective prudential policy. Whether these will be enough remains to be determined.
State finances and economic coordination
In 2011 amendments were made to the Stability and Growth Pact to ensure more effective surveillance over state budgets and deficits.38 A new Treaty with a similar scope though outside the European acquis was also ratified by almost all Member States. The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, most commonly referred to as the “Fiscal Compact”. Enshrined in it are several provisions for budgetary discipline, such as the concept of the structural deficit or the notion of the medium-term budgetary objective.
The Fiscal Compact was an ad hoc response to the EMU’s design flaws. Given that this is an international treaty, it effectively enjoys a constitutional status. That strengthens the European level by eliminating the scope of national governments for unilateral budgetary planning. The Fiscal Compact may be outside the EU acquis, but it remains aligned with it. The plan is that it will eventually be incorporated in the acquis some time over the medium term. The reasons for it being a new treaty, rather than just another piece of EU legislation, can be traced to legal and time constraints. In principle, the Fiscal Compact partakes of the same underlying approach to economic policy as the rest of European law.39
On this area of policy there also exists an extensive corpus of secondary law. Europe’s new framework of economic governance is based on two sets of legislation known as the Two-Pack and the Six-Pack. The former consists of two legal instruments. The latter of six. What these laws essentially do is extend and further specify the rationale of the Stability and Growth Pact. They also broaden the extent of policy coordination well beyond the confines of budgetary policy. Economic governance covers everything from the drafting and monitoring of state budgets, to which macroeconomic indicators will be examined in the evaluation of the relative competitiveness of Member States.
The process of the EMU’s governance takes place within the context of the so-called “European Semester”. This is a procedure that starts with the calendar year and covers its first half. The Commission assesses the economic outlook of each state and proceeds to issue recommendations on any issue that may need to be addressed. These recommendations will need to be considered by the government in question prior to the drafting of its next budget. Draft budgets must be sent back to the Commission for review.
The European Semester is not a bureaucratic exercise in just issuing opinions and recommendations and in publishing macroeconomic reports, though it may well appear that way. It has a profound effect on policy. Unlike the original design of the EMU, the Commission enjoys extensive powers over the enforcement of the rules. It can proceed to impose restrictions or even sanctions in cases where it identifies any excessive macroeconomic imbalances, or deviations from the targets on the budget deficit.
Governance not government
What remains of the Economic and Monetary Union’s original design is the lack of a central authority for exercising economic policy. Everything has been harmonised except decision-making. The EMU continues to be a rules-based system that binds together nation states that are otherwise thought of as independent. There is no overarching sovereign, no European state that underpins the euro (in the same way other currencies are backed by a sovereign state).
While economic governance is a shared competence between the Union and the Member States, there is next to nothing in terms of specialised EU institutions for economic policy outside the scope of intergovernmental decision-making. For example, the EU does not have a European Finance Ministry that could be tasked with formulating a coherent, system-wide economic policy. The EU does not have its own fiscal capacity manifesting as a European Treasury. It can neither raise taxes nor issue debt instruments. There only are national fiscal policies that need to be coordinated between them, not with respect to a European fiscal policy.
To this end, shared competence on economic governance means that the EMU proceeds based on what is the best negotiated result between national governments, not what is necessarily needed for the good of the system at-large. This kind of mismatch between the legal corpus and the political process can engender asymmetries on two levels:
- there is no defined, and hence transparent, procedure for tackling in a timely fashion macroeconomic imbalances that are cross-border in nature;
- the European Central Bank has trouble fulfilling its mandate on targeting inflation, since it cannot enjoy the support of a counter-party fiscal authority that could help prop up aggregate demand.
The gist of the matter is that the EMU remains a work in progress. It is not that long ago that the euro crisis provided the impetus for its thoroughgoing reform. The changes made to its design can all be summarised as a concerted effort at state building at the supranational level; a corrective to the EMU’s original statelessness.
The latest roadmap for the completion of the EMU was published a little less than a year ago. It is the “Five Presidents Report”, which describes in outline all of the new initiatives or pieces of legislation that will be put forward over the short-to-medium term.40 We can expect something more specific towards the end of this year or more likely during 2017.
Whatever the case, the euro is here to stay. Without it Europe’s Economic and Monetary Union would be of no use. The European Union would then have a hard time evolving into anything more than a regional trading block. Too much political capital is invested in the ultimate success of the single currency. The very scope of European integration hinges on it. It would be extremely unlikely for policy-makers to abandon a project that was initiated in the early 1990s and which [tacitly] aims at the political unification of European nations.
Couched in these terms, it might as well be argued that those who are foreseeing the impeding demise of the euro are placing a bet against Europe’s collective ambition to remain relevant in the ever globalising world of the 21st century.
Accountability and independence of the ECB
The powers of the EU are horizontally divided in accordance with the principle of the separation of powers. Each European institution, every EU entity tasked with a cardinal function, enjoys operational independence. Neither the other institutions nor national governments can interfere with their internal affairs.
The European Central Bank, also known as the ECB, partakes of this principle. Its independence is commensurate with its role as the ultimate authority over monetary policy in Europe’s Economic and Monetary Union, the euro area in particular.41 Being independent allows it to conduct its operations with a medium-to-long-term horizon. Electoral cycles do not affect it, nor can a new EU policy agenda force it to adjust its monetary stance.
European leaders have designed this institutional arrangement under the impression that a central bank can only be effective when emancipated from the short-term temptations of the political process. Price stability presupposes consistency and that requires long term planning and execution. Monetary policy trickles down to the economy in an incremental fashion. The transmission mechanism is not immediate. Macroeconomic changes reflecting the impact of the central bank’s actions take time to materialise. To this end, the monetary authority cannot be bound by the will of politicians, whose role forces them to focus on the short term. A money supply that would be tailored to the needs of politics, would risk becoming erratic and, hence, ineffective at achieving price stability.
This is, in outline, the rationale underpinning the institutional standing of the ECB. Opinions on the particularities of economic policy notwithstanding, the notion of insulating an authority from the ups and downs of politics is not specific to central banks. It applies equally to other functions of the polity where holistic thinking is needed. The military is a case in point. The same is true for the courts, albeit for slightly different reasons.
Legitimacy and accountability
The point is that the underlying principle is sound. What matters is the modal features of its instantiation and how these impact the institution’s legitimacy and accountability. These democratic qualities go hand-in-hand: a state entity cannot be legitimate while remaining unaccountable and vice versa.
Legitimacy in the normative fundament of an official entity’s authority. Powers granted to an institution must be sufficient and proportional to the task, limited in scope, aligned with the will of the demos, and consistent with its stated ends.
Let us take a closer look at this claim:
- Sufficiency. The institution must be in a position to deliver on its mandate, otherwise it cannot be judged as ineffective in the task of pursuing its policy objectives;
- Proportionality. The authority it wields needs to be commensurate with the task at hand. Never in excess. A disproportionate use of power implies abuse, and that may entail an authoritative practice.
- Limited in scope. The mandate of a specialised institution can only be evaluated if it is specific. The broader it is the more divergent the interpretations can be, and hence the greater the difficulty to determine whether the institution is operating within its remit.
- Will of the demos. Given that the legal status is protected by the constitution, and since that is based on democratic legitimation, the institution must not deviate or in any way contradict the practical morality of the polity. Doing so could create tensions, raising questions about the appropriateness of various policies.
- Consistency of ends. A mandate is given to a specialised institution so that it may deliver on it. For as long as it meets its objectives it is evaluated as adequate for the task.
Legitimacy is further divided in two classes: (i) input and (ii) output. The former concerns the mandate given to the official entity. Legitimacy of this sort exists only when the demos offers its input within the framework of the legal order. As for output legitimacy it is about the outcomes of the institution’s measures and whether they comply with its mandate.
The European Central Bank has no direct input legitimacy. It is a technocratic entity whose members are appointed in office by national governments. At best that makes it indirectly legitimate in terms of input.
The ECB draws legitimacy from its output. It has a precise objective that is enshrined in the European Treaties: to ensure price stability. It has been endowed with sufficient powers to pursue that end, and, it enjoys operational independence which further guarantees its capacity to act.
The very mandate of the ECB is legitimate. It partakes of the legality of the EU Treaties. As such, the criterion for measuring its success or indeed its compliance with its role rests in price stability. For as long as the ECB delivers on that front, it qualifies as legitimate in terms of output.
The obscurity of “price stability” over the “medium term”
The justification for output legitimacy is plausible and clear. It may even be the optimal legal arrangement for specialised institutions. Where complexity and indeed obscurity is introduced is on the precise meaning of certain key terms, or rather on which entity gets to attach a signification to them. More concretely, the Treaties do envisage “price stability” as the ultimate telos of monetary policy. In doing so they provide the legal cornerstone of the ECB. What they fail to clarify is the exact meaning of that concept. They do not provide for either a methodology or indeed a rate (or range) of fluctuation in the aggregate price level.
Anyone who has ever followed the news on the European Central Bank has come across the much-vaunted objective of price stability, which manifests as a policy of targeting an annual inflation rate that is, in the words of the ECB, “below, but close” to 2%. This definition, the quantification of the Treaty provision, is provided by the ECB’s Governing Council.42 Put differently, the institution to be held accountable defines the criteria for its accountability.
The European Treaties have completely omitted the horizon over which a stability of prices is to be measured. This too is defined by the ECB and encapsulated in the otherwise vague notion of the “medium term”. It is never talked about in terms of years. We cannot know for sure whether the ECB has delivered on its mandate since we may not tell where the evaluation is supposed to start and end on the time axis. Given that the inflation rate is somewhat clear (close to 2%, but how close?), one would expect some more specificity on the temporal magnitude of the method.
What we infer from the above is that a flaw of the Treaties contributes to a rather awkward institutional arrangement where the ECB is in the advantageous position of both defining the criteria for its accountability and making the judgement call on whether they are met. Output legitimacy can be a sound justification for institutional independence provided there exists a precise legal basis that ensures the aforementioned aspects of legitimacy, namely, sufficiency, proportionality, limited scope, democratic consent, consistency of outcomes. In the absence of a clear method for measuring the deliverable results, it is impossible to determine in any objective way whether a technocratic institution is fit for its task.
Open-ended inflation targeting
To illustrate the point, the ECB cannot be questioned for having failed to maintain an inflation target of below, but close to 2%. The euro area has been consistently far below the ECB’s target. From July 2012, when Mr. Mario Draghi (the ECB chief) stated his famous “whatever it takes” claim for saving the euro, up until March 2016 the average inflation rate is 0.8%.43 That is near 1%, i.e. far below target.
Perhaps though we have just used the wrong time frame. Maybe it is too short to qualify as “medium term”. But how are we to settle this issue in some objective way? Our best guess would be to infer a temporal horizon from the ECB’s own policy initiatives.
In its March 10, 2016 meeting the ECB’s Governing Council approved of a new set of monetary measures for injecting liquidity in the financial system. The programme goes by the technical designation of Targeted Longer-Term Refinancing Operations II (TLTRO II). What is of interest to our inquiry is the maturity of these loans to the financial sector (the time until they expire). That is four years long, while the entire programme is conducted in the interest of price stability according to the ECB’s words:44
TLTRO II will contribute to a return of inflation rates to levels below, but close to, 2% over the medium term.
This is our most reliable indicator under the circumstances. The ECB is tacitly admitting that it will meet its target at around the year 2020. If we stick to July 2012 as a starting point—and there is no reason why we can’t start earlier—that would be about eight years. So, may we conclude that the ECB’s medium term is at least an 8-year-long period? The answer is negative. All we are doing here is making an educated guess, or rather, we are probing into the flaws of the European Treaties as concern the accountability structure of the European Central Bank.
Output legitimacy based on benchmarks
For output legitimacy to function as intended, the mandate of the ECB will need to be evaluated against a set of objective criteria. Based on the above-mentioned loopholes or omissions in the Treaties these could encompass the following:
- the Union’s primary law would have to render specific the meaning of “price stability”;
- the time frame for targeting inflation should be explicitly defined in months or years;
- whatever quantification of the Treaty provisions should be ancillary and supportive of the main task enshrined in primary law, without anyhow endowing the ECB with additional discretionary power.
In the absence of at least those three items, the independence of the European Central Bank does not really contribute to its legitimacy. Furthermore, the basis for its accountability is rather feeble and ineffective. This is one of the cases where the European Treaties exhibit a major flaw. One of the main EU institutions falls short of satisfying the normative democratic criteria of legitimacy and accountability.
A deeper fiscal-monetary disconnect
No central bank is omnipotent. Monetary policy cannot be a panacea for weaknesses on the fiscal front nor a substitute for sound budgetary planning. Europe’s Economic and Monetary Union is already based on the harmonisation of monetary affairs but remains far from homogenised on fiscal issues. The EU, in particular the euro area, has a single monetary function headed by the institution of the ECB, yet it lacks a counter-party treasury. There is no EU-level entity responsible for economic coordination, for raising and directing resources in an orderly fashion, and for drawing linkages between finance and the real economy on a system-wide scale.
Against this backdrop, the ECB can indeed face insurmountable obstacles in its task to ensure price stability. It may then be true that we have misplaced expectations for the monetary authority. We may be labouring under the erroneous assumption that the inflation rate is solely a function of monetary decisions. That the central bank can fine-tune it at will. The truth is that the demand curve is equally important. For instance, disinflation or deflation can also be reversed by activity on the fiscal side such as in the form of investment spending that would, ceteris paribus, put an upward pressure on prices.
The EU is in the process of completing its Economic and Monetary Union. The fiscal and financial aspects of it are still incomplete. In particular, there is no EU-level economic policy that could contribute to the ECB’s efforts for an average rate of 2% inflation. The European Central Bank continues to be the only supranational entity that can directly influence the average price level.
Whatever the case, economic policy is at its optimal when it is holistic, where there is concerted action between the various branches of the polity that deal with those issues. The European Central Bank may not be delivering on its mandate because it is trapped in an inefficient or incomplete institutional framework. Even so, that policy constraint would not detract from the normative fact that the effective arrangements for its legitimacy and accountability are far from adequate.
European demos and sovereignty mismatch
In a nation state those who are citizens of the state are by default members of the national demos. The demos at-large bestows legitimacy upon the authorities. In exchange, the state in its various functions exists to promote the general good, or the national interest, which among others includes national safety, social peace and cohesion, and, in democratic systems, a set of fundamental rights and values that provide and safeguard personal and collective freedoms.
The nation state is the only entity within a predefined territory that enjoys the right to exercise legitimate force, or else sovereignty. It is the application of this principle that provides a binding effect to its statutes and policies. The law is an expression of sovereign authority. It is the ultimate instrument for regulating intersubjective relations within the territorial confines of the state. The tool for formulating the specifics of the national compact and for determining such cardinal issues of social organisation as the distribution of resources, or the scope of individual freedom in relation to the needs of the community. The power of the state to perform these vital functions renders manifest the first aspect of national sovereignty: state sovereignty.
In a democracy the demos lays the foundations of legality by agreeing on a primary corpus of law, a constitution, or by recognising the law developed through its historical-cultural tradition as the legal fundament for the democratic institution of society. It is the primary law that ultimately determines whether the statutes, decisions, or actions of the state are legitimate and in line with the letter and spirit of the national compact. The legitimation function of the demos, the fact that it sets the specifics of the constitution, reflects the second aspect of national sovereignty: popular sovereignty.
The people provide the state with the power to govern. Yet the people qua demos only exist by virtue of the relevant legislation that regulates citizenship. There is no body of citizens in a legal sense if its members are not citizens of the state. And therein lies the virtuous feedback loop between state and popular sovereignty. In a democracy both need to be present. There can be no legitimate democratic polity without the demos and there can be no properly defined citizenry without state fiat.45
We may think of modern democracy as a constituted polity, a compact between the state and the demos, a virtuous feedback loop of state and popular sovereignty; founded on a predefined corpus of primary law; predicated on the separation of the state’s functions and the decentralisation of its authority; where the executive rules for, by, and with the people; where the judiciary is the ultimate arbiter of the legality of the legal order; where statutory acts are formulated by representatives of the demos in accordance with the rule of the majority, without infringing the inalienable rights of the minority and the irreducible capacity of every person to perform their role as citizen in sharing the public good; and where the political order is framed and bound by the law of the international community at-large, with the universal values it recognises.
The missing link for a European demos
The non-legal characteristic of the demos is its self-consciousness as a community of citizens. One of the reasons the nation state has been an enduring political construct through the centuries and remains at the heart of international relations, is that the national demos functions as an organic whole. The people do feel a sense of belongingness to their fellow citizens. They share the same or similar traditions, collective memories and narratives, are likely to speak a common language, have the opportunity to participate in the same public activities, abide by a uniform legal code, and, above all, are willing to live in that nexus of norms, rules and institutions as citizens.
This disposition is the sense of national identity, or else banal nationalism.46 People tend to be proud of being part of their nation. It is the glue that keeps the demos together. Statutes may confirm the national identity and regulate it further, but they cannot foster it on their own. Interpersonal confirmation among the people is needed. And it is this very sentiment of national belonging that underpins the interchangeability of the concepts “national” and “citizen”.
In a European context, every national of an EU Member State is by extension a European citizen.47 A strict legal interpretation of this fact would lead to the conclusion that there exists a fully fledged, over-encompassing European demos. Such inference would be erroneous. What is missing is the non-legal element: the necessary social attitude for togetherness. The basic solidarity that is more or less a constant within nation states.
In terms of the EU constitutional order, European citizens think of themselves as primarily nationals of their respective state, with the EU dimension being an addition to whatever benefits their nationality grants them. We claim thus based on the revealed preferences found in the very design of the EU, in particular:
- Nations as the EU constitutional subject. Nation states are the basic building blocks of the European Union. Their governments formulate, sign, and ratify the primary law of the Union, its “constitution”. The EU does not have sovereignty of its own but only whatever set of competences is explicitly conferred to it by its constitutive nations.
- Intergovernmentalism in day-to-day politics. EU Member States collectively are the most important actor in European politics. Through the institutions of the European Council and the Council of the EU they engage both in forming and making European rules. Additionally, all EU funds come from national contributions, meaning that the European level cannot implement an outright European fiscal policy, say, for the sake of tackling unemployment.
Intergovernmental affairs are the outward expression of multiple banal nationalisms. If citizens did not prioritise their respective national interest, they would put pressure for establishing an outright European government. This tendency would be expressed in the medium-to-long-term ambition of national governments. Inter-state politics would be set along the path of becoming superfluous.
Ambitious or perhaps unrealistic expectations aside, for as long as the national interest takes precedence over the European interest, there can be no fully realised European demos. To that end, intergovernmentalism will remain a defining feature of EU federalism.
Mismatch between popular and state sovereignty
Against this backdrop, we cannot consider the EU to have the virtuous cycle of legitimation germane to national democracy, at least not in a direct form.
State sovereignty exhibits a high degree of uniformity in those areas of policy where the EU has competence. Decisions are adopted at the European level and are implemented throughout the Union.
Whereas popular sovereignty remains compartmentalised along national lines. National interests are being represented in a multitude of ways. There is no equivalent European interest. What ends up being the European good is a negotiated result—a grand compromise—between competing national agendas.
This mismatch contributes to the overall indirectness of European democracy, which can be further qualified as (i) indirect input legitimacy and (ii) indirect accountability.
As concerns input legitimacy, European citizens do not have the right to directly elect the European “government”. The EU’s implementing executive, the European Commission, has its political leadership appointed in office. The Commission is supposed to be an apolitical, technocratic entity: the “guardian of the Treaties”. Regarding the Union’s deciding executive, the European Council, it is composed of the heads of state or government of the Member States. They are elected on national platforms. The political leader of Germany is decided by the Germans, that of France by the French, and so on. The Europeans as a whole do not get to choose their “head of state or government” in EU-wide elections.48
The effects of such arrangements are particularly evident on the accountability front. The EU has no supranational procedure whatsoever for holding accountable the European Council as such. If the citizens of a Member State do not like their government they can vote it out of office. If they do not approve of the European Council, they can do nothing as a unified whole. The only way would be for each national demos to elect a new government following national procedures. Notwithstanding the logistics and impracticality of such a venture, it would not be founded in EU law. It would rather be covering a glaring omission therein.
The constitutional order of the European Union is designed in such a way that what applies in a national democratic context does not hold true for the European level, at least not in its fullness. A European demos does not exist as a self-conscious whole. What is present courtesy of EU law is, at the very best, a demos manqué.
As for sovereignty and the democratic order it founds, the EU exhibits an overall indirectness and incompleteness, which may imply suboptimality, in both the modalities of its legitimation and the procedures for its accountability.
This is the Union’s sovereignty mismatch, which we may define as the absence or malfunction of the virtuous feedback loop of democratic legitimation between popular and state sovereignty.
Whether it is a design flaw of the European architecture or an immanent characteristic of politics on a continental scale is subject for another discussion.
As its title suggests, the Little Guide to the European Union aims to introduce a wide audience to the main features of European politics.
Its focus is on those items in EU affairs that enjoy a high degree of constancy. That are more or less permanent. Current issues, as these unfold in the news, have been intentionally omitted to help streamline the book’s message. The underlying assumption is that an understanding of the general makes it easier to comprehend the particular, while the opposite may not be true. Knowing, for instance, the specifics of the March 2016 EU-Turkey deal does not offer any insight as so why the European Council concluded the negotiations or why the European Commission is working on implementing its provisions.
This book does not exhaust the topic it seeks to analyse. It is not intended to be the one-and-only book a citizen has to read, nor is it a beginner’s manual to European politics. All it provides is a guide for the politically minded to pursue further studies on their own. It is an intermediate point between research cycles.
The Little Guide is delivered to the public free of charge. That probably is the most pronounced form of idealism it partakes of. Everyone with access to the Internet should have the chance to read it, learn from it, and expand upon it. Knowledge of this sort need not be confined to inner circles or hidden behind paywalls. What I gain in return is, at the very best, a slightly improved chance at the labour market.
Though this is not an exhaustive list, and with the risk of unintentionally forgetting to mention someone, I wish to express my gratitude to:
- All those behind the official EU websites for providing most, if not all, of the primary information used to produce this book.
- Dr. Alexander Apostolides (@alexapostolides on Twitter) for his enthusiasm and support over the years.
- Hans Mund for his laudable efforts to raise awareness of the European Union and improve its transparency by connecting all the relevant sources of information, both private and public, via his spreadthenews.eu platform.
- Gerald-Christian Heintges and Dr. François Mennerat for setting up EurAssoc, as well as for their overall devotion to the empowerment of an EU civil society and the realisation of a European res publica.
- Jakub Jermář for his insightful views on federalism and the establishment of a European Federal Republic as distinct from the Treaties-based model of the EU.
- Thomas Fazi for his extensive commentary on the European Union and the euro, as well as his constructive criticism of certain idealist tendencies of the European Left.
- The people at OneEurope, especially those I know best, Ivan Botoucharov and Cherian Grundman, for their contributions towards the emergence of a European public sphere and for their positive attitude in fostering an open debate about Europe.
- All those who have actively shared my publications in their social network, with Twitter users Lluís Camprubi (@lluiscamprubi), Tom Crowley (@Planoltom), Anda Burve-Rozīte (@RoziteBurve), and GrkStav (@GrkStav) being among the ones I am aware of.
None of those mentioned can in anyway be held accountable for what is written in the Little Guide to the European Union. I just refer to them as a sign of good will. Responsibility rests entirely with me.
These are “important” in terms of their role in the EU architecture. Understandably, this can be a judgement call. [^]
Treaty establishing the European Coal and Steel Community. Overview of the Treaty. [^]
Treaty establishing the European Economic Community. Overview of the Treaty. [^]
Though there exists a single market, it still remains fragmented along national lines on the following: e-commerce, financial services, energy and transport, taxation, the recognition of vocational training. [^]
The European Union succeeded the European Economic Community in 1993. It was ushered in by the Treaty of Maastricht, which was signed in 1992. The euro, which is the centrepiece of the Economic and Monetary Union was introduced in 1999. [^]
The ordinary legislative procedure used to be known as the “co-decision procedure”. The Treaty of Lisbon renamed it and made it the main process of law-making in the EU. On its website, the European Parliament offers an overview of the legislative powers it enjoys. [^]
The notion of “success” is here used in a quantitative sense, not a normative one. The scope of European integration keeps broadening, while the EU is becoming ever more capable in enforcing European law. If the original telos is an “ever closer Union”, then the European polity is well on track to meet it. Whether this is “good”, “desirable”, or whatnot and whether its modal features should be of a particular kind or another, is a separate discussion. [^]
Also worth reading on this subject is my essay titled: European integration, leftism, and the nation state. I comment on Thomas Fazi’s constructive criticism of certain idealist tendencies of the European left. Published in my EU politics blog on April 9, 2016. [^]
By “horizontal separation” we refer to the division of powers between the various branches of the polity (executive, legislative, judiciary, etc.). By “vertical separation” we denote the distribution of authority between the various levels of government (supranational, national, regional, etc.). [^]
This claim is in line with Articles 1 and 2 of the Treaty on European Union (TEU). The former recognises the nation states and European peoples as the constitutional subject of the Union. The latter documents the practical morality they have in common.
Article 1 TEU:
By this Treaty, the HIGH CONTRACTING PARTIES establish among themselves a EUROPEAN UNION, hereinafter called “the Union”, on which the Member States confer competences to attain objectives they have in common.
This Treaty marks a new stage in the process of creating an ever closer union among the peoples of Europe, in which decisions are taken as openly as possible and as closely as possible to the citizen.
The Union shall be founded on the present Treaty and on the Treaty on the Functioning of the European Union (hereinafter referred to as “the Treaties”). Those two Treaties shall have the same legal value. The Union shall replace and succeed the European Community.
Article 2 TEU:
The Union is founded on the values of respect for human dignity, freedom, democracy, equality, the rule of law and respect for human rights, including the rights of persons belonging to minorities. These values are common to the Member States in a society in which pluralism, non-discrimination, tolerance, justice, solidarity and equality between women and men prevail.
The exception to this would be those cases where intergovernmental politics take place outside the framework of EU law. For example the European Stability Mechanism is not envisaged in the European Treaties, though it is consistent with them and will eventually be brought into the European legal corpus. The same goes for the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union. The governments congregating as European Council may have to adopt a certain decision that is legally binding on them but technically is not based on the EU Treaties. These kind of legal gymnastics are worth studying for the sake of understanding the inventiveness of European leaders and their capacity to find solutions even when the EU Treaties seem to offer no good option. At any rate, no international covenant of such a sort can contradict the European constitutional order. What they do is complement it on the margin. [^]
When we allude to “the Treaties”, “European Treaties”, or “EU Treaties”, we are referring to the two international covenants that underpin the European legal order, namely: (1) Treaty on European Union or TEU, (2) Treaty on the Functioning of the European Union or TFEU. Both have the same legal status as primary law of the Union. [^]
It is “inferred” as such since the Treaties do not offer a proper name for it. “Delegated sovereignty” or “shared responsibility” are descriptive terms I have coined. [^]
Exclusive competence covers (Article 3.1 TFEU):
(a) customs union; (b) the establishing of the competition rules necessary for the functioning of the internal market; (c) monetary policy for the Member States whose currency is the euro; (d) the conservation of marine biological resources under the common fisheries policy; (e) common commercial policy.
Supportive competence includes (Article 6 TFEU):
The Union shall have competence to carry out actions to support, coordinate or supplement the actions of the Member States. The areas of such action shall, at European level, be: (a) protection and improvement of human health; (b) industry; (c) culture; (d) tourism; (e) education, vocational training, youth and sport; (f) civil protection; (g) administrative cooperation.
The meaning of delegated sovereignty—though not the exact term—and the provisions for its reversal are enshrined in Article 50 of the Treaty on European Union. [^]
There are a couple of exceptions to the rule of adopting the euro. Read the official summary for the United Kingdom’s and Denmark’s exemption from the third stage of Economic and Monetary Union. Sweden is another country that does not look likely to join the euro area. Technically, it has not been granted a formal opt-out. It just “fails” to meet the requirements. [^]
In technical terms, the euro represents the third stage of Economic and Monetary Union (EMU). It is meant to complete the development of the single market into a cohesive economy. All EU Member States are part of the EMU. Not all of them have reached the third stage, though they will eventually have to (opt-outs notwithstanding). [^]
The no-bailout clause is enshrined in Article 125 of the Treaty on the Functioning of the European Union. Strictly speaking, it does include language that can be interpreted in justification of the various bail-out schemes. [^]
What is interesting about the modalities of the Fiscal Compact is that it reveals exactly how creative European decision-makers can be when they find that the EU framework hampers their plans. Given the scope of the treaty, it also shows that the euro area has specific needs, which will most likely be further defined and institutionalised in future amendments to the EU’s primary law. [^]
We could name this “democratic sovereignty”. Perhaps though that is a superfluous qualification since a sovereign state in the modern international legal order has to be democratic or, more generally, to partake of certain universal values. [^]
“Banal nationalism” is just the widespread sentiment of belongingness to a nation. It should not be confused with nationalism, an ideology that prioritises—even exalts to the extreme—the national construct over every other facet of the polity and usually is intimately linked with ultra-conservative, authoritarian politics. [^]
The only EU institution that enjoys direct input legitimacy is the European Parliament. That still is not enough to change the bigger picture where the Parliament is but one of the many parts—and not the most important one. [^]