Euro and the gradualist path to political union

2015-09-29

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In a September 28 article titled “Toward a Genuine Economic and Monetary Union?”, Otmar Issing, one of the euro’s architects and former chief economist of the European Central Bank notes the following (emphasis is mine):

In my view, however, the report, like the proposal to establish a European finance minister, is fundamentally flawed. While the report contains a number of important observations, its underlying assumption – that steps toward all of its goals should be taken in parallel, with a genuine political union emerging at the end of the process – is problematic.

Mr. Issing is writing about the so-called “Five Presidents” report, a document I have also criticised through several articles on this website. That report suffers from a fundamental problem, one that is peculiar to the very process of European integration: its gradualist approach.

Gradualism in context

European unification was never presented as an over-encompassing objective. Back in the 1950s when this process officially started the original Member States were interested in harmonising a very limited number of policies, starting from the industries of coal and steel.

Over the decades, often with the European Court of Justice providing the impetus, harmonisation extended to other areas of economic activity, eventually creating the single market. The “four freedoms”—freedom of movement for goods, persons, capital, and services—were gradually introduced and fleshed out in law, and the European Economic Community became the European Union.

The integration process was a step-by-step exercise in creating common rules. We may outline the underlying approach as follows:

• by means of a Treaty, establish the minimum necessary of supra-national rules and institutions over a specific range of policies;
• allow their interplay to deliver secondary rules and to eventually engender the need for another Treaty that will broaden and deepen the scope of those policies;
• the new Treaty will iterate on the previous one, initiating another phase of gradual integration, which is epitomised by yet another Treaty, and so on.

The items on that list provide a general description of the European integration process from its first day hitherto. To expand on our understanding of gradualism, the following may also be considered:

• functional necessity: integration must always satisfy a basic need, namely to correct whatever flaws or shortcomings present in existing Treaties; flaws or shortcomings that may have been recognised long in advance and dismissed regardless, as in the design and introduction of the euro;
• top-down politics: rule formation is contingent on the decisions of heads of state or government, be it in the occasion of a Treaty amendment, or in the formulation of a new set of policy priorities at the European Council which are then executed by the European Commission (the European Council, not some European Demos, mandates the Commission);
• inter-governmentalism: though supra-national institutions are in place, their role is to extend and to materialise the common will of the Member States’ governments; it is national governments that collectively have the first and final say in this quasi-confederal Union.

What the architects of the euro wanted to set in motion with the creation of the single currency was an inexorable drive for political unification. It was readily apparent that the euro, as it was first introduced, was not a well designed system. It did not have a fiscal capacity, was heavily dependent on inter-governmental bargaining, lacked a harmonised banking system, did not have a fiscal backstop, was not incorporated in a broader framework of a republic.

True to gradualism, the plan was to establish a monetary union, however flawed, to act as a catalyst in the acceleration of the European integration process. The modal features of monetary integration in conjunction with the functional requirements for the optimal operation of a currency union would necessitate far-reaching changes over broad areas of policy, covering fiscal, economic, and financial issues.

Put differently, the euro was conceived as the means for bringing about a series of faits accompli for the centralisation of authority. This has indeed been the case as can be demonstrated in the ever-elevated role of the Eurogroup, and in the introduction of the Two-Pack and Six-Pack of Community regulations as well as the Fiscal Compact, which establish a rather centralised framework for the exercise of economic governance in the Economic and Monetary Union (EMU).

[see analysis: On Draghi’s “political centre” for the euro]

Though it may be argued that gradualism serves the ends of the single market, it is most likely the case that it does not satisfy the needs of the single currency. It creates half-measures and ill-designed structures that need to be revised on a regular basis. In the meantime, national democracy is being eroded incrementally yet steadily without giving its place to a greater European democracy, creating a vacuum of legitimacy in the process.

Beyond gradualism

Mr. Issing concludes his article with the following:

Pacta sunt servanda – agreements must be honored. If this principle is permanently violated, how can one expect a prosperous future based on a new set of treaties that are even more demanding than the existing ones?

This statement is indicative of the very mentality that is at the heart of the problem. The principle of pacta sunt servanda concerns inter-state covenants and was conceived as a means to overcome the inherent constraint therein: the absence of a sovereign authority regulating affairs between nation states.

The model of inter-state treaties that maintain a quasi-confederal order with its stateless fiat money—the EU with the euro—can only work effectively under one condition: the reinforcement of an ostensibly apolitical set of institutions trusted with the capacity to enforce the principle of pacta sunt servanda in line with predefined, decontextualised, and inflexible procedures.

[see analysis: On the statelessness and flawed governance of the euro]

My view is that European integration cannot proceed along such technocratic lines. It is an unreliable, indeed undesirable, longer term commitment. The Treaties have delivered all they could. Instead of perpetuating the status of the EU as an international organisation, we ought to think differently, shifting our understanding of Europe from yet another theatre of international relations and competing nationalisms to a common space for trans-border and trans-national politics.

Instead of signing pacts that need to be served by states regardless of the circumstances, we should have a common constitution, a codified corpus of primary law, as the basis of a European republic. This is not a “new set of treaties” but an extension of the republican values that, in principle, already underpin the Member States of the EU.

Creating a European Democracy is no simple task. It may indeed prove to be unrealisable, as many a citizen may stand in opposition to it. It is however preferable to be honest about the objective, to place it in the public dialogue, to follow democratic norms, and to expect that if it becomes the guiding narrative the resulting European constitution will be approved by plebiscite. No more inter-governmental bargaining behind closed doors, no more inter-state treaties and international relations among Europeans. Just democracy on a greater scale.

The euro can’t return to its past

I think Mr. Issing is right to criticise the report of the Five Presidents for effectively continuing with the practice of placing the cart before the horse: of establishing common rules first while expecting common politics to emerge later.

Yet his tacit proposal is a throwback to the early days of the euro; to an era when it was considered desirable, indeed prudent, to have fiat money without a genuine state and to expect competing national governments, operating within the framework of inter-governmental relations, to regulate themselves in accordance with a limited set of macroeconomic indicators (the famous Maastricht criteria for public debt and budget deficit).

Mr. Issing thus fails to recognise the similarities between the euro’s early days and the present, remaining trapped in the same gradualist mindset that delivered the single currency and which now guides the Five Presidents in their uninspired vision for the future of European integration.