Europe’s ever closer inter-governmentalism

2015-10-10

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Article 1 of the Treaty on European Union states the following (emphasis is my own):

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.

“Ever closer union” provides the direction of the European integration process, without attaching to it any specific normative end. It is vague enough to apply to a very broad set of political organisations, ranging from the quasi-confederation of the present, to a proper federal republic.

Context matters

Vagueness is not a problem per se. In constitutional law, and international treaties, a degree of abstraction is desirable, as it enables flexibility, allowing the polity to cope with evolving needs and circumstances via the rational, circumstances-aware use of secondary legislation.

A descriptive and enumerative primary corpus of law can become so rigid to the point where the system begins to malfunction (also as a Cypriot citizen I can attest to how an ill-designed constitution may force a state into implosion—see the Cyprus dispute and how the island remains divided).

In my view, the problem with “ever closer union” may be inferred from the milieu in which it is now found in. It can be argued that in the 1950s it made sense to view integration as a domino effect, where harmonisation over one area of policy has spillover effects in another, engendering the need for further coordination at the Community level. Only gradually did the regulatory framework of the single market come into being, through a process of trade liberalisation that started from the industries of coal and steel.

Much has changed since those early days. The European Economic Community (EEC) was maintained as a means for harnessing the potential of economies of scale on the areas where harmonisation occurred. However, the transformation of the EEC into the European Union (EU) heralded a change in the scope of the European integration process, epitomised in the introduction of the euro.

The single currency has dramatically altered the modal features of integration, yet the underlying mindset has, for the most part, remained unchanged, trapped in the mid-20th century.

Between trade liberalisation and monetary union

The projects of a single market and a monetary union are profoundly different, even if they may belong to the same ideology of liberal economics. Creating a single market between states is the practice of reversing protectionism. It involves age-old practices for eliminating barriers to trade between the contracting parties, while raising obstacles to economic activity for third parties. Trade liberalisation practically means a mutual abolition of those regulations that create cross-border incompatibilities, in conjunction with the formulation and establishment of a new set of common rules.

The rightfully criticised TTIP (Transatlantic Trade and Investment Partnership) is, in my opinion, a pact under negotiation that best illustrates the notion of trade liberalisation as reverse protectionism. It also is worth examining for it seems to incorporate the lessons learned from the process of European integration: trade agreements that embed rules in an international, supra-state, largely technocratic framework.

Contrary to international trade, monetary union is, whether recognised or not, an endeavour in state-building, which starts from the institutions that deal with economic affairs. Member States cannot just agree to mutually abolish some minor set of provisions, as if there were no effects beyond those envisaged in the agreement.

Monetary integration has far-reaching ramifications, all which have been exposed courtesy of the euro-crisis, such as:

• expected convergence: market expectations are shaped in such ways that all Member States, by virtue of partaking in a single currency bloc, are treated as if their longer term risk profiles were identical, fostering the convergence of interest rates on sovereign bonds;
• erratic capital flows: capital flows adapt to the opportunities that arise from such perceived uniformity, leading to unsustainable market distortions that are made manifest in bubbles of various sorts;
• exposure to asymmetric shocks: with no monetary instruments at their disposal, and with the single market decisively preventing any form of protectionism, Member States are left with a very narrow space for adapting to evolving circumstances, meaning that they may prove powerless to cope with an asymmetric shock, and/or be forced into implementing policies that repress direct and indirect labour costs (aka “internal devaluation” or “austerity”).
• state-bank symbiosis: banks are encouraged to take on public debt, not least due to its increased attractiveness as a safe asset, inadvertently creating a feedback loop between themselves and states, which in times of crisis makes for a toxic combination of concurrent financial and sovereign debt crises.

The peculiarities of monetary union suggest that integration on that front cannot be reduced to a mere exercise in harmonisation. Unlike trade liberalisation, monetary union imposes a certain set of mutually exclusive choices. In particular, it forces Member States to transfer part of their sovereignty to the supra-national stratum of authority. To that end, the Economic and Monetary Union (EMU) is a suitable case study for Dani Rodrik’s famous “impossibility theorem”. As the eminent professor puts it in a blog post from June 2007:

[…] democracy, national sovereignty and global economic integration are mutually incompatible: we can combine any two of the three, but never have all three simultaneously and in full.

The EMU is hitherto giving up on democracy so as to preserve its inherent inter-governmental structure (national sovereignty) while economic integration deepens and broadens.

Euro and inter-state coordination

The euro is stateless fiat money that operates on the same premise as the single market: inter-state arrangements reinforced by supra-national institutions.

The process of administrating the single currency is not akin to that of a federal republic. Instead, it involves policy coordination between Member States, centred on budgetary surveillance and a set of macroeconomic indicators under the purview of the European Commission. The European Semester, where economic governance takes place, is heavily dependent on inter-state relations, and the balance of power therein.

As Pier Carlo Padoan, the Italian Finance Minister, admits in a recent speech, the system is predicated on “trust” between national policy-makers:

One lesson arising from the crisis, is that the stability and progress of economic and monetary union requires more mutual trust, and a more forceful systemic approach, which implies more attention to the positive externalities of the integration process. Mutual trust can be accumulated by showing peers that one country abides by the rules. Rules must be designed so as to reward good individual behaviour and discourage uncooperative behaviour (i.e. prevent moral hazard).

This sort of narrative is not some morality tale about the frailties of human character, notwithstanding the possibility that some decision-makers may be moralistic in their interpretation of the policy challenges at hand. The insistence on “trust” reflects the suboptimal “peer pressure” model of the euro’s economic governance. It demonstrates its inherent inter-governmentalism. There is no other way than inter-state coordination to make numerous states enforce the same set of rules while maintaining the desired impression of national sovereignty over all areas of policy that fall within the scope of the EMU.

“Ever closer union” as is currently being applied to the euro’s economic governance is but the reinforcement of the so-called “Community Method”, the quasi-confederal method: inter-governmental politics, with the support of EU institutions, especially the European Commission, the European Central Bank, the European Council, and the quasi-legal entity of the Eurogroup.

The euro-crisis could have been a unique opportunity to overcome the old gradualist mindset for European integration. Instead of a quantum leap in the direction of constituting a federal republic, political leaders clung on to their failing practices, and established the new ruleset of the EMU as yet another platform for inter-state bargaining.

The retroactive policy response to the crisis, culminating in the Two-Pack and Six-Pack of Community regulations, as well as the Fiscal Compact and the ESM Treaty, only succeeded in calcifying and expanding the technocratic elements of the pre-crisis EMU. What we now have as the framework for economic governance, is the vivid realisation of an otherwise uninspired vision for the political unification of Europe, which comes in the form of common rules without—or with limited scope for—common politics.

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

Europe as idiosyncratic foreign policy

As concerns the way forward, it is becoming increasingly apparent to anyone following the events that the pensée unique of “more Europe”, the ambition of the misguided pro-european, has not changed by a single iota. The report of the Five Presidents, Jean-Claude Juncker’s and Emmanuel Macron’s notion of “economic government”, Mario Draghi’s “political centre” for the euro, and the like, are all instances of the same old mentality that made the EMU a quasi-confederal technocracy in the first place.

One would hope that “ever closer union” in the aftermath of the euro-crisis would entail an outright federalisation of the EU or the EMU, to correct what indeed was evidently flawed in the original policy regime. Though there are voices calling for the system to be transformed into a federal republic—present author included—the political mainstream continues to see in “Europe” and in “Brussels” a special kind of foreign policy.

Perhaps part of the reason for this intellectual inertia is to be attributed to the very narrative that guided the regulatory response to the financial crisis. While resting on a kernel of truth for some cases, irresponsibility over fiscal policy was perceived as the root cause of the EMU’s imbalances (remember those lazy PIIGS?).

The underlying rationale of the original Stability and Growth Pact (SGP) was touted as prudent (which was confirmed by the introduction of the European Semester). There was no recognition of the fact that the overall architecture of the euro—the absence of a fiscal capacity for addressing structural asymmetries, the lack of deeply integrated capital markets, the non-existence of a banking union, the overall disconnect of monetary and economic policy from ordinary parliamentary politics at Union level—did make the crisis primarily systemic.

What was identified as the main area for improvement, was the enforcement of legal provisions. It is lamentable that such a rather unambitious approach was preferred, for it asserted that the architecture was essentially sound, and that whatever necessary changes beyond a “banking union” and a “fiscal union” would be limited to secondary issues, whose scope would be to place a more credible check on the presumed weaknesses of human ethos: a powerful constraint on “frivolous” fiscal policy.

Greece was a case in point, with a budget deficit that wildly violated the rules of the SGP. But Greece’s crisis has been proven unique in a number of ways, implying that the generalisation of the moralistic rhetoric for controlling spendthrift propensities was both analytically incorrect and practically flawed. With such provisions as those that effectively prohibit moderate and responsible expansionary fiscal policy, the Union is, in principle, depriving future policy-makers from instruments that could have been used to mitigate or ameliorate a financial shock.

We thus come back to the much-vaunted issue of “trust”. Rhetorically it remains very important for the unencumbered operations of economic governance. In practice, the tactic has been to hard-wire strict provisions in an ever-expanding legal order, which cumulatively result in a centralised-and-centralising control over fiscal policy.

When national policy-makers are thinking of Europe they are trying to conceive of ways to make their peers fall in line with a certain proposition or set thereof whose aim is to limit the scope for independent action. What once stood as harmonisation of trade provisions, now and with the specifics of monetary union, assumes the form of an inexorable drive for uniformity; a process for standardisation which can only be enforced in a top-down, technocratic, and only-ostensibly decentralised fashion due to the fact that the EU is not a republic with a legitimate government that could have conducted [federal] policy for the good of the system at-large.

With the exception of the European Parliament, which is anyway far less powerful than what is sometimes assumed, the European Union remains a special case of international relations among its Member States. Europeans do not elect a European executive (spitzenkandidaten litanies to the contrary notwithstanding). They do not have representatives in a bicameral European Congress. There is no European Treasury under the political direction of a Ministry of Finance, nor is there some European Chancellor of the Exchequer who can exercise democratic control over the European Central Bank. Further, the primary law of the Union is not a constitution, but a set of inter-state treaties, making the high contracting parties (Member States) not citizens the constitutional subject of this organisation, and hence consolidating inter-state politics as the default mode for rule formation in the Union.

Most of the euro-crisis management happened behind the closed doors of Europe’s various inter-governmental settings, typically in the institution of the European Council, or the Eurogroup, its quasi-legal equivalent for the euro area. The very fact that the Eurogroup has de facto become such a powerful player is indicative of the prominence of the inter-governmental modus operandi.

In search of alternatives

Though I personally have reservations as to the direction of European integration, I think that a credible alternative has yet to gain momentum. By “alternative” I do no mean some purportedly radical party which promises much while having the capacity to deliver precious little, nor do I have in mind the kind of atavistic “plan B” that Mr. Varoufakis is campaigning for. I am referring to a new vision for the future of Europe, what I tend to refer to as “altereuropeanism”.

Such an idea (which is not “my own”) is the one that calls for the EU to become a federal republic. This does not concern day-to-day politics, such as whether one is for or against austerity. It is a discussion on the primary law of the Union, the abstract structure of this potential state. Though I do endorse that federalist or republican position, I have to admit that it remains a fringe view, also because the issues of EU primary law and EMU governance continue to attract a niche audience.

No mainstream party is openly supporting the federalisation of the Union. All governments in the EU are more-or-less in agreement when it comes to maintaining the quasi-confederal status and outlook of the system. Their thinking is that this represents a “win-win situation” as they can preserve enough national sovereignty—whose flip-side is inter-governmentalism—while also having a supra-national institutional layer that deals with “technical” issues, such as the conduct of economic governance in the EMU, the regulation of the single market, and the hammering out of trade agreements with non-EU countries.

Alas, this mindset has failed to account for the modalities of monetary union, remaining trapped in an outdated view of European integration as trade liberalisation and of European politics as technical in scope and international in nature. Couched in such terms, republican values, which already apply at Member State level, at least in principle, are omitted from whatever public debate on Europe. Indeed “Europe” and “Brussels” are brought into the discussion only when national politicians search for some scapegoat or bugaboo, or if the EU is cast in a more positive light, it typically is for the sake of calling on the need to strengthen some of its technocratic features.

What can be understood as the essence of the general direction of short-to-medium-term European integration, is that the commitment to “ever closer union” in the prevailing circumstances entails an expansion and reinforcement of the quasi-confederal method. A close reading of the afore-mentioned Article 1 of the Treaty on European Union contains all the valuable information:

1. Member States, not some European Demos, are the constitutional subject of the Union;
2. the EU is created as the assignee of its Member States, with the sole purpose of introducing and enforcing policies that are in the common interest of national governments;
3. “ever closer” inter-state politics will be taken close to the citizen provided that is possible or perhaps expedient—just ask the Eurogroup;
4. the primary law of the Union is a set of inter-state treaties that decisively hamper any effort to make the EU function as a genuine, constitution-based, federal republic.