Notes on Completing Europe’s Economic and Monetary Union

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On June 22, 2015, the European Commission published a report (pdf) on Completing Europe’s Economic and Monetary Union. It is signed by presidents Juncker (Commission), Tusk (European Council), Schulz (European Parliament), Draghi (European Central Bank) and Dijsselbloem (Eurogroup).

In what follows I elaborate on my thoughts concerning the main themes of the report, namely (1) the underlying culture of stability, (2) the predominance of common rules over common politics, and (3) the politics of wage repression.

The culture of stability

What the EMU architects have always sought is ways to “de-politicise” the stated objectives of individual policy instruments. This has typically resulted in the enumerative legislative practice of hard-wiring complex rules in an ever-expanding maze of technical arrangements.

For example, the famous Maastricht criteria of 3% budget deficit and 60% public debt were enshrined in the Stability and Growth Pact, in an effort to permanently remove them from [any possible] future parliamentary review. For them to change, the SGP needs to be amended or abolished—and that is not up to any given parliament’s deliberations, be it the European or a national one.

The main benefit of this approach is to establish strong institutions that offer little room for arbitrariness. They provide for stability—for a _culture _of stability—and thus engender confidence in the validity of stipulated procedures and provisions.

On the downside though, their inherent inflexibility can prove to be too rigid a constraint. Borderline scenarios or cases of emergency often require swift, decisive, and adaptable action. A tight legal framework can force decision-makers into near powerlessness or, conversely, compel political leaders to employ shrewd lawyers with a purpose to use—or abuse—any loopholes.

Considered in conjunction with the already complex and multifaceted policy-making processes of the EU, this setup is, nolens volens, geared to deepen and lengthen periods of extreme duress, such as economic crises. The asymmetric shocks across the euro area are clear indications of such systemic flaw, with the case of Greece being the worst possible outcome (notwithstanding the numerous endogenous factors contributing to Greece’s economic depression).

As concerns the EMU, the process of grounding the project in this sort of legal-institutional order of stability was already underway, albeit at a painfully slow pace, when the 2008 financial crisis hit. Policy-makers were caught unprepared, lacking properly fleshed out tools for addressing the crisis and arresting the downfall. Unchecked market failures together with structural institutional inadequacies reinforced a system-wide crisis, the likes of which have never been witnessed in the history of European integration.

European leaders searched for means to circumvent self-imposed limitations, such as the notorious “no bailout” clause. The result was a series of ad hoc procedures aimed at delivering retroactive solutions to persistent and emergent challenges. Given the afore-outlined rigidity, they eventually had to venture in legally grey areas of exploring intergovernmental arrangements outside the Community acquis.

Products of that exercise are the ESM Treaty and the Fiscal Compact (Treaty on Stability, Coordination and Governance in the Economic and Monetary Union). The guiding principle was to create the structures necessary for an “immediate” response to the crisis and, with conditions gradually coming back to normality, think about how to incorporate them in the EU’s legal corpus.

As is recognised in the report of the five presidents (p.4):

Europe’s Economic and Monetary Union (EMU) today is like a house that was built over decades but only partially finished. When the storm hit, its walls and roof had to be stabilised quickly.

Common rules without common politics

I think the lesson to be learned from the Euro crisis, at least as concerns this very subject, is that common rules are not enough to guarantee cohesion. Rules and strong institutions are essential to any modern democracy, yet their function consists in framing, complementing and instantiating political will. There has always been relatively much in way of common rules; there has been precious little in terms of common politics.

With the presence of the former and the absence of the latter, decisions are to be made against the backdrop of intergovernmental affairs, and become subject to abuse in circumstantial power relations that may exist therein. Since the EU/EMU is not a mere international organisation, but a quasi-confederal entity on the range of policies over which it has competence, the results of intergovernmental—and intergovernmental_ist_—politics and backdoor bargaining ultimately have to be standardised via European institutions, providing them with a patina of “Community method” and “federalism”.

I have previously argued that the edifice suffers from a fundamental sovereignty mismatch. I would contend that the ethos of the EMU, what permeates and sustains it, has never been outright endorsed by the majority of European citizens. In terms of perception, ownership of the project is not theirs. Most citizens are alien to it, thinking of its rules as instances of heteronomy.

[hetero-nomy is rule by other, i.e. the opposite of auto-nomy]

I am not trying to formulate—nor do I agree with—the dubious ex cathedra pronouncement that “these are too technical topics for people to understand”. All I intend to suggest is that the citizen who has not spent a considerable amount of time studying the EU’s and the EMU’s particularities and peculiarities does not see in “Europe” some compelling paradigm of democracy.

What they see is a group of presidents, five in number, some more technocratic than others, signing a roadmap whose realisation is expected to deliver a political entity that has no clear constitutional identity. What will the envisaged EMU be? Though we may speculate in advance, I guess we will have to find out after the fact, inappropriate as that may be.

Notwithstanding the inopportune timing of its publication (due to the events in Greece), my feeling is that this report would have drawn far more attention from the public had it concerned something more relatable such as, say, the creation of a “United States of Europe”.

The report certainly aims at aligning various instruments with EU law. That in itself is a worthy effort. If we are to have common rules, we might as well incorporate them in our common legal framework. Yet the report adopts a quantitative approach to rule-formation, which will not alter the state of affairs in favour of expanding the scope for common politics.

Too little is suggested in the form of substantiating the political dimension of the overall architecture. Though, normatively, constitutional matters are addressed at Treaty level, this report does nothing to streamline things, in an effort to prepare the ground for a new Treaty that will consolidate the legal order of the Union. Instead of labouring to simplify the EMU, the five presidents are encouraging an increase in its complexity and concomitant, albeit unintended, opacity.

The politics of wage repression

On the economic front, a great emphasis is placed on a very narrow conception of competitiveness; one which ultimately comes down to the cost of labour. I am not at all convinced that the realisation of a “social market economy”, a stated objective of the EMU, is as limited a concept as this much-vaunted, and ultimately misguided, “competitiveness” seems to suggest.

Let us comment on this proposal from the report (p.7-8) [emphasis my own]:

The creation by each euro area Member State of a national body in charge of tracking performance and policies in the field of competitiveness is recommended. This would help to prevent economic divergence and it would increase ownership of the necessary reforms at the national level. These Competitiveness Authorities should be independent entities with a mandate to ‘assess whether wages are evolving in line with productivity and compare with developments in other euro area countries and in the main comparable trading partners’, as already agreed by a large majority of Member States under the Euro Plus Pact.

There is no denying that the cost of labour is a factor in economic activity. It is not the only one though. Where are the environmental values? What about health, education, the infrastructures that enable and empower productivity? Where is longer-term research that will fertilise and sustain innovation in areas where market forces are not yet willing to invest in? Where are such criteria as wealth inequality and quality of life?

The gist is that economic policy prescriptions in the EMU have come down to a pernicious and simplistic recipe for reducing and constraining labour costs, hoping for “the market” to do all the rest. As a former libertarian, I may claim that such worldview is far more ideological than it is factual. “Competitiveness” is just a much fancier term for describing the politics of wage repression.

There is nothing wrong with setting up policy-specific governmental entities. This is common practice for all sorts of issues. What is questionable and ultimately objectionable, is to deliberately render economic policy viable for the fewer, for those who happen to be on the upper parts of the income distribution.

The implicit moral framework of that class ideology, which only comes to the fore when conditions reach a critical point and niceties are abandoned, consists of at least two parts:

  1. superiority—doubt their integrity: if an economy is underperforming, then the vast majority of its working force is being paid more that it deserves to or, perhaps, they are lazy;
  2. purity—blame the victim: if you happen to be unemployed it most likely is due to your high demands for renumeration and/or to their misalignment with your productive capacity; whatever the case the fault is mostly yours.

With respect to what was argued in the previous sections, such sort of economics will be enshrined in treaties, pacts or regulations, to the effect of being exalted to a status of pseudo-permanency. Another case of “de-politicising” a policy. Instead of that, we ought to always have the power to question, consider, and revaluate it through the ordinary procedures of representative democracy.

Consider further, the lack of real effort to push for the establishment of system-wide automatic fiscal stabilisers (p.7):

In EMU, monetary policy is centralised, but important parts of economic policy remain national. However, as the crisis made particularly visible, euro area members depend on each other for their growth. It is in each member’s common and self-interest to be able to cushion economic shocks well, to modernise economic structures and welfare systems, and make sure that citizens and businesses can adapt to, and benefit from, new demands, trends and challenges. It is equally in each member’s interest that all others do so at a similar speed. This is crucial in a Monetary Union like EMU where large scale fiscal transfers between members are not foreseen and where labour mobility is relatively limited.

Let us be reminded that this report is a roadmap for implementing a series of reforms to the EMU architecture. The above statement does little other than reaffirm a commitment to—and tacit satisfaction with—a clearly malfunctioning setup that exacerbates recessions and strengthens the underlying dynamics of wealth concentration. The report of the five presidents is quite clear. The assumptions underlying the economic policies to be pursued henceforth are very well defined and all-encompassing.

Against this backdrop, the pro-european leftist mantra of “yes to Europe, no to austerity”, seems to be divorced from the EMU’s actuality and the economic-institutional outlook thereby established.

What must a pro-european do if, contrary to what is becoming standard EU policy, they believe that European integration and narrow-sighted economics are two distinct magnitudes? Other than advise to vote for parties that toil against the egregious misconceptions underpinning EMU conduct, I honestly have no persuasive argument to propound.

A missed opportunity

In conclusion, I treat this report as a missed opportunity. Some good ideas are put forward, yet they remain confined to the same-old mindset that has repeatedly been proven wanting on a number of levels. It is high time we witness a shift away from those methods and presumptions. What we need in Europe is a fully fleshed out democratic turn. It seems like this won’t happen any time soon. Don’t search for such a vision in that document.

Other than that and as concerns the process of European integration, this report reaffirms the inexorable drive to form a two-tier Union. There is a clear chasm in outlook between the countries sharing the euro and the ones that do not. The former group is to strive for a “political union” of sorts, while the latter will remain a spectator on the sidelines of the project. This perhaps is a pragmatic approach to deal with the realities imposed by such member states as the United Kingdom. In the longer term, it may prove to be beneficial for all sides, though given the afore-mentioned it might inadvertently make the case for less EMU more plausible.

Lastly, on enacting democratic reform across the EU edifice, there is a tacit recognition of the two-fold fact that (i) Treaty amendments are necessary but unlikely to happen any time soon, and (ii) in their absence the EMU will continue to be sub-par in terms of the standards of modern representative democracy, suffering from the _sovereignty mismatch _I have previously outlined.