Not Just Another Recession
Why the Global Economy May Never Be the Same
When the heads of the EU’s three major institutions -- the European Commission, the European Council, and the European Parliament -- collected the Nobel Peace Prize together in Oslo last December, they spotlighted the vague mandate and lack of institutional clarity that are at the core of the organization’s current problems. Unless these institutions can garner legitimacy among European citizens and transform the EU into a real federal union, with common fiscal and economic policies to complement its single currency, Europe will be worried by its future as much as its past and continue to find its social model battered by the gales of an ever more competitive global economy.
The first step forward has to be developing an economic growth strategy, to escape the union’s current debt trap and to create breathing space for the tough reforms that can make Europe as a whole competitive again. As former German Chancellor Gerhard Schroeder has said, “Structural reforms can only work in conjunction with a growth trajectory.” Then, to sustain reform, the union needs a clear path to legitimacy for a strong but limited European government, one that resembles today’s Swiss federation. This will entail creating an executive body that is directly accountable to Europe’s citizens (emerging from the current commission), strengthening the parliament as a lower legislative house, and turning the council (a committee of the leaders of the member states) into an upper legislative house. Along the way, France will have to yield more sovereignty than its historic comfort zone has so far allowed, and Germany will have to realize that its own self-interest calls for it to bear the burden of resolving the current account imbalances within the eurozone.
The key to creating a federal Europe with legitimate governing institutions is appropriate implementation of the principle that Europeans already know as “subsidiarity,” with higher levels of government taking on only those functions and responsibilities that cannot be fulfilled at a lower level. The Berggruen Institute on Governance’s Council for the Future of Europe has sought to address these issues by gathering a small group of Europe’s most eminent and experienced political figures to debate and design the institutions that would govern a federal Europe and then plot a path forward, step by step; this article draws on their discussions.*
THE GERMAN PROBLEM
Proponents of a federal Europe need to make their case to an increasingly skeptical European public by stressing not only the benefits of a united continent, with the world’s largest market and free mobility of labor and capital, but also the inadequacies of Europe’s existing structures as a basis for success in an increasingly globalized world. German Chancellor Angela Merkel has put the issue squarely: Europe today has seven percent of the world’s population, produces 25 percent of the world’s products, and accounts for 50 percent of its social spending. Without reform, in an ever more competitive international economic environment, it will be difficult to finance the generous welfare state that Europeans are used to. The European public, notes former Polish Prime Minister Marek Belka, has come to see the common currency as “amplifying the dislocations of globalization,” instead of shielding Europe from them, as if the advent of the euro helped hand Europeans’ economic fate over to global financial markets and their jobs to distant low-wage countries, such as China. In fact, he points out, the reverse is true: the only way to make Europe competitive again and reap the benefits from globalization is to embark on a political union.
The failure of the euro would harm Europe’s core every bit as much as its periphery, and Germany’s middle class could well pay the highest price. Germany’s success as Europe’s most competitive trading nation today can be traced back to the structural reforms it enacted several years ago, including increasing the pensionable age and trimming labor costs while spurring investment in training and research and development. These have helped manufacturing to continue to account for a healthy 24 percent of the German economy. What never seems to be debated in Germany, however, is how this industrial foundation of German prosperity would be threatened if the euro failed. In that case, Germany would be forced to return to the deutsch mark, the value of its currency would skyrocket, and the competitiveness of its manufacturing sector would plummet. German multinational companies would waste little time before shifting their production out of Germany to take advantage of lower foreign labor costs, the global spread of technology, and the web of supply chains that enables quality production elsewhere. Research and design might remain at home, but the production and assembly associated with plentiful middle-income jobs would move away. The big losers in such a scenario would be the members of the German middle class -- and so, properly understood, for Germany, the euro is a class issue.
Yet precisely because of its historically strong manufacturing economy, Germany has become less oriented to financial markets than other states, which has led to a certain deafness among German political elites to the effect of Germany’s prescribed fiscal policies for Europe on global bond markets. Today, however, the reality is that those bond markets will dictate not only whether the euro will survive but also the costs that the German middle class will pay. If Germany wants to remain a broadly prosperous and fair society in a globalized world, it can do so only within a stable eurozone and all that that entails -- to start with, a banking union, then fiscal union, and, ultimately, a federal political union.
If the euro were to fail, moreover, the German financial sector would also take a hit and further damage the economy. The domino effect of default in the European periphery would ultimately end up hitting German banks and savers alike, since they are among the major creditors owning those troubled debts (with outstanding loans in 2012 of more than 300 billion euros to Greece, Ireland, Italy, Portugal, and Spain). And failure of the eurozone due to hesitation in Berlin would place the blame for the ruin of Europe on Germany, something neither the public nor elites there want.
Germany has multiple strong reasons to want to maintain the euro, therefore, but to do so, it must help correct today’s destabilizing current account imbalances by accepting a diminished external surplus. Indeed, with a diminished surplus, the so-called transfer union that so many Germans oppose -- a permanent subsidy for the weaker peripheral states -- would be unnecessary. But with continued large external surpluses, it would become indispensable, since only that would allow other Europeans to finance the purchase of German goods. The real issue for Germany today is thus not about bailing out the rest but about saving itself before it is too late.
History offers few notable examples of successful political federations. At its moment of federation, in the 1780s, the United States was a sparsely populated handful of young states with a common culture and common language, and so it does not provide many relevant lessons for Europe today. Switzerland’s experience, however, offers more, one of which is about slow gestation. “Federation needs time,” says the former Swiss diplomat Jakob Kellenberger. “It took centuries for people living in Swiss cantons to get to know each other, then a long period of confederation before the move toward full federation in 1848. That transition was made only following an historical moment of great tensions between liberals and conservatives, Protestants and Catholics.” The Swiss federation has worked, he notes, because the center has been respectful of the autonomy of the cantons (which were never anxious to hand over their authority) and careful not to abuse its powers. All powers not specifically delegated to the federal government by the Swiss constitution, moreover, continue to be held by the cantons. With decades of step-by-step integration already behind it and an accelerating world ahead, Europe must accomplish its shift to full political union in years and decades, not centuries, but this shift can nonetheless usefully follow much of the Swiss model.
Asked once how he would account for the prosperity of the Scandinavian nations despite their high tax rates, the economist Milton Friedman responded that it was because their common identity and homogenous culture had enabled consensus to emerge. Free markets, he pointed out, were important precisely because they allowed people without a common identity to work together, even if they hated one another. Such a process of integration has worked well in Europe so far, but in order to lock in the gains and connections, institutions need to follow where markets have already gone. These institutions must be limited to providing public goods that are in the common interest, even as they avoid unnecessary interventions in the autonomous lives of the union’s national units. Like Switzerland, in other words, Europe needs a strong but limited central government that accommodates as much local diversity as possible. As is the case everywhere, it is a matter of balancing priorities. Governance works best -- because it is more legitimate and accountable -- when the scale is small; markets are most prosperous when the scale is large.
One area that certainly needs centralized regulation and institutional guidance is finance. As former Spanish Prime Minister Felipe González has argued, “It is ridiculous for member states to maintain different rules in this common and integrated space where financial institutions operate freely. The absence of homogenous regulation will only sow the seeds of the next financial crisis and hobble Europe in the decades ahead as it faces new competitive challenges in the global economy.” European countries also need to agree to common balance-of-payments requirements and a harmonized minimum taxation in order to fund a European budget. Such moves would help drive deep structural reforms in individual countries, such as increasing flexibility in labor markets, that would promote competitiveness.
Some argue that aligning European states more closely on issues such as wage levels, the social contract, and tax rates should be the task of the European Commission -- which represents all 27 member states -- rather than of intergovernmental treaties whose negotiation is inevitably dominated by France and, particularly, Germany. This makes sense, but for the commission to take on such a role, it will need to acquire much more popular legitimacy. This means that the commission’s president will have to be elected directly by European citizens at large, in order to give a face to the political unity of Europe. The parliament and the council, meanwhile, need to be able to initiate legislation (a power only the commission has now). It would also make sense to allocate seats in the parliament in a way that more accurately reflected the populations of the member states and to create the office of a commissioner for savings, who could help see to it that the member states met their various financial and budgetary commitments and obligations.
Former German Foreign Minister Joschka Fischer, meanwhile, has suggested leveraging the current legitimacy of the nation-state to forge a more effective common European budget policy. “Because there can be no fiscal union without a common budget policy,” he has argued, “nothing can be decided without national parliaments. This means that a ‘European Chamber’ -- comprising national parliament leaders -- is indispensable. Such a chamber could [start out as] an advisory body, with the national parliaments maintaining their competencies; later, on the basis of an intergovernmental treaty, it must become a real parliamentary control and decision-making body, made up of national parliaments’ delegated members.” (In a similar vein, the German philosopher Jurgen Habermas has suggested bridging national and European sovereignty by having “certain members of the European Parliament at the same time hold seats in their respective national parliaments.”)
Although a federal Europe must be open to all eu member states, forward movement toward it should not be blocked because some are not yet willing to go there, but nor should it be imposed from on high. The democratic public of each state will have to decide whether it is in its long-term interest to join the federation or opt out. It is an illusion to believe that a strong political union can be built on the weak allegiance that results from tweaking treaties. Its foundation must be a popular mandate. The appropriate venue for these discussions, as Schroeder and others have suggested, would be a full-scale European convention. Former Belgian Prime Minister Guy Verhofstadt, the German politician Daniel Cohn-Bendit (both members of the European Parliament), and others have proposed turning the 2014 elections for the European Parliament into the election of a constituent assembly to draft a new constitution for Europe that would incorporate these sorts of ideas.
How, specifically, might a political union in Europe work? The European Parliament could elect the chief executive of the European Commission, who would then form a cabinet of ministers out of the larger parties in the parliament -- including a finance minister with the capacity to levy taxes and formulate a substantial budget on a Europe-wide basis. The finance minister’s focus would be macroeconomic coordination, not microeconomic management. Other cabinet positions would cover the provision of supranational European public goods (defense, foreign policy, energy, infrastructure, and so forth), leaving as many decisions on other matters
as possible in the hands of the national governments within the federation. The European Court of Justice would arbitrate any issues of disputed sovereignty arising between the commission and the member states.
Because the parliament would have enhanced power, selecting a chief executive for the union, it would make sense to have parliamentary elections based on Europe-wide lists instead of national party lists. Having more at stake in the elections would lead to more discussion and higher rates of voting, which would mean more legitimacy for the results and the institutions in general. Parties that obtained less than ten or 15 percent of the vote in Europe-wide elections would be present in debate but could not vote. Such a rule would tend to push politics toward centrist compromise and avoid gridlock that might arise from the veto power of small parties in a coalition.
The current European Council, in this scheme, would be transformed into the upper house of the union’s legislature. Members would be selected by nation-states for staggered terms longer than the shorter electoral cycle of the lower house of the parliament, thus encouraging a longer-term perspective on governance. Unlike the lower house, which would focus primarily on the short-term interests of its national constituents, the upper house would be a more deliberative body, focused on broader and longer-term questions. Representation would be based on a proportional system according to the member states’ populations.
In order to preserve some of the nonpartisan, meritocratic quality of the current commission, each cabinet minister in the commission would be paired with a permanent secretary from the European civil service in his or her area of competence. As in an ideal “Westminster system,” the formulation of budgets would rest with the commission, not with the parliament. The commission’s budget would be presented for an up-or-down vote in the parliament; a vote of “constructive no confidence” by the parliament might reject the policy direction set by the commission, in which case a new government would be formed. (A constructive no-confidence vote is a consensus-forging mechanism whereby a no-confidence vote can take place only if majority support for a new, alternative governing coalition has already been secured.) Taxes and legislation would have to be approved by a majority of both legislative houses.
IF NOT NOW, WHEN?
Any move toward such a political union would obviously raise myriad thorny issues. The new institutions and their rules would ideally be established from the bottom up through a constituent assembly, rather than by a treaty change -- but how could a truly ground-up process ever get traction? The large parties that would win the most seats in the European Parliament would need to hash out a compromise or a common agenda robust enough to make governing possible -- but what if they did not? And what is most fundamental, could a political union ever really cohere if not preceded by continent-wide nation building aimed at forging a forward-looking common identity? What is crucial now, however, is recognition that the current system is not working and that closer, rather than looser, integration is the more sensible and attractive option.
In 1789, Alexander Hamilton, then the U.S. secretary of the treasury, proposed a strong federal system of government that would assume the states’ debts from the American Revolution while guaranteeing a steady future revenue stream, further integrating fiscal policy while preserving a large swath of local sovereignty on nonfederal issues. This was the first step in making the United States a continental and, ultimately, global power. So, too, in Europe, debt resolution can be the midwife of a political union that could make Europe a powerful pillar in the geopolitical order of the twenty-first century. The only way to answer Europe’s current challenge in the face of the many uncertainties is for Europe’s leaders, and its public, to at last commit to this transformation instead of remaining paralyzed with hesitancy.
* The members of the group are Marek Belka, Tony Blair, Juan Luis Cebrián, Jacques Delors, Mohamed El-Erian, Niall Ferguson, Anthony Giddens, Felipe González, Otmar Issing, Jakob Kellenberger, Alain Minc, Mario Monti, Robert Mundell, Jean Pisani-Ferry, Romano Prodi, Nouriel Roubini, Gerhard Schroeder, Michael Spence, Joseph Stiglitz, Peter Sutherland, Matti Vanhanen, Guy Verhofstadt, Franz Vranitzky, and Axel Weber.