How a Great Power Falls Apart
Decline Is Invisible From the Inside
The European Union has always struggled to accommodate the democratic politics of its members. The problem became serious in 1999, with the creation of a currency union without an accompanying political and fiscal union. Then, beginning in 2011, the eurozone sovereign debt crisis turned what had been a real but manageable issue into a predicament from which the EU has no discernible escape. Stuck with an unworkable currency union, the EU can neither accommodate democracy in its member states nor suppress it. The result is likely to be the continuation of the pattern over the last decade: crisis after crisis with no lasting solution.
The confrontation between the Italian government and the eurozone authorities over the size of the Italian budget deficit is the latest example of the EU’s inability to cope with democracy. Both parties in the Italian coalition government, the Lega and the Five Star Movement, made tax and spending promises during the general election last year. But they cannot deliver on them, since doing so would mean running larger deficits. That would break commitments the previous government made to the European Commission and the fiscal rules enshrined in the treaties that set up the eurozone. Italy largely depends on the European Central Bank (ECB) to finance its borrowing, so it cannot simply defy the EU.
Yet the majority of Italian voters will not readily acquiesce to European control over Italian politics. Indeed, it was only after 2011, when the ECB and German Chancellor Angela Merkel pushed Italian President Giorgio Napolitano to fire the recalcitrant Italian Prime Minister Silvio Berlusconi and appoint a technocratic government, that the Five Star Movement began its spectacular rise. Today, the Italian government believes that the more it stands up to the EU, the more votes it will win in next May’s elections to the European Parliament.
Despite the euro’s obvious structural flaws, its member states cannot agree on what is wrong with it—let alone how it might be fixed. French President Emmanuel Macron has presented his proposals for eurozone reform as a practical necessity to equip the bloc for the next crisis. But his conviction that his solutions are indispensable mistakenly assumes that there is a consensus on what needs setting right.
Beyond some technical questions about the banking union, reshaping the euro is a political issue, and any change will have to be democratically legitimated by the countries that will bear the burden of reform. Macron wants a substantial eurozone budget, for example, which would have to be funded by the taxpayers of northern and central Europe. But those countries won’t go along. Several of them formed an alliance earlier this year, the New Hanseatic League, which comprises Estonia, Finland, Ireland, Latvia, Lithuania, and the Netherlands (and, for non-euro matters, Denmark and Sweden). They want stricter and better-enforced controls over national budgets, which would constrain southern European countries and probably France, too. The conflict won’t be resolved until one side or the other explains to their national electorates that as long as the eurozone includes countries with divergent economies, one set of members will have to bear a greater political burden than the others. Unable to confront the problem, the Eurogroup of national finance ministers earlier this week provisionally concocted yet another fudge.
The eurozone’s problems are structural. It is part of a multicurrency EU that is an effective labor union thanks to freedom of movement. And its financial center, in London, stands outside it. The path to the EU’s biggest rupture, Brexit, began in the problems these structural faults generated for British Prime Minister David Cameron’s first government. Once the eurozone crisis began in 2011, the economic fates of a large part of the eurozone diverged from that of the United Kingdom thanks to the differences in monetary policy between the ECB and the Bank of England. The ECB’s conservative approach pushed the eurozone into recession, while the Bank of England helped the British economy consolidate its recovery from the financial crisis. The United Kingdom then became the destination for people who could not find jobs in southern European countries where unemployment remained sky-high. British democratic politics had to absorb the consequences. The result was an EU referendum that turned in large part on the question of immigration.
Any attempt to resolve the EU's fundamental contradictions will only end up rupturing it.
The EU’s structural imbalances have been compounded by the ways in which the eurozone crisis shifted political power inside the EU. EU states that were not members of the eurozone could not shape the response to the biggest existential crisis the EU had ever faced. Moreover, Germany’s position as the main creditor in the bailouts of other eurozone members—and the fact that the ECB was for so long held back from launching large-scale bond purchases by fear of the response from the German government and Germany’s Federal Constitutional Court—dramatically increased German influence within the EU. For several years in the middle of this decade, European politics appeared to be a matter of waiting for Merkel to decide what to do. Would she expel Greece from the euro? Would she welcome migrants and refugees or negotiate with President Recep Tayyip Erdogan to keep them in Turkey? Would she make concessions to the United Kingdom to avert a potential Brexit?
Together, these two facts—the concentration of power in Merkel’s hands and the structural contradictions of the EU’s multicurrency union—provided the final push necessary for the Leave campaign to win the British EU referendum. Cameron’s ill-fated efforts to renegotiate the United Kingdom’s position in the EU before the referendum campaign began sought to reclaim some aspects of British sovereignty while remaining within the union. Cameron invested his hopes in Merkel’s influence. But the EU was unable to accommodate the United Kingdom’s domestic problems, and all Cameron delivered to the British public was a perfect demonstration of the limits of British political power within the union. Cameron asked Merkel to decide what the EU wanted its relationship with the United Kingdom to look like. But the EU could not respond to the risk of British secession since it was, in practical terms, incapable of reducing unemployment in southern Europe and, in constitutional terms, unable to allow the United Kingdom to put any limits on the treaty-based rules that ensure freedom of movement for all EU citizens.
Now Brexit has split the EU again. Although the EU has remained united over Brexit itself, the prospect of the United Kingdom’s departure has helped produce the New Hanseatic League by pushing the countries that previously allied with London over the regulation of the single market into an alliance with the two remaining non-euro northern European states, Denmark and Sweden. This new group has only added to the eurozone’s political difficulties. When Macron took office in 2017, what appeared to matter in eurozone politics was what concessions the German government could make in order to reestablish a working French-German partnership. Now, however, the eurozone has another well-organized veto player in the New Hanseatic League. France has reacted to the emergence of the league by making explicit what used to pass unsaid: the long-standing French assumption that the EU rests on a hierarchy in which France and Germany take the lead and other countries avoid making factional alliances that might get in their way. But the EU is rhetorically invested in the idea of European unity, so governments will have a hard time explaining to their electorates why they have to knuckle under to France.
One way the eurozone might end its perpetual crises would be to form a fiscal union that would be able to respond to democratic politics. But there is not enough public support within the EU for the further loss of sovereignty over national budgets and the debt sharing that such a union would require. On top of that, the eurozone crisis has shown that the EU is now politically unable to make changes that require revising its treaties. In response to crises, EU institutions have had to adopt ad hoc emergency measures. The most prominent example is the ECB’s program of quantitative easing, which has proved crucial to supporting indebted southern European states. The program has left the ECB in an uncomfortable situation, as its new powers have not been legitimated by national governments. When normal deliberative politics cannot adapt to changing circumstances, the improvised responses that emerge invariably reflect the current distribution of power and avoid democratic accountability, fueling further discontent among the electorates of the weaker states.
But neither can the EU take the opposite tack—returning some powers to national governments to reestablish democratic responsiveness there. Doing so would require the very treaty changes that are so difficult without a political consensus that does not exist. Moreover, the EU has already lasted long enough to compromise the democratic legitimacy of its constituent nation-states, especially when countries’ elections exclude EU citizens who do not also hold national citizenship but are otherwise free to live and work there. The inescapable conclusion is that the European Union is trapped. In its current state, it cannot respond sufficiently to democratic politics because its set rules must be enforced whatever national electorates decide. But people naturally expect that national politicians should have the final say over EU officials. Since the EU cannot move either decisively toward closer union or decisively away from it, any attempt to resolve its fundamental contradictions will only end up rupturing it.