By Steven Hill, Washington Monthly, September 27, 2012
When European Commission president Jose Manuel Barroso stood at the podium at the European Parliament in Strasbourg on September 12 to give his annual “State of the Union” address, few in attendance knew of the bombshell he was about to deliver. Europe has been wracked by a sovereign debt crisis – an existential battle over whether wealthier states should bail out debt-ridden states – since 2010. European leaders’ modus operandi had become “do the minimum necessary” to deal with the latest crisis, and to continually kick the can down the road. As President Barroso stepped to the microphone, the various audiences that pay attention to such staid events expected more of the same.
Instead, Mr. Barroso shocked the audience by loudly and boldly using the “f-word.” No, not that f-word, the other one: federalism. He called upon Europe to remake itself into a “federation of nation states,” saying the move was necessary to combat the continent’s economic crisis. “Let’s not be afraid of the word,” said Mr. Barroso, as he made his case.
Mr. Barroso himself had long been known as a skeptic of European federalism, so his words rattled the halls of Parliament and beyond. Europe has been stuck in the middle of a rushing river for over two years, unable to figure out whether to go forward to a new shore or back to the old one. So Barroso’s use of the F-word was greeted with excitement in some quarters, but dread in others. His dramatic speech may someday be regarded as historic, and it already has unleashed a wave of new debate across Europe. Many are nervously asking: “Why is more European integration necessary? Is more federalism really desirable? And will democracy at the European level ever become – democratic?”
Despite their indecisiveness and clumsy crisis management, European leaders nevertheless have managed to stitch fundamental changes in between the lines of previous treaties and agreements, with only minimal democratic oversight. Their economic and political union had been slowly transmogrifying into a stranger and more mangled beast, making the populace increasingly queasy. Leading up to President Barroso’s speech, forewarnings of further radical change already had been mooted.
So for example Europeans scratched their heads and wondered what it all meant when, on September 6, European Central Bank chief Mario Draghi announced that the ECB would use its considerable firepower to act as a financial backstop for troubled eurozone states trapped in spiraling debt. Economic experts had been calling for such action since the eurozone crisis erupted, and Draghi’s “almost a bazooka” bond buying program quickly caused the bond spreads for Spain and Italy to drop considerably. So that action was greeted with cautious applause.
But that was followed a few days later by an announcement for the release of more detailed plans for the creation of a European wide banking union, also designed to make the financial system more stable. President Barroso revealed these details in his September 12 “f-word” speech, providing some heft to his calls for more federalism. That was followed in rapid order by the president of the European Council, Herman Van Rompuy, issuing a much-anticipated white paper on how to further integrate the eurozone, including proposals for a common eurozone budget, limited debt mutualisation (like Eurobonds), and even a eurozone parliament – potentially more powerful than the European Union’s current parliament — that would try to bring greater democracy and accountability to efforts to federalize the eurozone economies.
But each creeping step leading further down the path of federalism unleashed an equal and opposite reaction across Europe, as more and more people began nervously asking: “Why is more European integration or federalism even necessary?”
An intense debate over Europe’s future has now begun, and will continue through the German national elections in the fall of 2013 and the European parliamentary elections in 2014. Federalist advocates have responded with at least two crucial answers to the naysayers’ anxious queries, both of them centered on what Europe will look like, not just in 2015 but in 2035 and beyond.
President Barroso preemptively addressed some of the critics when he said in his State of the Union speech, “Europe’s member states on their own are no longer able to effectively steer the course of events.” The sovereign debt crisis has astounded many an expert at how the global financial system has become so monstrously gargantuan that even countries as large as Spain or Italy can see their well-being put into play by speculators and bonds raiders.
But it was also a shorthand way of saying: Chindia. China and India’s rise as two of the world’s largest economies highlights a new 21st century reality: size matters. In today’s world, population counts as much as productivity toward determining economic power. Going back as far as the industrial revolution, worker productivity levels in Germany, the United Kingdom, the U.S., and Japan made those countries both rich as well as the world’s largest economies, despite having far smaller populations than places like China and India. Today, even though most Chinese remain poor, China’s rise to rank as the world’s second largest economy makes it one of the world’s largest traders, creditors and markets for commodities. The decisions it makes shape markets globally.
Or as economist Arvind Subramanian has put it, “GDP and size matter in crude superpower terms. It shows what resources you can bring to the table.”
A Europe composed of dozens of diffuse member states, none of them more than seven percent of the population of China or India, would slowly see its productivity and competitive advantages chipped away. Member states would soon be in competition with each other, even more so than today, instead of fostering continental cooperation and development. But if Europeans can band together and form some kind of United States of Europe, with a population of anywhere from 350 million to 500 million people, they have a chance to maintain their quality of life and broadly shared prosperity. Unfortunately, the reality is that the current economic and political structures of the European Union, which were fine for a loose confederation of states, are inadequate for a monetary, fiscal and transfer union in today’s globalized world. Hence, say Barroso, Van Rompuy and others, major institutional change enacting more federalism is a requirement for maintaining the “social” in Europe.
The second answer advanced by federalist advocates to “why more integration and federalism” can be understood by comparing Europe to the United States. Economists and commentators have tended to view “austerity economics” on both sides of the Atlantic through the same prism, yet the situation in Europe is quite different than in the United States.
In the US, there exists a long-standing federal system that collects large amounts of taxes from Americans in all 50 member states into a national treasury that is spent on various nationwide priorities, as decided by the federal government in Washington DC. Little protest is made over which states contribute more to the national pot, or whether Californians or New Yorkers transfer some of their wealth to poorer Alaskans or Mississippians – which they certainly do, year after year, federal budget after budget. In America, the prevailing philosophy is “a rising tide floats all boats,” and “E Pluribus Unum” — “out of many, one,” as it says on every U.S. dollar bill.
But in the European “union”, the federal institutions – whether the chief executive, parliament, central bank or regulators – are in their infancy. There is a small treasury – the E.U. collects about 1 percent of the member state’s GDP, compared to the US federal government absorbing about 24 percent of America’s GDP – so there are far fewer resources at the European level to deal with a crisis.
Indeed, a federal European consciousness that would allow such crisis intervention barely exists. Instead, national and even regional interests jealously track which EU member states are the economic drivers and which are the alleged slackers. The Germans, Dutch, French and others suddenly find themselves in the very foreign situation of having to extend financial assistance not only to the Greeks but also the Portuguese, the Irish, the Cypriots and increasingly the Spanish.
In the US, such geographic spreading around of the wealth is normal. But on the European continent, where nations fought bloody wars against each other not that long ago, such transfers from the wealthy states to the poorer ones are still very controversial. Yet those are an important tool for keeping the continent economically as well as politically stable. If Greece, for example, were to sink to “failed state” status, it would have a destabilizing effect in the southeast corner of Europe, which undoubtedly would spread westward. But if Greece can’t keep up competitively, and also has lost the capacity to devalue its currency as a way of regaining some of its competitiveness, assistance from wealthier states like Germany becomes essential to prevent Greece from sinking further.
So unlike in America, Europe’s crisis has not been simply a policy debate over “austerity versus stimulus.” It has been an existential crisis over union, cross-border solidarity and how to define “self interest.”
European leaders are keenly sensitive to the criticisms over the growing “democracy deficit,” in which fundamental changes already have been launched by leaders who, because of the very nature of crisis intervention, are out in front of their publics. So the latest process unleashed by presidents Barroso and Van Rompuy has been designed with an extended timeline so that the proposed reforms will be subject to intense public debate leading up to the German and European parliamentary elections, when voters will have their say. Europe’s leaders have stated they have no intention of excluding the public or democratic accountability, but lurching from crisis to crisis has resulted in exactly that. Europe-wide democracy has some catching up to do, and Van Rompuy’s proposal for a eurozone parliament is designed to foster the political institutions necessary to oversee the proposed federalizing of the economy.
Despite such good intentions, the Madisons, Jeffersons and Hamiltons of Europe are not waiting for the roar of a popular mandate. They already are pushing forward toward more integration and democratically-accountable federalism, because they believe it is the best hope for Europe in the 21st century. They also believe that, at the end of the day, that’s what most Europeans want as well, notwithstanding the doubts and confusion expressed in opinion polls. America’s transatlantic ally is very much a work in progress, and one that will take years to complete.