One nation under Brussels

No one has dared solve the eurozone’s central problem
July 18, 2013

Graffiti depicting Mario Draghi and Angela Merkel outside the European Central Bank in Frankfurt—Draghi said he “would do whatever it takes to defend the euro”© Bloomberg via Getty Images

Until the eruption of the sovereign debt crisis in 2010, it looked as if the project of European integration, begun in the years following the Second World War, had succeeded. France and Germany were reconciled. Southern and Eastern Europe, long in the grip of local dictators or Soviet domination, were brought into the democratic fold. Above all, the German problem appeared to have been solved. Europe took German unification—which many predicted would lead to a “Fourth Reich”—in its stride. The Germans had changed since 1945, becoming sincere democrats who were committed to working together with their European “partners.” A common currency, the euro, was successfully introduced in order to replace the mighty Deutschmark and to weld Europeans closer together and stimulate their economies. The once-poor Celtic and Mediterranean periphery boomed. The European Union was widely touted as a model for Africa, Asia and even the Americas, where it seemed to contrast favourably with the United States.

The debt crisis changed everything; the subsequent rollercoaster is rivetingly described by the BBC’s Europe editor Gavin Hewitt in his book The Lost Continent. For more than three years, Europe was gripped by the fear that a country would default on its debts, provoking a collapse of the common currency and possibly a disintegration of the EU itself. So far little has been resolved. At best, the countries in the eurozone have bought themselves time. That must be used to address the root problem of the eurozone: the lack of democratic legitimacy.

To understand the scale of the problem, we must go back to the origins of the European project after the Second World War. Following Hitler’s failed attempt to impose his hegemony on the continent, the writer Thomas Mann famously told an audience of students in Hamburg that they should try to build “not a German Europe but a European Germany.” European integration was designed to make this possible—by embedding the Federal Republic of Germany (FRG) in European political, economic and security structures, and by mobilising German energies for the common good. This was the fervent wish of the FRG’s western European neighbours, of the US, which repeatedly had to pick up the pieces during the 20th century, and of the West Germans themselves, who were fearful of their power and saw in Europe a vehicle for rehabilitation as a nation state.

Over time, the European “project” developed a much broader agenda, but the aim of preserving peace in Europe through the integration of Germany was at its heart at the start and remained throughout. Nearly 30 years after the war, the French President Georges Pompidou recalled the need to “fasten Germany to Europe in such a way that it can never detach itself again.” Such sentiments underpinned a fresh surge in European integration triggered by the strength of the West German economy and the Deutschmark in the 1980s and intensified by its absorption of East Germany after the fall of the Berlin Wall.

This story is well described by Luuk van Middelaar in The Passage to Europe: How a Continent Became a Union. The author is an adviser to Herman van Rompuy, the first full-time president of the European Council. Middelaar’s book is a humorous, jargon-free and historically well-informed account of how the EU has developed. Starting in the late 1950s with Germany, France, Italy and the Benelux countries, the EU “widened” to include Great Britain and Ireland in the early 1970s, Greece and Spain in the 1980s, and then virtually the whole of Eastern and Central Europe after the collapse of communism. It “deepened’” from being a “European Economic Community,” created by the Treaty of Rome in 1957, via the establishment of an elected European Parliament in 1979, to the union we know today.

The new polity seemed to defy definition. Some claimed it was a completely new form of political association, a uniquely European answer to problems from history. Others, such as John McCormick in Why Europe Matters, argue that it is essentially a confederation of nation states, albeit with important federal characteristics. The key decisions are—or were—taken by agreement between national governments, but with increasingly important roles for the European Commission, European Parliament and European Court of Justice.

From the beginning, “Europe” struggled to make its voice heard on the world stage. In the early 1970s, Henry Kissinger famously complained that when he wanted to talk to “Europe” there was no number to call. Without a common army, the continent seemed doomed, as the cliché had it, to be an economic giant but a military dwarf, a West Germany writ large. This has become painfully obvious during the past 20 years, as the EU has grappled with the post-Cold War security challenges. As Middelaar concedes, it was completely unable to stop murder and ethnic cleansing in Bosnia; Nato was forced to intervene under US leadership. In the late 1990s, the EU did better over Kosovo, but it was still dependent on Washington to provide the military muscle. These embarrassments drove the quest for a common foreign and security policy. Progress, however, was slow. When the Belgian Prime Minister Guy Verhofstadt, who held the rotating chair of the European Council, rang the White House after the attacks of 11th September 2001, Middelaar tells us, nobody there knew who he was or why the President George W Bush should take his call!

When the European debt crisis flared in early 2010, the German and French governments at first worked closely together. Angela Merkel and Nicolas Sarkozy, dubbed “Merkozy” by the press, coordinated their positions ahead of summits, presenting the others with faits accomplis. They did not allow the European Central Bank (ECB) to buy unlimited amounts of euro sovereign debt, which would have calmed the markets at the cost of increasing inflation—anathema in Germany. Instead, the two leaders insisted on a programme of austerity to balance national budgets before releasing bailout funds. Technocratic governments took over in Greece and Italy, in the first case to implement the bailout, in the second to forestall one. Over the past 18 months or so, however, Merkel’s position has changed. In part, this was forced upon her by the election of the anti-austerity socialist François Hollande as President of France. It also reflected the growing realisation that her previous course risked precipitating the very European Armageddon she so feared, by crushing the economic life out of the periphery. It was probably a wink from Berlin that encouraged the new head of the ECB Mario Draghi to declare in late July 2012 that he “would do whatever it takes to defend the euro.” That stabilised the markets for the rest of the year.

Then, in March, the Cypriot banking crisis blew up. The long-standing convention that individual savers’ deposits were sacrosanct was abandoned, with heavy losses, particularly for large Russian account holders. (Representatives of the “troika”—the EU, ECB and IMF—visited Cyprus in July to see how the country was faring under the terms of its bailout. Cypriot finance minister Harris Georgiades said the island’s economy was chafing under the effects of capital controls. He met Draghi on 3rd July to see what the ECB could do to help, short of asking for more cash in addition to the €10bn that the eurozone and the IMF had already committed). More ominously still, the German constitutional court has just begun to consider whether the loans to European banks announced by Draghi violate the German constitution, by making Germany liable for huge losses without a vote of the national parliament. This forced Draghi to put a limit on his promise. The markets have not yet reacted, probably because they do not believe that there will be any such ceiling in practice, but if the court causes them to change their minds the crisis could erupt with renewed savagery.

Meanwhile, the combination of recession and “austerity” has ignited furious protests across the continent. Riots in Athens claimed the lives of innocent bank employees and resulted in millions of euros worth of damage. There are sit-ins across Spain, as home-owners fight eviction and council workers fume against cuts or at not being paid at all. The human misery is grippingly chronicled by Hewitt and is analysed by the distinguished German sociologist Ulrich Beck in his short but punchy book, German Europe. Adapting his concept of a “risk society”—originally conceived with environmental dangers in mind—Beck sees whole societies buckling under the threat of financial and economic disaster. “Banks live transnationally,” he writes, “but die nationally.” Across large swathes of the continent, there is a new educated but un- or under-employed class of the “precariat,” to use his felicitous phrase. Above all, Beck points out, many Europeans feel disenfranchised. A recent Eurobarometer poll tells us that 72 per cent of Spaniards do not trust the EU. According to Pew, 75 per cent of Italians think that European economic integration has been bad for them. Similar numbers of French and Greeks believe the same.

The crisis has changed the balance of power in Europe, or at least exposed how it has shifted since 2000. Since then, Germany has reformed its economy, making it easier for companies to hire or fire workers. It has also profited from huge Chinese demand for its cars and other “metal-bashing” products. While the debt of countries on the periphery has become increasingly toxic, Germany has benefited from low interest rates as a safe haven. It has also enjoyed an influx of highly qualified and enterprising migrants from southern Europe, despairing of prospects at home. By virtue of this strength and its position of lender as last resort to much of Europe, Germany has been setting the rules and the agenda. Beck writes of a “German Europe” in which Berlin has “the only real say.” This leadership, it should be emphasised, has not been sought by Berlin but has fallen into its lap. Yet we now have, in Timothy Garton Ash’s evocative phrase, a “European Germany in a German Europe.”

Britain’s position is complicated. Her vital interests—as the Chancellor of the Exchequer, George Osborne, rightly warns—would be seriously damaged were the euro to collapse. This would quickly smother the tentative recovery. Yet it is less easy to see how Britain might influence the destiny of the continent. In 1940, Churchill laid such stress on keeping France in the war that he suggested a full political union with that country. The equivalent today would be the deployment of Britain’s reserves and credit in support of the euro (beyond the credit lines it has already opened for Ireland)—in effect joining the common currency. Osborne and David Cameron wisely refuse to do so. The other extreme—to use the crisis to demand the “repatriation” of powers from Brussels—is not helpful either, because it suggests to our European partners that we are completely turning our backs on them.

The UK and US have long been much more deeply indebted than the eurozone average. But creditors tolerate that because the political nation as represented in Parliament or Congress is responsible for the debt—and because they know that there is a central bank which has the capacity to print money as required. The eurozone as a whole, by contrast, lacks proper parliamentary representation and there is still considerable doubt about the ECB’s mandate to match the “firepower” of its Anglo-Saxon counterparts. For this reason its debts—at least those not covered by a solvent national government—are not “owned” by anyone.

Historically, there has always been a close connection between debt and democracy, or at least representative government. The English “financial revolution” of the late 17th century, which later served as a model for the US, was based on the assumption that the entire electorate—then selected according to a more restricted franchise, of course—served as collateral for the national debt. This gave both states a decisive edge in mobilising capital over the rickety monarchies of the continent, though there too 19th-century creditors increasingly demanded that their loans be guaranteed by representative assemblies. By the same token, the eurobonds needed to solve the sovereign debt crisis will only be credible if they are hypothecated against the future revenues of the entire eurozone, which in turn would need to be legitimated by a political union. In short, if the eurozone wishes to get to grips with its various financial deficits, it will have to address the “democratic deficit” first.

How might the EU—or the eurozone—be made legitimate? The first possibility is through what political scientists call “outputs,” or what Middelaar playfully labels the “Roman strategy” of supplying economic prosperity, a welfare net or other forms of protection. The second is through “inputs,” or, in Middelaar’s term, the “Greek” strategy of “periodic appraisal by the population of representatives who take decisions on its behalf.” Finally, there could be a shared identity between peoples and governments, which has either grown organically or has been constructed through what Middelaar calls a “German” strategy of “a national history, a flag and anthem, national holidays, conscription” and so on. In the classic nation state, of course, all three forms are present. So far, the EU has failed in each respect. It is not providing the goods that Europeans want and, despite all the billions spent on cultural programmes and information campaigns, it certainly does not command the instinctive loyalty of the populations on whose behalf it claims to be acting.

Of these four authors, Hewitt describes the problem but makes no claim to provide an answer. As seasoned Europe-watchers, Middelaar and McCormick explore a variety of solutions, involving incrementally improved “inputs” and “outputs,” all of them considered but none particularly new. Only Beck offers something different: a “new social contract” for Europe through far greater integration. Member states, he argues, “should cede various sovereign powers such as control over one’s budget” in order to create a “pot of money” to finance a social security system and “in this way step by step to create a political union.”

Like most members of the European political establishment, all four authors take the standard view that the construction of a political union will be a process. This is also the belief of Chancellor Angela Merkel, and many other European leaders, for whom political union, and perhaps eurobonds, will come at the end of a longer period of economic convergence and rule keeping.

There are good reasons for this approach, foremost among them the fears of the more prosperous countries that they will otherwise be throwing money into a bottomless pit, but it is nevertheless doomed to failure. In some cases, such as Greece, compliance is simply impossible given the size of the debts. In many others, success depends on a best-case scenario for economic recovery which is looking increasingly remote. Simply writing off the debt without ejecting the relevant states from the eurozone, on the other hand, will encourage them to run up fresh debts. The introduction of eurobonds without eliminating state sovereignty through full political union will have the same result. Nor can the eurozone simply muddle through. At the moment, the markets are making the unsafe assumption that Draghi’s limit on ECB purchases is as void as they rightly believed the original Maastricht “no bailout” clause to be. If they are disabused of this notion by the German constitutional court or by a major Mediterranean default, the result may be chaos. In short, the policy of political union as a process can lead nowhere but further disunion, probably to a major blowout on the bond markets and ultimately to disintegration.

Yet history shows that the most successful unions have been events, in which the details were worked out over a longer period but the fundamental principles were agreed more or less simultaneously. This is the lesson of the Anglo-Scottish union of 1707 and the American Union of 1787-1788. It was recognised by the “founding fathers”, who embraced the British example of a single act of debt consolidation and parliamentary fusion, and explicitly rejected the confederal model of the Holy Roman Empire of the German nation, which expired 20 years later after failing to turn itself into a proper union for the common defence.

Imagine, for a moment, a European union designed on Anglo-American lines. The parliament would consist of two chambers: a house of citizens elected by population and a senate made up of two delegates from each of the constituent states. Secession would only be possible by a two-thirds vote within the member country. The union government would be led by an executive president elected by direct popular vote. Some responsibilities—such as foreign affairs, the armed services, and the common currency—which are now vested in the European Commission, the European Council, the Representative of the Union for Foreign Affairs and Security Policy, the European Parliament, and member states would be the sole preserve of the union government.

The banks, bond markets and other financial and economic institutions and structures of this ideal union would be integrated and subject to unified law and supervision. All existing state debt would be federalised in a one-off move through the issue of union bonds to be backed by the entire tax revenue of the common currency zone. This would be accompanied by the introduction of an automatic balanced budget requirement for all national and regional administrations with a subsequent “no bailout clause” and an insolvency purge of all insolvent private sector financial institutions, in which deposits, but not loans, shares or bonds, would be guaranteed by the union.

The official language of the union would be English. The eurozone would become a single state with a new name—the Democratic Union of the Eurozone. The new union would join—or in the case of most of its members remain within—Nato as a single state. The remaining members of the existing EU, especially Britain, could “repatriate” certain legal and other powers, and then join the union in a free-trade area and cooperate in foreign policy and defence.

Britain could of course join such a union, although the prevailing popular disenchantment with all matters European would make this very unlikely. The members of the eurozone would have to accept that the British, or at least the English, will never surrender their sovereignty, neither by sacrificing the pound nor by participating in a parliamentary merger, nor by merging the armed forces with those of a putative union. The eurozone would have to recognise the huge contribution the UK makes to stability and democracy through Nato and its permanent seat on the United Nations Security Council, for instance, by refraining from discriminating against the City.

But there would, in any case, be no need for Britain to join anything like a eurozone union. The European project was designed to “fix” something on the continent that was never broken in Britain. The UK has many faults, but it has never suffered the kind of catastrophe that befell nearly all other European states at some point in the 20th century. It is viable on its own, a characteristic it shares with Switzerland and perhaps no other European state. The rest are either too small or—in the case of Germany—too large. Continental European leaders should therefore desist from trying to lure London into ever closer union. It won’t work, and it isn’t necessary. After all, to adapt the words of Thomas Mann, what is needed now is not a European Britain, but a British—or at least an Anglo-American—Europe.