Europe between deconstruction and reconstruction

Europe in the recent years has gone through an exceptionally long crisis, and the European Union is still not on solid ground. Quiet the contrary: the EU crisis seems to be perpetuated, and for the youngest generation it may appear as a normal condition.

The crisis has become so long largely because of the constraints of decision making. German sociologist Claus Offe in his recent book „Europe Entrapped” compares this situation to a trap.

„A trap can be defined as a condition which is itself painful and unbearable to those caught in it but where, at the same time, movement is incapacitated, escape routes blocked, and forces of liberating agency weak and uncertain.”

Another book by the Australian economics professor William Mitchell speaks about a „Eurozone Dystopia”, claiming that the EU has been trying something utterly illogical with the creation of the single currency, and the result is a surrealistic mixture of confusion and stagnation.

Offe and Mitchell of course are not alone with their criticism. Their books come on the top of literature which explains how flawed the original design of the Economic and Monetary Union (EMU) was, and how wrong the policy answer has been in the European Union (EU) in the last 6—7 years.

Why policy-makers in EU institutions and member states have not found (or implemented) the right response to the crisis? Mitchell’s explanation is based on the concept of groupthink, which locks the intellectual and the policy debate into a hopeless circle that excludes most if not all the right answers.

Today the problem is not simply that the EU is in a trap, or the state of dystopia, but that the political community of Europe is divided alongside the various visions that present possible future scenarios. Fringe ideas of the past are now part of the mainstream debates. Europeans are lacking a unifying narrative about the Union, which makes it harder to find the way to recovery and reconstruction.

There is probably no shortage of ideas, but there is a lack of wide enough common platform among major pro-European forces that would lead to a better funcioning EU and greater satisfaction for its citizens. This disunity also means that various destabilising factors which sometimes look marginal can do much greater harm than those who believe in  the tyranny of the status quo often believe.

Below we outline the main competing visions regarding the future of the European integration. Then we look at the two main destabilising trends that influence whether Europe continues on towards reconstruction or deconstruction.

Competing visions on Europe

2014 was a period of European Parliament elections, which was followed by the launch of a new European Commission. Four main paradigms can be counted as highly influential.

• United States of Europe Europe for seven decades has been marching towards ever closer unity, so the current crisis also should be used to a higher level of integration. As often, more Europe is the solution to the crisis, and we should not be afraid of the f-word: federalism. This paradigm is much less influential than a the glorious times of the European Convention that aimed at creating a federal constitution, nevertheless still strong and has an answer to all problems (even if the practical implementation of those answers turns out to be difficult). Politicians like Guy Verhofstadt and Daniel Cohn-Bendit, who actually co-authored a book about Europe, are active proponents of this federalist idea. Philosopher Jürgen Habermas has endeavoured in shaping public thinking towards a common Europe with less national division and particularism. Overcoming national fragmentation, more solidarity, greater unity vis a vis rest of the world are key imperatives of our time. And, despite alternative visions often seem more practical or trendy, new elements of the EU architecture like the Banking Union, Capital Market Union, Energy Union and others (digital agenda, investment plan etc.) are adding new layers to this building. The great refugee crisis of 2015 may push another policy area into the shared competences of the EU.
• Slim Europe Those who believe that the EU construction is more or less reasonable, but the EU could be made more efficient and popular by reducing its costs, legislative activity and regulatory agenda, want to make it more attractive by making it slimmer. This is partly a product of puritanism but also reflects the influence of managerialism, which introduced the concept of “lean production” in the post-industrial period, and offers solution to the European Union as well. The EU may need to produce rules and procedures for its member states and societies, but it should not produce more than absolutely necessary, and there should be a constant drive to cut out the outdated or ill-conceived ones. Subsidiarity has to be taken seriously, and by refraining from a proliferation of competences the EU should be “big on big things, small on small things”. Like the fight against obesity, slimming the EU institutions, budget and staff can only result in improvements. One can only find waste, and for many the Strasbourg seat of the European Parliament is a symbol of unjustified EU expenditures that has to be eliminated. Better regulation is needed, and not only for aesthetic reasons, but also for the better functioning of the European economy. Politicians of various political groups can be characterized as Slim Europe promoters: from the Christian-Socialist Edmund Stoiber as well as the Social Democratic Frans Timmermans. Among academics, Damian Chalmers is a well-known advocate.
• Two-speed Europe Some time ago the idea of a two-speed Europe was a reference to different attitudes. Some may have favoured a closer integration while others just a loser association, feeding also on differing Catholic and Reformist traditions. Since, however, the EU’s mission have been to create unity out of diversity, the concept of the two-speed Europe was more an afterthought, or a sign of insufficient ambition. Advocating a two-speed Europe today is easier than in the past, because we have two strong frameworks defining the two speeds. On the one hand, we have the single market, and on the other hand we have the monetary union. Originally, at the launch of the European Union, the two looked like the two sides of the same coin. Today the idea of the two-speed Europe is linked to the necessity and urgency to deepen the EMU, while recognizing not only the opt-out of the UK and Denmark, but the hesitation of Sweden and Poland, the reluctance of Hungary and the Czech Republic, and the longer preparatory phase of some other member states. Disembedding the EMU from the single market creates the two-speed Europe, which is needed according to those who stress the urgency of EMU reform. French minister Emmanuel Macron is probably the most vocal and outspoken advocate of this view in economic policy, while others, like Thomas Piketty also argue for a Eurozone parliament. Italian political scientist Sergio Fabbrini authored a book about the political architecture that would allow for a two-speed EU. “Ever closer union” should not apply to all, but Eurozone should be allowed to drive ahead towards deeper integration, including elements of a political union.
• Deconstruction The long Eurozone crisis has given rise to tendencies arguing for deconstruction as opposed to deepening. Dismantling the euro or the EU or both is the programme of the deconstructioninst, who tend to belong to populist or extremist groups. According to them, a return to national structures, institutions or governance leads to better economic results and also greater political legitimacy. Politicians like Nigel Farage in the UK have a minimum program, which is the withdrawal of their country from the EU, but in reality they don’t wish a long life to the EU either. Deconstraction may not necessarily mean the abolition of the euro or the EU, but a significant reduction of their coverage and integration level. Arguing for deconstruction today is not an exclusive property of extremists or populist. German political scientist Wolfgang Streek also argues for a withdrawal from the single currency to the more balanced and legitimate “monetary system”. Czech author Jan Zielonka is another scholarly proponent of deconstruction.

These visions, neither of them entirely new, dominate the debate on the future of Europe among political leaders, commentators and institutions. Which one of them would turn out dominant in the coming years largely depends on the dynamics of instability in the North-West and the South-East ends of Europe, i.e. the risk of Brexit and Grexit.

Destabilising tendencies: Brexit and Grexit

The two main destabilising tendencies of today’s Europe: a possible British exit from the EU and a possible Greek exit from the Eurozone are linked to two different underlying dynamics. Brexit has been stimulated by the imbalances of the single market, while Grexit has been stimulated by the imbalances of the EMU. Countering these destabilizing tendencies requires a rebalancing of the single market and the EMU.

Brexit

The referendum about EU membership has been announced by Prime Minister David Cameron, and a significant minority in his party actually want the UK to leave the EU. However, the main proponent of UK exit is the UK Independence Party. UKIP originally was founded to oppose the single currency, but more recently they capitalised on a hysteria over free movement of workers and related benefits provided for EU workers and their family members.

In reality, the EU membership of the UK in the EU is about much more than East Europeans coming to Britain in unprecedented numbers. Indeed, the EU allows the freedom to work for other Europeans in the UK, but it also gives the same freedom to move to British workers, pensioners, companies and investors. The EU is also the framework in which the UK together with other countries can look for effective answers to climate change or foreign policy challenges.

While many on both sides of the English Channel understand these common challenges, there are indeed some fundamental causes for division which fuel the movements for separation as well. The crux of the matter is that many in Britain never fully signed up to the continental concept of the social market economy, which is also enshrined in EU treaties.

This problem is not new. It goes back to the time when Margaret Thatcher restructured the British economy and the welfare system. While Jacques Delors, EU Commission president at the time, strived to strengthen the social dimension of the single market, Thatcher was keen to weaken trade union power as well as income redistribution. Delors thus won over the British left, but the EU lost support among the British conservatives.

British Euro-scepticism was particularly energized by the creation of the single currency. Even if the UK has an opt-out, and no one would want to force the UK to give up sterling, the gulf between Britain and the continent has been widened by the launch of the monetary union.

Although today the very existence of the euro does not fuel euro-skepticism in the UK, its functioning and performance. The fact that Europe, as opposed to the US, was unable to avoid a second recession in 2011-13, contributed to the popularity of UKIP. The recent recovery, however weak and uneven, has visibly weakened anti-EU feelings in England.  On the other hand, the way the Eurozone finance ministers treated Greece in the recent months, again raised doubts among many in Britain. People may ask if this really is the community Britain should belong to.

Since in recent years UK economic performance (growth of GDP and fall in unemployment) has been better than in the Eurozone, some draw the conclusion that economic regulation in the EU should converge further on the UK. Those, however, who connect the Eurozone turmoil with the superiority of the British business model are mistaken. It is not a product of microeconomic structures but that of a greater macroeconomic elbow-room that the UK grew faster.

Comparing the UK trade deficit to the German surplus gives a better idea about relative competitiveness and the strength of the respective business models. It is not only for Southern European countries, but also for the UK to take inspiration from the pillars of German competitiveness: the so-called Mittelstand, dual vocational training, and the social dialogue. The idea to “cut red tape” in order to enhance economic performance is certainly too categorical, and misleading. At the level of the EU, the effort to keep legislation within reasonable limits and up to date already serves the purpose of “smart regulation”.

The membership of the UK in the European Union is already somewhat special. The UK has an opt-out from the single currency, it has a handsome big rebate from the EU budget, it is not part of the Schengen zone, and it applies the Working Time Directive with a good deal of flexibility.

But there can be various ways to read this special status. Some would say that since in the past it was always possible to find the modus vivendi, also now we should be positive. If there is a will, there is a way. Others would say the UK has already exploited its ambivalence for special treatment, so perhaps there should be a limit to this á la carte approach. Enough is enough.

Although the referendum time in the UK is very close, it remains unpredictable what the outcome will be.

Grexit

Many predictions of the recent years failed regarding the recovery of the Greek economy, and the future of the country in the Eurozone. Greece’s exit from the Eurozone has been averted last summer, but probably not buried forever as an idea. The Greeks themselves want to keep the euro and a large share of the 25 % GDP reduction can be seen as a sacrifice for the right to stay.

The Greek adjustment has been more severe and painful than any recent stabilization effort in Europe. Greece’s economic pain and agonizing politics rightly receives so much attention. On the other hand, excessive focus on Greece, which sometimes was inevitable, never helped putting a proper analysis of the EMU on the agenda.

No doubt, Greece has been and remains the weakest link in the Eurozone, and there are many internal reasons for that. However, the shortcomings of the whole EMU architecture would require more constant attention, before continuing weak economic performance and future disturbances destabilize the system again, with an increasing likelihood of disintegration.

The question is not only Greece. It is high time to ask why since 2011 the EU economy decoupled from the US, why countries keeping their national currencies are more dynamic and stable than those in the euro area, and why the EMU remains so imbalanced and fragile despite investing so much political capital in stabilization and reforms.

And the problems did not start with the Great Recession of 2009. If we look back to the time when the EMU project was launched over two decades ago, we can see that in these years Europe has drifted further and further away from full employment. The labour market became the terrain of adjustment, when full employment itself should be an objective, and trade and money should be organised in a way that would make this possible.

Maastricht framed macroeconomic policy within specific fiscal and monetary targets, together with and exchange rate regime before countries reach the single currency. And within narrow scope of objectives, the fiscal criteria play a dominant role – wherever they are enforceable. And it seems they are more enforceable against the weaker countries.

The gap between the EU Treaty objectives and the policy outcomes has widened. The Treaty actually obliges the European Union to deliver economic, social and territorial cohesion. But the Five Presidents’ Report (2015) diagnosed the Eurozone with acute divergence between core and periphery. This divergence is probably the main threat to the existence of the single currency and to the stability of the EU as a whole. Hence, there is a need for further strengthening of the EMU architecture, and in particular to strengthen its economic performance and its social dimension. Without an improvement in real economic and social outcomes, rising nationalist sentiment will continue to turn against either the single currency, or the EU, or both.

If the single currency is to be kept, the original Maastricht design has to be replaced with one with a much stronger social dimension, supported by a stabilisation and recovery capacity. The Four Presidents’ Report (2012) signalled the end of denial, and highlighted the systemic nature of the crisis. However, it was insufficient to trigger a proper reconstruction effort. Such an effort is badly needed, and not only for the sheer survival of the euro, but for restoring convergence and a decent level of economic growth.

Rebalancing the Eurozone is a key question. For this purpose, various models of rule-based, though limited mechanism of solidarity have already been explored by think tanks. Such instruments would strengthen people’s and markets’ confidence in the euro, and thus create a better institutional foundation for the recovery of investment. An unemployment related shock-absorber would help economically as well as socially: it would help by sustaining demand in recession time, but also by protecting human capital.

Better governance is necessary in the Eurozone (e.g. joint action against excessive imbalances), but member states will not hand over competences to a stronger EMU level governance structure without more risk sharing. This latter would also help strengthening public acceptance of the EMU. Strengthening discipline, solidarity and legitimacy simultaneously would probably pay-off economically as well as politically.

Conclusions

Brexit and Grexit are real risk scenarios today with the risk of deconstruction. They have encouraged slimming down the EU but also deepening the Eurozone, while also blocking more genuine moves towards federalism.

Brexit feeds on the imbalances of the single market but also on the sense of Eurozone failure, even if the UK has maintained its monetary independence. In many ways, the current Treaty allows for repairing the EU instruments and mechanisms. However, the electorate in the UK needs to be convinced that this reparation is actually happening in practice.

In recent years, series of legislative acts (incl. on posted workers) helped the EU to have more fairness within the single market. A lot has been done for the greater effectiveness and accountability of EU funds. If, nevertheless, these improvements are ignored and the UK replaces its semi-detached position with a detached one, the remaining EU structures would certainly continue to function.

Brexit would be a great shame for the EU, but the Union would survive. Grexit would be technically possible, perhaps with some market hiccups. In the long-run, however, Grexit would bring a greater risk, because it would send a signal to the economic actors that the way out of divergence cannot be found. To the citizens on the Eurozone periphery it would mean that the necessary level of material solidarity in the EMU cannot be developed.

While the main political proponents of deconstruction can be found among the fringe parties of the political spectrum, there might be a temptation of these ideas among the mainstream of politics as well. When former French Prime Minister Michel Rocard opens the door to Brexit, and incumbent German finance minister Wolfgang Schauble would open the door to Grexit, the risk of deconstruction needs to be taken seriously.

Perhaps a dramatic momentum is not here now for a sudden paradigm shift. But the time is right for a serious and deep reflection. In fact this might be the last time when the road forward towards a more perfect EMU is still open. Our external challenges should also push us towards more cooperation and deeper integration.

If this chance is missed, and divergence and asymmetries are not dealt with, continuing stagnation will turn even greater shares of the electorate against the euro as well as the EU. Reconstruction will be blocked, and the only choice will be between orderly or disorderly deconstruction.

An Italian version was first published in the magazine “TESTIMONIANZE”, n°502-503, titled “Declino o rinascita? L’Europa al bivio”, pages 160, October 2015, Florence (Italy). www.testimonianzeonline.com