Can Europe Make It?

Straightening Europe’s crooked timber into a democratic eurozone

Opposition to the direction of the Eurozone can be expressed through national democracies, for example through the election of Syriza, but this is now an inadequate form of political representation.

Mathew Lawrence
22 June 2015

Immanuel Kant.

Immanuel Kant. Wikicommons/ Public domain. Some rights reserved.

The Eurozone’s nemesis – the ongoing Greek debt crisis – has once again returned to centre stage. With Greece’s existing bailout package expiring in just nine days time, today in Brussels the Greek government and its creditors – the ECB, the IMF, the European Commission and the Eurogroup - are meeting in a last-minute attempt to find a deal that can avoid default.

Much is at stake. Without an agreement, Greece risks defaulting, potentially triggering an exit from the Eurozone that could cause economic turbulence across the world economy.  For the Greek people, meanwhile, the conditions of the bailout continue to extract a heavy social cost: unemployment has spiralled to 26 per cent, and food consumption has fallen by 28.5 per cent since austerity measures have been introduced.  Both sides desperately require breathing space.

Yet whatever the outcome, the latest day of drama is unlikely to be the last. For the intransigence of the crisis is underpinned by a central contradiction: what is necessary is near-impossible politically.  Critically, while monetary union necessarily involves losing - or pooling - some form of sovereignty, the creation of the Eurozone and its various coercive economic instruments has not been matched by political or fiscal union, with little democratic accountability or control over the decision-making institutions of the Eurozone.  Central to any efforts at reforming the EU must therefore be grasping the nettle implied by the creation of the Euro: the economic logic of monetary union must be matched politically. Monetary union requires deeper fiscal and banking union which in turn requires greater political union.

This necessity – of deeper integration to overcome the debt crisis matched by more effective democratic decision-making within the Eurozone’s structure - is near-impossible, however, in a Europe deeply divided between the interests of creditor and debtor states and their different political economies, between the ‘core’ dominated by Germany and the ‘periphery’ of southern Europe.

Nonetheless, a way forward must be found, both to resuscitate the effective power of the democracies of the debtor states of the Eurozone and to strengthen the economies of Europe more generally. For in an effort to sustain the single currency, the governance regime of the Eurozone has transformed in recent years, progressively neutralising democracies across the debtor states of southern Europe and undermining their right to oppose decisions imposed upon them by a technocratic-led centre.  For example, the European Semester System (2010), the Euro Plus Pact (2011) and the Fiscal Compact (2012) have steadily eroded the ability of debtor states within the Eurozone to control their tax and spend decisions, the very stuff of democratic government.

To enforce this, moreover, comprehensive powers of economic surveillance and disciplining mechanisms have been granted to the Commission, particularly the Six Pack (2011) and the Two Pack (2013). These startling discretionary powers underline how the Eurozone’s institutions and its policies have become increasingly insulated from democratic pressure.  As such, opposition to the direction of the Eurozone can be expressed through national democracies, for example through the election of Syriza, but this is an inadequate form of political representation given the political configuration and decision-making structures regulating the Eurozone.

Economically, meanwhile, as the German political economist Fritz Scharpf has expertly articulated, the political economy these mechanisms have erected is counterproductive, requiring a policy of constant downward pressures on wages and public spending in the debtor states, both to support export-led growth in economic downswings, and conversely to limit the growth of external deficits during upswings. As is evident across southern Europe, such a regime has institutionalised a destructive cycle of internal devaluation, which in turn has been the trigger for further efforts at wage and fiscal restraint. As Claus Offe argues, then, ‘the euro has rendered European democratic capitalism more capitalist and less democratic.’

So, if today is about attempting to secure a temporary lifeline for Greece, what more substantively can be done to resolve this broader European crisis in the long run? Most importantly, the logic of monetary union must lead to stronger political and fiscal union if democracy is to be revitalised in the Eurozone, the ongoing social catastrophe in southern Europe eased and the economies of Europe put on a more stable footing.  Fortunately, substantive proposals are now being developed that can move toward this goal.

Earlier this month, Emmanuel Macron and Sigmar Gabriel, the finance ministers of France and Germany respectively, set out a series of steps to overcome the flaws in the Eurozone’s architecture. In particular, they called for a new process of staged convergence, based not just on structural and institutional reform, but also for social and tax integration, for example harmonising corporation tax and introducing a common financial transaction tax.

The latter in particular would support a new Eurozone budget, designed to ‘improve the ability to provide automatic stabilisation and allow the European level to expand or tighten fiscal policy in line with the economic cycle.’  Finally, they too recognise the need for strengthened mechanisms for accountability, for example through the creation of a Eurozone grouping within the European Parliament.

Such an agenda would go some way to resolving the flaws of the single currency’s architecture and open up space for more effective forms of positive integration in the single currency region.  Perhaps most importantly, it suggests that there is increasing political will in France and Germany to resolve the crisis through more accountable forms of integration. Political leadership of this nature will be vital if progress is to be made.

Others are rightly bolder still. Building on the 2013 proposals of the German-based Glienicker Group, the recent Piketty-lead Manifesto for Europe has a simple but powerful aim: the rebuilding and democratising of Europe’s dysfunctional institutions so that it can better  ‘regain control of and effectively regulate twenty first century globalised financial capitalism.’ To do this, the group argue the Eurozone must develop shared economic, fiscal and budgetary instruments, particularly given that pooled monetary sovereignty means unilateral devaluation has been ceded as a national economic tool.  In doing so, they argue that Europe must become less intrusive in regulating issues of secondary importance that are best decided nationally, and more effective in tackling issues of substantive transnational concern, whether that is for example action on tax havens or stronger financial regulation.

The manifesto is built on three central recommendations, which share but go further than the proposal of Macron and Gabriel.  First, they reiterate the call for a common Eurozone tax base, beginning with a shared corporate income tax combined with the automatic sharing of financial and banking information across the currency union. Such a move would both limit the capacity of corporations to play European nations off against each through a race to the bottom in the tax code, and also provide capacity for an effective budget to drive investment in the Eurozone.

Second, they argue for the pooling of the debts of the Eurozone countries as the only way to definitively move past the current debt crisis and ensure effective monetary policy for the single currency in future. Concretely, the Manifesto recommends restarting the proposal for a ‘European debt redemption fund’, where all debts exceeding 60% of a country’s GDP are pooled.

While this appears a bold step, the Manifesto rightly agues that with the establishment of the European Stability Mechanism, the nascent banking union, and the ECB’s development of the Outright Monetary Transactions programme, a de facto process of pooling debt has already begun. Yet, while Eurozone taxpayers are increasingly enmeshed with each other, they lack democratically legitimate mechanisms to oversee and shape the process, something that is pivotal if deeper fiscal and financial integration among Eurozone member states is not to accelerate the drift into post-democratic governance.

This brings us to the third and most important recommendation, where the break with the Franco-German plan is most acute.  For to decide on how the pooled debt should be brought down over time, ‘and more generally to discuss and adopt the fiscal, financial and political decisions on what is to be shared in the future in a democratic and sovereign fashion,’ the Manifesto urges the establishment of substantive democratic infrastructure for the Eurozone.  In particular, they argue for a parliamentary chamber for the single currency to go alongside the European Parliament, with members drawn from national parliaments weighted to the political balance of those bodies, with the number of national representatives in the Eurozone parliament proportionately based on the population of each country.

The virtue of this proposal is that collective Eurozone decision-making will be rooted in national parliamentary sovereignty through their elected representatives, allowing democracy into the decision-making processes of the currency zone. In deciding upon issues relating to the currency, pooled debt and a potential budget, countries in the Eurozone would no longer be represented by their heads of state alone through the Council of Europe, but would have directly elected national parliamentarians reflecting the political pluralism of the currency bloc.

Transparent, majority rule decision-making would then shape the future of the Eurozone, rather than the present, where the EU’s excessive constitutionalism combined with the depoliticised technocratic governance structures of the Eurozone has accelerated a drift towards a post-democratic condition.

This will still take political leadership and compromise but it is the most effective route out of the seemingly never-ending crisis of the Eurozone. Importantly though, the crisis has nonetheless exposed the sharply political forces at work within the Eurozone – and the EU by extension - that undergird its various democratic deficits. European integration does not proceed by remorseless logic, emptied out of political contest; the architecture of the union provides institutional spaces in which democratic politics can re-embed themselves, with the peoples of Europe better able to shape the continent’s future.   Progress can therefore be made in building a more accountable, democratic and effective governance for the Eurozone.

The UK’s referendum campaign – an opportunity for change

For the UK, the arguments emerging on the continent reinforce the parochial quality of the debate over EU reform thus far witnessed. It is vital then that even as the UK remains outside of the Eurozone, it advances arguments for substantial economic and democratic reforms to the EU as a whole, including the Eurozone, rather than simply focus on marginal adjustments in its balance of power and competences. The referendum campaign – and the potential leverage this has created in terms of securing institutional change at the EU level - is the opportunity to marshal these arguments and put forward a constructive case for change.

It is critical it succeeds for if we are to confront the economic, social and ecological challenges facing us, we need a revived, democratised Europe: the present institutional settlement no longer works; a radical democratic and financial overhaul is needed that recognises and responds to the increasingly multi-speed nature of the EU.  The challenge is in deciding what reform agenda could deliver such an outcome given the present constellation of forces both within Europe and in the UK.

In the next post, we will further explore what could constitute such an agenda.  Given today’s events, its necessity is clear. For just as one of the early imaginers of a liberal European internationalism, Immanuel Kant, once argued that out of the crooked timber of humanity no straight thing could ever be made, so today with the Eurozone: if Europe cannot find a way to reimagine and democratise its dysfunctioning institutions, nothing truly straight will ever grow out of it. Today’s drama is merely pruning the tree. To overcome the Eurozone’s underlying crisis, more substantive surgery will be required.

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