Demotix/Elias Theodoropoulos. All rights reserved.In openDemocracy of October 9, Thomas Fazi critiqued my paper on The German Question and the European Question. Monetary Union and European Democracy after the Greek Crisis (DEM WP Series 105, University of Pavia). He maintains that while European democratic federalism is “possible and desirable”, this “does not make it more likely”. Here I put forward the thesis that a monetary union without a fiscal union and a democratic government cannot survive in a global economy, where the liberalisation of the financial markets is already a reality and the old political order built after WWII is crumbling.
In my answer I also try to consider the arguments of Arestis, Sawyer and Legrain, which Fazi quotes in support of his point of view. In general, we disagree on the nature of the European Federation and the strategy for building it: Fazi and some economists of the left support the point of view that “Less Europe, more Nationalism” is the answer to the European Union's present crisis. As I see it, this is a conservative stance, and a dangerous one: to take a progressive view we need a policy that is viable for Europe and the rest of the world.
The history of European integration has had its critical points, but it is also a success story. The European Union is a new institution in the history of mankind: a supranational federation in progress. The model of the federal state was unequivocally recalled in the Schuman Declaration of 1950, but the Coal and Steel Community only represented a partial form of supranational government, with various areas left undefined. We should therefore be careful to draw lessons from existing federations – such as the USA, Canada, Australia, Switzerland, India, Germany, etc. – because they are all nation-states.
Europe is not a nation and cannot become a nation-state. The process of European integration has its roots in the tragedy of the two World Wars and the need to overcome the bloody divisions of the past among national peoples. Therefore, in order to be clear in my answer I will explore a number of arguments, discussed in the second part of my paper, which were not considered in Fazi’s critique.
The size of the European budget
According to Fazi we should aim for “an effective fiscal union with tax-raising powers at the EMU level in the order of at least 10% of EMU’s GDP.” Of course I agree on this general aim, but why 10% and not 5% or 20%? The proper size of the federal budget is precisely the kind of topic where the difference between traditional federations and the EU matters.
Compared with the USA and many other federations, the EU is atypical: the main institutions of the welfare state (pension, health, schools) are provided at a national level, and at the European level it is only necessary to have a budget to finance crucial European public goods, i.e. public goods which cannot be provided effectively by the single European market or by the cooperation among national governments.
In my paper I consider two interjurisdictional spillovers which caused serious damages to the European economy during the crisis of the EMU, and I propose some reforms. The first spillover is the ‘bank sovereign nexus,’ which caused many problems for the banking systems and the public debts of the PIIGS economies.
Some important reforms to stem this effect are already under way, above all banking union. In my view, to complete these reforms, we need federal bonds issued by a European Treasury, under the control of a federal government. A real capital market cannot work with the modest reform proposed by the Report of the five Presidents: i.e. an efficient capital market for large and small firms. Europe needs Treasury bonds similar to the US Treasury bonds.
In order to work, the European capital market needs real European public bonds, whose value does not change in every member state of the EU: in short, Europe needs Treasury bonds similar to the US Treasury bonds. This new EU financial tool is essential in order to enable the European financial market to compete on a level playing field with the US market, and to finance European public investments, such as those proposed by the Juncker Plan.
The second spillover is the internal deflation trap. This problem preoccupied Keynes back at the Bretton Woods conference: if a surplus country causes great imbalances in deficit countries, the burden of the adjustment is fully on the latter, which are forced to cut imports and wages if they are not able to increase their competitiveness in the short run. The outcome is the slowdown of the international (or European) economy.
After WWII the recovery of the European economies was based on the devaluation of the European currencies, and the Marshall Plan. In the present EMU there needs to be genuine structural fiscal capacity at the European level, in order to provide the European public goods needed for greater social and economic cohesion, and the recovery of the EMU economy.
I propose: setting up a shock absorption mechanism for excessive national unemployment during the crisis; increasing the funds devoted to scientific research and education, and increasing the structural funds already in the EU budget, but poorly financed at present. Indeed a ‘transfer union’ already exists, but the European Commission needs to be able to count on real spending power in the event of a dramatic crisis, such as that of 2008.
The spending power of the European Commission could ensure ‘flexibility’ when it comes to managing crisis situations: at present this is not possible under the so-called ‘stupid rules’ of the Fiscal Compact. These rules are ‘stupid’ because there is not a clear way to calculate if a certain budget deficit or debt/GDP ratio is correct.
But in a federation, endowed with a monetary union, some hard budget constraints are necessary. My proposal (based on the McDougall Report and the two interjurisdictional spillovers discussed) is that a budget of about 3% of EU GDP (not including defence and foreign policy spending) could provide sufficient flexibility during a negative cycle.
The euro and the world economic order
Fazi says that the political conditions are not ripe for a move towards a fully-fledged fiscal and political union. Therefore “a step back in the integration process” is necessary, “demanding greater flexibility at the national level, as advocated by Philippe Legrain.” Legrain's proposal is “to restore the Maastricht Treaty’s no-bailout rule … creating a mechanism for restructuring the debts of insolvent countries. Greece’s debts to private creditors would thus have been written down in 2010, not replaced with debts to European taxpayers.”
While I agree that this “mechanism” is necessary, I think that it should be more similar to what happens when a local or regional government fails, i.e. a combination of political and economic sanctions (for instance jail sentences for corrupt politicians and the obligation to reimburse the community's financial losses), rather than what happens when a sovereign national government fails (see Argentina, 2001), and can simply refuse to reimburse all its creditors.
In the EMU the question is that if a big state, Italy or France for instance, fails, the survival of the euro area and also the EU is at risk. If the question is whether a monetary union can survive with a fully-fledged national fiscal responsibility in the present global market, my answer is a definite no. Monetary union is a political project, which also entails a degree of fiscal solidarity among its members.
The first sign of an excessive national debt is the flight of capital and the increase of CDS and national interest rates to refund the debt. In such an eventuality, a national government will do whatever it takes to save itself, including strong capital controls and high customs duties. But such a return to economic nationalism would represent an infringement of the European Treaty and a rejection of the four fundamental liberties that are the basis of the process of European integration.
Therefore, in a monetary union there need to be some hard budget constraints for national governments and, since constraints can always be viewed as ‘stupid,’ more flexibility should be provided by a federal budget, when a crisis hits. I do not want to stress what I have already said, only to recall that European integration is not only an economic project, but a political project, a federation in progress, with the potential to become a pillar for the creation of a new world economic and political order. That is the real issue for a progressive policy. Let me quote two recent proposals.
The first is the approval by the UN, on 25-27 September, of the Sustainable Development Goals (SDGs). All the UN member states agree that: “There can be no sustainable development without peace and no peace without sustainable development”. The UN member states “recognize that eradicating poverty in all its forms and dimensions, including extreme poverty, is the greatest global challenge and an indispensable requirement for sustainable development. We are committed to achieving sustainable development in its three dimensions – economic, social and environmental – in a balanced and integrated manner.” These are the main goals for the year 2030. It is difficult not to share the values and the political objectives described here, but they sound more like the promises of visionaries than political statements issued by responsible people.
This Agenda has been approved by governments like the USA and Russia, that are now threatening to enter into a new cold war; by the governments of the European Union, incapable of constructing a serious foreign policy; by the surviving governments of the Middle East, after the Arab springtime, which are instigating a religious war among Sunnis and Shiites, and all the authoritarian regimes across the various continents. Is the 2030 Agenda for Sustainable Development a serious commitment or just a smokescreen for gullible citizens?
Is the 2030 Agenda a serious commitment or just a smokescreen for gullible citizens? If we look for the political means required to achieve these goals, we will be sorely disappointed: the final “Call for Action to Change our World” says nothing about the radical reforms of the UN system required to implement these policies. What can the EU do to help make the Agenda a working project?
The second proposal concerns the reform of the international monetary and financial system. The Economist (October 3 - 9) says unambiguously that the dollar, on which the present international monetary system is based, is “dominant and dangerous.” Its Special Report says: “The global monetary system is unreformed, unstable and possibly unsustainable. What it needs is an engineer to design smart ways to tame capital flows, a policeman to stop beggar-thy-neighbour policies, a nurse to provide a safety net if things go wrong, and a judge to run the global payment system impartially. If America’s political system makes it hard to fill those vacancies, can China do better?”
We are curious to discover the role of the EU and the euro. The Economist is explicit: “The euro is a currency whose very existence cannot be taken for granted. Only when the euro area has agreed on a full banking union and a joint bond issuance will those doubts be fully laid to rest.” So, the conclusion of the Report is that a serious reform of the international monetary system should be based on a political duopoly of the USA and China.
I do not wish to repeat the proposals I put forward in my paper for the reform of the EMU consistent with the construction of a new world economic order. I only wish to underline that any reform of the EU should be conceived as a step towards a better world, as envisaged in the Agenda for Sustainable Development. A progressive policy for Europe must be a progressive policy for the world.
The strategy for a European democratic government
The first call for a federal Europe came during WWII, in 1941, with the Ventotene Manifesto. If federalist movements exist and are active today it is because federalists are patient and tireless. But they are not naive. We are well aware that the present crisis of the EU may cause the collapse of the European project, if anti-federalist parties prevail in some crucial country, like France.
Nevertheless, we think that this dramatic outcome can be avoided if European citizens, the European democratic parties and the national governments of the EU understand that an alternative is possible. Public opinion in Germany, France and many other countries is not against a Federal Union. If political leaders have the courage to propose a clear plan for a political union, the European people will be in a position to understand and to agree. National interests – citizens' well-being and the survival of democracy – can only be achieved if Europe's peoples are united.
The European integration project is strong, because national interests – citizens' well-being and the survival of democracy – can only be achieved if Europe's peoples are united. We can also point out that the political and economic cost of dismantling the Union is greater than that of improving its functioning. So, today, the wavering of the French and the German governments can be overcome.
Federalists have established the Union of European Federalists (UEF) and the JEF (the youth organisation of the UEF). The two organisations are active in all of the EU's member states. Moreover, we are very active in the European Parliament, where the Spinelli Group gathers all the pro-Europeans MEPs, and one of its leaders, Guy Verhofstadt, was appointed by the Constitutional Commission of the EP to draw up a Report for the reform of the EU.
The first draft of the Report shows a clear federalist stance. At present there is also debate among national governments on the same issue. The Italian government proposed a meeting among the six founding countries of the European Community in order to agree on a plan to revive the European project.
The revival of the European project is very complex because today there is not only the question of the EMU crisis to face, but also the issue of massive immigration and creating a more effective foreign and defence policy, both on the Eastern border of Europe and on the Mediterranean border with Africa and the Middle East.
Nobody can say whether the proposals on the table, especially the federalist proposal, will be successful and whether we will see the creation of a real democratic European government. I can only say that the federalists are committed to building a Federal Europe and that if a significant number of citizens support this goal it will be possible.
My conclusion is a call to the activists of the European left to support the federalist struggle, and help make the Federal Union “more likely.”