July 30, 2012

Europe’s political union is an idea worthy of satire



Recent history, and not just that of Germany, teaches us that the idea of sustaining an economic and monetary union over time without political union is a fallacy.” Has former German chancellor Helmut Kohl, who gave this warning in 1991, been proven right by the eurozone crisis? Should Europe now seek political union?


Forming such a union implies nothing less than the end of the nation state. A European government would have to be created with powers of taxation and public spending, a corresponding European parliament and so on. There are powerful arguments why “Europe” – whatever this means and how many countries might be included – should have this ambition. However, to base the argument for integration primarily on saving monetary union is anything but convincing. And it is more than strange when foreign politicians and experts are pressing eurozone states to give up national sovereignty, out of fear that a collapse of monetary union might have severe consequences for their economies. Juvenal would have said: Difficile est satiram non scribere (It is difficult not to write a satire).

Recent history, and not just that of Germany, teaches us that the idea of sustaining an economic and monetary union over time without political union is a fallacy.” Has former German chancellor Helmut Kohl, who gave this warning in 1991, been proven right by the eurozone crisis? Should Europe now seek political union?

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But, independent of any answer to these questions, political union is impossible to achieve within a few years. It cannot be a means of crisis management. And here comes the dangerous part: any proposals, for example, to extend the amount and scope of financial support mechanisms premised on further integration in the future. Promising later action against requests for more money now does not look like a credible strategy – quite the opposite. This approach would severely undermine the idea of establishing political union.
Take eurozone bonds, which would lead to higher interest rates for government bonds in countries of (so far) good reputation in financial markets. The implicit transfer of taxpayers’ money would be a violation of the fundamental democratic principle of no taxation without representation. This is true for all forms of debt mutualisation. This is hardly the proper way to create a democratic European Union.
Or take the idea of banking union. There can hardly be any doubt that a monetary union should be accompanied by integrated financial markets. The concept of a banking union is based on European competences for bank supervision, for a resolution scheme and for deposit insurance. However, the latter two elements imply a need for a fiscal backing and therefore cannot be separated from fiscal and eventually political union. A clean-up of banking systems would have to precede the introduction of a European resolution fund and deposit insurance. Otherwise funds collected so far in national schemes would be socialised. This would not only undermine efforts by weak – to put it mildly – banks to break with the past, but would create an uproar in countries in which depositors would be effectively expropriated. This is hardly a way to foster identification with Europe.
In 2009, the EU’s “de Larosière report” recommended that the European Central Bank become the home of macroprudential supervision (overall financial stability) but warned against giving it the power of microprudential supervision (individual banks’ health). Besides administrative problems, we (I was a member of the group) saw potential conflicts with the ECB’s fundamental task of monetary policy, namely price stability. “This could result in political pressure and interference, thereby jeopardising the ECB’s independence,” we wrote. Developments since the publication of the report have strengthened those concerns. Take the longer-term refinancing operations, which in effect worked as a rescue mechanism for weak banks. In such a context how credible would the ECB be as banking supervisor?
Political union is not the solution. All measures that implicitly pre-empt the establishment of political union are inconsistent and dangerous. They imply huge financial risks for a few member countries and could not only undermine honest efforts in the direction of political union, but also destroy the fundament on which such a process finally rests, namely the identification of the people with the European idea.
Is the collapse of the eurozone therefore unavoidable? This is a risk that can no longer be denied but there is a viable alternative. The eurozone is based on treaties and commitments that were unfortunately broken time and again with the consequence of a deep loss of credibility. Can confidence be restored? A monetary union of sovereign states cannot function without the principle of no bailout, which means that every country is responsible for its policies. Financial assistance must be based on strict conditionality and be given at interest rates that do not undermine the will to reform. As such, monetary union could survive without political union.
After so many disheartening experiences, is it not naive to expect that credibility for such a regime can be restored? Probably yes. But if trust in treaties and commitments cannot be restored, how credible are all the much more ambitious plans in the direction of political and banking union? It would be the peak of naivety to put the future of not only the eurozone, but also of Europe, on such shaky ground.
The writer is a former member of the executive board of the European Central Bank
http://www.ft.com/intl/cms/s/0/d5efc38a-d64b-11e1-b547-00144feabdc0.html#axzz228PPXcux

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