19/6/2013: European Federalism and EMU Experience

There is a number of flaws in the euro area design that were exposed by the current crisis. Perhaps the most fundamental is the flaw relating to the system complete incapacity to generate critical capacity. Despite the crisis continuing for the 7th year in a row, the EU and the euro area as its core sub-set remains unable to ask the key question of viability of the social, political and economic project based on the premise that ever-increasing levels of policies and institutions integration, harmonisation and coordination is a feasible and a desired direction to pursue.

Let's start from the top.

Firstly, it is now pretty much an accepted wisdom that in shaping the EMU, European leaders have failed to see even the basic implications of deep integration. The implications missed were not just monetary or economic. Current crisis has shown deep divisions within the euro area on matters such as inflationary preferences, expectations formation mechanisms, conditionality evaluations and fiscal transfers, all cutting across social and cultural division lines, rather than purely economic ones. This failure has led to the design flaws that are principles-based and, as such, cannot be corrected by managerialist solutions. They require structural change - a matter of concern for Europe, so far incapable of following through with even managerialist changes, such as adherence to well-specified Maastricht Criteria targets at the times of aplenty or expression of any solidarity at the times of constraints. There is little hope the EU can deliver on much less defined, broader and, at the same time, culturally and socially more challenging reforms and changes required to move the euro project forward, away from the danger zone.

Secondly, it is also pretty clear that the EU institutions are incapable of learning from the mistakes of their leaders and from the signals transmitted from the nation states and the electorates. Instead of making an effort to understand the underlying causes for a rushed, poorly planned and poorly executed monetary policy harmonisation, the EU leaders are now jumping head-in into attempting to cure the sever hangover from the common currency creation by doing more of the same - embracing the idea of banking and financial services integration (the Banking Union - EBU) and political consolidation (the Political Union - EPU).

A combination of the two directions will, under these conditions, risk leading Europe toward a repeat of the EMU fiasco on a much grander scale - a failure of all three 'unions' - the EMU, the EBU and the EPU. History can repeat itself, having shown its hand today as a structural crisis in one area of the system, with a replay of the crisis across the entire system.

There are number of reasons for this conjecture.

The EU's latest drives - across political and banking dimensions - into deeper integration are lacking the deep foundations on both, the demand and supply sides of their respective equations. In this, they are  exactly mirroring the EMU creation that too faced the original minor crisis in the 1990s only to be pushed through in the noughties.

In case of the EPU, the lack of these foundations is even more fundamental than in the case of EMU or EBU. EPU has no political legitimacy and is losing any potential future legitimacy on a daily basis. EU institutions and even the core ideas of the later-stages EU (EMU, Fiscal Compact, 6+2 Pack packages of legislation etc) are deep under water when it comes to popular mandates. All Eurobarometer surveys show rising dissatisfaction across the EU with the European institutions, including the common currency. The two words 'democratic deficit' that were present in the European politics prior to the crisis are now, probabilistically-speaking, dominate the popular and national discourse about Europe in every country of the Union, including the new Accession states. A popular mandate in Iceland has led to cancellation of the EU Accession talks this month.

Only doctrinaire Europhiles, and even then, predominantly within smaller countries' national elites, as exemplified by some members of Ireland's ruling coalition, today deny the presence of this deficit at the fundamental level across all European institutions.

There is also a major problem of Europe's 'capability deficit'. Brussels - full of (mostly) men in suits with offices to go to after lunch is hardly a source for inspiration or for leadership. And absent inspiration, perspiration does not work all too well. The entire European project lacks vitality, and thus - viability. There is no enthusiasm, no ideal, no dream. These were exhausted at the stages in the project history when 'peace between France and Germany' had meaningful referential counter-point (it no longer has, as no one sane enough would conjecture that absent the EU, Alsace will be once again dug into an anti-tank trenches giant washing board) or when the EU (brilliantly and correctly) was expanding the liberty of trade and freedom of movement across its internal borders. Absent purpose, leadership is wanting too. The void is filled with simulacra of bureaucrateese: the alphabet soup of 'programmes' such as ESM, EFSF, EFS, OMT, EBU, and so on, all the way until ordinary European gets lost in the world of corridors, meeting rooms, windowless conference venues, meaningless letters and mumbo-jumbo of various white papers, etc.

To confront these deficits, the EU is creating even more bureacrateese - papers, positions, plenaries, meetings, councils, pacts, compacts, conferences, agendas.

Amidst this, Europe still lacks a single face capable of holding its own in front of the electorate. Lacks, that is, on the 'federalist' or pro-EU side. There are rhetorically competent MEPs on the opposition side of the chamber, but there is not a single appointed or elected leader of the 'official' Europe capable of not putting to sleep at least half of his/her audience.

Europe has 4 'Presidents' today: President [of the Commission] Mr Jose Manuel Barroso, President [of the Council] Herman von Rompuy, President [of the Parliament] Martin Shulz, President [of the Eurogroup] Jeroen Dijsselbloem. Absent the latter one, not a single one have been known for talking straight on any hard issues. Including the latter one, none inspire many to anything akin the commitments and sacrifices required to achieve meaningful federalisation of the EU. All, with no exception, got their EU positions bypassing direct election by the voters of Europe. Power and responsibilities of each are directly proportional to the distance by which they are removed from the European electorate. When these levels of confusion and power politics dispersion are not enough, there's always a fifth President lurking around: the Head of the Presidency State. In Henry Kissinger's terminology, the question is not 'Who do you call when you want to speak to Europe?' can now be replaced by 'Who do you not call?' Latest G8 summit photos stood as a great exemplification of the problem: there amidst leaders of 8 nations stood three 'leaders' of Europe, not because they had anything to say, but because they had to be there to upstage one another.

The five-headed 'leadership' beast is now on a quest to 'increase democratic mandate' of the EU Commission. To do so, it is proposed that the blocks of parties shall be formed in the EU Parliament to 'nominate' the next Commission and its President. In other words, the EU leadership sees 'renewal' and 'democratic participation' as a function of optics. Dominant blocks of largely sclerotic national-level parties will be dominating the EU legislature and executive to simply replicate the stasis that has captured national political platforms of the main EU states: Germany, France, Italy and Spain. Effective opposition will remain impossible, just as it remains today, but the fig leaf of 'more direct' ('slightly less-managed') democracy will act to cover this up from, hopefully, oblivious or satisfied electorates.

Thus, by design from above (not by will from below), the EU is supposed to move toward a two-party system, replicative of the traditional core parties of the national politics: the centre-left with a clientilist base in unions, state employees and 'social pillars' - the 'social democratic centre'; and the centre-right with a clientilist base of 'employers confederations' and state managers - the 'populist & conservative movements'.

The dynamism of such a system will be equivalent to the excitement of a turtles race on sticky putty. Or differently, a two-party system will do for the political leadership what the Euro did for the monetary policy - put a straightjacket of superficial conformity onto the society that for centuries was based on differentiation-driven boundaries and nation states.

Both demographic and socio-economic changes from the 1945 through today, in Europe as elsewhere, have meant emergence of more diversity and differentiation in markets for everything, starting with simple products, such as diapers to complex services, such as healthcare. To assume that politics and ideologies can remain in the stasis of the two, adjoining at the centre and even overlapping, sets of ideals and policies is about as naive and counterproductive as it was to assume that Greece and Finland, or Latvia and Portugal, can be brought into single currency within a span of one/two decades.

There are three key ingredients that are required to sustain two-party system: 1) stability of ideological preferences (informed by popular objectives for policy), 2) allegiance to the single unifying institution of the state overriding local/national/ethnic or even more atomistic allegiances and interests, and 3) organic evolution of the two-party system (usually out of the bifurcating economic power balance, such as land-owners vs capital owners, workers vs capital owners etc).

Modern world, especially the world of Europe, does not support either one of these preconditions. Current conflicts and, thus, incentives lines are drawn across generations; skills groups; risk-taking capabilities and preferences of populations; national and even sub-national distinctions; ethnic, historical and cultural differences and grievances; external threats that range across a very wide spectrum from immigration from the South to hegemonic threat from the East, to cultural threat from the West, and so on. Two ideologies can never capture this diversity, let alone provide a sufficient basis for forming participatory democratic institutions. Look no further than internal nation states' dynamics in the UK (Scotland, Norther Ireland, Wales), Italy (North, South, East), Spain (Centre, North-East, North-West), Belgium, and recall the fate of Czechoslovakia, Yugoslavia. Look at the emergence of challengers to the two-party systems in all European states - never quite capable of displacing one of the parties of the 'old' system, but always present, reflective of the ongoing process of atomisation, or rather customisation of politics.

At the same time, with hundreds of millions spent on propagandising the concept of European citizenship, Europeans remain in deep allegiance to their nation-states, and in many Federal states - to their local 'tribes'. In fact, the EU has been recognising this and reinforcing the locally-anchored distinctions. Culturally, everyday life matters more to the majority of Europeans today that the 'geopolitical' aspirations of Brussels. And culturally, we are living in an increasingly 'goo-cal' world, where trade delivers to us goods and services from all over the world, but we identify ourselves on the basis of goods and services that are local in origin.

In the countries, where two-party system seemingly is stable - e.g. the US and the UK - underneath the surface, the fact that the two-party system fails to capture sufficient percentage of population in an ever-increasingly individualised world is also evident. It is expressed in the stalemate produced by the system where mainstream parties are captive to small minorities of activists and are often torn internally by sub-groups and sub-interests.

Lastly, the two-party system of ideological debate has been shown inadequate in the face of the current crisis.

Looking forward, this failure is extremely significant. In order to work, compared to today's EU, the EPU must be either comprehensive or devolved. On the latter, see below. The former requires significant transfer of power and power base to the EU, implying ca 20% of GDP-sized Federal Government, dominant power of taxation, harmonisation of core public services, such as health, social security, pensions, education. The member states will be allowed some 'gold-plating' of the Federally-set standards, but the standards will have to be set nonetheless. The reason for this is that in a real Federal Union, there will be a functional Transfer Union and that implies standardisation of services funded by transfers. A two-party system will never be able to break away from the sub-national political bases sufficiently enough to deliver such homogenisation.


If European federalism is to evolve, it will have to evolve on the basis of accommodating more diversity, not by homogenising the system by reducing differentiation and fragmentation of the political institutions. It will have to adopt market-like features where turnover of ideas is fast, deployment of solutions (goods and services) is rapid and never permanent, and the system thrives on diversity. This is the exact opposite of the harmonisation and consolidation implicit in traditional federalism, but is rather more consistent with Swiss federalism. The key to this form of federalism is that it severely limits the central powers of taxation and redistribution of resources and vests powers of policy origination, design and implementation in local hands. It also acts to encourage policy heterogeneity - an added bonus in the world of uncertainty, as it allows for creation of policy hedges: a shock impacting different systems differently necessarily shows both the pitfalls and the strengths of various institutions and regulations. In other words, Europe needs less of European centralisation and more of European diversity.

Before this can be delivered, however, Europe needs to systemically dismantle or reduce those institutions that act as an impediment to bottom-up governance - the institutions of centralisation of power.

The first for a review should be the strictest of them all - the euro. Here, the required change will see assisted exits from the euro of non-core states, leaving behind only those countries for which monetary harmonisation makes sense. Most likely these are Germany, Finland, Czech, Austria, and possibly Belgium and the Netherlands. Other countries can revert to their own currencies and/or run open currency system with euro remaining one of the legal tenders in their economies. Belgium and Luxembourg can run in a union with France, if so desired.

The second candidate for restructuring will be the EU Commission. The President of the Commission should be elected on the basis of direct vote with state-based 'electoral' voting system similar to that of the US, to alleviate extremes of population-weighted distribution of votes. The President then can appoint her/his own Commission on the basis of: (1) each member state must be represented in the Commission, (2) Commission candidates can be nominated by member states, the EU Parliament and the President, (3) each member is confirmed independently by the EU Parliament and the Senate.

The third candidate for reform is the EU legislature. The European Parliament should be augmented by the independent, separately elected Senate, based on member states' representation principle and vested with the powers similar to that of the US Senate. The Senate should be directly elected and it should replace the current Council. To strengthen direct links between nation states and the Senate, the formal leaders of the nation states (e.g Italian and Irish presidents) should serve as senators representing their states.

The fourth candidate for reform should be the system of European checks and balances. This should, among others, include a Constitutional ceiling on taxation and redistribution powers.


There are other reforms that will be required. This is hardly a place to attempt to narrate them all. However, the key principle is that the EU needs a drastic reconstruction of its upper levels of legislative and executive powers. And the key question that is yet to be asked and debated (a necessary pre-condition to deriving any solutions) is whether the proposed EPU (and to a less important extent, the proposed EBU) stand a chance of working out any better than the failing EMU?