Europe | November 5, 2012 at 5:44 pm

Europe: Between Technocracy and Democracy

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The Eurozone’s tumultuous struggle to extricate itself from its sovereign debt crisis has dominated international headlines since 2009. However, only recently has any substantive progress been made by policymakers. The combination of the European Central Bank becoming the effective lender of last resort for Eurozone members through its new bond-buying program, and the German Constitutional Court’s sanctioning of the European Stability Mechanism constitute the first substantial buffer against financial panic.

Though the crisis remains far from resolution, the breathing room created by these recent developments has allowed E.U. leaders to consider long-term solutions for the Eurozone’s structural problems. This debate over reform, however, has shifted from economic to political grounds.

Economic Solutions

From a purely economic standpoint, nearly all technocrats support tighter fiscal integration for the Eurozone. As former Bundesbank board member Hans-Helmut Kotz told the HPR, “there are absolutely no new arguments in the euro debate.” The current ones were raised when the Eurozone was created but ignored for political reasons. For example, Kotz notes that Robert Mundell and others argued as early as the 1960s that relatively tight fiscal and monetary integration, including some minimal fiscal transfers and robust labor market mobility, were necessary for maintaining a currency union. Kotz argues that none of this has occurred on a sufficient level at the Eurozone level thus far.

However, today’s crisis has enlivened an active discussion about these issues of economic union, and has forged a consensus among policymakers at both the European and national levels. At the E.U. level, a strong commitment to, and blueprint for, economic integration was laid out by the European institutions. Olli Rehn, Vice President of the European Commission, described to the HPR the Commission’s three-pronged plan for bolstering the Eurozone’s viability. The first prong concerns financial integration through a banking union, which would be comprised of a single supervisory mechanism, a European-wide deposit insurance scheme, and a bank resolution fund. The second prong entails more budgetary control, and the third is increased institutional legitimacy. For Rehn, banking union is the “most urgent” priority, because it can be implemented without treaty changes, whereas the other two are only feasible long-term.

Within individual member states, debate has been more discordant: northern creditor nations are advocating tight fiscal supervision to avoid profligacy, while southern debtor nations are pushing for mutualisation of risk. Yet, from the Commission’s perspective, the dichotomy between mutualisation and supervision is illusory. Rehn states that because of the need to avoid moral hazard, there can be, “no mutualisation without increased integration.” Thus far, the Commission has focused on bolstering supervision, but plans to subsequently increase mutualisation.

Despite what he calls, “divergences in the political discourses of member states,” Rehn argues that within the Eurozone, there remains a deep commitment to further integration. Member states have assured the Commission that, “in the case of a tight spot, they are ready and willing to go far,” to support the Euro.  The European Stability Mechanism rescue fund underscores this significant step toward mutualisation.

Long-term, Rehn’s vision of Eurozone integration is a currency union with extensive coordination on both fiscal and budgetary policies. Even if, “the E.U. will not become as integrated as the U.S.,” Rehn believes that the Eurozone will ultimately embody a significantly more robust economic union than its current form suggests.

A Voice for the People

Unfortunately, European citizens are not nearly as enthusiastic as the Brussels technocracy about this ‘Euro-topian’ economic vision. They have recently expressed their dissent through social unrest in Greece, Portugal and Spain, and through their support of far-right, populist, and Eurosceptic parties.  This latter undercurrent, present in many member states, is most prominent in Finland, the Netherlands, Hungary, and France. Vivien Schmidt, an expert on democracy within the E.U. at Boston University, tells the HPR that such reactions are “dangerous” to European stability.

However, these actions can and should be viewed as citizens trying to intervene in a process in which they have little input. Given the consensus that fiscal integration is necessary and that political unrest is increasing, Schmidt proposes an ambitious plan for political integration. She argues that directly electing the Commission President, and having each European political grouping propose its own candidate, would allow for, “more politics, more debate, and less technocracy.” A partisan Commission President could conduct policy in line with his or her political leanings.  Elections could provide an opportunity to debate Eurozone policy at the national level, whereas much is currently decided among Brussels technocrats.

The idea that fiscal federalism requires political federalism has been making some headway in Europe. For example, a study group of E.U. foreign ministers called the ‘Future Group’, led by the German Foreign Minister Guido Westerwelle, released a proposal in mid-September that included many democratic ideas mirroring Schmidt’s. Chancellor Angela Merkel’s government, especially her finance minister Wolfgang Schäuble, have started using the word “political union.”

Even Eurosceptics are convinced that the two are intrinsically linked: Jan Fischer, a Eurosceptic candidate for President in the Czech Republic, recently said at Harvard that he opposes fiscal federalism because it “inevitably means” political federalism. Putting preliminary ideas on the table, however, could calm political tensions. Democratization of E.U. institutions would undercut the message of far-right Eurosceptics, as average citizens could help shape European affairs.

Opting Out?

Amidst these ambitions for an ever closer economic and political union, the issue of dealing with member states left outside the common currency is almost completely ignored. E.U. member states except for the U.K. and Denmark are technically obligated under the E.U.’s fundamental treaties to join the Euro. However, Sweden has been holding off since a popular referendum rejected the Euro in 2004, and policymakers have resigned themselves to this de-facto opt out.

Following Sweden’s footsteps and refraining from using the Euro for the foreseeable future has become an attractive option for E.U. member states outside the Eurozone with the debt crisis. Grzegorz Ekiert, Director of the Center for European Studies at Harvard, points to Poland as a prime example. Its finance minister, Jacek Rostowski, despite being “highly educated and pro-European,” recently declared that Poland would not join either the banking union or the Euro. The Bulgarian Prime Minister recently declared similar intentions for his country.

Schmidt, nevertheless, does not see the fact that the Eurozone includes only some E.U. member states as problematic. After all, she says, the European Union has always been, “a regional state of nations,” consisting of many overlapping policy ‘clubs’ that include subsets of member states. The Eurozone, or the proposed banking union for that matter, are no different in this respect. However, Ekiert predicts political problems with this increasing policy fragmentation, which will make “political consensus even more difficult to find.”

Although much remains unclear, and new developments can still emerge, the E.U. and Eurozone are nearing substantial transitions. If the Eurozone becomes as robustly integrated as policymakers hope, Ekiert argues that the distinction between Eurozone and non-Euro nations will, “lead to a two-track Europe.” The only question that remains is whether the two tracks are compatible with each other. Deeply Eurosceptical nations like the U.K. and Czech Republic, for instance, are unlikely to further ingratiate themselves in the European project. Ultimately, though the reforms spurred by the crisis originated from the economic necessities of correcting a flawed monetary union, the intra-E.U. battles over further integration will for the foreseeable future entail political and philosophical concerns as member states and E.U. institutions carve out roles in a new order.

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