Slow Road to a Federal Europe

The Sunday Business Post published an opinion piece of mine on the eurozone crisis yesterday under this title. As its content seems to have disappeared behind a paywall, I attach the piece here

Angela Merkel’s recent reflections on the future of Europe to which I refer are here.

15 thoughts on “Slow Road to a Federal Europe”

  1. Many thanks for posting on this topic. Your conclusion:
    “The dominant logic today is that increased scale is required if governments are to have any control over the consequences of globalisation. This logic will not diminish.” should be inserted surgically in to heads of both sides on the referendum debate.

    However, the current liberal/centre-right hegemony thoughout the EU which is seeking to develop a strategic response to globalisation is repulsive to many – and for good reason. Despite this apparent German government intent to enhance the democratic legitimacy of the EU’s institutions which has to be applauded, it is bound up with a determination to embed this liberal/centre-right hegemony.

    It is a matter of great regret that the constructive engagement between liberals and social democrats/progressives in the last century that secured popular consent for major advances in economic prosperity and social well-being has mutated to mutual animosity and distrust.

  2. A very interesting paper but posited, like nearly all academic papers on the subject, on the assumption that a federal state on the lines of the US is required for the euro to work because of the smoothing out impact of the federal budget.

    The jumps in logic that allow for this conclusion can be noted in the following (sequential) extracts.

    “As the Honohan Report on the banking crisis noted, one of the reasons why Ireland adopted a non-intrusive regulatory environment was concern for the IFSC’s ability to attract international business. The same applied in the UK. This suggests that responsibility for financial regulation may need to be federalised”.

    Why not now? This can be done within the existing treaties. What is lacking is the political will to do it. In the case of the UK, for example, is there a willingness to see bank supervision transferred to the ECB (as can be done – bu unanimity – under Article 127.6 TFEU)?

    “Similarly for bank resolution. There are no clear rules within the eurozone for who might need to bail out foreign subsidiary banks. Even without this complication, expecting Ireland to finance on its own the bailout of the Irish banking system is, as Morgan Kelly put it, like requiring the
    residents of Newcastle to do the same for Northern Rock”.

    Ditto!

    “This clearly moves us further towards a federal Europe”.

    Why?

    “But now consider the role that the US federal budget plays in cushioning regional recessions in that jurisdiction. Tax payments to Washington fall sharply, and there is some reallocation of federal expenditures towards the
    region. Some analysts estimate that as much as 40 percent of a regional downturn is cushioned in this way, which serves as a substitute for currency realignment. Europe’s Structural Funds are insignificant in comparison”.

    I have not seen the estimates of the analysts in question but it is certain that no such transfer of wealth between the countries of Europe is going to come into existence and such a transfer is not necessary for the successful operation of the single currency.

    What the high-falutin debate about the ultimate federal destination for Europe, most recently initiated by Merkel, disguises is the unwillingness of politicians to take the unpopular decisions that could resolve the immediate crisis. The most significant of these, in addition to agreeing rapidly the legislation on financial regulation and banking resolution, would be to complete the single market, the failure to do so being the biggest drag on the introduction of the need flexibility in the economies of the Euro Area to allow them to even out disparities in competitivity. These have little to do with the euro but everything to do with the defence of sectoral interests in the various economies.

    On the issue of taxation, the same faulty logic is used;

    “If federalism entails some measure of corporation tax harmonisation, this strengthens the case for a transfer union. Smaller, poorer, more peripheral member states have lower corporation tax rates to compensate for the natural advantages that the opposite characteristics bestow. Public
    investment also helps in the competition for foreign investment flows. This would put the periphery at a further disadvantage unless it was funded federally”.

    Why should federalism entail such a tax at an EU level? An origin based system of VAT, with a common collection at an EU level, would make much more sense. The fact is that there is no provision in the treaties with regard to the harmonisation of direct taxes because no such harmonistaion was seen, correctly, as being necessary. There are provisions with regard to the harmonisation of indirect taxes in the context of the operation of the single market but decisions are subject to unanimity and the member states have been unwilling to agree even a basic homogeneous regime across the EU.

    The leaders of Euro Area are, indeed, far ahead of their peoples but have put themselves in a situation from which they can only reasonably hope to advance, not retreat. This advancement, however, consists of completing the the construcion that they have already undertaken not trying to sell their unwilling electorates a bill of goods that some further institutional change is necessary to resolve their problems.

    If some want to move ahead faster within the treaties – as is allowed under the enhanced cooperation provisions of the Lisbon treaty – by all means let them do it!

    The class assignment is in the letter of the Twelve sent to Van Rompuy ahead of the most recent summit. Do any of them really mean it or do they intend to carry out only those elements that suit them?

    http://www.number10.gov.uk/news/joint-letter-to-president-van-rompuy-and-president-barroso/

  3. Don’t know why everybody wants a repeat of the American federal experiment of waste based consumption.
    Ireland became a terrible place to live after 1987 when this sick process was accelerated.
    These massive capital flows have a dehumanising effect on the soul – destroying the very fabric of civilisations.

    http://www.youtube.com/watch?v=28BXqQWqYJU

  4. This is a multi-decade project.

    As regards the Commission, the president is usually a compromise candidate from a small country. Many of the commission members are poltroons.

    For a start, a one term like the ECB president may help.

    As regards Paul Hunt’s point on the centre right, it seems that the SPD in Germany has more in commom with its conservative colleagues than for example with the French Socialists.

    Peer Steinbrück, the SPD finance minister in Merkel’s first coalition made the chancellor look like Ms Charm.

    As for the US, many states have fiscal problems as a result of the recession and services are being cut.

    In 2009 the Obama stmilus program of $787bn provided aid to the states but it only passed by a whisker because of implacable Republican opposition and the program has already ceased.

    Silicon Valley, officially known as Santa Clara Valley, south and southeast of San Francisco Bay in Northern California – – is recovering and in 2011 added 42,000 jobs but incomes outside high tech fell while public services deteriorated as California’s dysfunctional referendum system makes it easy to spend but hard to tax.

    San Jose, a city of almost a million people in the Valley, has shed a fifth of its workforce in 4 years.

    There is no Utopia.

    As regards corporate taxes, Ireland should end the support for extensive tax haven activities which deprives other countries of taxes but gives Ireland little additional revenue.

  5. There are some managers who believe just function best – and can best justify their existence and value – only in crisis situations. And they almost will and engineer these crises to occur so that can demonstrate their ‘crisi-mangament’ skills and grace under pressure, rather than taking small, sensible steps in advance that might prevent the crisis – or, at least, ameliorate its impact.

    If they’re not at this nonsense they’re constantly on the look out for new ways of doings or the latest gad or gizmo or the latest dose of snake-oil from the management gurus so that they can ‘shake the business up’ and somehow ‘improve performance’. Most of the time the disruptive impact can cause chaos among staff and reduce productivity. But, again they believ this affirms their credibility and effectiveness as managers much more than doing simple boring tasks and making minor, but reversible, changes within existing procedures that cumulatively increase productivity.

    It seems that EU politicians share many of these characteristics. Many ssem to revel in a crisis, and posture in a manner to project the image that they are having a ‘good crisis’. And most will shy away from completing important, but unfinished, business (that was probably initiated by a predecessor) in favour of seeking strike new poses and to establish new institutions and procedures that are likley to prove unfit-for-purpose while the boring, tedious unfinished business remains uncompleted.

    And so it seems to be the case, as DOCM has pointed out, in relation to completing the single market in so many sectors. Too many narrow sectional economic interests exercising excessive power and influence that might cut up rough. Better let sleeping dogs lie and conjure up some eye-catching whizzo schemes or enormously detailed but basically futile action plans (such as the Government’s Action Plan for Jobs involving all 15 govt. depts. plus 36 separate govt. agencies implementing more than 270 actions) that will distract voters and might convince them that government is working furiously and single-mindedly in their interests.

    This is total and utter bollocks. Effective governance and policy fomulation and implementation are generally boring, tedious and often thankless work. We need boring, competent politicians who can convey a sense of purpose.

    Perhaps Chancellor Merkel scores on this count, when so many other don’t.

  6. By insisting for one commissar per country Ireland effectively suppressed the possibility of an efficient European Commission . It would have been much better to increase the powers of the European parliament . If we get more federalism without more democracy,the system is bound to explode.

  7. People don’t seem to understand what happened – talk of the European Parliament is beyond surreal.
    After 1987 the Banks were freed completly from their nation state Bondage.
    Well guess what did they do ? – they switched on a massive global slave Arbitrage engine otherwise known as late 20th early 21rst century Globalisation.
    So instead of Financing one Nuclear plant in their base of operations they financed 5 coal plants in China.
    Creaming the profit from the wage arbitrage – no new wealth was created – it was merely extracted at a higher rate and expressed as profit.
    This was profitable until oil began to rise as this was needed to transport goods back to the gorged credit Pigs of Europe & North America.
    The banks came back to shit in the European nest and now people want to keep these Cuckoos via a European Banking Superstate !!
    A mini me like operation via German mercantile boutique manufacturing that supplied the financial & criminal centres with goodies was also in operation during this time.
    Creating the biggest shitstorm since 1914.
    Unbelievable – truely unbelievable.

    And yet people want more of this !!!!!!!!!!!!!

  8. @ Overseas commentator

    This is an old chestnut and based on a double misunderstanding.

    The first is that the powers of the EU can be gauged in terms of the powers of individual institutions when what matters is the interplay of powers between them. The Commission – deciding as a college by simple majority of its members – proposes and the Council and the Parliament, as the legislature, jointly decide legislation under the “ordinary legislative procedure”. In a number of sensitive situations, however, the member states have reserved the right of decision to the Council and, in a few instances, without the need even for a proposal from the Commission.

    The second misunderstanding is that it was the demand of Ireland alone that ensured that there should be one commissioner per member state. My understanding is that this was far from being the case. The majority of countries made the very sensible calculation that, if they did not have a commissioner from their own country, the college could easily lose sight of its very existence and make proposals – without which the legislature cannot act – that did not take the interests of all member states into account.

    You should forget the efficiency interpretation. It is a myth pushed by the larger countries anxious to neutralise the Commission.

  9. EU citizens want the susidiarity principle and local taxation to pay for locally provided services as much as possible. Eurocrats (the self-proclaimed ‘elites’ believing that they know better than their citizens) want all to be decided in Brussels, taxes to be collected and sent to Brussels for their ‘enlightened’ disbursement.

    The so called ‘elites’ going against the wishes of the citizens? Yep, no question about it.

  10. We are where we are.

    It would be great if Europeans all spoke the same language. The fact that we don’t does not make us despair of having common institutions, rules, parliaments etc. They don’t work as efficiently as in the single language US but we can nonetheless get round the difficulties.

    In the same way we can see that the current national diversity of Europe makes true fiscal union politically unworkable in the near term and hence again we have a big disadvantage over the US when it comes to operating a currency union. But it does not make it impossible and just as we make no attempt to move towards a common language we should abandon any immediate ambitions for a true fiscal union and make the best of what we have got. That seems to be the realpolitik of the fiscal treaty.

    Having said that, it is clear that the single currency project was altogether too ambitious in the first place, lucky Brits for steering clear of it albeit on Little Englander grounds.

    I for one am still glad that the mistake was made for I shudder to think what my pension in punts would now be worth.

    Finally, it was a good article, but rather lets itself down with the Newcastle/Northern Rock swipe. As I understand it Newcastle had nothing to do with the regulation of Northern Rock.

  11. @ DOCM

    Thank you, and of course I agree with all of your comments as expressed in your earlier posts. Common sense. Realpolitik. These should be the watchwords. No point in mad fantasies about exiting the euro, stuffing the ECB etc.

  12. It’s refreshing to read some aknowledgement that the Euro structure itself was flawed from the get go. And that the solution wil require fiscal transfers in some form or other.

    It must be based on true partnership where no one gets left behind.

    However, the US system mentioned, whilst having a better structure (hard to be worse), also demonstrates just how bad outcomes can be when the underlying understanding of money, banking & macro economics, as it informs policy options, is flat wrong.

    Similarly flawed mainstream economics thinking in Europe is also being used as an ideological tool to enrich a few percent at the expense of the rest, just as it is in the US (& much everywhere else).

    I see no indication of this fundamental intellectual bankruptcy being addressed by ‘authorities’, and that gives me zero faith that some properly functioning federal-type system will emerge from the incumbents.

    We need a full & open public debate on all aspects & +all+ options fully considered, not anothewr stitch up by the few, on the quiet or otherwise.

    I have no doubt whatsoever that if the general public knew the correct understanding of money, & policy options that follow, of MMT, they would have no hesitation in demanding its introduction.

    Over 2,000 people recently attended an entire weekend in Italy dedicated to learning about MMT. Lecturers were from UMKC.

    Time a few Irish economists copped on?

  13. An interesting paper that emphasises the logic of moving forward towards a federal Europe.
    Logic may suggest that but there have been very many illogicals during the past few years.

    “There has been much talk of the “democratic deficit” in European affairs. But the real democratic deficit has been that Europe’s political elites have been so far ahead of their electorates in terms of the long-term direction of European integration that they find themselves now with no one behind them.”

    Have Europeans leaders really been ‘ahead’ of their electorates or have they running with a free capital markets agenda that is distrusted by the electorates who are being subjected to its demands, demands that appear to dominate the thinking of the elites?

    In the Troika of markets, elites and electorates who is leading whom?

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