Rebuilding a New European House

A United States of Europe takes a giant step forward… yet the Euroskeptics still see the glass as half empty

I was surprised at the chorus of carping that greeted the recent European agreement to launch greater fiscal integration and union. Predictably, the usual gloom and doomers – Wolfgang Munchau, Paul Krugman and just about anyone British – were bound to see the glass as half empty. But even pro-Europeanists like columnists Harold Meyerson and Timothy Garton Ash found a shrill note to sing. The choral theme, as it has been consistently over these many long months, was “It doesn’t go far enough” and “It will be too late.” A subset of criticism was leveled against Germany and France for, in effect, taking too much leadership when previously the skeptics had bemoaned a lack of European leadership. The critics are a hard lot to please, like certain theater critics who, even when they love you, they hate you.

Certainly it’s true that the recent agreement is not the final solution that some – unrealistically – had hoped for. If one thing has become clear over the last year and a half it’s that this ongoing evolution of Europe is going to take many years, and by necessity it will proceed in stages, usually in reaction to the latest crisis. Yet that doesn’t mean the Europeans haven’t trudged a good distance down Integration Road. Indeed, I would categorize the recent agreement as darn near miraculous. Countries that not that long ago (as these things are reckoned) fought bitter world wars against each other are binding their destinies in a manner that Jean Monnet and Robert Schuman could scarcely have imagined. We are witnessing a United States of Europe in formation, it’s like watching a new planet condensing from the clouds and dust of the cosmos. Many details still are to be decided, but contrary to the hysteria of the chattering class, Europe in fact is not falling apart. Quite the contrary, it is falling together.

And the shape of it, the overarching trajectory, has become clear enough that we can make some projections about where it’s going to land at some future point. Taking the United States of America as a basic model – though with obvious differences – there are four foundations that Europe must materialize to end up with some version of its own U.S. of E.

First, there must be a degree of fiscal stability union in which important decisions around levels of debt, pensions, tax rates and the like are harmonized across member states (just as Social Security and federal income taxes are the same across all 50 U.S. states); second, there must be a degree of transfer union, in which the better-off member states assist the lesser-off member states, whether through a federalized appropriations process of sufficient magnitude or a conscious policy of rebalancing trade within the union among deficit and surplus states, or both; third, there must be a central bank or other financial body with enough firepower and policy tools at its disposal to act as a financial backstop of last resort and guarantor of member states debt; and fourth, there must be a political union influential enough to both facilitate as well as popularly legitimize economic decisions.

Europe has been charting a course in all four areas for many years, some tracks faster than others, with the speed picking up considerably in the last year as a result of the eurozone crisis. The most recent agreement takes a giant step towards locking down the rules for the first track, a fiscal stability union. It mandates a harmonizing of budgetary expenditures and deficits/debts for the Eurozone 17 (and other E.U. states that wish to join), a sort of Stability and Growth Pact with teeth, with automatic sanctions for violators. The new motto is, “This time, we mean it” (to which the skeptics respond, with some justification, “We’ll see”). Stimulus hawks like Krugman have decried this effort as misguided because it will lock in what they see as German-obsessed austerity as permanent policy, but this is nonsense. The fact is, 49 out of 50 US states have balanced budget requirements, either by statute or in their constitutions. This is a necessary, foundational step toward ensuring that the risky economic policies of a few member states can’t drag the rest off a cliff.

It’s also a precursor to what must come next, which is crafting a transfer union. At this point most of the political class realize that if member states are to bind their budgets and currency to each other, losing the capacity to devalue their currency to cope with economic downturns, there must be some mechanism for better-off member states to assist those who are not doing as well. The brilliance of this part of the American design (other parts of the American system are antiquated and moribund) is one of E Pluribus Unum, “out of many, one.” Member states like New York, California and Illinois only receive back about $.75 for every dollar they send annually to the federal government, with the extra $.25 going to the bursary of poorer states like Mississippi, Alabama, Wyoming and Alaska. The specific amounts of those transfers are negotiated and subject to the political process.  It has been that way for decades, and most Americans, even those in the transferring states, rarely question or are even aware of this arrangement.

Yes, dear German, Dutch and French taxpayers, unfortunately you will have to extend a Good Samaritan hand – in the form of a bunch of euros — to some of your fellow Europeans in order to make this piñata work. That argument has not been made forcefully enough, especially in Germany, by any of the political parties there, left or right, including the considerable benefits that Germans reap by having neighboring states that are flourishing and consuming German exports. China understands this perfectly well – witness the trillions in loans it has made to a cash-strapped America to shore up the U.S. consumption machine that is the second largest importer (after Europe) of Chinese products. At some point in the economic cycle, surplus nations like Germany and China have to counter-lever the deficit nations. Germany and its partners already have been doing this to some degree, loaning money to Greece, Portugal and Ireland at favorable interest rates lower than market rates. But most likely a real transfer union will require a change of government in Germany to accelerate this forward motion (though the current leadership has changed its positions quite a lot already in response to the weight of events).

In terms of the third foundation, which is creating a financial backstop that can guarantee the debt of member states, such as a European Central Bank or European Stability Mechanism with an expanded mission, deploying tools such as eurobonds, that no longer seems far-fetched either. Leading European voices are now seeing it as inevitable. The ECB has been stubbornly resistant and obsessed with its inflation targets, but even the ECB is a different creature than it was two years ago. It has engaged in previously verboten behavior, such as buying massive quantities of bonds of member states under attack by the bond vigilantes and rating agencies, and under its new president Mario Draghi most recently offered banks three year loans for the first time to assist with longer-term liquidity, and passed two consecutive interest rate cuts to boost the eurozone economy.

In short, the ceaseless conveyor belt of integration appears to be inexorably pulling everyone in the same direction. At this point you have the center-left Social Democrats in Germany already committed to some form of United States of Europe, as well as the Greens which together will likely form the next government. On the conservative side, the European Commission and its conservative president, José Manuel Barroso, is firmly on board with it, as is French President Nicholas Sarkozy, and even Germany’s former conservative Chancellor Helmut Kohl has spoken up for this, indirectly criticizing his former protégé, current Chancellor Angela Merkel. Merkel herself increasingly uses the rhetoric of integration, though of course the devil is in the details and she is not (yet) there in terms of launching the final solution toward an effective transfer union or expanded ECB.

But should that come as a huge surprise, that Merkel has not yet committed the German taxpayer to bailing out the Greeks and the Italians for decades to come? It takes time – and a crisis or two or three – to focus people’s minds and move attitudes. Yet clearly that is where this trajectory is heading, because there is no other option. Europe is halfway across that stream, and everyone agrees they can’t go back. So the only way is forward; and the only way forward is some kind of transfer union and some central bank or financial authority that has the mandate as well as the capacity to guarantee the debt of member states.

Some of the critics have expressed understandable skepticism that the transfer union piece will ever come to fruition. But when I inquired recently about all these matters to a high-ranking European Commission official I know, he responded thusly:

“Indeed, last week’s agreement is a breakthrough in integration. It will effectively lead to a European system of fiscal federalism. The collective budgetary discipline leading to a fiscal Union is the first part of the deal; it will have to be completed by a comprehensive solidarity component (italics mine). This will certainly come, but it can’t happen unless the first part is enforced and respected by all. ‘Sequencing matters,’ as [ECB president] M. Draghi said.”

Yes indeed, sequencing does matter, since it builds confidence and consensus among the member states. A transfer union – a “comprehensive solidarity component” — might not happen until Merkel exits the scene, or it might. But at this point the overarching trajectory of where Europe is heading has too much momentum to stop. The price of going backward is too steep, and the potential benefits of going forward too central to the European dream. It’s just a matter of time.

Other critics have expressed fear that Europe is moving too slowly, and that if the troubled countries can’t meet their obligations during this waiting-for-ECB and transfer union interregnum and a major recession ensues, the fact that the ECB rides to the rescue after the disaster will not be very consoling. As Washington Post columnist Harold Myerson told me, “If the EU becomes synonymous with recession, it won’t last.”

But Europe has been through recessions before, so another one is not going to unwind things dramatically. Indeed, the climbing interest rates of about 6.5% being paid by Italy and Spain to finance their debt, while showing a worrisome trend, are only about half the interest rates paid by these countries in the mid-1990s when interest rates peaked at over 13%. The people of Europe have faced dictators, fascists, and all sorts of other calamities far worse than what they are dealing with now. The older people of course know this intimately, the younger people through secondhand knowledge. But I think it gives them a patience with all of this that Americans perhaps can’t understand. Analysts should not let a bit of protest in the streets make them conclude that Europe is falling apart. Protest is healthy and good, in my view, not a disturbing sign at all. People should be fighting back to make sure that the elites, whether in Europe or the US, take the interests of everyday people in account. Until the Occupy Wall Street movement occurred in the U.S., Americans had accepted the plundering of their Main Street economy by Wall Street with a troubling degree of passivity. Unfortunately, the antiquated US political system is incapable of responding to the demands of the 99 percent, for reasons too complex to go into here. In Europe, the political system is responding, albeit at a cautious pace. I am much more worried about America’s plight than Europe’s.

Besides, outside the PIIGS and the UK, most other European countries have emerged from this global economic crisis in decent economic shape. To me the bigger challenge is whether, as a consequence of this process, Europe loses too much of its social dimension, resulting in a degrading of its support system for families and workers, as well as to its world-leading pro-environment and carbon-reduction policies. But so far, I don’t see many signs of that happening. Europeans are trimming their supports a bit, but they start from a place of such comprehensive generosity compared to what Americans and most of the world receive that they are still way ahead in that regard. Everyone in Spain and Italy still has health care, for example, unlike 50 million Americans. The average European still emits only about half the carbon and uses half the electricity of the average American. Even the conservatives in Europe like Sarkozy and Merkel often sound like the most progressive Democrats; the European center is where the American left would love to be.

That brings us to the fourth foundation, the legitimacy of a Europe-wide political union. The preservation of social and green Europe will be depend on the credibility of the federal institutions. The European Parliament, the second largest elected legislature in the world (after India), certainly is legitimate and credible, and it’s newly expanded powers as a result of the Lisbon Treaty are a welcome add-on. But the executive bodies, including the European Commission and European Council, which is where most political power still resides, are seen as distant, unresponsive and insufficiently beholden to a European electorate. Proposals have been floated to elect some of the Members of the European Parliament Europe-wide instead of on a national basis, as well as to directly elect a president of the European Union. An elected president representing all 500 million Europeans is not as far-fetched as it sounds: the presidents of 12 member states, including France, Finland, Ireland, Austria, Portugal, Bulgaria and Romania all are directly elected. Another possibility is directly electing a Swiss-style executive council of seven members. The Lisbon Treaty already has created a Europe-wide limited referendum process, in which a petition signed by million people places an issue onto the European Commission’s docket.

It seems to me that holding Europe-wide elections, especially to elect a president or multi-member executive body,  is an important reform to advance, both to forge a continent-wide electorate as well as to create the unifying public figures that Europe needs. President Barroso and former UK prime minister Tony Blair have endorsed a directly elected president, and so have Merkel’s Christian Democrat party and her imposing finance minister Wolfgang Schäuble. This is one proposal to watch, as the logic of it will become increasingly clear.

At the present time, it’s important to take stock of what has been accomplished, as well as what remains to do. If a glass is half empty, it’s also half full. You have to wonder about the agenda of critics who, for whatever reason, apparently aren’t capable of pausing in their criticism to look back for a few moments and see how far this United States of Europe has come. We have only to look at America’s own history to understand that these issues of integration and union are extremely complex and take years – decades, actually – to play out. A full 70 years after its first government in 1789, America fought a bloody and bitter civil war over “states rights” (and the related issue of slavery), which at its core was a violent disagreement over the powers of central government and member state integration. Young Europe today can best be understood by realizing that it is in its Articles of Confederation stage, entangled by many contradictions and tensions as it continues to fashion its union and decide how integrated it wants to be.

Make no mistake, this evolution of Europa is an epoch-making spectacle and not to be missed. A union of sorts is in formation, and there appears to be no turning back.  The planets are in realignment, and the stars in the firmament will never look the same. But if you lurch from gloomy headline to gloomy headline, you will miss it.