Size does matter – Europe must unite to compete

By Steven Hill, Guardian, October 8, 2012

Europeans may not want federalism, but they have little choice. A divided Europe would suffer in the global market 

In light of the recent political and economic proposals in Europe – especially European commission president José Manuel Barroso broaching the “f-word” in his call for a “federation of nation states” – the terms of the debate will shift to addressing the following key questions: why should Europe integrate further? And is more federalism really desirable? There are at least two crucial answers to these questions, both of them centred on what Europe will look like, not just in 2015 but also in 2035 and beyond.

First, it’s important to remember that these decisions are being made in reaction to the ongoing economic crisis and the perils of austerity economics. Economists and commentators have tended to view “austerity” on both sides of the Atlantic through the same prism, yet the situation in Europe is quite different than in the US.

In the US, there exists a long-standing federal system that collects large amounts of taxes from Americans in all 50 member states into a national treasury that is spent on various nationwide priorities, as decided by the federal government in Washington DC. Little protest is made over which states contribute more to the national pot, or whether Californians or New Yorkers transfer some of their wealth to poorer Alaskans or Mississippians – which they do, year after year, federal budget after budget. In America, the prevailing philosophy is “a rising tide floats all boats”, and “e pluribus unum”: “out of many, one”, as it says on every US dollar bill.

But in the European “union”, the federal institutions – whether the chief executive, parliament, central bank or regulators – are in their infancy. There is a small treasury – the EU collects about 1% of the member states’ GDP, compared with the US federal government absorbing about 24% of America’s GDP – so there are far fewer resources at the European level to deal with a crisis.

Instead, national and even regional interests jealously track which EU member states are the economic drivers and which are the alleged slackers. The Germans, Dutch, French and others suddenly find themselves in the very unfamiliar situation of having to extend financial assistance not only to the Greeks but also the Portuguese, the Irish, the Cypriots and increasingly the Spanish.

In the US, such geographic spreading around of the wealth is normal, but on the European continent, transfers from wealthy to poorer states are still very controversial. Yet those are an important tool for keeping the continent economically as well as politically stable. If Greece or Portugal, for example, were to sink to “failed state” status, it would have a destabilising effect in other parts of Europe.

But if Greece and Portugal can’t keep up competitively, and also have lost the capacity to devalue their currency as a way of regaining some of its competitiveness, assistance from wealthier states like Germany becomes essential to prevent Greece and Portugal from sinking further. The only way to avoid this would be to expel them from the eurozone, but that entails risks as well, not only short-term but also long-term if they can’t adequately police their borders or become further destabilised.

So unlike in America, Europe’s crisis has not been simply a policy debate over austerity v stimulus. It has been an existential crisis over union, cross-border solidarity and how to define self interest.

The second response to “why more integration and federalism” is China and India’s rise as two of the world’s largest economies. This highlights a new 21st century reality: size matters. In today’s world, population counts as much as productivity toward determining economic power. Even though most Chinese remain poor, China’s rise to the ranks of the world’s second-largest economy makes it one of the world’s largest traders, creditors and markets for commodities. The decisions it makes shape markets globally.

Or as economist Arvind Subramanian has put it: “GDP and size matter in crude superpower terms. It shows what resources you can bring to the table.”

A Europe composed of dozens of diffuse member states, none of them more than 7% of the population of China or India, would slowly see its productivity and competitive advantages chipped away. But if Europeans can band together and form some kind of federated Europe, with a population of anywhere between 350 million and 500 million people, they have a chance to maintain their quality of life and broadly shared prosperity.

European leaders have created a timeline for the proposed reforms that will allow for lots of public debate leading up to the German elections in the autumn of 2013 and the European parliamentary elections in 2014. But they are not waiting for the roar of a popular mandate. Already they are pushing forward toward more integration and democratically accountable federalism, because they believe it is the best hope for Europe in the 21st century.

They also apparently believe that this is what most Europeans want as well, notwithstanding the doubts and confusion expressed in opinion polls.