Photo: Paul Downer / Flickr
Europe is in crisis, and it’s not just about occasional flare-ups in peripheral sovereign debt markets anymore.In fact, it’s really never been about that.
The European continent has for decades since the end of the Second World War struggled to create a transnational identity, the fulfillment of a dream to end military conflict between continental superpowers like France and Germany that has plagued it for centuries.
However, that identity – and the institutions like the EU and the ECB that embody it – has come at a great price. Voters in euro area member states have found that they are able to exercise less and less control over their own governance at the ballot box. In short, democracy is in crisis.
Now, Europe is at a historic crossroads, brought about by the disastrous implementation of the euro – it must either cede even more power to the supranational level, where voters aren’t represented by elected officials, or face the fallout in financial markets.
The European Union was just awarded the 2012 Nobel Peace Prize for its contributions to democracy in Europe
On October 12, the European Union was awarded the 2012 Nobel Peace Prize. Interestingly, its contribution to strengthening democracy in Europe was cited as a key driver of the Nobel prize committee's decision, per the press release:
In the 1980s, Greece, Spain and Portugal joined the EU. The introduction of democracy was a condition for their membership. The fall of the Berlin Wall made EU membership possible for several Central and Eastern European countries, thereby opening a new era in European history. The division between East and West has to a large extent been brought to an end; democracy has been strengthened; many ethnically-based national conflicts have been settled.
The admission of Croatia as a member next year, the opening of membership negotiations with Montenegro, and the granting of candidate status to Serbia all strengthen the process of reconciliation in the Balkans. In the past decade, the possibility of EU membership for Turkey has also advanced democracy and human rights in that country.
The EU is currently undergoing grave economic difficulties and considerable social unrest. The Norwegian Nobel Committee wishes to focus on what it sees as the EU's most important result: the successful struggle for peace and reconciliation and for democracy and human rights. The stabilizing part played by the EU has helped to transform most of Europe from a continent of war to a continent of peace.
Austrian writer Robert Menasse says that the way the EU is set up, the institution's effect on democracy in Europe is like a black hole:
We can only talk of developed democracy when there is a separation of powers...
In the EU, however, the division of powers has been done away with. The parliament is certainly elected, but has no right to initiate legislation (or now, after Lisbon, only through the back door): only the Commission has the right to initiate legislation...
But the Commission is the institution in which, in the end, democratic legitimation is annulled: here an apparatus is at work which is not elected and cannot be voted out and which has abolished the separation of powers...
In terms of democratic politics, therefore, this triad of Parliament, Council and Commission produces a black hole into which what we used to understand as democracy disappears.
Furthermore, numerous referenda around northern Europe have shown lack of popular support for the EU
Just in the years since 2000, on occasions when EU-related matters have been put to a popular vote, several have failed to be approved by the people:
- In 2000, 53.2 per cent of voters in Denmark were against joining the euro
- In 2003, 56.1 per cent of voters in Sweden were against joining the euro
- In 2005, 54.9 per cent of voters in France and 61.5 per cent of voters in the Netherlands were against the Treaty Establishing a Constitution for Europe
However, to fully understand the current crisis, we need to go back to the plans of Jean Monnet, a founding father of the European Union
Monnet was the architect of the EU's precursor, the European Coal and Steel Community, which aimed to rein in Germany
And 40 years later, a similar rationale – with Germany again in mind – led France to push for the creation of the euro
In 2010, Der Spiegel published the contents of classified meeting minutes from 1989 as evidence that the French government used the occasion of German reunification to advance the interests of a single European currency:
'Germany can only hope for reunification,
According to that version of events, Germany gave up the Deutsche Mark in exchange for German reunification
German economist Philipp Bagus writes in his book, The Tragedy of the Euro:
In 1990, the Soviet Union still had troops stationed in Eastern Germany, while the United States, France, and Great Britain commanded troops in the Western part. All four of the occupying forces were atomic powers and vastly superior to Germany militarily.
Without the authorization of these four powers, a unification of Germany would not have been possible. The French and British governments in particular feared the power of a unified Germany, which could easily demand its natural place in the power structure of Europe: it is the most populated nation, the strongest economically, and it is located in the strategic heart of Europe.
Much more feared than the German army--made up primarily of infantry destined to slow down a Soviet attack on NATO--was the Bundesbank. The Bundesbank repeatedly forced other nations to curtail their printing presses or to realign their foreign exchange rates. It seems possible, if not plausible, that Germany had to give up the Deutschmark and monetary sovereignty in exchange for unification.
The euro's introduction caused borrowing costs among euro-area countries to converge as less economically competitive southern states were able to borrow at the same rates as competitive core countries like Germany.
This helped to create massive imbalances among member states as countries in the euro periphery ran up massive debts to purchase more and more goods from core countries like Germany.
Now, the debts of those countries need to be restructured in order to be put on a more sustainable path and banking systems need to be recapitalized in order to restore the flow of credit in the troubled periphery.
And as a result, justified as necessary to clean up the mess made by the euro, leaders want to transfer even more power to the centre
On June 26, 2012, European Council President Herman Van Rompuy unveiled his new master plan for the euro in a report entitled 'TOWARDS A GENUINE ECONOMIC AND MONETARY UNION.'
The report proposes 'four pillars' of the Council's new vision for Europe: banking union, fiscal union, economic union, and political union.
Van Rompuy sets the stakes high right from the outset, writing, 'The economic and monetary union (EMU) was established to bring prosperity and stability across Europe. It is a cornerstone of the European Union. Today the EMU is facing a fundamental challenge. It needs to be strengthened to ensure economic and social welfare.'
The tone throughout the document is one of urgency.
The first pillar of the new master plan for the euro is banking union, which elevates regulation of the financial system to the supranational level
As the chart shows, the term 'banking union' has exploded on the scene in the second half of 2012. Right now, it is the primary consolidation initiative being pursued by European leaders.
Of course, given the nature of the common currency and the current fragmentation of banking systems across Europe, banking union is touted by European leaders, economists, and markets alike as necessary to ensure the future economic well being of Europe.
Van Rompuy in his master plan urges for a banking union framework ASAP:
Integrated supervision is essential to ensure the effective application of prudential rules, risk control and crisis prevention throughout the EU. The current architecture should evolve as soon as possible towards a single European banking supervision system with a European and a national level.
The European level would have ultimate responsibility. Such a system would ensure that the supervision of banks in all EU Member States is equally effective in reducing the probability of bank failures and preventing the need for intervention by joint deposit guarantees or resolution funds.
The second pillar is fiscal union, which relegates sovereignty over matters of national budgets to the EU
There is already an agreement on the books that sets parameters for the budgets of euro area member states.
The Stability and Growth Pact, ratified in 1997, stipulates that total debt-to-GDP of member countries should be kept below 60 per cent and the total budget deficit as a percentage of GDP should not exceed 3 per cent. These rules have been widely violated by member states including Germany and France themselves.
However, the increasing control of supranational institutions like the EU, ECB, and IMF of national budgets is manifesting itself in program countries like Greece, Spain, Portugal, and Ireland where, in order to secure bailout aid, governments have ceded sovereignty over fiscal decisions.
The third pillar, economic union, ensures that the EU has more say in harmonizing structural reforms pursued by member states
The concept of competitiveness lies at the heart of the euro area economy's problems. Core countries like Germany, with lower unit labour costs, can produce goods more efficiently than their neighbours in the euro area periphery.
The euro's supranational institutions, without a doubt, feel they are most able to remedy this issue, and the requisite powers for them to do so should thus be established quickly.
An excerpt from Van Rompuy's report regarding economic union:
This is essential for the smooth functioning of the EMU and is an essential counterpart to the financial and fiscal frameworks.
It is important, building on the principles spelled out in the European semester and the Euro Plus Pact, to make the framework for policy coordination more enforceable to ensure that unsustainable policies do not put stability in EMU at risk. Such a framework would be particularly important to guide policies in areas such as labour mobility or tax coordination.
The fourth pillar -- 'political union' -- is necessarily the least fleshed out of the four concepts presented in Van Rompuy's grand vision for the future of the euro.
Here is the report's entire description of the fourth pillar:
Decisions on national budgets are at the heart of Europe's parliamentary democracies. Moving towards more integrated fiscal and economic decision-making between countries will therefore require strong mechanisms for legitimate and accountable joint decision-making. Building public support for European-wide decisions with a far-reaching impact on the everyday lives of citizens is essential.
Close involvement of the European parliament and national parliaments will be central, in the respect of the community method. Protocol 1 TFEU on the role of national parliaments in the EU offers an appropriate framework for inter-parliamentary cooperation.
The fate of the euro hangs in the balance, according to European leaders. Mario Draghi finally calmed European market turmoil in late July when he declared that the ECB would do 'whatever it takes' to save the euro.
This approach is rather predictable, according to Enzensberger, who writes:
In its hour of need the European Council falls back on a catch phrase which national governments also value. 'There is no alternative to the decision we're taking.'
The spokesmen in Brussels...have come up with a strategy which is supposed to immunize them against criticism. Anyone who contradicts their plans is accused of being anti-European...A German politician who tried to get the better of his opponents by saying their behaviour was 'unGerman' would make himself look ridiculous.
A prime minister of Luxembourg, however, can evidently permit himself to accuse the Chancellor of a neighbouring country of an 'unEuropean approach' if he doesn't like her decisions; and not so long ago José Manuel Barroso, President of the Commission, claimed that member countries which resisted his plans were 'not acting in a European spirit'...It's hard to believe though, that an unelected governor should be the person to embody the European spirit. It's a fairly abstruse idea that the officials of the Union should decide who is a good European and who is not.
A Pew survey conducted this year entitled 'European Unity on the Rocks' revealed attitudes toward the EU among the electorates of various member states.
A few of the questions directly addressed the issues of EU authority over fiscal decision-making at the national level. The survey showed that a majority of those surveyed in a majority of EU member states opposed more EU authority over member countries' budgets.
Societe Generale economist Annatoli Annenkov wrote recently that at this point, European leaders will have to start rewriting governing treaties in order to transfer more power to the supranational level and away from national governments:
It would appear that we are reaching the limits of what is feasible without a deeper discussion on either re- designing national constitutions or EU Treaties. Not surprisingly, Commission President Barroso delivered a passionate appeal for starting the work on a new Treaty in his State of the Union address yesterday, starting well ahead of the European Parliament elections in 2014.
Unless the current measures to calm financial markets over the viability of the euro are sufficient, and demands for a deeper fiscal union increase, possibly including more permanent public sector transfers, it will be inevitable for politicians to start contemplating new domestic and/or a new EU Treaty, in line with what has already happened in Germany. Until these issues are addressed, it will be difficult to move on with further integration in the EU and euro area.
And the ECB's increased role in the centralized European power structure has drawn pointed criticism
But it isn't just banking union – the ECB's new euro rescue plan, dubbed OMT, is a political power play as well
The ECB's new Outright Monetary Transactions (OMT) bond market intervention program -- designed to help control rising funding costs for troubled member states in the euro periphery, is considered by some to be a political power play.
The ECB is widely seen as the only European institution with adequate firepower to stem Europe's sovereign debt crisis. However, the central bank has attached political pre-conditions to OMT eligibility -- in other words, the ECB, a supposedly independent, non-political institution, now wields influence over the leaders of euro area member states and their fiscal and economic policies.
CNBC's veteran ECB-watcher Silvia Wadhwa posed the question to ECB President Mario Draghi directly at the central bank's latest meeting.
Wadhwa asked Draghi:
If the OMT is a purely monetary measure to help repairing dysfunctional fragmented markets, how can you say, how can you set political preconditions to it? Is that not a little bit like my local fire brigade telling me I can only turn on the water 'if you show me you've got a roof improvement program?'
Draghi brushed off that accusation by explaining how, of course, the ECB's latest move is justified and necessary
Draghi told Wadhwa:
The second point is really…I think it's just the other way around. I think I did say something about this last time we had this press conference. We started thinking -- when the OMT was designed, we had the perception and the evidence that there were tail risks in the area; namely, that there was a bad equilibrium for certain countries in certain markets.
It means that expectations were self-feeding and would create, in the end, disruptive scenarios.
So, that's the case for the policymaker -- which in this case is the ECB -- to step in with the program.
But, at the same time, we shouldn't forget how these countries got into a bad equilibrium to begin with. Namely, bad policies -- or in some cases, no policies at all for a long period of time, while the rest of the world was changing, completely.
So, the first conclusion was that any monetary policy would have no effect if the other policies wouldn't change. That's why conditionality is so important.
It's actually -- as I said at the beginning -- what makes the monetary policy effective, and it's what protects the independence of the ECB.
So, it's not really -- I wouldn't, buy the example, the example you made, I think it's, it's really an integral part of this. The second quest--well, this was the second question, really. Thank you.
Austrian writer Robert Menasse concludes that democracy may no longer be the answer for Europe:
The present crisis and the way it is being addressed touches on the last taboo of democracies which believe themselves to be enlightened. This taboo is democracy itself...Can it be that democracy as we have laboriously and inadequately learned it since 1945, and as we have become used to it, simply cannot function at the supranational level? That it is the problem to which with growing helplessness we expect it to find the solution?
It is a fact that all the states which have joined together in the EU are democratic, but it's also a fact that in doing so they have at the supranational level lost democratic standards which had been achieved in the nation states, if indeed they have not deliberately surrendered them...The Lisbon Treaty has brought a few improvements compared to Maastricht, but the retrograde steps and deficits in democratic politics have not been removed, far from it, in fact some have been virtually carved in stone.
That is the point at which perhaps one would have to be prepared to admit, that today it is a mark of progress, a liberation even, if the basic conditions of our life are no longer decided by popular vote...And only here, observing the construction and working methods of the EU at close quarters, did the thought occur to me, that classic democracy, a model that was developed in the nineteenth century for the rational organisation of nation states, cannot simply be applied to a supranational union, indeed perhaps even impedes it.