Here's and interesting article from the New Statesman, It describes how the Obama administration has been a bit iffy about the prospect of a euroskeptic conservative government in the UK. It repeats some of the points that I have made here about how this new government is either going to have to revise its position on the EU or start to consider the implications that these positions have in terms of the cooperation it can expect from it European partners. Could we be heading towards an era of freezing European Integration? It seems to me that this scenario is very likely. Why? Because there are only 5 policy fields left for the EU to expand its power to, and they are all quite tricky: 1)Fiscal policy 2)Integrated Foreign and Defence policy 3)Decent European Military Hierarchy 4)Decent home affairs 5)More adequate proportionality in EP elections (this is what 6)Clear structure of power within the EU (What is legislative and what is executive?! After Lisbon, where does the power lie?MSs or EU?) Following Alesina Angeloni and Etro 2001, (the first link from here, at psu.edu ) and Alesina Angeloni and Schuknecht (2005) (here) in that the EU should operate in policy areas where there are externalities and economies of scale, a view supported by EU citizens according to the analysis of their preferences conducted by Cerniglia and Pagani 2007 (graph 2, Slides 35-37) , there is a very good argument to be made about the need for 1), 2) and 3). 1) Fiscal Integration This is by far the trickiest one although the most obvious one. The economic concern is with the externalities arising from asymmetric shocks within a monetary union. As figure 1 below shows, when France and Germany both have their currencies (Franc and DM) if there's an asymmetric economic shock both nations have both monetary and fiscal policy tools to adapt to it and cushion the fall. In that case, if France suffers a contraction and Germany an expansion, due to some increase in german productivity, which steals French jobs, at first the Aggregate Demand (AD) of Germany expands and that of France decreases.
A decrease in output will create a decrease in government revenues. If the government does not wish to incur new debt (for example because it already has too much debt, or because it fears that this will crowd out private investment), then there's always the monetary policy tool. What the French Central Bank can do is to decrease the value of the French Franc, by starting to sell it on its own in international markets. This will do nothing about the productivity of French workers, but it will make their produce seem nominally cheaper in comparison. This, however, is a pretty crappy approach to international economics and is the type of thing that sparks trade wars, leading countries to levy tariffs. An alternative "solution" is to create inflation. This does nothing for the productivity of workers, once more, nor does it help with the nominal value of their produce. However it implies a real depreciation of the currency. France and Germany had several problems with nominal depreciation of the Franc partially as a consequence of the 1968 protests and Italy became famous for its use of inflation which led to the "mile lire" problem. Both solutions are described in figure 2, and both cause a shift from asymmetric shock equilibrium point 1 to the original (+ or -) equilibrium point 0.
A solution to this type of problem is to guarantee that competition between countries is conducted fairly. This being the EU it makes sense that this principle would underlie the Common Market. As a result there is indeed no better way to avoid trade disputes than to establish the Euro. However there is a problem. Competition is all nice and good, but its sucks to be the sucker who can't compete. In this case, if there is no national monetary policy, how can governments help their industry and its workers, when they face an asymmetric shock? Only by taxing or by issuing debt. Taxes will decrease disposable income and thus decrease consumption, which may be both good and bad (though in this case it is certainly bad because it will decrease demand which will lead to ever less production and thus the cycle perpetuates itself) or it can cause a flight of capital from the country (if corporate and financial revenues are taxed), which will lead to a decrease in investment, which in turn will cause a decrease in GDP. In the end the people who suffer are the workers who are much more bound to their country than money is. Debt is at best damaging (if by going to the financial markets, governments will take investment resources from the more efficient private sector and thus crowd it out, leading to a decrease in the rate of growth) and at worst impossible (if the original debt is so high that no one will buy new government debt for fear that it will not be able to pay it). Both options are possible, but a third one is more attractive economically: Fiscal Federalism. Fiscal federalism is here proposed from its redistributive point of view, not from a fiscal competition perspective (of the "Race to the Bottom" type). Thus what I mean is very simple(Honestly I dont mean anything... DeGrauwe does). If Germany suddenly makes more money, the EU takes the revenues that it is able to collect from Germany and redistributes a larger chunk of its revenue to France. Thus it is possible to move from point 1 back to poin 0 (+ or -) without needing exchange rate manipulation. However, it is necessary that Germany be either coerced or willing to transfer it's excess revenue to France. An easy way to do this is by endowing the EU with the ability of levying its own taxes, as it is likely that "Germany" will be tempted to refuse to contribute to the "lazy" "French" (Keep in mind that "France" and "Germany" are hypotheticals. They are country A and country B). This situation is made even better if instead of considering a 2 country union one considers a 3 country system. Where the cost of the asymmetric shock on the lagger can be spread through more than one partner. A third alternative (which is really a variant of the second one) refers to the advantages of being able to borrow money as the EU and spread the risk to all 2, 3 or (as in real life) 27 EU member states rather than having the country suffering the economic contraction carry that burden alone. This however would impose a cost on the future growth of all EU Member states rather than just on the growth of France, as the EU would have to pay the debt, but once spread out, this would not be so bad, and more importantly, it would increase FDI to the EU, rather than to a single country, meaning that this would then be targetted once inside the EU. The last alternative goes back to cooperation and sees France issuing debt, but having Germany being its major purchasor, thus ensuring that interest rates are low and thus that the debt servicing costs of France in the future will not increase dramatically. However this implies that Germany wants to help France but is unable to do it (electoral concerns anybody?). It's possible, but if I was "France" I'd like not to have to rely on "Germany's" good faith. An integrated system, where more powers are delegated to the EU is not a bad idea, although certainly it is not the only idea. 2) Integrated Foreign and Defence Policy The Lisbon Treaty, by creating the High Representative of the Union for Foreign Affairs and Defence (HRUFAS) and the European External Affairs Service (EEAS) goes a step further in terms of delegating more foreign policy and defence powers to the EU. However it all seems a bit unclear. What will be the new nature of the relationship between the foreign policies of the member states and the EU? Is the HRUFAS going to be another Solana, or will the budget give him or her some discretion? Is it going to be like the secretary of state in the USA? It's hard to tell and the whole thing was designed to be uncertain until 2012, the deadline set for the EEAS operational start. Either way, to act the HRUFAS is still dependent on the agreement of the EU member states who decision making will not yet be included under the purview of the Qualified majority voting procedure. From this point of view it may be easier to create further integration in this field than in the fiscal one, as it could simpify require that the decision making process be reformed to QMV. However there's also the issue of conflicting interests between national foreign policies and the EU's. The final step would require either that the Member States give up the priviledge of conducting foreign policy, or that their credibility as actors in this field would be permanently disrupted. However where there is an agreement there will be a Mr Europe, who will even be in charge of Intelligence sharing, though not gathering. The directors for this sui generis unit will be very coveted places. 3)Clear European Military Hierarchy It would be interesting to see if any crazy world event will push the EU to fuse the present armies of its constituent nations and create a structure of power whose legitimacy is derived from the states, but whose authority lies at the centre of EU institutions. More on this in the future as I will look at the path that led the USA to where it is today. An interesting approach in the future will be to try to better understand the roles of the EU and NATO, and how these organisations interact. 4) Justice and Home Affairs: can we have an EIAS? The Lisbon treaty also proposes the extension of Qualified Majority Voting to issues pertaining to what is known as Justice and Home affairs. This is interesting and may imply a bigger move towards integration than the creation of the HRUFAS and the EEAS. To what pertains to intelligence gathering it may also be interesting to see what ensues. Will it be possible to reform Europol from a facilitator of intelligence into an active law enforcing and intelligence gathering force? Theoretically I would say Yes, but it's very unlikely that such a think would be done in the open and it is more likely that there will be a push to put a vague clause somewhere in some upcoming treaty which would facilitate the creation of this service. The implications for this would be imense and would imply an increase in the Staff of the EC similar to the one proposed for the EEAS. It is possible that we will end up with an European Internal Action Service (EIAS) to replace Europol. 5)True Proportional Representation This is an issue which was raised by the German supreme court in its hearing regarding the constitutionality before German Basic Law of the Lisbon treaty. One of the comments that it made was that the EU could not be considered to be a democratic body as the European Parliament seems to give more weight to Luxembourguish citizens than to German ones, as it over represents them in this legislative body. I honestly favour the system that the USA have where one chamber represents the interest of the states equally while another represents the interest of the citizens equally. This however is impossible given that in Germany it seems that even when representing the states, the principle of equal proportionality between constituents and representatives must apply. I could be completely wrong, but I don't think the present state of affairs works to Germany's Magistrates liking. I believe that sooner or later if the EU truly is to be seen as legitimate, it will have to do something about this, but we are likely to procrastinate. This is one of those very unattractive issues which resemble too closely the institutional debate that has been going on for 10 years now and that I hope will culminate in the ratification of the Lisbon Treaty. This is something likely to take as long, as reforms require unanimity and none of the small states is going to willingly vanish into legislative irrelevance. 6) Clear institutional Hierarchy and the Democratic Deficit I believe that this reform will cause a bit of a confusion as to who is in charge. Will it be the President of the European Commission? The president of the permanent Council? The rotating president of the Council? The HRUFAS? It is all a bit messy and uncertain, and in this case it would be nice to have clarity and avoid too many turf wars and competition between the institutions. Due to the lack of democratic legitimacy of a lot of the institutions, it is normal and necessary to create competition between officials so that they themselves keep track of each other, thus ensuring transparency and accountability. However there's a point after which this becomes unviable and starts create executive and legislative bottlenecks. Could it be that these inefficiencies if left unchecked would create an environment where by the renewed authority of the EU would cause the elections for the EP to become more relevant and thus endow the president of the European Commission with more legitimacy and leverage over his or her European national peers? Who knows... 7) No enlargement, no deepening Looking back on European integration it seems that contrarily to common belief, not only does enlargement not deter deeper integration, it actually seems to trigger it (Common Market and UK, Cohesion funds and Spain, Greece and Portugal). In the absence of any pending enlargement (and Turkey is certainly not pending, though if you ask me, my generation will be happy to take it on board) it is unlikely, coetris paribus, that there will be any movement towards deeper union. However, as the Balkans will join, it is likely that a lot of these policies will emerge as necessary (particularly fiscal support in the guise of structural aid and the EIAS in order to manage corruption and criminality arising from those new member states). Obviously this is contingent on Cameron and Klaus not ruining the party... Despite the fact that according to these articles European integration should proceed within these fields, is it really possible that it extends that far? And at what speed? I won't try to look into my crystal ball, but I can venture a guess: Excruciatingly slowly, as everything else in the EU. Remmember it took 30 years between the Werner Plan and the Introduction of the Euro. If that seems to be indeed the minimum time frame for big change, then yes we do indeed seem set for a freezing of (the deepening part of) European Integration.
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