Europe’s re­turn to cri­sis?

Business Standard - - OPINION - DANIEL GROS

Just four months ago, when the Eu­rophile Em­manuel Macron was elected as France’s pres­i­dent, it seemed that the Euro­pean Union (EU) could fi­nally look for­ward to a pe­riod of calm. But calm is the last thing one can see on the streets of Barcelona, where demon­stra­tions in favour of Cat­alo­nian in­de­pen­dence — a ref­er­en­dum on which was bru­tally sup­pressed by govern­ment forces — have been met with equally po­tent protests against it.

As Spain’s in­ter­nal con­flict escalates, a re­turn to cri­sis in Europe may seem all but in­evitable. Yet what is hap­pen­ing on the ground in Spain ac­tu­ally in­di­cates that the Euro­pean eco­nomic re­cov­ery is strength­en­ing, while high­light­ing the lim­its of what the EU can achieve.

The strength of the EU’s eco­nomic re­cov­ery is re­vealed by the ab­sence of any sig­nif­i­cant fi­nan­cial­mar­ket re­ac­tion to the tu­mul­tuous scenes in Cat­alo­nia. Had a sim­i­lar sit­u­a­tion arisen a few years ago, there would have been a run on Spanish govern­ment bonds, and Spain’s stock mar­ket would have tanked. To­day, how­ever, mar­kets are tak­ing the coun­try’s pro­found po­lit­i­cal un­cer­tainty in stride.

This vote of con­fi­dence is built on solid foun­da­tions. The en­tire Eu­ro­zone econ­omy is grow­ing at re­spectable, al­beit un­spec­tac­u­lar, rates. And the Spanish econ­omy has been grow­ing faster than the Eu­ro­zone av­er­age, all while keep­ing its ex­ter­nal ac­counts in slight sur­plus.

This means that Spain’s re­cov­ery is based on in­creas­ing sup­ply, rather than ris­ing do­mes­tic de­mand, as was the case dur­ing the pre-cri­sis construction boom. Add to that the ex­is­tence of Eu­ro­zone in­sti­tu­tions that can ad­dress tem­po­rary fi­nanc­ing dif­fi­cul­ties faced by banks or states, and it be­comes clearer why Spain’s deep po­lit­i­cal cri­sis has not been ac­com­pa­nied by dan­ger­ous fi­nan­cial­mar­ket gy­ra­tions.

But the Cat­alo­nia cri­sis also un­der­scores the lim­i­ta­tions of the EU’s model of in­te­gra­tion, which are rooted in the fact that the Union is ul­ti­mately based on the na­tion-state. This model can­not be de­scribed as in­ter-gov­ern­men­tal. Rather, it is based on in­di­rect im­ple­men­ta­tion: Al­most ev­ery­thing the EU does and de­cides is car­ried out by na­tional gov­ern­ments and their ad­min­is­tra­tions.

This dis­tinc­tion can be seen most strik­ingly in the area of mone­tary pol­icy, where the de­ci­sion-mak­ing mech­a­nism is def­i­nitely not in­ter-gov­ern­men­tal: The Euro­pean Cen­tral Bank’s (ECB’s) Gov­ern­ing Coun­cil op­er­ates on the ba­sis of a sim­ple ma­jor­ity.

But the im­ple­men­ta­tion mech­a­nism is cer­tainly in­di­rect: Once a de­ci­sion is made, it is car­ried out by na­tional cen­tral banks — an ap­proach that can have im­por­tant im­pli­ca­tions. For ex­am­ple, the vast bond-buy­ing op­er­a­tions nominally un­der­taken by the ECB in re­cent years have been han­dled largely by na­tional cen­tral banks, which pur­chase their own gov­ern­ments’ bonds.

The Euro­pean Court of Jus­tice in Lux­em­bourg – an­other com­mon in­sti­tu­tion of cru­cial im­por­tance – also re­lies on a de­ci­sion-mak­ing mech­a­nism that is not in­ter-gov­ern­men­tal. Yet its judges are nom­i­nated by na­tional gov­ern­ments, and na­tional courts and ad­min­is­tra­tions en­force its de­ci­sions.

A com­par­i­son with the United States high­lights the weak­nesses of this ap­proach. While the US Fed­eral Re­serve also has a re­gional struc­ture, the in­di­vid­ual District Re­serve Banks cover sev­eral states and aren’t tied to any state govern­ment or in­sti­tu­tion. Like­wise, US Supreme Court jus­tices are nom­i­nated by fed­eral in­sti­tu­tions (the Sen­ate ac­cepts or re­jects nom­i­nees put for­ward by the pres­i­dent), not by state gov­ern­ments.

For the EU, re­ly­ing on its mem­ber states to build com­mon in­sti­tu­tions was ar­guably the only way to start the in­te­gra­tion process, given deep mis­trust among coun­tries that had fought so many bru­tal wars against one an­other. And yet a union that re­lies on the na­tion-state, not just for im­ple­men­ta­tion, but also for le­git­i­macy, can func­tion only as well as its in­di­vid­ual mem­bers. But, to­day, with most of them are be­set by in­ter­nal strife, that model is reach­ing its lim­its.

In Greece, weak ad­min­is­tra­tive and ju­di­cial sys­tems have im­peded eco­nomic re­cov­ery. In Poland and Hun­gary, “il­lib­eral” gov­ern­ments are un­der­min­ing ju­di­cial in­de­pen­dence. And in Spain, the po­lit­i­cal sys­tem seems in­ca­pable of re­solv­ing the con­flict between the re­gional govern­ment of Cat­alo­nia, with its as­pi­ra­tions of greater self-de­ter­mi­na­tion, and the cen­tral govern­ment in Madrid, which ar­gues that even con­sid­er­ing the ques­tion would un­der­mine the con­sti­tu­tional or­der.

Even Ger­many is fac­ing in­ter­nal po­lit­i­cal chal­lenges. Hav­ing lost about one-fifth of her vot­ers in the re­cent fed­eral elec­tion, Chan­cel­lor An­gela Merkel will have to reckon with three un­ruly coali­tion part­ners dur­ing her fourth — and prob­a­bly last — term. As for Italy, opin­ion polls sug­gest that a ma­jor­ity of vot­ers now sup­port pop­ulist and/or Euroscep­tic par­ties.

While out­right Euroscep­tic par­ties ap­pear un­likely to gain power any­where, th­ese po­lit­i­cal shifts do not bode well for Euro­pean in­te­gra­tion. The EU faces lit­tle out­right hos­til­ity. To­day it is fac­ing, in­stead, an “ob­struc­tion­ist in­dif­fer­ence,” as many of its mem­ber states are in­creas­ingly pre­oc­cu­pied with their in­ter­nal chal­lenges, mak­ing Euro­pean in­te­gra­tion lit­tle more than a sec­ond thought through­out most of the con­ti­nent.

Those EU lead­ers who do still want to ad­vance in­te­gra­tion can no longer count on the ar­gu­ment, used dur­ing the fi­nan­cial cri­sis, that there is no al­ter­na­tive. And the per­mis­sive con­sen­sus of the first years of in­te­gra­tion is long gone. If fur­ther progress to­ward “ever-closer union” is to be made, Europe’s lead­ers will have to find a new model that can over­come their ci­ti­zens’ deep­en­ing apa­thy.

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