The EU’s future is doomy
Over a decade ago when I attended meetings in Europe on the riveting subject of European corporatetax harmonization, one astute British friend offered a remark that came back to me as the Brexit votes were being reported. He argued that the Europe Union model — unlike the federalism in Canada and the U.S. — would ultimately fail.
His view was succinctly put this way: A monetary union with free mobility of labour operating in Europe could not work without a banking union, since governments would eventually need to support and regulate distressed banks.
But since a banking union requires stronger economies to support weaker ones, that would in turn require a fiscal union with transfers made between member states and the control of taxing power handed to the European level.
And since spending and tax policy is an expression of sovereignty, ultimately the EU must become a political union to support a fiscal, banking and monetary union. Except that no European member state would ever agree to secede sovereign powers, as was done in Canada and the United States when they became nations.
This comment, perhaps reflecting the now unmistakable unease among many British for the European experiment, was dismissed at the time. The EU became a popular institution to end wars among member states. Since the formation of the EU’s monetary union, countries prospered as they dropped tariffs, withholding taxes and regulatory impediments to trade in goods and services. Free mobility let rich countries like the U. K. and Germany hire citizens of other European countries to work in jobs that would otherwise go unfilled.
The 2008 financial crisis abruptly changed the course of European affairs. The Maas- tricht Treaty’s obligation to keep deficits below three per cent of GDP was disregarded, resulting in unsustainable debt burdens. Banks in the PIIGS (Portugal, Italy, Ireland, Greece and Spain) faced failure potentially leading to banking and public debt crises in the stronger states. Unemployment rates soared reaching over a quarter of the working population in Spain and Greece.
The next step was to form a banking union. The northern states, especially economically powerful Germany, would agree to backstop failing banks and distressed government debt but only if beleaguered countries undertook economic reforms to improve their competitiveness. The PIIGS — with the exception of Ireland — became so uncompetitive that a 30 per cent currency devaluation would be needed if they had their own currencies. If German and northern state taxpayers were to support distressed banks and governments, southern states would have to agree to strong economic reforms that would be unpopular with entitlement-loving populations.
Austerity and banking reform became the EU’s confidence-building measures after 2009. Banks restored their health, public deficits were reduced and unemployment started to fall.
However, the EU itself did not reform its bureaucratic and plodding decision-making. When the immigration crisis hit, with millions of Middle Easterners and Africans claiming refugee status, European leaders were stumped, responding with different actions ranging from Germany’s open doors to Denmark’s closed borders, with important implications for the EU’s free labour mobility.
The EU is a troubled institution. While trade eased among the European countries, the EU bureaucracy, encumbered by EU voting procedures among member states, failed to respond to economic impera- tives. Trade treaties taking years to negotiate, such as one with Canada and now with the United States, are still not ratified. The EU could not even agree to adopt something as beneficial as corporate- tax harmonization, even though it would have simplified life for many pan-European firms.
So now the United Kingdom will be negotiating to leave the European Union. Once they’ve settled their political leadership crisis, the British will likely push for a free-trade agreement of some sort with Europe, seeking something like the Swiss and Norwegian arrangements. Britain will pursue strengthened economic ties with other parts of the world, restricted in the past by EU membership.
The EU’s response will be critical. Angela Merkel is calming the waters by seeking some sort of accommodation with Britain. French leaders are less forgiving, taking a tougher stance. With talks this week, we will see if the numbed EU decision- making process will provide a good path forward.
I do believe Angela Merkel is on the right track. Europe would benefit from a trading relationship of some sort with the U.K. So would the U.K. Yet, this is only one step for the EU. More is needed to ward off the growing populist push to dismember the EU.
Europe should shift i ts bureaucratic approach to decision- making by developing an approach that enables some countries to agree to policies that would benefit the EU without going to the lowest denominator. Countries need to agree to growth-oriented policies that would provide greater economic and social benefits to EU populations.
Whatever the answer, Europe needs a different course. Otherwise my British friend might be right, and the EU is doomed.
MEMBERS CAN’T EVEN AGREE TO ADOPT BENEFICIAL TAX HARMONIZATION.