TOWARDS A GENUINE ECONOMIC AND MONETARY UNION?

Since Europe’s Economic and Monetary Union (EMU) was created, no progress towards political unification has been made or even really attempted. Now that Europe’s current crisis has convinced many that existing institutional arrangements are unsustainable, this may be about to change. But should it?

According to the presidents of the European Commission, the euro summit, the euro group, the European Central Bank, and the European parliament, the answer is yes. Indeed, in a recent report, they call for progress toward a “deep, genuine and fair” EMU; economic, financial and fiscal union; and a political union that provides the foundation for the rest “through genuine democratic accountability, legitimacy and institutional strengthening.” The report echoes similar proposals by academics, journalists, and other public officials, including, most notably, French President Francois Hollande.

In my view, however, the report, like the proposal to establish a European finance minister, is fundamentally flawed. While the report contains a number of important observations, its underlying assumption — that steps towards all of its goals should be taken in parallel, with a genuine political union emerging at the end of the process — is problematic. After all, establishing a political union would require amendments to national constitutions and, in most countries, referendums. But voters are far from enthusiastic about the prospect of ceding more authority to Europe.

Initially, monetary union was supposed to propel Europe towards political union. But the euro is no longer a strong common currency that reinforces a shared European identity. On the contrary, it is now a source of deep resentment among European peoples — resentment that, 70 years after the end of World War II, was supposed to have been eliminated.

To be sure, many have suggested the current crisis represents a vital opportunity to overcome these tensions and build an ever-closer union, citing the belief of Jean Monnet, one of the EU’s main architects, that crises are critical to spur progress toward integration. But can this approach work when there is so little trust among member countries? Or would pushing forward under such circumstances create more resistance?

The five presidents recommend launching their proposed agenda to reinvigorate integration only after 2017. It seems likely that this timing reflects the fear that voters in the biggest countries, where elections will be held in the next two years, will react negatively to the proposal. This is not a sign of great confidence in the suggested procedure.

The reality is that a European political union is unlikely to be established any time soon. And without true political unification, efforts to pursue the rest of the presidents’ plan, including the transfer of fiscal competencies to the European level, would carry serious risks.

Fiscal integration is high on the five presidents’ agenda. Although the Stability and Growth Pact has lost more and more respect (indeed, it is now to be applied, according to the European Commission, purely according to national leaders’ discretion), it would remain the anchor for fiscal stability and confidence. The report also specifies that a genuine fiscal union would require “more joint decision-making on fiscal policy.” The presidents insist that this “would not mean centralisation of all aspects of revenue and expenditure policy,” with member states continuing to decide on taxation and the allocation of budgetary expenditures. But “as the euro area evolves towards a genuine EMU,” they explain, “decisions will increasingly need to be made collectively,” perhaps through a euro zone treasury.

Limited or not, this is a transfer of fiscal responsibility to the European level. And it is difficult to imagine how the report’s call for “democratic accountability and legitimacy” in the decisionmaking process can be met without a full-fledged political union.

There is a fundamental conflict between the call to give priority to European needs and the dictates of member states’ constitutions, which cannot be resolved by gradually shifting competences de facto from the national to the European level, or by expanding the EU budget. Within the existing institutional framework, political responsibility for higher transfer payments among countries must remain with the national governments, controlled by national parliaments and electorates.

Political union may remain possible in the distant future. It cannot, however, be achieved through the back door, by eroding members’ fiscal-policy sovereignty. Attempting to compel transfer payments would generate moral hazard on the part of the recipients and resistance from the donors, with the resulting increase in tensions possibly jeopardising the integration that has been achieved so far.

Given this, for a considerable period of time, Europe’s monetary union will have to exist without political union. This means the EMU will remain an institutional arrangement among individual countries that retain their fiscal sovereignty. The key to making such a system work is to ensure national governments are held accountable for their economic policies. All treaties and commitments — including, crucially, the Maastricht Treaty’s “no bailout” clause — must be respected without exception.

Pacta sunt servanda — agreements must be honoured. If this principle is permanently violated, how can one expect a prosperous future based on a new set of treaties that are even more demanding than the existing ones?