The (at times) United States of Europe

A concise research paper for ECON 396-003 World Economic Policy. It addresses the development of the European Union, economic policy successes, and ongoing governance and  . identity challenges. Written 4 April 2012

The Europe of 2012 is markedly different and notably more united than the Europe of 1945, and for that reason alone the economic integration of its nation states should be considered a success. Following a seemingly endless cycle of continent-encompassing wars, the union of now 27-member states has prevented another such conflict between its largest powers for more than 60 years. Still, eschewing the economic destruction of war in favor of the growth found in commerce is not the only signal that Europe has had its successes with the grand experiment of greater unity. Indeed, it too has fostered a common market that has eliminated trade barriers and promoted labor mobility. Nevertheless, those successes have not come without their challenges, and there are lingering roadblocks to creating a more effective and efficient transnational entity. Questions remain concerning the disparate social policies of its member states, the lack of a common European identity – and the resulting risk of national sentiments trumping sound economic policy; and the criticism that its institutions are antidemocratic and paradoxically anti-Western. Even as the European financial crisis would appear to have calmed, there are still concerns regarding the viability of the euro and the prospects for fiscal policy coordination. Before turning to a wider analysis of its remaining challenges, this discussion will present a brief historical account of the EU and its institutions.

From the start, the foci of the forerunner of the modern EU were trade and the promotion of shared economic goals. Following the devastation of World War II, six countries came together to create the European Coal and Steel Community, in 1951. Those countries: France, Germany, Italy, Belgium, Netherlands, and Luxembourg sought the elimination of trade barriers for those two key industrial commodities and to lay the foundation for a common market. More than 60 years later, the cooperation of France and Germany would not seem extraordinary, but the two nations had fought numerous times before and since the unification of modern Germany. As such, the EU and its predecessors having operated as guarantor of both peace and trade between the two nations should be regarded as astounding. From the Coal Community came the 1958 Treaty of Rome and the European Economic Community. That treaty provided for a common market for all goods. External trade policy too was united in 1968 with the expansion of the organization to a customs union. By 1993, when the EU was formally established through the Masstricht Treaty, its membership had increased to twelve countries. In 2002, the Eurozone – featuring a common currency and monetary policy, was adopted by a majority of EU members. However, the seeming inevitable march to greater unity and a United States of Europe was halted in 2005, when Dutch and French voters rejected the proposed European Constitution.  From that setback came the Lisbon Treaty, with its eventual ratification in 2009 implementing many of the priorities of the failed document.

The scale of the progress towards economic and political unity should not be discounted. With no statutory limit on its future size, there are significant prospects for expansion from its current membership. Each successful expansion brings millions more individuals into the common market with rights to labor mobility within the Union. More important, the adoption of the Lisbon Treaty strengthened its governing institutions. At present, the European Council, which is comprised of the heads of government, sets policy priorities for the Union and negotiates treaty changes. The European Commission acts as an Executive, with a commissioner from each state appointed by national governments to act in the interest of Europe. A two-part legislature comprised of the European Parliament – which is directly elected from its member states’ citizens, and the Council of Ministers considers legislation drafted by the Commission. With Lisbon, the Commission received an appointed President and implemented qualified majority voting to overcome the increasingly elusive member-state consensus on all policy questions. Even as the organization sets a common environmental policy, directs grants to member states for infrastructure development, and maintains various agricultural subsidies – the EU is criticized for its somewhat antidemocratic nature. The Parliament is the only directly elected body, but it cannot draft its own legislation.[1] The legitimacy of its economic decisions can be further eroded with declining voter turnout for that body’s elections, with it falling below 20% in some countries in the last election in 2009.[2]

Although the complexity of the European Union may share the blame for low voter turnout – as citizens must already navigate their own national system, the lack of a common identity may prove to be the most significant block to further economic and political integration. Strong French and Dutch national identities likely precipitated the defeat of the European Constitution. The same sentiment likely lead to the initial rejection of the Lisbon Treaty by Irish voters, and most recently the United Kingdom and the Czech Republic’s unwillingness to cede a measure of fiscal policymaking to the supranational organization. European sociologists have suggested that the Union’s common laws, institutions, and treaties may, in a manner similar to the founding documents and legal system of the United States, form the basis for a common European identity. [3] Still, it would be odd today to see European protesters waiving the Lisbon Treaty or EU flag. A better strategy for fostering that identity and a subsequent willingness to support controversial bailout decisions for floundering member-states would be through both an education system that teaches a common history and increased interaction among member-state citizens. At present though, the EU cannot set national education policy, and socioeconomic status continues to hinder movement despite the removal of barriers to travel.

Even if a common European identity develops, the ongoing financial crisis emphasized the risk of disaster found in an uncoordinated fiscal policy. Although politicians in the United States are all too willing to lump European “socialism” into one ill-defined, but surely un-American, category, the Europeans themselves experience a range of welfare states from the largest in scope Scandinavian countries to the apparently too generous, Southern European model. The multiplicity of models presents a dual moral hazard. Older persons may shop for the country with the most generous welfare state in which to retire and governments may not practice their peer’s fiscal responsibility. Fiscal irresponsibility was highlighted by Greece. Indeed, successive bailouts, with the most recent at €130 billion, underscored the poor incentive structure of the Eurozone that enabled Greece to borrow at artificially low interest rates. Those rates were based on the strength of euro-leaders such as Germany and France, and enabled Greece to finance an overgenerous welfare state despite its stagnating economy. Although it was later revealed that Greece underreported its debt and deficits to meet the Eurozone requirements, the spread of the crisis to Ireland, Italy, Portugal, and Spain exposed the lack of enforcement of those requirements once membership was achieved. Perhaps it was that poor set of incentives that convinced several member-states to not adopt the euro. However, such a refusal to adopt the currency – particularly by the United Kingdom, cemented the burgeoning two-tiered disunity between the 17 countries in the Eurozone and the 10 that are not. Such a troubling trend of disunity would appear to be perpetuated by the most recent fiscal compact.

Announced in January 2012, the Treaty on Stability, Coordination, and Governance in the Economic and Monetary Union would apply deficit and debt requirements to all member states. It mandates that neither sovereign deficits nor debt can exceed 3% and 60% of GDP, respectively. While the treaty would not unify disparate welfare states or dictate the manner in which governments spend their tax revenues, the change would have helped to further integrate the EU through some common fiscal rules. Nonetheless, even the small change was too much for the United Kingdom and the Czech Republic, as both refused to adopt the measure. More troubling, is the EU’s willingness to bend the treaty’s requirements, as Spain has already requested and received a reprieve on the deficit target – the request was enough for one pundit to claim that the treaty had “failed.”[4] Its enforcement powers too are diminished without the universal approval of its requirements. Still, even as both that effort is struggling and the prospects for a single set of policies to govern the entire EU appear dimmer, the European Council has approved funding an €800 billion permanent European Stability Mechanism (ESM). The intent of the mechanism is to reassure investors that the debt instruments of member states are secure, with the ESM able to provide bailout funds if needed. However, as the crisis has ebbed, the political will for instituting further austere changes appears to have waned. The Prime Minister of Luxembourg noted the lack of appetite for greater fiscal policy and other integration by suggesting that they “all know what to do. We just don’t know how to get re-elected after we’ve done it.”[5] That quote will be tested, as the proposed ESM must be ratified by each member-state.

While this discussion may appear to present a litany of insurmountable challenges and to contradict the initial claim that the European Union’s economic integration must be considered a success, it should be treated as similar to the sentiment that what is already good can always be made better. Despite its many challenges, the grand experiment has yielded some stunning results. The growth rate of GDP of Europe increased two times faster alongside greater unification, and its growth rate of GDP per capita has increased three times faster in the second half of the 20^th century. It is able to launch common economic sanctions against pariah states – and can invoke the power of a 500 million-person common market to make those countries feel economic pain. Having eliminated tariffs and other non-tariff barriers to trade, interstate exchange within the EU was valued at more than €2.5 trillion – nearly double that of trade to non-EU countries. That trend of internal trade valued more than external was consistent across all member-states.[6] Still, the most significant contribution of the integration effort to its member states, is the assurance that even as the United States rose to a world power and as the BRIC countries start to assume a global role, that the otherwise small nations of Europe could still hold weight in world economic affairs. As testament to that preservation of power, without the EU, only four member-states could participate in the G-20.