Three things the EU needs to fix, and one that it doesn’t

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At a recent event organised by the Spectator, Matthew Goodwin, an academic who has made his name with studies of the far right, suggested that the European Union was falling apart, and that in time Brexit, for its trauma, will be seen as the right move for Britain. Supporters of the EU are so mired in the crises of the moment, from Brexit to the Italian budget to refugees to governmental corruption in east Europe, that they are not asking deeper questions abut the Union. In the spirit of moving the debate along, I want to talk about three fundamental problems that need to be fixed, and one that doesn't.

The one that doesn't is a lack of democracy. This is a nearly universal complaint, but it is a proxy. It is an old rule about complaints: often what people say isn't the real issue. In the EU's case the real issue is that people feel that they don't have enough say in key things that affect their lives, such as who can move into their neighbourhoods. The answer to that isn't making EU institutions more transparent and accountable, and still less directly electing officials. In practice these will tend to centralise power and create yet more aggravation from those who get outvoted. There is as yet no European polity, and little solidarity between Europe's extremes. These are necessary prerequisites for democratic structures. The European parliament is a democratic failure for this reason: the only useful purpose its elections serve is as a vehicle for protest votes - but that is because the voters don't care about the consequences. Decisions in the Union are made through a consensus or near consensus of democratically elected heads of state - which is as good as it is ever going to get. Instead we need to look at the issues that are causing the deepest friction, in particular the free movement of people, or the greatest institutional stress, such as corrupt and populist governments, or both, like the Euro.

Let's start with the free movement of people. This is so difficult is because free movement is in fact very popular. People like the idea that they can up sticks and move anywhere in the continent where the opportunities are better or the climate is nicer. This is, above all, what inflames passions amongst Britain's Remainers. And it is why Europe's politicians created the Schengen passport free zone. But for those people who find themselves surrounded by newcomers, it feels that they have lost control over an important aspect of their lives. And the biggest stress of all comes from people who originally come from outside the continent to live here, though we shouldn't forget the stresses created by Poles and Lithuanians in Lincolnshire, or British "expats" in Spain. There is an undoubted racist undertone to this, but liberals need to understand that behind this is the feeling that rural and small town residents have of lost control. Democratisation, in this case, means more local control on who is entitled to residency, work and benefits. Of course this would mean that those choosing to keep foreigners out should lose the benefits of having foreigners come in - but people need to make that calculation for themselves, rather than have it imposed on them from on high.

The next problem for the Union is the way that corrupt elites can take control of governments with weaker national institutions, and bend them towards favouring insiders. Often this is done under the guise of populism, as in Hungary and Poland; sometimes it is a bit more obvious, as in Bulgaria and Romania. The elites running these countries are able to take the benefits of EU membership while ignoring its institutional norms, such as free speech and the rule of law. The more skilled practitioners, like Hungary's Victor Orban, are then able to portray the EU's complaints as an outrageous attack on their own democracy. Here what is needed is a bit of rebalancing of EU institutions to give the majority more leverage. Time is on the EU centre's side: few things are more unpopular than corruption and sooner or later voters will endorse the rules-based EU institutions. But the majority need to be able to exert more subtle pressure on the backsliders than currently. The EU budget is an obvious place to start.

And so we come to the Euro. As with freedom of movement the problem is that the Euro both very popular, and has a capacity to create extraordinary friction. The Euro is popular because it is, for most people (Germany and the Netherlands excluded), a better store of value that any local currency would be, as well as a more flexible unit of exchange - two of the key functions of a currency. Meanwhile governments like the reduced cost of borrowing that the Euro brings. Germany and the Netherlands, meanwhile, derive much of their wealth from trade and doubtless appreciate that a floating currency would tip the terms of trade against them. And yet a single currency brings many problems with it, especially when combined with the fiscal rules that prevent countries from properly managing their business cycles. This can create unnecessary hardship, as well as dangerous frictions between the currencies haves and have-nots. The new Italian government is about to challenge the system to breaking point. It wants to loosen the fiscal rules to stimulate its economy, for which there may be a perfectly decent case, while at the same time rolling back reforms that would make the Italian economy more efficient. Interestingly, it is not finding this as easy as it thought, since its manoeuvres have raised its cost of borrowing without the EU institutions lifting a finger. But doubtless they will succeed in engineering a damaging confrontation. Most people think that they way forward is to create stronger institutions at the centre of the zone so that resources can be moved around within it more freely. The Germans object, though, and so there is impasse.

The solutions to each of these three issues are not clear. But what I think is clear is that they will require a new EU treaty of some sort. At the extreme it may mean closing down the existing union and creating a new one - or at least for the core countries to threaten this. That will require the crisis to deepen. They also mean that some of the fundamental rights and freedoms on which the Union has been built will have to be rethought. The sooner that people start that rethinking, the better.

But before we despair we must remember the things the Union does well. First is that it makes continental commerce easier, especially since the Single Market was instituted in 1992. Second, it is more effective than any national institution in taking on global multinational businesses, whose anti competitive practices are an increasing global problem. Third, they help its smaller members to stand up to bullying by countries inside and outside the union. Ask yourself why Vladimir Putin and Donald Trump dislike it so much? And fourth, it does regulation pretty well. A recent example of this is the General Data Protection Regulations (GDPR). This is a welcome push-back by the European public against the abuse of data by commercial and other interests. It is very unlikely that individual governments would have done as good a job. Their local political agendas are too full to make room; crucial elements would have been watered down by local vested interests. Even in Brexit Britain you hear very little protest against what is a very irksome set of requirements; people feel that something needed to be done. There are many other examples. And, of course, it makes sense if each country's regulations are compatible with each others. It is not that EU institutions are immune to special interests, but that it is better placed to handle them than national governments.

And there is such a thing as a shared European identity, based on a shared history. This may get stronger. Europeans used to see the rest of the world reflected in its own image - a result of its period of empire in the 18th and 19th Centuries. As other continents emerge from that shadow, Europe looks a smaller place - but it becomes more obvious what unites it. It stands against the free-wheeling capitalism of America, the totalitarianism of China, the theocracy of Iran and Saudi Arabia, and the cynical kleptocracy of Russia. It does so based on centuries of learning things the hard way. As the EU struggles with its raison d'etre something more cohesive should emerge. That is my hope.

 

 

13 thoughts on “Three things the EU needs to fix, and one that it doesn’t”

  1. This post raises the important issue of what future a pro-European can realistically hope for the EU. I agree that the EU is in trouble; I expect that both its two latest projects, the single currency and the Schengen zone, are in time likely to partially disintegrate; indeed, the Schengen zone is already doing so, according to an account I heard recently of a tourist moving by train from Italy to France. Nevertheless, other parts of the architecture look to me rock solid. The union started as a customs union plus a common agricultural and fisheries policy. Of these, I see no prospect of the customs union breaking up; and its extension to a single market in goods is I believe looking sufficiently robust and beneficial that it can be expected to continue.

    I would also agree that more centralised purportedly democratic imposition is not the answer, in the absence of a viable European polity and solidarity. The EU is already in trouble with most of the European countries with established traditions of democracy stretching back before WW2 into the 19th century; Switzerland, the UK, Norway, Denmark (whose democratic processes rejected the single currency), Holland (whose strong pro-EU sentiment has melted away) in particular. It needs to work with the nation-based democracies more, not threaten to undermine them with rival institutions.

    So, what should happen about the friction areas the post mentions – freedom of movement, the Euro, and self-serving, corrupt elites? I offer some brief comments on all three. On freedom of movement, it seems to me that the cosmopolitan’s claim is mistaken, that their liberty should include the right to permanently reside, with their human rights protected, in a culturally foreign community within a legally foreign country. It is the state that protects their human rights; indeed, to those of us who do not believe in some heavenly realm of human rights existing independently of mankind, it is the state, together with individuals, who are the co-creators of human rights. Thus, the state, as the guarantor and co-creator of human rights, is entitled to some control over socially disruptive mass migration.

    On the single currency, I think that it is a question of balance. It is indeed a convenience to travellers; and it is an aid to productivity growth through the exploitation of economies of scale, including scale in the exploitation of expensive R&D on technological advance. So, I am in favour of the single currency in transnational areas which are closely integrated economically, such as the area of heavy industry which includes the Ruhr and nearby areas of Luxembourg and France. But extend the area too far, and the game, I suggest, is not worth the candle; for example, if Britain had joined, we would at present be in trouble over the tendency of the UK’s business cycle to be out of phase with the continent, and the imposition of a central bank interest rate not necessarily suited to British circumstances.

    Which brings me to the question of Governance. The EU is, I suggest, in a problem; that it have been picking up member countries of unstable governance, and losing the loyalty of members (such as Britain and Holland) of stable democratic governance. This leaves the remaining stable loyalists – such as (hopefully) Germany – in an uncomfortable position. Thus, if it were to be possible to snatch back British membership of the EU, as the problems of a Brexit of any particular defined type become clear, I would see this as an advantage to all. True there would be social strains within small town England; but whether these are a decisive factor surely depends on whether these areas retain, or lose, the older industrial areas of England as allies. And this is not to speak of the further strains Brexit is bringing to pro-EU Scotland, and to Northern Ireland where the EU has, unnoticed, facilitated the peace process; and its accentuation of unfairness between the anti-EU older and pro-EU younger generations.

    1. Thank you Hugh. All the problems I have identified have a can’t live with it but can’t live without it feel. That is what is making them so hard to deal with. People may not think that the Euro was such a good idea, and certainly not letting some of its members in – but it is very hard to undo it without creating chaos. Greece would be out if there was a viable way of leaving. The Italian politicians advocating leaving are either bluffing or deluded – Italian savers will not permit any move away from the single currency. So the EU has no choice but to find a way of making it work better. The biggest threat to the EU I think is that the core members get fed up, collapse the current formal structure and then reform a new union without many of the current members. For now that looks very unlikely. Alas the absence of Britain is not helping things. Quite a few people suggest that if Britain had been part of the Euro it would have been much better managed. Personally I don’t think Britain would have been any worse off in the Euro (things were pretty disastrous outside, as it turned out), but that we were not politically ready for it, so just as well we stayed away.

  2. The lack of democracy isn’t something to be dismissed quite so easily IMO. Most people, including myself, would be in favour of some kind of ‘Europe’, up to a point. The old EEC wasn’t ideal. For instance it could have well done without the talking shop known as the European Parliament, but it worked well enough for all that.

    There wasn’t any popular clamour for the shift from something that worked reasonably well to the EU that came about after the Maastricht treaty. That’s where the democracy, or the lack of it matters. We’ve ended up with something that is causing all kinds of problems and which hardly anyone, outside the tightly knit bunch of enthusiasts who run the EU wanted in the first place. When the UK or France or Germany is in trouble, there’s enough sense of solidarity in each of these countries to rally around the Government of the day and to work to achieve whatever needs doing.

    Now the EU is in deep trouble there isn’t anywhere near enough of the ‘European-ness’ from everyone that would be needed to pull it out of the mire. The underlying problem of the euro is that you simply can’t have 19 separate countries share a single currency and expect it to work. Money will always gravitate to other money in any single currency union. The poorer regions will run short and end up in debt and recession. The wealthier regions will have overflowing coffers and unspendable surpluses. When Italy and Greece get into trouble the finger is pointed at them with accusations of laziness and corruption.

    Unless and until there’s a single EU government to remove large quantities of money, rather than just token amounts, from surplus regions and hand it over to the deficit regions, the EU is never going to work. And there’s no chance of the German government ever allowing that to happen! The Germans are really no different from us in this respect. In the UK the argument was about what ‘we could get out of the EU’ and whether ‘we’ were better off being in or out.

    There’s little or no use of the word ‘we’ in a European sense. The EU is in present form is never going to work until that changes.

    1. I don’t dismiss the complaint about democracy – but rather the idea that making the current institutions more democratic will help. It may actually makes things worse. What people are annoyed about is when “Europe” does something to them that they don’t like; I thin they will feel the same even if they have voted for more EU wide positions. What they actually want is more say in what happens to them in their own neighbourhood, especially over free movement.

      I would agree that Maastricht was a turning point, but the influx of new countries to the union destabilised things – and it would probably have disrupted the pre-Maastrcht structure too. It may still have been a good thing, as by and large the EU has helped these countries in their economic development.

      Large currency areas can work: take the USA, India and China. India is probably closest to the EU, as the central government is quite weak, and there isn’t much in the way of fiscal transfers. But I would agree that the Euro area in its current form has some basic problems.

      1. The USA and China have strong central Governments and so of course a single currency can work in those countries. The Geographical size isn’t a problem if the central government acts to counterbalance the tendency of the more prosperous areas to suck money away from the less prosperous regions.

        I’ve not looked at how the Indian government handles the problem. In some parts of India I would expect there still to be subsistence farming and the labourers paid in kind rather than with money. However, as it develops it will have to do what the USA does now to make its economy function properly.

        The EU needs to do the same thing of course. Either ditch the common common currency and move back to an EEC or move forwards to a United States of Europe.

        1. I don’t think the US or Chinese governments do very much to counterbalance regional flows in fact – even if it is more than the Eurozone. In America I think there are fairly free local banking markets, though local government tends to constrained by balanced budget rules, which are even tighter than the Eurozone. In China I think local governments are less restrained – but the banking system also takes a great deal of the strain. In both there are fairly fluid labour markets, with a lot of internal migration. But the Eurozone has quite a bit of that too, as things turned out. What both countries do have is stronger central management of the banking system, with deposit guarantees and so on.

  3. Matthew,

    “Personally I don’t think Britain would have been any worse off in the Euro”

    You don’t? It’s not so much the euro as a the rules of the so-called stability and growth pact that go with it.

    The UK runs a current account trade deficit of typically something like 3-4 % of GDP. That means the Government has to deficit spend 3-4% of GDP back into the economy to top up the money than drains out to pay the import bill. The UK private sector hasn’t been a big saver but even so they’ve usually managed to stay in the black. So let’s say this is 2% of GDP. This means the amount the Govt has to deficit spend is now 5-6% of GDP. This is against the SGP rules.

    So sure, conceivably, the UK could have done what Germany does and run an export surplus. Wouldn’t the world be a much better place if everyone ran an export surplus?

    But how likely was that? Britain would simply have fallen foul of the rules very quickly and been forced into even deeper levels of austerity economics than we’ve seen in an attempt to ‘balance the books’.

    The 2011 riots would have probably turned into a revolution.

    1. I appreciate this is a minority opinion, and clearly fuelled by my political bias. Actually at the time I thought the pound was too high against the Euro, and that would have caused big problems; afterwards it appreciated further. I don’t think fiscal rules would have been the problem; we didn’t breach them outside the zone to an appreciable extent until after the crash. And with us on the inside, the Germanic influence would have been counterbalanced and the emphasis on the pact softened. We would have had a problem with monetary policy being too loose when we joined, as it would have implied lower interest rates. That would have fuelled a property boom, with lots of capital flowing in from the world over to counter the current account deficit. My argument is that by accelerating a financial bubble the authorities would have tackled it earlier, and we would not have been so exposed when the global financial crisis struck. We would almost certainly have been forced into a tighter fiscal policy to counter the looseness of money, so Gordon Brown would have been able to cut income taxes, which in my view was one of the primary causes of later austerity. But it would not have been an easy ride.

  4. “I don’t think fiscal rules would have been the problem; we didn’t breach them outside the zone to an appreciable extent until after the crash. ”

    That’s because the borrowing was done by the private sector before the crash and there aren’t any Euro rules about private sector borrowing. After the crash the borrowing was done by the government. Someone has to do it! BUT there are certainly rules about that!

    Just why there are different rules is a bit of a mystery. Do they, ie the supposedly smart very paid EU economists who should really know what they are doing, think one is intrinsically better than the other?

    1. Well public and private borrowing are different types of risk. The creators of the Eurozone felt that the political risks associated with public debt merited extra controls. They were worried about profligate spending would undermine the integrity of the zone. But, as you say, they had a blind spot on the dangers of private debt, especially when magnified by the free movement of capital – and how that would lead to panicky bailouts.

      One reason offered for the mistakes of the Eurozone is that they lacked the sophisticated monetary economists of the Bank of England. Maybe so. British commentators spotted that the convergence of public debt interest rates between the different countries was a danger signal rather than a sign of success. But since the great financial crisis played out worse than in any other major economy in Britain there is reason to doubt their expertise!

      1. Some BoE economists do have a good understanding of how modern money works. This paper by McLeay et al is pretty good, IMO !

        https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf

        However, there could be others in the BoE, and Treasury, who disagree with this line. Or maybe they don’t really disagree but express their reasoning in more conventional terms so as not to appear too heterodox in their economic thinking. That’s my suspicion.

        The main thing is that they do get some things right, though. Like saying the UK should stay out of the euro, even if the stated reasons aren’t quite the right ones. It’s quite possible to do the right thing for the wrong reasons. My mother was against the euro because she wanted to keep a pic of the Queen on our banknotes. 🙂

        I’m not sure if the GFC was worse here. Yes, we and the the USA were more responsible for its creation than the EU, but we recovered better from it than they did. If we hadn’t the net flow of migration would have been in the other direction- as it was in the recession of early 90s. We didn’t recover as well or as quickly as the USA but that was more down to us having a more neoliberally inclined Govt after 2010.

        1. Actually the conventional argument about that article was: So what? We already knew this. Paul Krugman referenced this article by James Tobin from 1963.

          I think you are being to generous to the big EU economies in their role in causing the GFC. A lot of dumb money in Germany fuelled the bubble. In France SocGen was at it too; so was BNP Paribas, though their senior managers had a much stronger control of risk (I was working for them at the time) and they were one of the institutions that called time in 2007. But my case is that that France and Germany did not suffer as much in the initial hit, and had a lot less to recover from, even if their ride hasn’t been a smooth one. I would have to draw the line about what a major economy is so that it didn’t include Spain.

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