The Fallacies and Follies of Political Union In Europe

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Herman Van Rompuyhas a vision problem.

Oh, I'm sure the good man-EU poet laureate, Belgian Prime Minister and European Council President-sees just fine through his eyeballs. But the quixotic ambitions in his recent proposal for a federalist eurozone suggest his mind's eye is a touch fuzzy. He seems to think he can help create the United States of Europe. But it won't work, at least as he envisions it.

In a whitepaper, "Towards a Genuine Economic and Monetary Union," Van Rompuy outlined four "building blocks" for Eurozone 2.0-"integrated financial framework" (banking union), "integrated budgetary framework" (fiscal union), "integrated economic framework" (political union) and "democratic legitimacy and accountability" (pipedream). He, European Commission Chief José Manuel Barroso and their fellow institutional Eurocrats believe ceding national sovereignty on banking regulation, fiscal and economic policy to Brussels is the only way the currency zone can survive over time. If each state would just follow Brussels' mandates, they argue, competitiveness gaps between core and peripheral states wouldn't exist, no country would have an outsized debt burden, and the eurozone would enter a prosperous age of growth and price stability.

On paper, it seems sensible enough. But consider that this requires 17 nations with disparate interests to agree on common policy-and to give up national power-and it breaks down.

The banking union-centralizing bank regulation-is doable, and officials can enact it under existing treaty provisions. Article 127(6) of the Lisbon Treaty says European leaders, with the permission of the European Parliament and Commission, may task the ECB with "prudential supervision of credit institutions and other financial institutions with the exception of insurance undertakings." EU leaders agreed as much last week, pledging to work with the Commission on proposals "on the basis of Article 127(6) ... shortly." It'll take time and debate to square the new scheme with national central banks' treaty-enshrined regulatory authority, and it may take an act of God for all 17 eurozone nations to agree on a scheme that doesn't end up a solution in search of a problem, but where there's a will, there's a way.

The fiscal and political union, however, seem much less feasible-if they even are at all. Sure, on paper, each nation has the same budgetary requirements: annual deficit no greater than 3% of GDP, public debt less than 60% of GDP and a bit of wiggle room during tough economic times. But in a true fiscal union, Brussels would have veto power over each nation's borrowing and budgets in general "if they are in violation of fiscal rules, keeping in mind the need to ensure social fairness" (whatever that means). National budgets would no longer be matters of national sovereignty.

Political union takes this one step further ... or, at least, I think it does-the whitepaper doesn't explain how, exactly, it'll work. It simply states, "national policies should be orientated towards strong and sustainable economic growth and employment while promoting social cohesion. Stronger economic integration is also needed to foster coordination and convergence in different domains of policy between euro area countries, address imbalances, and ensure the capacity to adjust to shocks in a globalized world economy." Reading between the lines, I gather that means economic policy-any policy pertaining to how businesses, labor markets and financial transactions are regulated and taxed-would be decided at the European level. Ditto for spending on social programs, ever precious in many European nations.

Well, if that's the case, what's the point of individual states with elected governments? Economic policy lies at the heart of every party's platform. It's what voters vote for. A federalist Europe negates this-national governments will be forced to follow whatever Brussels (European Commission? Council? Do they know?) dictates. Voters' will gets lost.

Now, officials' purported goal is for all nations to follow the reform path mandated in the periphery-public-sector cuts, labor-market reforms and the like. Perfectly sensible, economically sound goals. But in some countries, voters want the opposite. France handed its popular new Socialist president and government a mandate to, among other things, lower the retirement age-the opposite of what officials have mandated in the periphery. In a federal Europe, Brussels would likely veto the change-but France's voters would surely be damned rather than be told what they can and can't do. Just as the Irish have shown they'll never let Brussels muck with their corporate tax rate. (As well they shouldn't!)

The only way political union could possibly work is if, instead of policy being decided at the institutional level (European Commission), it falls to the European Council (heads of state/government). Only that broad consensus can keep either ideological extreme-or any one country-from driving common policy (a surefire recipe for civil unrest). But, consider what's happened every other time the 17 eurozone leaders have tried to agree on common policy: They end up with a watered-down hodgepodge of supply- and demand-side provisions, a lowest common denominator that pleases everyone and no one. A feckless program, and a lot of red tape.

With this in mind, it's no surprise EU leaders removed a pledge to "deepen coordination of their economic policies" from last week's Summit Statement-they likely know it's untenable when nations have such divergent interests. Perhaps they also realize that, despite his best efforts, Van Rompuy didn't offer a blueprint for democratic safeguards-vital in a federalist Europe. His whitepaper's provision on "strengthening democratic legitimacy and accountability" was, disturbingly, the shortest and fuzziest-long on platitudes, lacking in detail. It says, "building public support for European-wide decisions with a far-reaching impact on the everyday lives of citizens is essential," which to me suggests the more intrusive policies would be subject to a referendum in each member state. But I can't see Brussels doing that, considering voters have a history of saying "no" in the few countries lucky enough to hold a vote. Eurocrats largely hate the mighty referendum.

Finally, what of the 10 EU nations who aren't in the currency union-how will their relationship with the eurozone evolve? In a recent op-ed in Britain's Telegraph, British Prime Minister David Cameron envisioned a UK that would "take forward [its] interests, safeguard the single market and stay out of a federal Europe." On that last point he was abundantly clear, deeming it "too much cost; too much bureaucracy; too much meddling in issues that belong to nation states or civic society or individuals." If other non-eurozone states feel similarly, perhaps the broader EU devolves into a free-trade, free-travel zone with coordinated private- and intellectual-property rights while the currency union integrates more tightly.

Don't get me wrong-tighter integration likely is necessary for the monetary union to thrive in the long run. I'm just not sure the current plans will accomplish anything-they add bureaucracy without encouraging true competitiveness in member states. If I were drawing a blueprint for a new eurozone, I'd take a lighter approach: Coordinate what needs coordinating, like deficit limits, debt brakes and bank regulation, remove red tape so the market can function properly and-most important-let markets be the arbiters of economic policy. Throughout history, they've proven far, far more capable of this than elected officials. Governments don't correct market behavior-markets correct governments. If you don't believe me, watch markets force new French President François Hollande to back away from his more onerous tax proposals. Just as markets, not mandates, have forced privatization, labor-market reforms and public-sector cuts in Italy and Spain.

Thankfully, European leaders are good at moving slowly and only making incremental changes, which lowers the risk of rushing into something ill-conceived. Finding the right vision will take time, care and healthy debate-a conversation worth scrutinizing in the years, not months, ahead.

Elisabeth Dellinger is a member of Fisher Investments MarketMinder's editorial staff. She has been with Fisher Investments since 2004.

This article constitutes the views, opinions, analyses and commentary of the author as of July 2012 and should not be regarded as personal investment advice. No assurances are made the author will continue to hold these views, which may change at any time without notice. In addition, no assurances are made regarding the accuracy of any forecast made herein. Past performance is no guarantee of future results. A risk of loss is involved with investments in stock markets.

 

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