The problems of Euroland haven’t exactly gone away, but after the climax, denoument and hashtag in Greece in July, things have calmed down enough to make it possible for the European politicians to have a bit of a think about long term plans, rather than having to run around putting out fires all the time. Since the next crisis scheduled on the EU production line is potentially “Brexit”, I think the long term question that needs to be addressed first is whether all the treaties and institutions that have piled up over the crisis are really fit for purpose. I think the answer is “pretty obviously, no”, and that as a result, David Cameron might, if he plays his cards right, find a more receptive audience than he expects when it comes to some fairly fundamental renegotiations of European treaties.
The document I think we need to be looking back at is the “Roadmap Towards A Genuine Economic And Monetary Union” written by Herman von Rompuy, Jose Manuel Barroso, Jean-Claude Juncker and Mario Draghi. The chairs have been shuffled about since then — von Rompuy has been replaced by Donald Tusk, Juncker has taken over from Barroso as Commission President and Jeroen Dijsselbloem has replaced Juncker at the Eurogroup — but this is still the overarching strategy document.
The Roadmap makes it clear that the very top levels of Euroland bureacracy understand the plain truth of the matter, even if it isn’t obvious that this understanding has trickled down to the political levels. If the Euro is to survive, it needs a lot more and stronger institutions to act as “shock absorbers” and to prevent things from ever getting to the stage at which populist and anti-Euro political parties are seen as the only answer to an otherwise insoluble economic impasse.
As Martin Sandbu points out in his excellent book, “Europe’s Orphan: The Future of the Euro and the Politics of Debt”, the creation of these institutions and shock absorbers doesn’t necessarily entail full fiscall union, or even a transfer union along the lines of the USA. The importance of fiscal transfers is generally overestimated. What is vital — and what makes things work in the US — is an integration of the savings and investment systems across the currency area, so that an economic shock to one region isn’t immediately reinforced by a credit shock in that same region. If the Greek banking system had been mainly French- and German-owned, things would never have seemed so dire. If the Euroland banking system in general had been smaller and less important relative to bond and equity markets, we might never have needed to have a second, Europe-specific aftershock of the Global Financial Crisis of 2008–9.
But “integrating savings and investment markets” isn’t a small project; it’s much bigger and much more ambitious than the current Capital Markets Union agenda. It would involve creating a single bankruptcy code and in all probability a single company law. And as you can’t create US-stye capital markets overnight, in the meantime the Euro Area needs more means of directing investment in securities to even out rate differentials between its members — as well as the EU’s Structural Funds, it needs Cyclical Funds.
And here’s where the problems start. The stronger you build the institutions of Euroland, the greater the difference grows between the Euro and non-Euro Member States of the EU. We saw all these issues in embryo in the debate over the creation of the Banking Union and the Single Supervisory Mechanism. Countries like the UK and Sweden, entirely understandably, believed that if the 19 members of the euro currency turned themselves into a single bloc vote, it would be game over for any non-Euro state getting a fair hearing for its own concerns and views in the field of financial regulation. A set of ad hoc fixes and safeguards were put into the Banking Union legislation to get the deal done, but the EU already has too many of these ad hoc fixes, and everyone knows you can’t achieve the road map on that kind of basis.
So we need to look at some of the more fundamental treaties in Europe and ask the simple question — who, exactly, are the current arrangements working for? They’re not working for the Greeks. They’re certainly not working for the Germans. They’re not working for the UK and they’re not satisfactory for a lot of the poorer former Communist states either. Nobody is really happy with the current European model, but there is no agreement on any alternative model either.
Something’s got to give, and the Gordian solution is to stop making such a fuss about the old rhetorical point of not allowing a “two speed Europe” to develop. A two-speed Europe is exactly what the EU needs, and for the non-Euroland members it’s entirely possible that their desired speed might be “Stop”.
In particular, the concept of “Ever Closer Union” is a turkey that’s never going to cook and needs to be binned. The idea in the Maastricht Treaty that countries like Sweden are “working towards” euro membership has been a laughing stock for years, but the more general ambitions enshrined in the treaties are also now only appropriate for the countries that form the euro.
An official decision to abandon “ever closer union” and to explicitly cut the UK out of any further integration might be a game changer for the domestic referendum, as it gives the Eurosceptics the recognition that they want, while not reversing the progress that’s already been made. It would also — since renegotiation of the Treaty of Rome is definitely a multi-year task — push all the difficult questions about free movement of labour into the post-referendum future, while giving a sufficiently interesting distraction to the news agenda. That means that the only people left carping that such a move is largely cosmetic and that concessions on the technical issues are all that really matters, would be the immigration nuts. And if the LEAVE campaign manages to get itself dominated by immigration nuts, it loses handsomely.
So, in my view, a general agreement to abandon Ever Closer Union, and to develop further integration for the Eurozone on its own, has a lot of attractive qualities. It addresses the number one risk to Europe in the near term — the UK exit referendum. It simplifies the task of building Euroland institutions that are vitally needed. And the cost is the loss of a lot of sentimentally important but basically ridiculous language that has been practically irrelevant for years. For these reasons, I think it will happen.