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Europe’s incompatible political trinities

Posted by hkarner - 8. September 2016

Marco Buti, Muriel Lacoue-Labarthe

Director General, DG Economic and Financial Affairs, European Commission

Adviser on policy and strategy, DG Economic and Financial Affairs, European Commission

07 September 2016, voxeu

A previous column stressed that a number of inconsistent economic and financial trinities emerged since the outset of the crisis (Buti 2014).  We build on this here by looking at current challenges from a political economy point of view, and identify three elements that are key to adapting our vision of subsidiarity to the current times: overcoming the intergovernmental method that has dominated EU decision‑making since the crisis (an EU task); refusing the seemingly easy solution to blame all evils on Brussels, including for the costs of tough but inevitable reforms (a domestic task); and moving towards a more unified external representation in global economic governance (a global task).

EU economic policy coordination: Where we come from

At the core of the concept of monetary union created by the Maastricht Treaty in 1992 was the “impossible trinity” proposition by Mundell – a group of countries cannot pursue simultaneously a fixed exchange rate, complete capital mobility, and autonomous monetary policies. This was even truer in the context of free trade, as emphasised by Tommaso Padoa-Schioppa in his “inconsistent quartet” (Padoa-Schioppa 1987). His report on the consequences of the Single European Act hence called for the evolution of the Community’s responsibilities for the three branches of public policy defined as allocation, stabilisation, and redistribution (Musgrave 1959). As the Single Market would have major consequences for allocation efficiency, monetary policy centralisation was key for stabilisation, and an evolution of the EU budget towards economic convergence and social cohesion would contribute to addressing distribution issues across EU countries.

In institutional terms, the principle of subsidiarity at the core of the Maastricht Treaty of 1992 led to centralisation of monetary policy, but left budgetary and economic policies as a “matter of common concern“ in the competence of member states, within a macroeconomic policy coordination framework including a specific set of minimum rules against fiscal profligacy. While the adoption of framework rules remains grounded in the traditional Community method, which implies majority voting and co-decision between the Council and European Parliament on the Commission proposals and recommendations, their implementation and the adoption of Council recommendations to member states belong to the Council alone.

The EU after the crisis: Policy challenges and their political consequences

The institutional setting laid out in the Maastricht Treaty has been put to a trying test from 2008 onwards. In the wake of the crisis, key policy challenges have emerged in terms of Eurozone internal rebalancing, structural reform efforts to increase growth, and financial stability and integration, all of which still need to be fully addressed (Buti 2014). Besides Eurozone economic issues, protecting public goods such as security, defence or asylum requires joint policy responses from the EU, rather than at the level of each member state. In the meantime, institutional and political challenges have arisen, raising the question not only of what should be done in policy terms, but also how it can best be delivered.  This requires addressing legitimacy issues that have arisen over the crisis years and considering their consequences for how the EU’s and its member states‘ competences should be articulated at the current juncture.

Politically inconsistent trinity

A first inconsistent trinity appears when decisions to be taken at the European level rely on democratic checks and balances based only on national institutions.

The response to the crisis was dominated by the shift to an intergovernmental process in decision‑making, based on unanimity. The European Council, often in its EA formation and based on pre-agreement between some member states, defined not only broad policy orientations – which is the role entrusted to the European Council by the Treaties – but also detailed arrangements. Examples of this include the negotiation of financial assistance programmes to vulnerable member states, or the details of the reform of economic and budgetary surveillance procedures set out in the Van Rompuy Task Force. The intergovernmental method also played a major role in the creation of financial assistance mechanisms. Both the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) rely on a mutual consent procedure. The Banking Union, launched in 2012 to address the incompatibility of national financial supervision with the objective of financial stability in a context of integrated financial markets (Schoenmaker 2011), was in key respects based on intergovernmental agreements, although most of its founding texts and new institutions are anchored in the Community method.

Unanimity, which entails the possibility of a veto, still has the same drawbacks that led to its replacement by a majority voting rule in the Single European Act of 1985. Participants are accountable to their domestic constituencies in the way they have upheld domestically defined priorities in decisions that will also apply to other constituencies. While a majority voting rule helps define a joint narrative and common interest beyond the mere average of individual objectives, unanimity leads to compromises based on a minimum common denominator or, as in the heat of the crisis, the relative bargaining powers of creditors and debtors. What ensues is the ‘ultima ratio’ logic where a consensus is eventually achieved, but often too late and at much higher costs. Not being based on genuine ownership, consensus proves difficult to sustain as soon as the market pressure abates.

In political science terms, this means that not only was the output legitimacy of the Eurozone in question, but also the ability of its decision-making to reach a balanced solution (‘throughput legitimacy’) and its responsiveness to the public debate, which was mostly held at domestic level (input legitimacy), as stressed by Schmidt (2015, 2016).

Similar to the ‘globalisation trilemma’ developed by Rodrik (2000), this complex process can be summarised in a first inconsistent political trinity, whereby democratic checks and balances over deeply integrated political decisions cannot be achieved by institutions based solely on national sovereignty. Democratic institutions at the national level are adapted to decision-making regarding domestic public goods. But combining democratic requirements with decision-making at the level of the EU or the Eurozone, to ensure public goods such as its integrity and stability, must also involve institutions that are representative and accountable to this wider constituency.

In institutional terms, this calls for overcoming ‘intergovernmentalism’ and returning to the Community method as an adequate setting for multilevel governance. It does not suppress national sovereignty but complements and shares it, with accountability commensurate to the level where decisions are made, based on a renewed subsidiarity assessment. This was recognised by the Five Presidents’ Report in June 2015, which, among other elements, calls for the creation of a Eurozone Treasury accountable at the European level, and the integration of the ESM into the Community framework, as parts of the second step of completion of the EMU (Juncker 2015).

Figure 1. First inconsistent trinity: Political integration

Institutionally inconsistent trinity

At the national level, blaming ‘Brussels’ is inconsistent with the relevant degree of subsidiarity, but also fuels domestic political instability.

One of the impacts of the crisis has been to deepen divergences between Eurozone economies, with deeply ambitious reform efforts still to be endeavoured, while revealing a larger extent of interdependence and spillovers from economic and fiscal policies.

In the current context of slow recovery, one of the key challenges is to ensure more symmetry in rebalancing efforts, in order to support the ECB’s inflation objective of price stability while vulnerable economies are restoring their competitiveness and reducing their high debt burdens. This requires member states that have the necessary margin to manoeuvre to support domestic demand and investment more than they are doing so now, and more vulnerable economies to run prudent fiscal policies and implement deeply ambitious reforms at the national level to recreate conditions protective of their social model, while restoring their public finances. In other words, this requires reorganising domestic priorities in recognition of deep economic interdependence.

Political parties have two choices in this respect. They can either create a narrative explaining why certain decisions are better taken at the central level and set out a European policy agenda, or blame an abstract Brussels that is unable to cater for domestic priorities and reluctantly implement the outcome of decision-making in which, however, ruling coalitions have participated.

The negative option has appeared more frequently in recent years, not just in populist forces but also mainstream parties. The length of the crisis, ensuing rising inequalities between and within member states, and the prospect of difficult reforms make political choices more difficult to accept and defend. However, blaming Brussels for the implications of difficult but inevitable choices entails negative consequences in public opinion, for which the result of the UK referendum on the EU should serve as a cautionary tale. First, it weakens the ability to effectively achieve the adequate level of subsidiarity-based devolutions at the European level, thus hindering the definition of mutually stabilising solutions. Second, it lends credibility to the anti-European, anti-euro stance of populist parties, even though none of their alleged solutions addresses the question of how isolated states would resolve the larger challenges of globalisation better than a union that shares core values of a European social and political model. This eventually creates instability in the domestic political landscape, making stable ruling coalitions more difficult to achieve, and eventually making the prospect of populist parties in governing positions more likely.

Hence, the institutional relations setting needs to overcome an inconsistent trinity, where taking the EU as a general scapegoat for the consequences of the crisis prevents the achievement of both domestic political stability and the adequate level of subsidiarity required to deliver EU‑based solutions to EU‑relevant problems.

Figure 2. Second inconsistent trinity: Institutional relations

Global governance inconsistent trinity

While European integration should help address economic challenges linked to globalisation, poor coordination weakens Europe’s voice in global debates.

A logical consequence of deeper EU integration, namely the creation of the EMU, was the ability to increase its influence on the functioning of the international economic system. The Union must be able to speak with one voice to make full use of its position, not just to adapt to growing globalisation but also contribute to shaping it. Again, this requires a balancing act between integrated and national policies and institutions for their representation in multilateral forums (Buti 2016).

While an important degree of integration has been reached in the field of trade policy, EU representation remains dispersed in multilateral forums – such as the IMF, the G20 and the Financial Stability Board – on issues of key importance for global economic governance, such as the stability of the international economic system and the need to rebalance economies.

Again, there is a choice to be made within an inconsistent trinity, whereby it is not possible to achieve an important role in global governance if representation in multilateral forums remains that of member states alone. In other words, fragmented external representation leads to a lesser weight for the European message to the world, or it weakens the effectiveness of the multilateral global governance framework via a tangle of state-to-state bilateral agreements.  Only a single external voice, at least at the Eurozone level – along the lines of the proposition of the Five Presidents’ Report and the proposal by the Commission (European Commission 2015) – can be conducive to a greater influence in global decision‑making.

Figure 3. Third inconsistent trinity: Global governance

Overcoming inconsistent trinities to achieve a new political synthesis

Lessons learnt over the crisis, and the need to respond faster and more effectively to secure the recovery, shed light on the importance of taking a fresh look at the degree of subsidiarity that is relevant today. Solving the three political trilemmas discussed here is instrumental to achieving better policy outcomes. The solution lies in a new trinity based on three elements – at the domestic, European, and global level – that would be mutually reinforcing, this time in a consistent manner.

At the domestic level, it is up to civil society, and chiefly mainstream parties, to develop a positive narrative on European integration, explaining why certain decisions are better taken at the central level and developing a vision for its integration.

At the European level, intergovernmental decision-making must be overcome in order to reach faster and more transparent solutions grounded in the common interest, by returning to and adapting the Community method to the requirements of the post crisis environment.

At the global level, the EU should be enabled to make full use of its position as one of the largest economies in the world, and, via a more unified representation in multilateral forums, bear more weight in promoting the core values of a European social and economic model that is unique in the world.

Figure 4. A new political synthesis

Gathering these three elements would, in turn, strengthen the conditions necessary for policy reform, both at the domestic and European level. While pundits and media commentators often emphasise the growing euroscepticism in several EU countries, one should not underestimate the profound understanding of and attachment to the European project that European citizens have, and their own readiness to take further steps for the EMU, even in the aftermath of this taxing crisis. Results from a recent poll in Germany, Italy, France, Spain, Belgium, and Poland showed, for instance, that 59-89% of respondents considered belonging to the EU as a good thing, and 57-75% were opposed to returning to domestic currencies. Moreover, 58-67% were in favour of the creation of the position of Finance Minister for the Eurozone, and 63-71% would be favourable to the direct election of a president of the EU by citizens (IFOP 2016).

While polls are obviously different from an actual vote, this only shows that there is solid ground to provide a rigorous and unbiased narrative of the implications of European integration, and to propose a renewed subsidiarity model whereby the respective responsibilities at each level are identified more clearly, and decisions are taken at the relevant level with commensurate democratic checks and balances.

Authors’ note: The views expressed in this column represent those of the authors and not necessarily those of the institutions to which they are affiliated.

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