From crisis can come opportunity. Out of this European crisis can come the opportunity finally to achieve a model of European integration that is sustainable. But right now this opportunity is heavily disguised. There is an old joke told about the stranger who asks the Irishman the way to his destination and is told “Well I wouldn’t have started from here.”
We might be tempted to say the same about the way to resolve this crisis and it would be equally futile. So I shall resist the irritating temptation of being the Brit outside the Euro trying to tell everyone inside why it was a bad idea. First because I don’t think it is a bad idea. In principle, in the right political and economic context, a single currency along with a single market makes sense for Europe. Second because in any event we are where we are.
There is relevance however in understanding why this this crisis is so acute. It is because monetary union was in many ways an idea motivated by politics but expressed in economics. So politics and economics had to be aligned. They weren’t. So now in the midst of crisis they have to be. Countries whose economies are divergent have to converge. Since this requires a huge degree of integration in decision making, the politics will then have to shift to catch up the economics. True economic union will imply a large measure of political union. This is the post crisis challenge.
Before I address it directly I make one remark about the crisis itself and it is again about the politics and the economics. One odd but telling difference of opinion between Europeans and those from the investment community in the US, China and elsewhere, is that the Europeans by and large believe the Euro will stay. That is because they are focussed on the enormous political will to ensure it survives. The outsiders by and large are deeply sceptical. That is because they are focussed on the maths.
The strategy so far adopted in Europe by political leaders, including by Chancellor Merkel, who has shown great skill and courage in handling the crisis, is entirely comprehensible as politics. It is to go step by step, by a series of increments that are major but do not deal with all the aspects of the crisis simultaneously. So the ECB action and readiness to use OMTs has hugely helped the liquidity issue and given us some respite.
But it doesn’t fully deal with the solvency or growth issues that also dog the Euro. The ESM is still untested and whilst deficit reduction plans are absolutely necessary, austerity makes policies for growth tough. Indeed sometimes it seems as if the public is being given the choice of austerity with reform; or growth without reform. We need growth and reform. And we need liquidity, solvency and growth issues addressed together. Without this, and especially without growth, the pain of the adjustment in debtor countries is frighteningly hard and several years of it may not be politically possible. This is again where politics and economics have to align.
The economics imply a strategy based less on incremental steps; and more on a “Grand Bargain” agreement that deals with liquidity per the ECB; solvency with the necessary fiscal transfers; banking union; a large degree of fiscal coordination; far reaching structural reform; and the back loading not front loading of austerity plans, to protect growth – and all at once. My feeling is that the only way, ultimately, confidence can be restored is with a fully comprehensive set of measures that convince markets and public alike that the fundamental issues have been overcome. The politics of doing so – particularly here in Germany – are fantastically difficult. But the economics of not doing so are even more difficult.
That is the immediate challenge. If it is overcome, then the politics of what comes next is also extraordinarily fraught.
Put simply there can’t be the integration of large areas of economic policy – banking union, fiscal union, even the prospect of an EU Treasury – without a commensurate political union. So inevitably now, along with the resolution of the immediate crisis, comes the investigation of what such a union would look like.
We should conduct this investigation with the lessons of previous efforts at integration in mind.
I bear the scars of participation in the Amsterdam Treaty, the Nice Treaty, the – Laeken process culminating in the Lisbon Treaty and the 2005 EU budget negotiation, when the UK held the Presidency – the most difficult negotiation I participated in, (even including the Northern Ireland peace agreement.) Many of those here today bear similar scars!
Out of that experience I would say there are two crucial strategic objectives which any negotiation for such a political union, should strive to achieve. First, some differentiation in the speed of European integration is now inevitable as members of the Eurozone seek to match political structures with integrated economic decision-making. However this is done is of huge import to the whole of the EU. I can almost feel the relief in some Euro-federalist quarters and amongst most Euro-sceptics at the prospect of a two or three speed Europe. But I would give a stark warning: if Eurozone structures end up with a Europe that is fundamentally divided politically as well as economically; rather than a Europe with one political settlement that accommodates different levels of integration within it, the EU as we know it will be on a path to break up.
Let’s be blunt here and go straight to the UK position. It is massively in Britain’s interest not to play short-term politics with this issue. Personally I would like to see the UK take a constructive role in shaping this new union, recognising the imperative of closer political union for the Eurozone countries and trying to keep the necessary divergence in economic decision making between ins and out, from spilling over into a complete divergence in political structures. It is a very tricky task. But it is an essential one if the UK is not to be side-lined and Europe to be without the active participation of such a large and significant member of the existing Union.
The negotiations over the proposed banking union and possibly over the new EU budget will provide an interesting test case of whether such constructive engagement can yield an optimal outcome. But naturally the UK will expect this to be a two-way process. The rest of the EU will have to understand and hopefully accommodate the UK’s very special position in the financial sector.
Secondly, we should be heedful of why, when monetary union came into being, structures of full scale political integration were not agreed. They were proposed, by the way. They just weren’t agreed. And the reason still has validity as a sentiment today. Greater political integration is indeed inevitable. But any new political union has to balance more carefully than ever before, the nation state and EU integration. This is the hardy perennial of debates over European political union. But now the union proposed for economic decision making reaches right into the heart of decisions normally reserved for national Governments and Parliaments. Though the British are often standard bearers of the nation state side of this debate, it is clear many march behind that standard. There is a reason for the referendum results in France and the Netherlands in 2005 and it wasn’t just domestic politics overshadowing a European decision.
This has always been the dilemma facing the politics of the EU. People feel far closer to national Governments and Parliaments. In the minds of the people, there is no plainly unified, homogenous polity in the way there is, for example, in the USA. Yet as Europe integrates, there opens up a democratic deficit – namely the gap between the importance of the European-wide decisions and the accountability of the European institutions making them. Hence there is the drive toward more Europe wide democracy at present formulated in extra powers for the European Parliament.
Here is the dilemma. Though in theory, as Europe integrates, people should demand more Europe-wide democracy, in practice, because they still feel a far closer affinity to national democracy, they don’t. The Europe political elite does. But the people often don’t. The danger is that the more we talk of “bringing Europe closer to the people”, the more “the people” feel alienated from it.
The dilemma is deepened by another factor. As the EU has grown in numbers and as the complexity of decisions necessary for things like the single market has intensified, so, for reasons of efficacy, Europe needs to have institutions that can rise above any one individual national interest. It is why despite UK objections, more majority voting in some areas can be justified, is even essential to make Europe work. Without it, we can get paralysis when we need movement.
On the other hand take an area like a common defence policy – launched by the UK and France in 1998. Here there was acceptance that it should be done at a Europe Council level rather than through the Commission.
So designing this new union will be very difficult. Let me make a few quick reflections. A Europe wide election for the Presidency of the Commission or Council is the most direct way to involve the public. An election for a big post held by one person – this people can understand. The problem with the European Parliament is that though clearly democratically elected, my experience is people don’t feel close to their MEP’s. This could change but only if the European Parliament and National parliaments interact far more closely.
Relegating the European Council to a side show would be a mistake. Even Eurozone members will look to their own Governments first. But there are a myriad of ways of making the Council more open and its relationship with Commission more transparent. There could even be more explicit links between the European Parliament and the Council.
We should also ask what political union really means. It doesn’t mean simply a set of institutional common bonds. It means also that in the minds of the people of Europe, there is a close connection between them. This can’t be legislated for. It has to be nurtured, culturally and socially as well as politically.
One thing I am certain of: Europe will mean more to people and be supported more by them if Europe re-focusses on practical issues that improve their lives in tangible ways. They understand the need for European action on jobs, on trade, on making the financial sector work for their interests not against them; on common energy policy; a common struggle against illegal immigration and organised crime; even on common defence in a world of increasing security risks and declining defence budgets. I think they could be persuaded to understand the sense of common co-operation on higher education, on science and research on a much bigger scale than present efforts; and likewise with art and culture. If this were combined with a sensible push for subsidiarity, this could amount to a package that would work.
So the balance will need to be struck. If not, then the whole project risks failure. I can’t see any new political settlement being acceptable without direct popular consent through referendums. So imagine this scenario. Suppose we find the will finally to resolve the Eurozone crisis. Suppose we agree the major future steps of integration for European economic decisions as part of that resolution. Suppose we then push forward to a new framework of political union as a necessary part of economic integration. At this point, we need to be reasonably confident the political union will gain consent. Otherwise we will find ourselves with referendums lost and back in crisis – this time with no clear way out.
I would like to make one final point amidst all this anxiety about crisis. The present situation is the most serious to have faced the EU since its inception. And as we speak, the crisis persists. But even so, we should recognise that the underlying, profound rationale for Europe and its union is stronger than ever. This is a point I will make to a British audience in a speech in a few weeks’ time. Ultra Euro-sceptics – by which I mean those essentially in opposition to the whole Europe project – are on the wrong side of history. The 21st Century case for Europe is based not on war or peace but on power or irrelevance. A 21st Century with China and India that in time, as GDP and population size realign, will become vast economic and political powers; with Brazil and Russia behind; a country like Indonesia with a population three times that of Germany; nations like Mexico, Pakistan, Nigeria and Vietnam all bigger than any European nation; in this new 21st Century geo politics, Europe carries weight, multiplies opportunity and makes sense for its individual nations.
In its essence Europe is the right idea, at the right moment of time and in the right geographical space between East and West.
Our challenge now, is, after the crisis, to make out of that good idea a better reality.