Future of the European Union

Joe JupilleColorado European Union Center of Excellence

(CEUCE)December 7, 2012

• Future of the European Union•  • The difficulties presented by the Eurozone crisis

have led some to question the European Union (EU)’s long term viability. Yet the lessons of six decades of European integration, and its endurance through countless existential crises, strongly suggest otherwise. Professor Jupille will discuss the current crisis in this historical context, and will project forward to a deeper EU, comprising some thirty members, by the turn of the next decade.

Outline

1. Starting Points

2. Eurozone Crisis

3. Responses to the Eurozone Crisis

4. Looking Ahead

5. Conclusions

1. Starting Points, 1

• The European Union (EU) was created by its 27 member states because it helps them address their most difficult economic challenges.

• Over time, it has developed by the “Monnet Method”, named for Founding Father Jean Monnet– slow and deliberate incrementalism, reliance on misdirection and

stealth in pushing integration forward.– Institutionalization: “Nothing is possible without men; nothing is

lasting without institutions” (Monnet).• The EU has a teleology: “ever closer union among the

peoples of Europe”.– No end-goal is specified. There is no finalité institutionelle, e.g., a

United States of Europe.– But it is always moving in the same direction (more Europe). There

have been many pauses and missed deadlines, but there has never been a major step backward.

Starting Points, 2

• In sum,1. The EU tackles very tough issues.2. It does so in ways that must be cumbersome,

complex, and hence frustrating.3. Institutions are central. They formalize and give

expression to tough problems and convoluted solutions.

4. The EU never falls back – it only moves forward.• And furthermore,

5. Markets and journalists misunderstand and underestimate these features, which is why they are so frequently pronouncing the EU dead.

6. The Eurozone Crisis reflects all of this.

2. Eurozone Crisis, 1:The Sky is Falling!

The EU is dead! Long live the EU!Time, August 22, 2011Economist, March 26, 1982

2. Eurozone Crisis, 2

• The sky is not falling.• Three problems converged to produce the

Eurozone crisis. Two of them were “baked into the cake” of EMU. They were recognized at the time, but it was hoped that they wouldn’t cause too many problems. They have.1.The EU is not an Optimum Currency Area (OCA).

OCA requires economic convergence (i.e., harmonized business cycles) and/or other means of adjustment, such as fiscal transfers and labor mobility.– EU has none of these.

2. Eurozone Crisis, 3

2. The EU’s Economic and Monetary Union (EMU) has more “M” than “E”, where the latter includes, among other things, common fiscal policy rules.• Fiscal discipline went out the window in 2003-

2004, when both France and Germany violated the Stability and Growth Pact (SGP)’s spending limits

• For political reasons, they were not punished for this transgression.

• Once they showed they weren’t going to follow the rules, Greeks, Portuguese et al. decided they didn’t need to, either.

2. Eurozone Crisis, 43. A third, exogenous problem is that markets

mis-priced the credit riskiness of Eurozone members.

Chart: http://blog.rivast.com/wp-content/uploads/Eurozone-spread-history.jpg

“Greece and Portugal are just

as creditworthy as Germany, right?”

2. Eurozone Crisis, 5

• Divergent macroeconomic circumstances, weak disciplinary mechanisms, and cheap credit proved a toxic brew.

• To varying degrees, peripheral countries (public and private sectors) went on a consumption and borrowing binge. When the bubble burst, the eurozone crisis erupted.

2. Eurozone Crisis, fin

• Not only did EU law not provide for bailouts of member states in trouble, it expressly forbade such help (articles 123-125, Consolidated Treaty on the Functioning of the EU [CFTEU]).

• In short, the EU had no tools to deal with the crisis. So, what did it do? In good European tradition, it improvised – but it did so institutionally. And, of course, in the direction of ever closer union.

3. Institutional Responses to the Crisis, 1

1. 2010 (in connection with Greek bailout): European Financial Stability Facility (EFSF)

– Created outside the EU legal framework by the 27 member states, intended to be limited/temporary.

– Allows “EU” to bail out member states (borrow, lend money, guarantee loans)

• Funded Greek, Irish, and Portuguese bailouts

– Now mostly replaced (see #3 below, ESM)

3. Institutional Responses, 2

2. 2012: Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (TSCG), a.k.a. Fiscal Compact

– Also outside the EU legal framework (signed by 25 of 27)

– Strengthens provisions relative to the old Stability and Growth Pact (SGP) and article 126 of the CTFEU.

– Supposed to enforce fiscal discipline, e.g., deficits at 3% GDP and debt at 60% GDP.

3. Institutional Responses, 3

3. 2012: European Stability Mechanism (ESM)

– Also a separate international organization (not technically part of EU), though involved amendment of the basic EU treaties (article 136)

– ESM inherits the functions of the EFSF. In short, it will provide bailouts and other help (e.g., loan guarantees) to Eurozone countries in trouble.

3. Institutional Responses, 4

• In sum, the EU’s institutional responses to the Eurozone crisis mean that it has the tools (though it may need more money) to address short-term problems in its member states and to enforce the kinds of policies that will prevent future problems in the long-run.

• Of course, this is not the end of the story in terms of the future of the EU …

4. Eurozone and Beyond, 1

… Re: the Eurozone, we see the following:

1. Discussions on Banking Union, with centralized banking oversight by the European Central Bank (ECB), are moving quickly and could well culminate in new measures in 2013.

2. Further out, there are serious talks about Eurozone Fiscal Union.• NB this is why the American EMU works as well as it does.

• Both of these reflect further moves toward ever closer union, and start getting to the heart and soul of “the King’s powers” and national sovereignty.

4. EZ and Beyond, 2

• The Eurozone could still see a lot of turbulence, e.g., a “Grexit”.

• But part of what makes the EU a one-way ratchet is its fetish for institutions, which theory and evidence tell us tend to “stick”.

• If they can get these EZ institutions “right”, that will provide some relief in the medium-term.

• Finally, markets and journalists underestimate not only the benefits of EU and the euro for Germany, but the very European constitution of contemporary Germany itself.

4. EZ and Beyond, 3

• Beyond the Eurozone, the EU faces other significant challenges.

• Centripetal tendencies in the EU itself.– Will the UK exit?– Continued expansion to new members: Croatia (entering 2013);

Iceland, Macedonia, Montenegro, Serbia and Turkey (candidate countries); Albania (applied 2009); Bosnia and Herzegovina (eventually); others.

– Multispeed Europe, Europe à la Carte, Variable Geometry Europe

• The democratic deficit.• Ageing societies, multiculturalism and the welfare state

in the era of globalization.

5. Conclusions

1. The Eurozone crisis has revealed several disequilibria. The EU addresses these by moving forward, rather than moving backward. This is one of the few constants in EU history: the EU is a one-way ratchet.

2. New institutions and prospective fiscal union would move the EU in the direction of the US as an economic union, and eliminate key problems (e.g., macroeconomic divergence) that were ignored in the original construction of the Euro.

3. Those anticipating breakup underestimate the power of Ever Closer Union and institution-building to maintain and propel the EU forward.

4. Rumors of the EU’s death are greatly exaggerated.