The European Union: are we headed for federation or fragmentation?

(CC By Yanni Koutsomitis)

The cohesion of the European Union is constantly called into question. Its consolidation is not a foregone conclusion. The longer the crisis lasts the more probable a drift towards division.

A recent proposal by EU Commissioner Viviane Reding to decisively strengthen the European Commission and Parliament is indicative of a determined, even desperate, charge in defense of European federalism, about which we seem to have been increasingly forgetting. One could come to the conclusion, when looking closely at the recently proposed solutions, that the crisis strengthens national statehood more than the EU as a whole. Formally everything sounds good. The European Stability Mechanism (ESM) was created in defense of common interests. Decisions geared toward defending the eurozone, and the currency itself, are being made all the time and banking union has become the most recent hot topic. Serious fears only arise when appraising whether actions will lead to a ‘multi-speed Europe,’ something that would divide Europe into its ‘hard core’ and its peripheries (which wouldn’t be anything new on the continent anyway).

To a lesser degree it is becoming obvious that the crisis continually strengthens national organisms within the EU and discredits its institutions. From here comes the desperate act from a recently somewhat ostracized Reding. Supporters of federal solutions are clearly on the retreat and the defenders of national state interests are doing their worst.

Strong member states

Careful attention should be paid to the Euro-Plus Pact, signed on March 11, 2011. The pact stipulates expressis verbis, that “the effectiveness of the pact will be guaranteed personally by the heads of governments and states.” The Commission was given mere functional and intermediary tasks. The Czech Republic, Hungary and the United Kingdom remained outside the pact.

A strengthening of the powers awarded to national authorities became even more apparent during the long debates and negotiations over the ESM. It was already noted during the preparations that it would be “awarded powers based on international consensus.” This left no doubt that capital cities, led by Berlin, and not Brussels or Strasbourg and their institutions, would play a leading role in the defense of the euro and the eurozone. In other words it would come into force “by virtue of an agreement among member states in an instance where the eurozone’s stability as a whole is threatened.”

After a long debate, a decision legitimizing the ESM was made on July 11, 2011. The mechanism was designed to be initiated should the finances of one or several member states endanger the stability of the eurozone as a whole. With this goal in mind, the ESM has at its disposal a subscribed capital of 700 billion euro. Effectively, it could have the capability to make loans of even 500 billion euro.

So in this sense it could be concluded: excellent, mechanisms have been introduced for protecting against the spread of crisis. A means to manage crisis and stamp out potential fires has been found. However, the make-up of the ESM is more than significant. The management board, which is the highest organ of the ESM, supported by the board of directors, holds formal operational control. The management board is nothing more than a body made up of eurozone finance ministers. Thus, it is a ‘Eurogroup,’ which automatically regards its current chief executive as its boss or chooses another executive from within its ranks. The roles and significances of its individual members are not all the same however. They depend, as in every typical financial organization, on a so-called weighted voting system and thus on each member state’s share of the initial capital.  Hence the real power of any given member state is decided by the fact that Germany injects funds amounting to 27.15 per cent, France 20.4 percent, Italy 17.9 per cent and Spain 11.9 per cent. So here some states are ‘more equal’ than others. Some are stronger and others weaker.

The commission as a utility

The European Commission can definitely not be added to the first group. It has once again been given a functional role. A mechanism was used according to which decisions made by the management board are binding, and the European Commission can sign ‘credit’ deals in the name of the ESM only after having them cleared by the ESM management board (read: the strongest countries), in justified instances in accord with the European Central Bank, as well as if required by the IMF.

It is clear from the agreements that everything was done to give the ESM full autonomy with regard to EU institutions. This happened together with a formal, legal, and institutional, separation of the ESM from EU institutions. The European Commission was reduced to the role of an entity acting only when ordered to do so. What is more, the Court of Justice of the European Union can resolve conflicts that have to do with the ESM as “an international, not an EU, court.” In this sense one is completely justified in asking; is the ESM a structure that is tied with the process of European integration and EU institutions, or is it autonomous?

The conflict on this topic between experts, lawyers, and economists, is flourishing. Meanwhile banking union is increasingly coming up on the agenda. Current proposals and solutions seem to indicate that we will follow the road paved by the Euro-Plus Pact and the ESM toward fragmentation rather than deeper integration.

For example, decisions have been made for the fledgling pan-European Credit Guarantee Fund to have its character drawn from national systems, not extra-national ones. Current proposals passed by Germany and other strong states (the United Kingdom as we know isn’t even thinking about a banking union, and is not taking part in these debates), and recently represented by Commissioner Michael Barnier, indicate that at least in the next few years national governments, and not EU institutions, will have to deal with collapsing banks.

Jacek Ramotowski is right in his assertion, published by OF, that under banking union “new institutions may turn out to be mere facades, and the mechanisms so protracted that they rule out the effectiveness of action.” It is, after all, still an open question whether we will follow in the direction presented by the solutions used when creating the ESM or those which were laid out in the fiscal pact signed in March 2012 (the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, entered into force on January 1, 2013). Here the controlling functions of the EC had a greater presence (e.g. defining a lump sum or financial penalty), as did the European Council – empowered by international agreements.

The fiscal pact, which only covers states within the eurozone, as well as the continuing debate on the banking union, serve to confirm the internal differences between EU states. If, however, (as is maintained by its leaders) the eurozone were to consolidate, then a key question would arise for countries outside the eurozone (such as Poland); to join or not to join? Nothing indicates that the best solution for us would be the British option, even despite the fact that this option is preferred by the authorities in Prague and Budapest. Especially as the alternative, as is seen in Hungary, is a series of important agreements with Russia and other states in the East.

In an economic and political sense, Poland – so strongly tied with Germany and other EU states – doesn’t really have an alternative. It should turn to the West. The problem is that the West no longer has a single voice, something which is shown very clearly by the continuing debate on banking union.

As many scenarios as there are votes

A significant example is a publication from September 2013 from one of the best European think-tanks that deal with integration; the London-based Center for European Reform. The publication’s authors, connected with the City of London and European banking (Paul De Grauwe, George Magnus, Thomas Mayer Holger Schmieding), have tried to anticipate the future of the EU in 2020. It is indicative that they couldn’t come to an agreement. Each sees the future in somewhat different colors.

Belg De Grauwe – and he is not alone in this – attacks Germany for its austerity measures imposed (also in the name of its own banks) on countries submerged in crisis, starting with Greece and Cyprus. George Magnus has also concentrated on Germany, but from a somewhat different perspective. He thinks – a line also held by others – that the crisis post-2008 deepened the differences between net contributors to the EU budget, as well as (to an even greater extent) between Germany and its northern European allies, and the southern European states and those from the Mediterranean basin who are having such difficulties. According to Magnus, this will not only end in the break-up of the EU into the eurozone and the rest, but it may even lead to the creation of two currencies for both of these regions (he doesn’t talk about the East). German representative Holger Schmieding defends the eurozone (which is not surprising, but may be indicative). He also expresses a fear for the future of French attitudes to the European project.

We don’t know whether the future European Union will be governed by the strongest states, those that add most to the budget, and whether they will impose their will on banking union as they did with the ESM. We don’t know whether there will be a consolidation of the strongest players or of the whole European Union. So many questions remain that we must now ask this basic one: are we going forward on the road to a federation, or (under pressure from national and eurosceptic forces now in the offensive), are we moving toward fragmentation?

In all this one thing seems certain. As long as the crisis continues, the chances of the second scenario becoming true will continue to increase. Who is going to lead us out of the crisis? The weakened EU and its institutions or the strongest states with Germany at their helm? That is the question!

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