Europe’s Not-So-Ever-Closer Union

Pushing ahead to deeper integration is infeasible politically, allowing the EU to fall apart would be a disaster. Why not take Europe’s long-established «principle of subsidiarity» seriously? A column by Barry Eichengreen.

Barry Eichengreen
«The case for centralizing fiscal policy has always been weak, because cross-border fiscal spillovers are weak.»
For the moment, the refugee crisis has pushed the euro crisis off of the front pages of Europe’s newspapers. But it is clear that the currency crisis will be back. Athens has fallen behind on its reform commitments. The new Portuguese government is a coalition of left-wing parties, including the Communists, officially sworn to remaining in the Euro Area but with a questionable commitment to taking the steps needed for continued membership. While there are some signs that economic growth may be picking up – a poor third quarter GDP report notwithstanding – some 30 per cent of German, French, Italian and Spanish exports are directed at emerging markets, casting doubt on whether any improvement can persist.

When it comes to the refugee crisis, Europe has only seen the first drop in what is likely to become a massive cloudburst. Migration from the Middle East and Africa will decline in the winter when the seas grow choppy, but it will pick up again in the spring. And now that refugee networks have been established, the volume of flows will rise massively. Earlier arrivals will be communicating their knowledge of which routes to follow and avoid by cellphone, Facebook and Snapchat. The idea that this flow can somehow be stopped at Europe’s borders, in the absence of an improvement in the refugees’ countries of origin, is risible. Even the highest razor-wire fence can be scaled or circumvented. And to the extent that it works, images of the Calais-like suffering of those penned up on the other side will not be tolerable.

These are the two most serious crises in the history of the European Union. The euro’s collapse could mean collapse of the Single Market and the EU itself. And the refugee crisis is poised to become an even larger and disruptive migration than that unleashed by the collapse of the Iron Curtain in 1989.

The EU’s management of crises is not convincing

So far the EU has shown little ability to cope with these challenges. The euro crisis has elicited calls for deeper integration – for «ever closer union» – as for example in the «Five Presidents’ Report» last June. (The five presidents in question are those of the European Commission, the Euro Group, the Euro Summit, the European Central Bank and the European Parliament.) At the same time it is clear that the European people have no appetite for deeper integration. The overwhelming effect of the euro crisis has been to undermine trust in the institutions of the European Union and therefore to strengthen resistance to giving the EU more power.

And if the euro crisis wasn’t divisive enough, the refugee crisis has further heightened tensions among EU member states. Hungary, by building a fence, simply diverted the flow of migrants to Croatia and Slovenia, increasing the burden on those countries. Member states are unable to agree on how many refugees they will accept. To the extent that Western European countries have forced their will on their Eastern European partners, recrimination has intensified. Greece and other frontline countries have received little help in managing refugee arrivals and securing their borders. As a foreign-policy actor, the EU has been singularly ineffectual at working to stabilize the situation in the Middle East.

It sometimes seems like the only possible responses to these crises are either pushing ahead to deeper integration, which is infeasible politically, or allowing the EU to fall apart, which would be an economic and political disaster of the first order. But there is an alternative. This is to take Europe’s long-established «principle of subsidiarity» seriously. Subsidiarity, recall, dictates assigning to the European Union functions that can be efficiently executed only if they are carried out collectively, while returning other functions to the member states. An example of the former is banking supervision, as Europe learned from the crisis, to considerable cost to itself. Instead delegating supervision to the member states – the wrong approach – allows national supervisors to neglect the spillover effects of their decisions on other members, destabilizing the whole. We saw this when French and German banks were allowed to recklessly lend to the Greek government before 2010. Bank supervision, it follows, should be assigned to the level of the union. Sensibly, this is what Europe has now done with the creation of its Single Supervisor.

In contrast, the case for centralizing fiscal policy has always been weak, because cross-border fiscal spillovers are weak. U.S. experience suggests that budgetary spillovers between the 50 states are limited. In Europe, such spillovers operate mainly by destabilizing banks in neighboring countries – as when the Greek debt crisis threatened to destabilize German and French banks that had invested heavily in Greek bonds. But once banks are disconnected from sovereign debts by the Single Supervisor, which can prohibit them from holding dangerous numbers of government bonds, control of national fiscal policies can be returned to national capitals. With banks no longer at risk, a no-bailout rule for the governments of individual members will be credible, as it is in the U.S.

While the same principle can be applied to the refugee crisis, in this case the implication is different. It is that important functions must be carried out at the level of the union. The inability of frontline states like Greece to invest adequately in border security has direct effects on other member states, like France, as we have seen in the terrible events in Paris. This means that all members must contribute money and manpower to secure the EU’s external borders.

The case for a common foreign policy

Similarly, each EU member has an incentive to underinvest in language education, vocational training and basic sustenance for refugees in the hope that, lacking support, they will then move elsewhere. But the refugee influx will only be a net positive for the European economy with adequate investment along these lines. This means that such investment must be agreed collectively and that it should be financed collectively, using the European Union budget.

Ultimately, Europe’s only hope of staunching the immigrant flow is by stabilizing conditions in the refugees’ countries of origin. This is no easy task, admittedly, but it will be impossible unless European countries work together. Member states either need to overcome their resistance to adopting a common foreign policy or else prepare themselves not just for millions but tens of millions of refugees.

This observation in turn points to what kind of political integration Europe needs. It needs a European Parliament and Executive strong enough to oversee a forceful Common Foreign and Security Policy but weak enough that budgets, other than defense budgets, can be repatriated to the member states. Prescribing these changes is easy. Putting them in place will be devilishly hard.