This article was published on May 22, 2014 in Fair Observer.
Many people see reasons for optimism in Europe this year, citing signs of an economic “recovery,” or noting improvement by some financial measures of EU “integration,” or hoping that the EU parliamentary elections this month will bring a new and constructive cycle of pro-EU policy that will overcome the evident obstacles to the process of further political EU integration. An optimist might conclude that the worst is over for EU integration. I am not an optimist and I am certainly not alone.
European Union 2014: Another chapter in the “dis-integration” of the EU?
It is understood that the integration of the European Union is an ongoing and unfinished project, a process that has been driven by the pro-EU political will of its member states since its post WWII inception to bring peace and prosperity to the political and economic union.
The recent era of EU integration, European Monetary Union, has its foundation in the 1992 Maastricht Treaty, an agreement between the EU leaders of the day that expressed the economic goals that aspiring member states would need to attain in order to adopt the common euro currency at the time of its introduction in 1999. The economic goals, “euro convergence criteria,” were meant to control inflation and assure fiscal discipline in the new union of diverse member states, and were expressed in terms of debt, deficit, and 10-year bond yields.
From 1992 to 1999, pro-EU sentiment was high, a function of the optimism that joining the euro would bring greater prosperity to each member country, given the efficiencies of trade, free flow of labor, and political clout of being part of the first tier of Europe. There was also a fear of being left out of the euro, which fueled a high degree of both nationalism and pro-EU political will to join the euro club.
At the introduction of the Eurocurrency in 1999, there was also the expectation that a “real” convergence of underlying country economies would follow. The hope was that the lower interest rates and capital flows into poorer countries would foster investment, and that true EU integration would evolve over the years, that improving productivity and competitiveness would result for each member state economy. The entire EU region as a whole was expected to benefit politically and economically.
Investor optimism and fear of missing the investment opportunity propelled capital flows from around the world into the bond markets of all aspiring member states, the peripheral countries, or “high yielders” in particular. Ten-year bond yields “converged” to near equal levels, allowing peripheral countries to fulfill Maastricht bond yield “convergence criteria.” Investors ignored the risks associated with the economic diversity of the aspiring member states as optimism of the coming euro era outweighed the underlying political and economic risks of the day.
The reality of the Eurozone has differed from expectations. What has evolved over the last 20 or so years is a natural divergence between the fundamentally weaker and stronger economies, particularly since the onset of the global financial crisis five years ago. Political will rather than true convergence in competitiveness between member countries has kept the EU together. But the pro-EU political will required to finish the integration process has been lacking since the onset of the global financial crisis, leaving fiscal union, true banking union, and mutualized debt undone, or left to debate.
Time is not on the side of EU policy makers. The current lack of pro-EU political will has resulted in EU policies that seem neither to measure nor support full EU integration. In fact, the opposite seems true: Exacerbated by the EU policy prescriptions of austerity and cost-containment required by the Maastricht Treaty, member states are in the process of what I have referred to as “dis-integration,”(“Is the EU dis-integrating?” April, 2010) a stagnation or even reversal of the integration process in important ways that are not measured by Maastricht Treaty “convergence criteria.” The current trends in the EU are that member states are diverging economically, politically, and socially in measurable and immeasurable ways.
The European crisis is one of relative competitiveness within Europe. The EU is in the process of de-converging by measures based on the realities of its diverse EU members, roughly divided now between “periphery” and “core” countries. The pro-EU political will is neither evident nor able to alter the process of “dis-integration.”
Yet the global era is one of regional political and economic blocs. As the Ukrainian crisis highlights, the EU is a political bloc. The future of the EU and the Eurozone are inextricably linked and both are certain to enlarge for political reasons in spite of their political and economic problems. While joining is difficult, leaving is virtually impossible.
For the 2014, the current fear is not that the Eurozone will “break apart” or lose members, but whether the EU member countries have “dis-integrated,” de-converging to a degree that even a renewal of pro-EU political will, if it did emerge from the EU parliamentary elections, could not mend.
What is “dis-integration” and why isn’t it measured?
The staggering unemployment, particularly the divergence in employment rates between weaker and stronger countries, is one symptom of the “dis-integration” among member states. The Maastricht Treaty does not have employment as part of its “convergence criteria” or as a policy objective for EU integration. It is not used as a measure to compare integration between member states, nor did the Treaty create a mandate for the central bank to support employment.
Instead, the EU’s labor market policy is meant to improve efficiencies and reduce costs of firing, as it is based in the Maastricht Treaty, which requires austerity and cost containment to meet debt and deficit “convergence criteria.” Reducing costs of firing workers, however, has not yet created employment in the weaker, less competitive peripheral countries hardest hit by the crisis: Weaker countries have a larger portion of unemployed that will likely not participate in the current “economic recovery” at all, as theirs is a problem of “structural” unemployment (workers who have lost their jobs in construction, for example, are unlikely to have the skills to work in the growing technology sector).
There may be signs of economic “recovery” in economic growth rates, but without job creation there will be no real, integrated, economic recovery for the EU. It is worthy of note that economic growth is essentially driven by productivity and demographics, but unemployment rates do not measure the loss of productive capacity of the many people who are leaving the country to seek employment outside the EU, nor the potentially “lost generation” of under-educated and unemployed youth.
Can a new cycle of pro-EU policy emerge from EU parliamentary elections to solve the EU’s integration problems?
If the EU is really meant to progress on the path of integration, a pro-EU political will that is capable of forging and implementing new and coherent policy must emerge. Can the political will to finish the EU integration project emerge from the upcoming EU parliamentary elections? Likely not.
Current polls indicate that the elections are certain to result in euro-skeptic and anti-EU parties’ winning seats in the new EU parliament. These parties will find their voice and express their opinions, which will bring broader discussion to EU policymaking, beyond the “austerity” versus “economic growth and investment” debate. However, it won’t necessarily be constructive debate in the formation of new EU policy, as voices against further EU integration are certain to result in dilution and fragmentation of the political will to create pro-EU policy.
As a consequence, the EU parliamentary elections will likely add another layer of dysfunction to the political processes in the implementation of new policy initiatives. Previously discussed comprehensive initiatives to influence the priorities of EU policy, such as the EU’s “Europe 2020”, the 10-year plan for growth and jobs strategy will likely remain largely as discussion points or theoretical measures, rather than the basis of new EU policy imperatives or initiatives.
EU policy will likely continue along current policy lines as the strong countries, Germany in particular, will continue to be in charge of policy formulation. Expect a continuation of austerity-focused EU policy because much of the policy is based on the foundation of Treaty of Maastricht and is enforced by the political will of the stronger countries. The Maastricht Treaty reflects German architecture: It is a politically enforceable, rule-based agreement, that is designed to pose limited risks of inflation and minimal costs to Germany, with sanctions for offenders. The Maastricht Treaty is difficult to change, particularly when there is no unified political will to do so. It is worth noting that last year’s 2013 German elections came and went with no discussion of the costs that austerity policy has wreaked on peripheral member states.
A continuation of the current, austerity-focused EU policy will continue as a policy to minimize the costs of keeping the Eurozone together for the wealthier core countries, but will also create continued and progressive instability for EU cohesion because the existing trends of “dis-integration” will stay in place. National governments will continue to negotiate for leniency on Maastricht Criteria and question its assumptions, more fervently still as the scope of EU parliamentary debate broadens.
Unfortunately, the trends indicate that the worst may not be over, but yet to come for the EU integration.
There is no reason to expect that the “core” and “peripheral” countries will have a different relationship than they do now, with the politically strong versus the politically weak, creditors versus debtors, apparent winners versus losers in EU integration. The European crisis is one of relative competitiveness, and the trade and current account deficits reflect that. Weaker countries will continue to run account deficits and trade deficits with Germany.
The weaker countries will be forced to adjust, as they have, and as painful as it may be for them to continue to do so, they will likely continue to suffer painful wage deflation and increasing income inequality, and have growing structural unemployment. There is no export panacea to stimulate growth, as the value of the euro subsidizes stronger countries, which should have a stronger currency and penalizes weaker countries, which should have a weaker currency. These entrenched trends are now inherent to the structure of the Eurozone itself, as they are the result of an ongoing relationship between stronger and weaker member states locked together by the common currency, exacerbated by the global financial crisis and austerity measures imposed.
The EU integration is an ongoing and unfinished project, and the Maastricht Treaty doesn’t provide a comprehensive framework to measure EU integration, nor was it meant to. As long as the natural dissimilarities between member states go unmeasured by Maastricht Criteria, and are not managed by EU policy, they will continue to further erode EU integration over time – economically, politically, and socially.
The political risks of the EU are currently understated by financial integration measures. 2014 is the year of EU political fragmentation and it holds the potential for political crisis, with ongoing risks for continued, perhaps explosive, social crisis in the years to come.