The euro crisis is prompting the European Union’s policy elite to push for “harmonisation”, with fiscal union, a banking union and Eurobonds being touted in the name of “more Europe”. But there is an alternative to ever-more centralisation – a Plan B that offers a radically different vision of “more Europe” that would instead stress decentralisation, diversity and competition.
Before setting out the details of Plan B, an excursion into the history of European ideas is in order. It is a story of “big Europe” versus “small Europe” and it frames the central policy choice before Europe today.
Back in the 1950s, the French elite and the founding fathers of European integration wanted to integrate in a “small Europe” club made up of France, West Germany, the three Benelux countries and Italy. “The Six” established the European Coal and Steel Community (ECSC) and the European Economic Community (EEC). Small Europe adherents had top-down planning in mind, imbued as they were with the ideas of French post-war industrial policy. This was at its most extreme in the ECSC: prices and production targets were set for coal and steel, inevitably accompanied by protection against imports from third countries.
There was an opposing camp, however, which came from West Germany. Its leader-in-chief was Ludwig Erhard, the architect of West Germany’s post-war Wirtschaftswunder (‘economic miracle’). Prominent in Erhard’s circle was Wilhelm Röpke, an outspoken economist who had fled the Nazis in the 1930s and ended up in Geneva. It was Röpke who best articulated an alternative liberal vision to that of “small Europe”.
Röpke argued passionately for a “big Europe”. Economic integration should be market-led “from below”, not planned “from above”. Policy competences should remain at the national level, and it was incumbent on governments to pursue liberal economic policies at home and free trade abroad. Yes, intergovernmental co-operation (among the democracies of Western Europe) would be needed for a European free-trade area, but Röpke was highly sceptical of establishing supranational organisations, for he feared they would create bureaucratic sprawl, and distort the market economy.
Hence Röpke’s Big Europe was one of policy decentralisation, competition, open markets and institution-light intergovernmental co-operation. And it had to be “big” geographically, bringing in as much of Europe west of the Iron Curtain as possible. Beyond economics and politics, Röpke’s cultural vision of Europe was one of organic unity through diversity – facilitated, not least, by open markets. Switzerland, his adopted home, not centralised, homogenised France, was his ideal Europe en miniature.
The EEC was a French-German compromise: Small Europe and Big Europe ideas flowed into the Common Market. The most visible outcome of Small Europe thinking was the Common Agricultural Policy. A combination of price-fixing, subsidies, production targets and protection against imports ripped off European consumers and taxpayers, and kept out cheaper imports from developing countries.
But the Treaty of Rome, the legal framework for the EEC, also referred explicitly to a competition-based economic order, upholding individuals’ property rights and contracts, and underpinned by rules that were to be enforced by the European Court of Justice and national courts. Then, in the early 1990s, came the Single Market with its “four freedoms” – the freedom of movement of goods, services, capital and people.
The Single Market was a signal victory for Big Europe. So was progressive enlargement of the Union to today’s 27 member states, soon to be 28. Finally, before the global financial crisis, the Lisbon Agenda had plans for further supply-side reforms to complete the Single Market. In all, as of five years ago, it seemed that Big Europe was in the ascendant.
The rootstock of the eurozone crisis is a failed political project – the euro itself. It was pushed through for political reasons – to further “ever closer union”. And it was a top-down political design grafted onto European skin – a product of Small Europe thinking.
The eurozone’s fatal economic flaw was that it was never an optimum currency area, given its diverse national economies and fragmented fiscal policies. The global financial crisis exposed these flaws and the result is a triple crisis of sovereign debt, banks and the common currency.
The conventional wisdom now is that monetary union needs the foundation of fiscal union, common bailout funds, a banking union and even a common debt pool. Once again, Small Europe provides the conceptual frame. These measures entail planning “from above”; centralised policies are to be administered by beefed-up Brussels organisations invested with vast new discretionary powers. Will this recipe save the euro?
There are three reasons to doubt it. First, the common expectation is that the European Central Bank (ECB) and the European Stability Mechanism (ESM) will stand ready with sufficient firepower to bail out distressed governments and banks. But the ECB has already gone so far in this direction that it has destroyed the sound-money policy so painstakingly built up over four decades by Germany’s pre-euro Bundesbank. Moreover, it is highly unlikely that the German government will accede to the vast additional transfers that others clamour for. Hence “firepower” will never be enough to save the euro.
Second, the new fiscal compact will in practice never have automatic German-style rules. Inevitably, they will be bargained over and watered down to a low political common denominator, and broken by countries that are unable or unwilling to stick to the rules.
Third, fiscal union is disastrous political hubris. Like previous chapters of European integration, it is a product of elite negotiations behind closed doors that were conducted in the expectation that European public opinions would meekly follow. But this latest march of top-down integration is probably a bridge too far. It penetrates deep into national fabrics of taxation and expenditure. And because forced, supercharged integration goes against the grain of European reality, it now risks sparking a popular backlash across the eurozone.
That leads me to the conclusion the eurozone will break up sooner or later. Any break-up will be very messy and will reverberate around the world through financial markets, trade and foreign investment. Most worryingly, an anti-EU backlash in the member states would ratchet up internal protectionist pressures and threaten the future of the Single Market. That would spill over into EU protectionism against the outside world.
One of the dreadful errors of the EU elite is not to have a Plan B. Rather, their tunnel vision leads them to conflate the future of the euro with that of the Single Market and the EU itself. That is mad, and it risks becoming a self-fulfilling prophesy. A sensible Plan B would attempt to contain the fallout from a euro breakup. It would smooth the transition to post-euro currency arrangements, protect the real gains of the Single Market, proceed with long-delayed structural reforms, and keep the EU open to the outside world.
Plan B should have three main elements. First, the ECB and other central banks should get back to core monetary policy in the spirit of the old Bundesbank. And there should be a hard “no bailout” clause for future currency arrangements. That would force national governments either to put their fiscal houses in order or leave the common currency.
Second, there is huge unfinished business on structural reforms, especially in services and energy where there is no Single Market. The EU’s climate change and assorted environmental policies are the costliest in the world, and a source of backdoor protection, particularly against imports from developing countries. And the EU is also becoming less open to foreign workers at a time when its ageing societies need them more than ever.
Third, the EU should decentralise existing policy competences. There are already too many “harmonised” policies, notably on labour markets, education, regional development and assorted social policies. These should be dealt with at national and sub-national levels as that would be in line with the EU’s subsidiarity principle – so far honoured mostly in the breach. The EU should stick to its core business of upholding and extending the Single Market – no more, no less.
In sum, Plan B has Big Europe, not Small Europe, in mind. It would eschew further top-down integration with its centralised, one-size-fits-all bureaucratic nostrums that emerge from Byzantine political decisions taken far away from ordinary citizens that in any case distort and repress markets. Power in the EU should be limited, and should be decentralised to unfetter markets, give individuals more economic freedom and make politics and policies less cartellised and more competitive.
But will the EU’s elite change course? Or will they continue to drag the EU in its present profoundly illiberal direction in the name of saving a congenitally dysfunctional currency union? If they do not change course, the price of staying in the EU might become too high for some governments, for the time may well be coming for Britain and other countries to think seriously of other options. When they do, Switzerland should be their model.
Razeen Sally is Director of the European Centre for International Political Economy in Brussels and Visiting Associate Professor at the Lee Kuan Yew School of Public Policy at the National University of Singapore. email@example.com