JEAN MONNET SEMINAR “EU À LA CARTE?” Malmö, Sweden, 19 - 21 June 2016
Education and Culture
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European Commission
EU à la carte? Jean Monnet Seminar 2016
European Commission Directorate General for Education and Culture Jean Monnet Activities
Sunday 19 June 18:00–18:30
Arrival of participants and registration
18:30–19:00
Opening and welcome: • Andreas Schönström, Deputy-Mayor, City of Malmö • Claire Morel, Head of Unit, European Commission - DG EAC • Monica Frassoni, Co-Chair, European Green Party (videoconference)
19:00–20:00
Keynote speeches: • Frank Schimmelfennig, University of Zurich, ECSA Suisse President “Ever looser union? Differentiated integration in the European Union” • Pierre Defraigne, College of Europe Bruges “Strengthening the Euro goes through building up a common defence”
Q/A session
20:00–21:00 Dinner
Monday 20 June 08:30–09:00
Arrival of participants and registration
09:00–10:30
Introduction to the working groups
Speeches: • Pierre Defraigne, College of Europe Bruges “New ways to a Union of prosperity” • Simone Tagliapietra, Bruegel Institute “The quest for a common EU energy policy: the case of gas security of supply” • Jan Joël Andersson, European Union Institute for Security Studies “Western security new challenges”
Q/A session
10:30–11:00
Coffee break
11:00–13:00
Working groups
WG 1a
Fiscal and monetary Union • Pierre Defraigne, College of Europe Bruges • Mojmir Mrak, University of Ljubljana • Roberto Di Quirico, Università di Cagliari • Jean-Marc Trouille, University of Bradford • Moderator: Claire Morel, European Commission – DG EAC
WG 2a
Borders and defence • Jan Joël Andersson, European Union Institute for Security Studies • Francisco Aldecoa, Universidad Complutense de Madrid • Emil J. Kirchner, University of Essex • Tomasz Kamiński, University of Lodz • Moderator: Renato Girelli, European Commission – DG EAC
WG 3a
Energy Union • Simone Tagliapietra, Bruegel Institute • Tim Boersma, The Brookings Institution • Nuria G. Rabanal, Universidad de Leon • Amelia Hadfield, University of Canterbury • Moderator: Marten Westrup, European Commission – DG Energy
13:00–14:00 Lunch 14:00–18:00
Side programme (parallel visits related to WGs) 1) Visit to the Danmarks Nationalbank, Copenhagen – Introduction: Mr. Martin Nygaard Jørgensen 2) Visit to Royal Danish Defence College, Copenhagen – Introduction: (tbc) 3) Visit to Sustainable Malmö (Hyllie, Augustenborg, etc.) – Introduction: Mrs Lotta Hansson
20:00–21:30 Dinner
Tuesday 21 June 08:30–09:00
Arrival of participants
09:00–11:00
Working groups
WG 1b
Fiscal and monetary Union • Pierre Defraigne • Mojmir Mrak • Roberto Di Quirico • Jean-Marc Trouille • Moderator: Giada Danubio, European Commission – DG EAC
WG 2b
Borders and defence • Jan Joël Andersson • Francisco Aldecoa • Emil J. Kirchner • Tomasz Kamiński • Moderator: Renato Girelli, European Commission – DG EAC
WG 3b
Energy Union • Simone Tagliapietra • Tim Boersma • Nuria G. Rabanal • Amelia Hadfield • Moderator: Marten Westrup, European Commission – DG Energy
11:00–11:30
Coffee break
11:30–12:15
Working groups’ findings
Q/A session
12:15–12:45 Speech
Adam Tyson, Acting Director, European Commission - DG EAC
Q/A session Closing
12:45–14:00 Lunch
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INDEX EVER LOOSER UNION? DIFFERENTIATED INTEGRATION IN THE EUROPEAN UNION....................................................7 Frank Schimmelfennig STRENGTHENING THE EURO GOES THROUGH BUILDING UP A COMMON DEFENCE...................................................................................................................................................................16 Pierre Defraigne EUROPEAN ECONOMIC GOVERNANCE: CONCEPT, TRENDS AND CHALLENGES......17 Mojmir Mrak A EUROPE APART? THE EMU, THE NEW ECONOMIC GOVERNANCE AND THE FUTURE OF EUROPEAN INTEGRATION.....................................................................................................................21 Roberto Di Quirico EUROPE IN THE DANGER ZONE CONSOLIDATING THE EUROPEAN MONETARY UNION IN TIMES OF UNPRECEDENTED CHALLENGES..............................................................................................................27 Jean-Marc Trouille REFLECTIONS ON ACADEMIC DISCUSSIONS ABOUT THE EUROZONE CRISIS..........35 Paulo Vila Maior THE FISCAL POLICY OF THE EU COUNTRIES IN TIME OF CRISIS........................................41 Jarosław Kundera DIFFERENTIATED INTEGRATION FOR GROWTH..............................................................................55 Ton Notermans WHAT IS THE BEST INSTITUTIONAL FRAMEWORK FOR THE EUROZONE FOR IT TO FUNCTION IN AN EFFICIENT MANNER?..................................................................................64 George D. Demopoulos Nicholas A.Yannacopoulos EUROPEAN UNION ‘À LA CARTE’. IS DIFFERENTIATED INTEGRATION THE WAY FOR MORE EUROPE?..................................69 Danuta Kabat-Rudnicka
EU à la carte?
THE CHANGING FACE OF EUROPEAN SECURITY ARCHITECTURE.......................................74 Nicolae Păun PERMANENT STRUCTURED COOPERATION AS A FORM OF DIFFERENTIATED INTEGRATION.........................................................................................................................................................81 Francisco Aldecoa Luzárraga STRENGTH AND WEAKNESS OF CSDP: LESSONS FROM EU-CHINA SECURITY COOPERATION..............................................................86 Emil J. Kirchner UKRAINE AS A BRIDGE TO RUSSIA. WHAT CAN THE EU LEARN FROM THE PAST POLISH POLITICAL STRATEGIES FOR THE EASTERN NEIGHBOURHOOD?...............................................................................................90 Tomasz Kamiński Marcin Frenkel ENVISIONING EUROPEAN DEFENCE À LA CARTE.........................................................................98 Jan Joel Andersson AN ECONOMIC VIEW OF ENERGY CHALLENGES IN THE EU: FROM THE PAST TO THE FUTURE.........................................................................................................102 Nuria G. Rabanal EUROPEAN ENERGY SECURITY IN THE AGE OF BREXIT.........................................................111 Amelia Hadfield THE ROLE OF TURKEY IN THE EUROPEAN ENERGY SECURITY CAN TURKEY COME UP AS AN ENERGY HUB IN THE MIDDLE EAST?...........................116 Bahri Yilmaz RECONSIDERING INTEGRATION AFTER BREXIT...........................................................................122 Antonio C. Pereira Menaut Celso Cancela Outeda À LA CARTE EUROPE? NEITHER NEW UNDER THE SUN, NOR DEFINITIVE...................................................................128 Eduardo Perera Gómez A' LA CARTE OR MENU DU CHEF? WHICH WAY FOR THE EUROPEAN UNION?.....................................................................................134 Adam Tyson
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EVER LOOSER UNION? DIFFERENTIATED INTEGRATION IN THE EUROPEAN UNION Frank Schimmelfennig Centre for Comparative and International Studies Swiss Federal Institute of Technology in Zurich
Abstract Differentiated integration is on the rise in the EU. Whereas the first predecessor of the EU, the European Coal and Steel Community, only knew members and non-members, the current EU distinguishes a dozen grades of membership. Differentiated integration proceeds in waves but at the end of each wave differentiated integration retains a higher level. This rise in differentiated integration is limited to treaty-based differentiation, however. In secondary legislation, differentiation has always been a feature of European integration and has actually decreased over time. Differentiated integration has benefited both integration and democracy. Differentiation has facilitated integration by allowing reluctant Member States to stick with the status quo, while integration-friendly Member States were not blocked from moving forward. It is a legitimate instrument in a union of states peoples, a demoi-cracy, in which the Member States and societies cannot be legitimately forced to integrate by others and retain their pouvoir constituant. To preserve its legitimacy, however, it needs to avoid closure and discrimination, on the one hand, and cherrypicking, on the other.
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Ladies and gentlemen, Dear colleagues, Thank you very much for the opportunity to speak to your here tonight. The question for your seminar is whether differentiated integration is the way forward to more Europe. What I set myself as a task is to provide you with some data and findings based on a large research project on differentiated integration that I have conducted together with a number of colleagues over the past years. I will not deal too much with the technicalities and the methodologies but I am happy to answer any questions that you may have in the Q&A session. One useful way to start discussing differentiated integration is to look at maps, and this would be the normal map that you will find of the European Union which basically makes one distinction between Member States and non-Member States.
In that view, European integration is ‘black and white’ or, rather, ‘blue and white’; you are either a member or you are a non-member. This is our usual representation of what the European Union looks like, using the European flag here to cover the white spot in the middle (Switzerland) where I work. Actually, what I want to show and argue is that Europe is a lot more colourful, so it is not just about Member or non-Member States, but there are various grades and shades of membership.
EU à la carte?
Each colour here represents a different membership arrangement, be those countries formal members of the European Union or non-members, as you can see we are here actually in differentiated territory which is what anyone who might have tried to pay a coffee in euro on the way to Malmoe might have realised. So, there is still a blue map here that you can see, and this is what one can call the ‘core’ of the European Union. But beyond that, there are very different arrangements of European integration. I want to follow and go through 4 questions: First, say a little bit about how we understand differentiated integration, than look at data how it has developed over time, try to answer the question why it has developed (what are the drivers, what are the conditions) after differentiated integration, which I think is important to understand also for looking into the future and, finally, what should we think of this (is it a good thing or bad thing, or under which conditions is it a good or bad thing). What is differentiated integration? We define differentiated integration as the differential validity of EU legal rules in European countries. That is a very formal definition, so we look at differentiated integration at the level of legal acts and we do not really care about implementation. Of course, we know that even if you have a uniform legal rule it is often differentially implemented in the Member States. But noncompliance is nothing that we look at, we basically stick to the text of legal acts, of EU legislation, and look which countries get a formal exemption. There are different forms of differentiated integration, which I will not go into too much: there is internal differentiation among the Member states; there is external differentiation, non-Member States participating in policies of the European Union. Some of the differentiations are exemptions – the famous opt-out – giving Member States the possibility to opt-out from obligations of membership but there is also (that applies mainly to new Member States) quite a bit of discrimination, meaning you do not give a Member State the full benefits of membership for some time at least. One distinction that we make in our analysis is between treaty-based differentiation and legislative differentiation. So we find differentiated rules at the level of EU treaties but also in secondary legislation. How has differentiated integration developed over time? There are various ways to look at this and I will show you a few.
The graph here above shows new grades of membership that the EU has invented over time. At the beginning, the European Coal and Steel Community had been only based on two grades of membership -member or not member. Already with the EEC Treaty, the Treaties of Rome, there was the invention of a new grade of membership: association. Over time, the EU has responded to challenges of some Member States not wanting to move ahead with the rest or some non-Member States wanting to participate to some extent in European integration with new forms of graded membership.
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As you can see here there were at first new arrangements for non-Member-States to participate to some extent in European Union policies and from the mid-1980’s onwards also new grades of membership for countries who did not want to participate in the more advanced new projects of European integration like Monetary Union or Schengen. What is also interesting here (dotted lines in the slide) is that these new grades of membership have not been invented for transitory periods but, actually, they have remained pretty much in use over the entire period. So according to our classification, the EU has 13 grades of membership arrangements with members and nonmembers; even today, 11 of those are still in use. So it is not just a period of transition but is actually a gradation that has become institutionalised. We also find that since the late 1990’s EU has actually not invented any new form of graded membership, so the system has become rather stable according to this classification. Another way of looking at it is to look at articles in the EU Treaties: and what we can see is that in the early ‘community period’ the European community had been rather uniform. 40 35 30 25 20 15 10 5 2015
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Anteil differenzierte Vertragsartikel
At the level of Treaties there hasn’t been much differentiation. Some small bumps in the line are related to Northern enlargement and Southern enlargement but treaty-based differentiated integration is really a thing of the European Union, starting in the early 1990’s and growing to these days (based on 2015 data) to the point where more than one third of the European Treaties are actually differentiated. So, one article in three is not valid in, at least, one of the EU Member States. To some extent, this is a bit of an over-interpretation because we have to take into account that during the same time, the number of Member States has increased tremendously, so there have been more opportunities for countries to seek opt-outs. The next graph takes this into account. (It basically looks at how many Member States have used this opportunity to have an opt-out or have been imposed an opt-out by the rest of the Member States).
EU à la carte?
This shows that the picture is a bit more nuanced, because what we see here is a wave-like development of differentiated integration. The ups and downs are mainly related on the one hand to the introduction of new policies that initially some of the Member States do not participate in (i.e. Schengen, Eurozone) but joined later. But the main driver of these waves is the enlargement of the European Union: it is clearly the main driver, but not a permanent driver. After some years, differentiated integration goes down again; new Member States become more uniform Members. After each of these waves, the bottom level of remaining integration increases, so we still have an increase in permanent constant differentiated integration over time. I think all of us have a rather good idea of Treaty-based differentiation: we were really curious about what we would find analysing differentiated integration at the level of legislation. I must say here we were extremely surprised because our initial hypothesis was that Treaty-based differentiation was just the tip of the iceberg and once we looked at legislation we would find more and growing differentiation that exists under the radar of scholarly or public attention. We were really surprised this was actually not the case.
Here, we see rather different movements: when the funding Members started integrating their customs and markets in the early European Economic Community, that was the time when legislative differentiation was at its highest. Enlargements created peaks: one is related to Northern enlargement, the largest peak is actually related to German unification, which created the need to differentiate a lot of legislation for some time, so that the new Länder could adapt. But overall, we see that the level of legislative differentiation has gone down and is rather limited: around 10% of EU legislation in force has, at least, one exemption for, at least, one Member State. This is not huge, it is not nothing but it is not a big threat to the legal unity of the European Union. Differentiated integration is really much more a feature of the EU constitution (the set of Treaties) rather than its everyday legislation. There is new differentiation when the EU legislates but it phases out, it is temporary and it is not where the greatest problems are. Let me now move to the next question: why do we find differentiated integration? Here again we are back to the EU Treaties; this graph shows what share of the overall European policies (which are aggregated according to the most common classification of policies, like Agriculture, Internal Market, Defence....) are differentiated.
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0.7 0.6 0.5 0.4 0.3 0.2 0.1
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horizontale Differenzierung
The solid line is a measure of European integration that combines competences of the EU, delegation to the supra-national Institutions, but also Enlargement. It shows a familiar picture of how the European integration has formally developed (rather flat at the beginning, then we have the ‘relance européenne’ in the late 1980’s and now it is stagnating again). What I want to show with this graph is that differentiated integration has accompanied the widening and deepening of the European Union. The more European integration has deepened, the more it has widened, the more it also has become differentiated. Differentiated integration has really been triggered by the major push towards integration that we have seen at the beginning of the European Union phase. So, differentiated integration is not the opposite of deepening and widening, but is actually an instrument that has developed during deepening and widening and the more the European integration has deepened and the more has expanded to new policies, the more differentiation has been used and that is something to keep in mind. Now the basic explanation for this is that differentiated integration is a really useful instrument, so to say, to deal with the increasing heterogeneity and contestation in the European Union. What happened is that the EU had expanded into new policies, mainly into core States’ power, like the monetary, domestic security that are more contested than just creating a customs union or the internal market. The Union has acquired more competencies; more power has been shifted from the Nation states to the European level, European commission, European Central bank, European Parliament; and this also created more contestation as there are countries that are very concerned about giving up too much sovereignty. And there have been more Member States. In the beginning the European community was limited to the most integration friendly countries and the more the Union expanded the more different views of where the union should go appeared. In its move towards more integration the EU somehow has to deal with this increased heterogeneity and contestation, and here the differentiated integration enters as an instrument because it facilitates integration if preferences and capacities are more varied as it allows some countries to move forward and not be blocked by those that would rather not integrate further and it also allows the European Union to exclude, at least for some time, countries of which the majority thinks they do not have the capacity to join integration at a higher level. I think about the convergence criteria for the Eurozone or to other requirements that countries have to fulfil to become full members of the Schengen area. In addition, we find that there are two diverse contexts of differentiation that follow different logics. Not all differentiated integration is the same or follows the same paths but there are different drivers. One has to do with deepening, treaty revision, expanding the power and policies of the union level. This creates resistance from Eurosceptic governments and citizens. Moving more policies and power to the European level creates concern about sovereignty and identity so one driver is optouts when the European Union moves to more integration in the area of core State power like security, fiscal policy, monetary policy, and typically it is the more nationalist societies that seek opt-outs, those countries where a large share of citizens and policy makers feel strongly about
EU à la carte?
national sovereignty and national identity. Often, these are countries having strong pride in their national institutions and think that the national institutions work a lot better than the European’s ones. What this creates is durable differentiation. This kind of differentiation is usually permanent. And this creates what has been called a distinction between core Europe and the rest, the periphery of the countries which will not move to full integration in the end. When we look at the context of the enlargement, widening, the differentiated integration works very much differently, it follows a different logic. Here the resistance is against the cost of enlargement. Old member States fear the competition on the labour market, too much migration, or that they have to pay too much money for the agriculture of the new Member States, so they temporarily restrict the access of new Member States to the market, to the subsidies, to funds. But it is also the case of some new Member States wishing to have more time to adapt to regulations. Here we find differentiated integration not in the area of core State powers but mainly related to the internal market and here we find that it is not the more nationalist Member States that seek differentiation but most of the differentiation applies to poorer Member States. The poorer Member States are in relation to the old member states, the more they will seek differentiation. The richer the Member States are the more they are concerned with the transfer to the others and the more the poorer seek opt out from curtains regulations. Typically this kind of differentiation is temporary. It lasts up to ten years and then it goes away. This is clearly the idea of multispeed Europe, where countries start their integration at different levels but after a certain time they return to uniformity which is of course the least damaging form of differentiated integration for a Union of States. We can also look at what the share of European Member States is in differentiation and we clearly see different groups: the original Member States which by definition have no differentiation resulting from accession during the different enlargements but which have also little differentiation deriving from the revision of the Treaties. These are the most integration friendly Member States but also those that basically set the agenda of integration and for that reason have no reason to say no to new European projects. Then, here you see differentiated integration deriving from enlargements and it is quite clear that richer new Member States like Austria, Finland have a small share of differentiation than the poorer new Member States in the south and the east. And there is another cluster, that is quite obvious and we all know it. Half of all differentiation resulting from Treaty revisions is due to two countries, the UK and Denmark, and here you can find a sort of a northern cluster, these countries are rich, they do not seek or are imposed differentiation based on their accession but mainly because they resist to too much integration for reasons of sovereignty. It is also interesting to look at how the differentiation in secondary legislation has developed.
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What we find follows the same logic, whether you look at Treaties or at secondary legislation across policy areas does not make that much difference. As in Treaty based differentiation it goes down for the internal market, goes down for agriculture, it’s a bit up and down for the regulatory policies of the EU. Where we see most differentiation also in secondary legislation is actually the supranationally integrated core State powers. So you do not see much in defence, because it is not supranational anyway so there is no reason for opting out if you have consensus decision making. But in the former third pillar which has moved to supranational integration as well as a monetary policy we see that Treaty based differentiation actually engenders secondary law differentiation as well. The final point will be, what should we think of differentiated integration and the basic point I want to make - based on past experience, it does not necessarily mean that it will always be like that in the future - but so far actually differentiated integration has been a good thing for European integration, and if you value European integration and if you want the EU to move ahead in unifying the continent and in supranationalising policies, differentiated integration is a great instrument to make this happen, because normally you need unanimity, you need intergovernmental consensus which is more and more difficult to get if you have a more heterogeneous membership, and if you talk about contested policies. So far Treaty based differentiation has only come about in the context of more integration in the EU, it has been an instrument to facilitate enlargement and to facilitate Treaty revisions and moving more power to the European Union. It has allowed those countries that wanted to move ahead to do so without been blocked by those that for good or worse reasons did not want to move along. So without differentiated integration I would argue the EU would be less integrated than it actually is. And I think it is also good for democracy; if we think of the European Union not as a single European demos or federal state but as a union of states and state peoples which retain sovereignty and should be asked every time that the basic rules of the European Union are changed, differentiated integration gives them the opportunity to act according to the preferred level of integration of these states and their peoples. Basically differentiated integration is an instrument that works in line with the European Union as a demoi-cracy rather than a single-demos democracy, but there are of course many issues, and I will not go in detail here. One is that in order to be democratically legitimate differentiated integration always has to be open to countries that want to join, permanent discrimination - keeping countries out that would like to join – is not in line with the idea and the principles. On the other hand, and this was mentioned before, differentiated integration should not become a venue towards cherry picking and free riding. There have to be instruments that make sure that those countries who do not participate in the integration of a policy also have to be excluded form benefiting of this policy. Otherwise differentiated integration would be a sure recipe for the disintegration of the European Union. So far we have not really seen that. Differentiated integration has not been a slippery slope, which is what typically lawyers fear and the Commission fears but the evidence for that is a really weak so far, because most differentiation has been temporary, has actually been multispeed and we only see a core Europe emerging in the area of core State powers. But we also see for instance as a result of the euro crisis that we have an increasing institutional gap and this seems to become a rather permanent and deepening divide among the Member States of the European Union; we also see that this divide can expand to other policy areas which so far have been uniform. This has been the case in financial market policy, which used to be uniform and has now been accompanied by the differentiated banking union. Summarizing the argument presented here today, the first one is that differentiated integration should be seen as a normal and permanent feature of European integration, of the integration of a union of states rather than a federal state of EU. There is ample evidence that ever closer Union goes together well with an ever looser Union and to some extent an ever looser Union is a prerequisite of an ever closer Union. In principle differentiated integration is about democracy and progress in integration. It should not be seen as the opposite of integration. It is an instrument which facilitates integration in a diverse and heterogeneous Union of European states.
FISCAL AND MONETARY UNION
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STRENGTHENING THE EURO GOES THROUGH BUILDING UP A COMMON DEFENCE Pierre Defraigne Madariaga Foundation College of Europe
Abstract The European Union should be prepared to face new challenges, think big and be audacious. Brexit is a huge threat for the Union because it implies the possibility of an unravelling. Even more dangerous for the Union is the grip of neo-liberalism thinking on Europe because it provides a rationale for severe fault-lines and institutional dysfunctions. They constitute the main causes for the current ‘existential crisis‘ of the EU: firstly tax competition deprives some large States of key resources whilst advantaging free riding States and it represents a major source of competition, distortions between large firms and SMBs, and between foreign and domestic firms. Tax competition undermines the welfare state and thereby aggravates income inequalities in Europe. Secondly the restrictive policies imposed to over-indebted Member States of the Eurozone, through fiscal austerity and wages devaluation, exert a deflationary bias in the Eurozone. Moreover double-digit unemployment and rising inequalities aggravate the contraction of aggregate demand. Last but not least, EU trade policy, which is not accompanied by an industrial policy aimed at redressing EU’s serious technological gap, or by a strong redistribution mechanism of the gains and losses attached to liberalisation, contributes indirectly to increase inequalities between and within countries. If compared with the American, Chinese and Japanese systems, which have been able to produce effective and powerful industrial policies, Europe has remained prisoner of its dogmatic view of the functioning of markets. Re-centering the European construction on a common social model and on a high degree of strategic autonomy would allow to overcome the EU present deadlock focused too much only on the single market which, incidentally, has not yet been completed in critical high-tech sectors. Adopting a common defence policy - within NATO - with the view of achieving political parity with the US through speaking to them with one voice, would both enhance the strategic capacity of Europe, and secure a precious base for an industrial strategy geared up to high technology. The additional resources obtained for the EU through corporate tax harmonisation or even centralization, could easily cover the costs and pay for a European defence. Such leapfrog would pull Europe out of its present dangerous and lethal inertia.
EU à la carte?
EUROPEAN ECONOMIC GOVERNANCE: CONCEPT, TRENDS AND CHALLENGES Mojmir Mrak Jean Monnet Chair University of Ljubljana
[email protected]
Abstract Dear colleagues and friends, This seminar is taking place at a historical moment for the process of European integration. In three days, we will have for the first time a referendum in one of the EU Member States with a very simple question – should the country remain in the EU or it should leave it. Whatever the outcome will be, this referendum will have very long-term consequences. In more than half a century long history, the process of European integration has gone through substantial changes. They have been characterized, on the one hand, by unprecedented deepening from the customs union to the monetary union, and on the other hand, by extensive widening from a handful of countries to the Union of 28 Member States. Both processes have been accompanied by significant economic governance challenges both at the level of the EU as whole as well as at the level of its euro area members. My contribution to the seminar is divided in three main parts. The first one deals with the concept of European economic governance and its evolution prior to the crisis. In the second part, changes in the European economic governance driven by the recent crisis are presented and assessed. And finally the third part that focuses on the economic governance challenges to be addressed and options for the future.
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1. Concept of European economic governance and its evolution prior to the crisis The term economic governance describes the overall philosophy and architecture of economic policy making as well as of the institutions and processes that guide the evolution of the economy. The manner in which European economic governance is run is unique for several reasons. One is the already mentioned evolution of the European integration process from a trade focused customs union into a monetary union as the most demanding form of a regional economic integration. Another reason for specific character of the European economic governance has been a growing sense that improved economic governance is essential for the EU to perform better. And finally, several rounds of enlargements, especially the enlargement with eastern countries, have increased heterogeneity within the EU and this has been associated with the need for more uniform rules and procedures. Before the mid-1980s, the EU policy debate was focused on policies rather than on processes. At that time, the main subject of the discussion was which additional economic policy powers Member States should assign to the Community level so that the process of European integration would continue to be efficient and sustainable. This method of economic governance called delegation applied not only to all those economic policies where the Community had exclusive competences, such as trade policy, competition policy and common agricultural policy, but also to some segments of those policies where competences were shared between the Community and member state levels, such as cohesion policy or state aide. Deepening and widening of the European Union in the period between mid-1980s and early 2000s was associated with a need for more legislation. The delegation method as the key method of economic governance in early decades of the EU was increasingly complemented with strong body of economic policies where responsibility stays with the Member States, but they subscribed for EU surveillance or policy coordination. Building up of this highly complex European economic governance system was not immune to various weaknesses and deficiencies. Let me mention here, for example, rather disappointing European governance of structural reforms under the Lisbon strategy based on the “open method of coordination”. Another area of governance weaknesses that has become very obvious in recent years is the area of macro-economic policies, especially for the countries that joined the monetary union.
2. Changes in the European economic governance driven by the crisis: trends and their assessment While recognising the fact that EU is not the most suitable candidate for a monetary union from at least two aspects – free movement of labour and fiscal arm of the union – the architects of the European Monetary Union (EMU) still designed to embark on the common currency project and articulated it within the 1992 Maastricht Treaty. Looking from today’s perspective, there were at least two major systemic design failures integrated into the original euro area economic governance structure. The first one was the failure to introduce an appropriate fiscal arm of the newly designed monetary union. As there was no political appetite of EU Member States to establish a full-fledged fiscal arm of the newly created monetary union at the time when the Maastricht Treaty was negotiated, a “second best solution” known as the Stability and Growth Pact (SGP) was put in place in 1997. The SGP was, in fact, the main crisis prevention instrument of the euro area in the pre-crisis period. Unfortunately, it had deficiencies, both in terms of its substance as well as of its management. On the substance side, the SGP was based under ambitious assumption that all euro area Member States would “keep their houses in fiscal order”, i.e., that all of them would stick to the Maastricht fiscal rules. Further on, it was designed very narrowly, with a strong focus on the fiscal performance. And even here, it was strongly focused on public finance deficit and treated public debt only on the margins. The original SGP was also managed in a sub-optimal way. This was clearly confirmed by the 2003 Ecofin decisions blocking the launch of the excessive deficit procedure against the two largest euro area members.
EU à la carte?
The second design failure of the original euro area’s institutional structure was a consequence of the first one. The architects of the euro area had namely been of an opinion that under an assumption of good SGP functioning, there would be no need for establishing such a mechanism. And this approach was actually articulated into the Maastricht Treaty in the form of so-called “no bail out” clause meaning that a country entering into a crisis would not be helped by the other euro area members. The developments in recent years have confirmed that this proposition has proved to be non-realistic. The main conclusion on the design failures of the original euro area economic governance is that the monetary union entered into the recent crisis with poorly functioning crisis prevention mechanism and with no crisis management and resolution mechanism. The overall strategy for a systemic reform of the economic governance in the euro area triggered by the crisis was conceptually aimed primarily at putting in place an appropriate fiscal arm of the monetary union that will be robust enough to sustain the pressures experienced during the crisis. In more specific terms, this governance reforms has been, on the one hand, oriented towards “repairing” or towards substantial strengthening of the SGP as the euro area’s key crisis prevention mechanism, and on the other hand, towards putting in place an entirely new crisis management and resolution mechanism as it was missing entirely in the original institutional infrastructure of the euro area. With respect to the substance of the crisis prevention mechanism, the reform of the SGP was focused towards broadening and widening the economic policy framework. In contrast to the precrisis period when the framework was narrowly focused on public finances, over the recent years the area of surveillance has broadened to overall macroeconomic coordination among the Member States. With the legislative packages, such as the “six pack”, the “two pack” and the Fiscal Compact, the public finance dimensions were complemented with more general macroeconomic surveillance issuers. In addition, the European semester was introduced as an instrument for coordination of the Member States’ economic and fiscal policies. Certain improvements have been introduced also in the management of these legal acts, such as the introduction of the “reverse qualified majority” into the decision making. As far as crisis management and resolution mechanism is concerned, when faced with the Greek crisis and its contagion to other countries, euro area members had no other alternative but to create an entirely new mechanism. At the beginning, European Financial Stability Facility was put in place as an ad-hoc temporary arrangement while a permanent mechanism called European Stability Mechanism started with its formal operations in October 2012. To summarise, during the crisis, the pre-crisis European economic governance model that was rather simple and straightforward has come to an end. It has namely become obvious that a sustainable monetary union, due to high level of economic dependency among the members, requires stricter rules of their implementation than in case of the EU members. There is no doubt that the “six pack”, the “two-pack”, the Fiscal Compact and the European Stability Mechanism do contain the most far-reaching legal reforms of the fiscal governance framework since the introduction of the single currency. Introduction of these legal acts has, however, contributed to a drastic transformation of the EU / euro area economic governance from a rather simple one into a very complex one. And this transformation has been associated with intensification of some old challenges for European economic governance as well as with some entirely new challenges.
3. Challenges to be addressed and options for the future Though the Community method – it is a synonym for rules-based governance with ‘supranational’ actors having the leading if not decisive role – has retained its important role in the EU / euro area economic governance, through the “six pack” and the “two pack”, this method is now complemented with various forms of the intergovernmental method. The European Stability Mechanism (ESM), for example, was established at the euro area level while the Fiscal Compact was institutionalized on the ad-hoc intergovernmental basis and incorporates 26 EU Member States. This highly complex legal response to the Europe’s financial crises combining Community and intergovernmental
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approaches has made the decision making system and processes much more complicated, difficult and also non-transparent. What are the main shortcomings of the reformed European economic governance? One that has been mentioned already is extremely complex structure of the governance. This has, indeed, negative implications both on ownership by policy makers in Member States and on effectiveness. Very often, Brussels is seen in Member States as a kind of an “external conditionality pressure” rather than an “internal support” to their national policy making. Second, the overall philosophy of the euro area’s fiscal leg has not changed substantially during the crisis. The prevailing philosophy still is that each country will “keep its house in fiscal order”. There is still no appetite for a move towards closer fiscal union that would be characterised with a budget, with common institutions, such as ministry of finance, and with common debt instruments. This clearly indicates that there is also still no appetite for rethinking the relationship between solidarity and conditionality. Third, as there has been s strong political view that it is not an appropriate time for changing the treaty, all the reforms have been introduced in a way that they did not require treaty changes. An important consequence of this approach is that procedures have been strengthened substantially. On the other hand, the role of the European institutions, especially the European Commission, has been weakened by the de-facto growing importance of the intragovernmental decision bodies, such as Eurogroup and ESM. Fourth, broadening framework of the original SGP, it now incorporates public debt elements and macroeconomic issues in general, into the »six pack« is a welcome development. However, the experiences show that the new governance remains strongly fiscally focused as monitoring of nonfiscal variables provided in annual country specific recommendations is non-binding and essentially ineffective. The effectiveness is weakened further also by de-facto asymmetric character of broad economic policy guidelines where surpluses are considered less problematic than deficits. And finally, there has been increasing recognition of the fact that methodologies that have been applied by the European Commission for calculation of the fiscal efforts to be made by individual countries are at least questionable and have been already challenged on professional grounds. These and other shortcomings of the reformed European economic governance are a reflection of a fundamental contradiction between the single supranational currency and the continuation of nation-state based economic policies. The crisis management of the euro area crisis has succeeded in preventing the system from collapsing, but it failed to stabilise it on a long-term basis. There is a consensus today that reform of the European economic governance is “a work in progress” that needs to be continued. There is, however, no consensus among the member states which way to go. What is needed is a shared vision of the direction in which euro area should evolve including the institutions that are required, and at what dynamics these reforms should be introduced. Under an assumption that euro will sustain as a common currency, there are schematically three main options for the European economic governance to proceed, each of them characterized with its arrangements regarding fiscal discipline, solidarity, governance and legitimacy, and each of them characterized with its specific economic policy considerations. One of them is a full fiscal and policy union option on the lines advocated in the five president report 8an its predecessor) and as analysed in various academic papers. Its components would, among others, include euro area budget with a function of providing temporary transfers to countries that are subject of asymmetric shocks, and with federal institutions, including the ministry of finance having also the treasury function. On the opposite side is a decentralised option which is rather close to the option we implement now. This option is characterized with a “no bail out” clause which we do follow in legal but not in economic terms, and with very limited solidarity among the Member States. Between these two extreme options, there is a set of possible intermediate options, each of them with characteristics designed from a combination of the two “clean” options.
EU à la carte?
A EUROPE APART? THE EMU, THE NEW ECONOMIC GOVERNANCE AND THE FUTURE OF EUROPEAN INTEGRATION Roberto Di Quirico University of Cagliari
[email protected]
Abstract This paper deals with the relationship between monetary integration and the rest of European integration. There are three questions to answer. The first is, “Did European integration cause monetary integration?” The second is, “Did European integration shape monetary integration, or it was monetary integration that shaped European integration, at least since Maastricht?” The third question is, “How did the crisis of the Economic and Monetary Union (EMU) impact European integration on the whole?” The key thesis of this paper is that monetary integration has its own logic, origins, and dynamics. All of them are different from those at work for other sectors under integration. Monetary, economic, and political integration are connected and influenced by each other. Nevertheless, they remain three separate pillars of a historical process that would be better to call “European integrations.” The convergence of these integrations allowed completing monetary integration, which, at that point, oriented the whole integration process.
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1. Dismissing the political prevalence approach The thesis I propose implies that to understand the whole integration process, it is crucial to analyze the relationship between integrations, in particular monetary, economic, and political integration. This is not an original starting point (1), except the central assumption adopted; this means dismissing the political prevalence approach that dominated the theories of European integration for years. This approach suggests that political integration is the core of the whole process of European integration and that integration in other sectors had been induced and depended on political integration. We can resume this idea using the famous saying of De Gaulle: L’intendance suivra. Instead, I suggest that “l’intendance” was miles ahead in politics even in De Gaulle’s time. In my view, many causes contributed to generating this misunderstanding. Probably, the most important one is dialectic. The word “integration” was only insistently used after the creation of the European Coal and Steel Community, legitimising this innovation politically, creating an idealistic framework in which sovereignty surrender and its costs could be justified with superior ideals. So, apparently, integration started when politicians began to speak about it in public. This means it was thirty years after the early attempts to solve the European monetary problem. One of the main innovations introduced by the founding fathers of Europe was a rhetorical framework capable of including almost every kind of cooperation among European countries. This frame was revealed as a powerful tool to legitimise further cooperation outflanking nationalisms with a superior ideal as the European one. Technical matters remained in the shadows. However, they determined the path of integration. Another reason that explains the success of the political predominance approach is the scientific background of many scholars who studied European integration since the 1950s. They were mainly political scientists concentrated on institutional aspects or international relations. So, their focus was prevalently political, and their skills and interests for “technical” matters as currency affairs were weak or non-existent. Later on, the historians arrived, but they were mainly diplomacy and international relations historians who devoted their attention to European integration. This characteristic strengthened the political predominance approach because these historians traditionally neglect systemic approaches and prefer concentrating on leaders’ relationships and diplomacy. In the meantime, many other scholars worked on monetary relationships and currency problems as well as on international trade without referring to European integration as a suitable solution. In fact, the reconstruction and consolidation of an International monetary system remained their primary concern and analytical perspective. It was only in the late 1970s and early 1980s that European integration became a useful model also for economists, economic historians, and scholars of other disciplines that usually concentrate on international matters. In fact, during that period, European integration became a politically attractive solution also for problems like currency instability and the obsolescence of European industrial production. So, European institutions became the ideal box where many integrative processes could converge. The attempt to create a European monetary system that failed in the early 1970s was re-launched, and the communitarian box became the working environment to pursue new aims of filling the competitive and technological gap between Europe and its competitors (mainly USA and Japan then). Then, political integration became instrumental to economic and monetary integration, even if the political discourse and the focus of many scholars remained on European political integration and unification. During the 1980s, the so-called gold decade of modern European integration, member states succeeded in the same tasks they failed during the previous 20 years. The European Monetary System became a working reality; new communitarian policies faced common problems, such as research, market fragmentation, and environment pollution. More generally, European integration became a one-fit-all solution for member states at least until the mid-2000s, when the political costs of sovereignty surrender became evident. However, since the early 1990s, the traditional “idealistic” view of academics, politicians, and citizens was challenged by the perception of the economic matters’ predominance resulting from the convergence into the single communitarian container of many separate problems. Critics against “bankers’ Europe,” “neoliberal Europe,” and “undemocratic Europe” arrived by both academics and politicians. In the meantime, constraints on national policies (1) The concept of interaction between sectors appeared since the start of European integration, in particular in the neofunctionalist literature. Later, interaction has been connected with side payments in the intergovernmental approach. Also, monetary integration has been explained as the price Germany paid for reunification and European political integration.
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and politics, risks for welfare and patronage, and the vanishing of the idealistic view of Europe proposed since the 1950s revealed the real nature of the “converging integrations of Europe.” Over the last 25 years, historians and political scientists have dismantled the idealistic view of European integration as a pleasant walk of peers animated by superior ideals and universal values. A fiercely competitive environment has emerged in which member states fight to impose their national priorities on the others, encapsulating their goals in the communitarian framework. So the communitarian arena appears as a real arena in which governments fight for their interests and prosperity, trying to keep themselves free from those external constraints that endanger their ability to manage domestic politics and policies. Their main aim is to safeguard the power at home; it means the network of clientele relations and arrangements between elites and sectors of the society that grants consensus and keeps governments in charge. Paradoxically, with monetary integration, the EMU member states accepted strict communitarian constraints to avoid the international constraints they could not manage or influence. The case of France is more evident (Helleiner 1994, 140-145; Howarth 2000). However, their choice was based on the estimated balance between international and European constraints to domestic politics that changed dramatically with the global crisis of the late 2000s and the introduction of a more strict set of rules we call New European Economic Governance (NEEG). So, monetary Europe and its troubles reorganized the EU governance, creating a pervasive supranational power that challenged most of the remaining prerogatives of national governments in domestic politics.
2. The multiple crises of Europe Today, the word “crisis” is widely used in the debate on European integration. In the newspapers and academic literature, there are many references to the economic crisis, sovereign debt crisis, euro crisis, and many other crises that touch European democracy and the welfare state, EU political institutions, and, more generally, the support for European integration and the fundamental values of uniting Europe itself. All of them are core topics in the political and academic debate about European integration as parts of a general crisis of Europe. The general crisis that has affected European integration since the late 2000s may appear as a result of the prevalence of monetary Europe on the other “Europes.” In fact, the EMU was the most ambitious and challenging step in European integration and its crisis became the crisis of the whole European construction. There are many reasons to consider the relationship between different “integrations,” a pivotal question in every debate about European integration. Today, the most prominent of these reasons deals with the impact of monetary integration on member states’ economy and politics. Completing monetary Europe made EMU the core of European integration and attracted to its orbit all the other issues that now must be coherent with how the EMU works. So the EMU problems became the biggest challenges for EU and influenced both national European policy and citizens’ attitudes toward EU institutions and further integration. There were three kinds of problems: economic, political and identity problems. On the economic side, the problems that affected the Euro area just before the crisis were not those suggested by the opponents of the EMU in the 1990s. The main problem was the flow of cheap money from northern Europe to southern member states and Ireland (the so-called P.I.I.G.S., meaning Portugal, Ireland, Italy, Greece and Spain) where interest rates were slightly higher. This flow created the conditions for something similar to a balance of payments crisis that put the entire EMU in danger. The cheap money inflow in P.I.I.G.S. resulted in wage increases that exceeded productivity growth. Also, speculation and governmental debts augmented it. Cheap money boosted inflation rates, and the competitiveness of southern economies declined. In the meantime, private debt rose, mainly in those countries where the real estate bubble pushed speculation and the government poorly respected the Stability and Growth Pact (SGP) prescriptions or did not respect them at all. So, when the international crisis rose, distortions in the euro area made the crisis deeper and harder to face than the American one. The picture I draw above makes the reform of economic governance in the EMU the key policy for saving and relaunching the EMU and integration in Europe. Unfortunately, damages caused by the governance shortage in the 2000s made it more difficult to reform the EMU. When the sovereign debt crisis became dramatic with Greece close to the collapse, member states took note of the impossibility for EU institutions to face the crisis and decided to outflank
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the EU stalemate by intergovernmental action. This strategy allowed the introduction of new rules both as intergovernmental agreements or Communitarian rules as well as new instruments to manage the euro area. These innovations were not enough for facing such a severe crisis. It was only the fierce action of the European Central Bank (ECB) that allowed them to stop the sovereign debt crises and to prevent the imminent collapse of the southern EMU. However, the solution adopted by the ECB to end the crisis made it a political actor with powers and tools it was not entitled to exercise. In fact, the ECB drew its power and built its weapons on a debatable juridical interpretation of the treaties and their mandates as well as on the blackmail power stemming from the broad discretion it enjoys as an emergency lender. So, the ECB gained the enormous power to manage “informal economic governance” in the EMU. This was not the end of the Euro crisis, just a turning point. After, the problem became how to manage the EMU and who had to do it. The run to find temporary and acceptable solutions to the sovereign debt crisis redesigned the roles of three kinds of actors: the traditional EU institutions (Commission and Parliament), the member states, and the Euro system (the ECB plus national central banks). While the main EU institutions seemingly gained power thanks to the New EU economic governance, member states (in particular Germany and France) and intergovernmental forums appeared as the key players in defining the future of the EMU and the common currency. However, the only player that proves to be as powerful and efficient as needed by the crisis was the ECB. On the political side, the external constraints imposed by the adoption of the euro and the introduction of the new economic governance fed anti-Europeanism and the opposition to further integration and surrender of sovereignty. So the euro became the preferred target for anti-EU parties and the fulcrum of the new anti-Europeanism. Unlike traditional anti-Europeanism based on the rejection of European values and surrender of sovereignty, new anti-Europeanism draws a solid background for its arguments from the problems charged to monetary integration. On the other hand, the euro crisis restarted the debate about the sustainability of a single currency without a single state; it showed the need for a European state with a government to manage the single currency. The problem of the EMU induced both opponents and supporters of European integration to depict monetary and political integration as two faces of the same problem. However, it remains unclear what the problem is. Was creating or joining EMU the wrong choice for some member states or, instead, was setting up the euro without creating Europe the wrong decision? What is the better solution to this problem? Dismantling EMU or building Europe? This dilemma inspired a new cleavage in the European party system that added a new dimension to the traditional right-left axis: the pro-anti European axis. This new dimension superimposed the traditional cleavages that divided the European party families and reshaped or redefined their political programmes and their electoral priorities. In this way, the new cleavage dramatically changed the votes’ distribution both in European and national elections. The most worrying face of Europe’s crisis is the crisis of the “European ideal,” that set of values and ambitions forming the core of European integration. The crisis of European ideals is dramatically different from the previous crisis faced by the EEC during the 1960s and 1970s. In those cases, political tensions and poor coordination caused an institutional crisis that affected the political and economic cohesion of the ECC. Today, it is monetary integration, its impact, and its crisis to influence the political side and the citizens’ feelings toward Europe. So, the U-turn in the sectors’ relationship is completed, and today, monetary Europe leads the fate of political Europe. As a result, it is not surprising that anti-European parties concentrate their critics against the single currency and the pervasiveness of EU economic governance in internal politics. Many elements feed this crisis. Among them, the perception of the EU as a neoliberal construction was magnified by the introduction of the New European Economic Governance and the austerity policies. The Greek crisis had an impact on the image of the EU as a community of solidarity, another value perceived as crucial to legitimising European integration. The imposition of heavy burdens and constraints for financial assistance as well as the rejection of proposals and requests democratically decided in Greece created a picture of Europe as a German-led leviathan and an undemocratic instrument of domination. This picture poses questions about the legitimacy of the EU and the real meaning of integration. Also, the inefficiency shown on many occasions as the sovereign debt crisis and the recent immigration crisis made doubtful the utility of the EU as a problem-solving arena. So all of these doubts about the nature, fundamental values, and usefulness of European integration
EU à la carte?
created a “crisis of the idea of united Europe,” hich means an identity crisis that risks driving the EU to collapse.
3. Conclusion: is “EU à la carte” the solution? The evolution described above made EU à la carte a poorly effective strategy for European integration, at least for those countries involved in EMU and constrained by the New European Economic Governance. In fact, the new and more constrictive contest requires uniformity in rules application and rigorous supervision. These needs made opting-out and open methods of coordination unable to granting the effectiveness of EMU governance and risks to fragment further the EU making integration unattractive for countries marginalised by opting-outs. The case of the United Kingdom and the Brexit supports this conclusion.
References Bartolini, S., Restructuring Europe: Centre Formation, System Building and Political Structuring between the Nation-state and the European Union, Oxford, Oxford University Press, 2005. Bickerton, C. J., Hodson, D., and Puetter, U., The New Intergovernmentalism: States and Supranational Actors in the Post-Maastricht Era, Oxford, Oxford University Press, 2015. Cowles, M.G., Caporaso, J.A. and Risse, T. (eds), Transforming Europe. Europeanization and Domestic Change, Ithaca, Cornell University Press, 2001. de Sadeleer, N., The New Architecture of the European Economic Governance: a Leviathan or a Flat-Footed Colossus?, in Maastricht Journal of Comparative and EU Law, vol. 19, n. 3 (2012), pp. 354-383. Dyson, K. and Featherstone, K., The Road to Maastricht. Negotiating Economic and Monetary Union, Oxford, Oxford University Press, 1999. Eichengreen, B., Globalizing Capital. A History of International Monetary System, Princeton Princeton University Press, 2008. Follesdal, A. and Hix, S., Why There is a Democratic Deficit in the EU: A Response to Majone and Moravcsik, in Journal of Common Market Studies, vol. 44, n. 3 (2006), pp. 533–62. Haas, E.B., Beyond the Nation-state. Functionalism and International Organization, Stanford, Stanford University Press, 1964. Haas, E.B., The Uniting of Europe. Political, Social and Economic Forces, 1950-57, Stanford, Stanford University Press, 1958, Heipertz, M. and Verdun, A., Ruling Europe. The Politics of the Stability and Growth Pact, Cambridge, Cambridge University Press, 2010. Helleiner, E., States and the Reemergence of Global Finance. From Bretton Woods to the 1990s, Itacha, Cornell University Press, 1994. Henning, R.C., Systemic Conflict and Regional Monetary Integration: The Case of Europe, in International Organization, vol. 52, n. 3 (1998), pp. 537-573. Howarth, D.J., The French Road to European Monetary Union, Basingstoke, Palgrave, 2000. Jonung, L. and Drea, E., The euro: It can’t happen, It’s a bad idea, It won’t last. US economists on the EMU, 1989 – 2002, Brussels, European Commission, Directorate-General for Economic and Financial Affairs Publications 2009. Milward, A.S., The European Rescue of the Nation State, London, Routledge, 1992. Mitsopoulos, M. and Pelagidis, T., Understanding the Crisis in Greece: From Boom to Bust, New York, Palgrave-Macmillan, 2012. Moravcsik, A., The Choice for Europe: Social Purpose and State Power from Messina to Maastricht, Ithaca Cornell University Press, 1998.
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Mourlon-Druol, E., A Europe Made of Money: The Emergence of the European Monetary System, Ithaca: Cornell University Press, 2012. Puetter, U., The European Council and the Council: New Intergovernmentalism and Institutional Change, Oxford, Oxford University Press, 2014. Scharpf, F.. Monetary union, fiscal crisis and the preemption of democracy. Zeitschrift für Staatsund Europawissenschaften, vol. 9, n. 2 (2011), pp. 163–98. Schmitter, P.C., A Revised Theory of Regional Integration, in L.N. Lindberg and S.A. Scheingold (eds), Regional Integration: Theory and Research, Cambridge, Harvard University Press, 1971, pp. 232-264. Serricchio, F., Tsakatika, M., and Quaglia, L., Euroscepticism and the Global Financial Crisis. Journal of Common Market Studies, vol. 51, n.1 (2013), pp. 51–64. Sinn, H. W., The Euro Trap. On Bursting Bubbles, Budgets, and Beliefs, Oxford, Oxford University Press, 2014. Talani, L. S. (ed), Between Growth and Stability. The Demise and Reform of the European Union’s Stability and Growth Pact, Cheltenham, Edward Elgar, 2008.
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EUROPE IN THE DANGER ZONE CONSOLIDATING THE EUROPEAN MONETARY UNION IN TIMES OF UNPRECEDENTED CHALLENGES Jean-Marc Trouille Jean Monnet Chair Bradford University School of Management, UK
[email protected]
‘Nothing is possible without men, but nothing lasts without institutions.’ Jean Monnet ‘There are many understandable political reasons to delay structural reform, but there are few good economic ones; the cost of delay is simply too high.’ Mario Draghi
Abstract: After Brexit, EU national leaders can no longer escape the need to implement structural reforms and improve Eurozone governance. Since the start of the crisis, considerable progress has been made to stabilise the European Monetary Union (EMU), but the current status quo is not an adequate answer to the challenges ahead. As in other domains of European interest, lack of initiative and reform is only fuelling populism. The European Central Bank (ECB) has contributed greatly to making up for the lack of policy coordination, insufficient structural reforms, and lack of progress in Eurozone economic governance. But its policy impact has been limited by these shortcomings and it has frequently been under fire for having had to take extraordinary measures. This paper, first, considers the initial flaws of the monetary project and the progress made since an EMU a minima was launched in 1999. Second, it examines the measures needed to make the longterm functioning of the euro area sustainable, and analyses the range of issues and choices that policymakers and political leaders need to face to stabilise the EMU whilst addressing the often structural lack of competitiveness encountered among Eurozone members. Finally, it formulates recommendations on how to improve the workings of the EMU without further postponing action.
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Introduction After the negative outcome of the British referendum on the UK’s relation to the European Union (EU), it has become, more than ever, imperative that European leaders address the issue of whether or not to speed up the economic and political integration of the euro area. They can no longer escape the urgent need to implement domestic reforms and improve Eurozone governance. Since the start of the financial and economic crisis in 2008, considerable progress has been made to stabilise the Economic and Monetary Union (EMU) edifice, but the current status quo is not sustainable on the mid- to long term, and therefore not an adequate answer to the challenges ahead. As in other domains of European interest, status quo and lack of initiative only fuel populist EU-bashing and do not provide a shelter against new crises to come. The European Central Bank (ECB) has made a substantial contribution to making up for the lack of policy coordination and insufficient structural reforms within the EU-19 monetary bloc, and for the lack of progress in terms of Eurozone economic governance. But the impact of its monetary policies has been limited by these shortcomings and it has frequently been under fire for having had to take extraordinary measures extending well beyond its initial brief. In particular, it currently pursues a very expansionary, interventionist policy marked by large-scale capital injection through Quantitative Easing (QE) in the Eurozone economies and Outright Monetary Transactions (OMT) to make purchases of bonds issued by Eurozone Member States. Concerned by persistently low inflation, the ECB is considering even looser monetary policy in its endeavour to lift inflation to its target of close to 2 percent from the current price stagnation and turn the current cyclical upturn into permanently higher growth. But it has not been supported by euro area governments. This paper, first, considers the progress that has been made since an EMU a minima was launched in 1999, in order to fully appreciate the extent of what has been achieved despite the flaws of the initial monetary project. It then examines the measures needed to move beyond the current status quo and make the long-term functioning of the euro area sustainable. In so doing, it analyses the range of issues and choices that policymakers and political leaders need to face to stabilise the EMU whilst addressing the often structural lack of competitiveness encountered among Eurozone members. To conclude, it formulates simple recommendations based on common sense in order to improve both the workings of the EMU and the economic and business climate of the euro area without unnecessarily postponing urgently needed action to better days.
Initially a currency union carried out a minima The euro area has undeniably gone a long way since Economic and Monetary Union was launched in 1999. To fully appreciate the extent of what has been achieved since then, it is useful to remind ourselves of the substantial flaws of the initial monetary construction of Europe. From the outset, the single currency project was launched without solving the fundamental opposition between two radically opposed monetary philosophies: • A French stance considering the currency as an instrument of macroeconomic policy, in favour of political control, e.g. of having an exchange rate policy, and which regards controlled inflation as acceptable. • A German stance traumatised by the hyperinflation of the 1920s, advocating monetary stability and a central bank on the model of the Bundesbank independent from political interference. These profound differences in the respective approach to monetary policy dividing the two main proponents of monetary integration, France and Germany (Uterwedde 2015), led to the construction of a giant with feet of clay, which was completely unprepared to cushion the random shock of the financial crisis when it started in 2008. The architecture of the single currency, as it was designed in Maastricht, was a construction a minima, with: • No political power to lead and represent to euro area; • No communitarisation of public debts, which had to remain ‘sovereign’; • No banking union, hence no bail out in case of a bank going bankrupt;
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• No bail out in case of default by a Member State (any mechanism of financial solidarity was prohibited by Art. 123 and 125); • No exchange rate policy; • No fiscal / budgetary policy (only a loose, non-binding ‘coordination’ of economic policies). In other words, instead of a water-tight construction, the architecture of the euro area resembled a sand castle. The Stability and Growth Pact (SGP), enacted in 1997, whose purpose was to enforce fiscal responsibility so as to meet Germany’s concerns, was grossly insufficient to make up for the acute lack of consistency in the edifice. Even the mention of ‘growth’ was in name only. It was an empty concession to the French partners which remained a dead letter since the Pact had no provision to stimulate growth. This anecdote only marked the beginning of a harsh debate about austerity versus growth, which started in 1991 in Maastricht. Moreover, the Franco-German misunderstanding in Maastricht was also about Politics versus Economics. Germany wanted politische Union but was thinking of its economic interests. France wanted un gouvernement économique but this was motivated by political considerations (Trouille 2016). This weak infrastructure reflected Germany’s concern for stability as well as its fear to have to resort to a cheque-book diplomacy to rectify any slippage in budget expenditure of ‘club-Med’ countries, which Germany only reluctantly admitted as members of the EMU. French concerns were different. France was keen to regain some of the monetary sovereignty that it had lost against the Deutschmark. Removing the Bundesbank from its high pedestal, and melting down the Deutschmark into a European single currency was the way to regain at least some of the lost monetary control. Needless to say that none of these expectations materialised. Furthermore, every country made serious mistakes. This lack of discipline worsened the shock wave of the crisis: • Germany and France were the first ones not to respect the SGP (rules they had designed themselves!); • Greece falsified its economic data; successive corrupt governments; pay levels not justified by productivity; • For years, Italy made too little effort to control exponential rise of public debts; • Spain allowed a disproportioned private debt and a huge housing bubble; • Portugal neglected its industrial productivity; • France adopted a consumption-based demand-side policy and was reluctant to undergo large-scale reforms of its welfare state.
Substantial progress has been made … The financial crisis was a random shock which revealed and exposed EMU’s structural weakness with unexpected violence. Its effects are still noticeable in Europe today, almost a decade after the collapse of Lehman Brothers. However, considerable progress has been made since the outbreak of the global financial crisis, whose effect has been to strengthen fiscal governance in the euro area: • Various mechanisms with substantial solidarity funds in case of a random shock have been set up; in particular, the European Stability Mechanism (ESM), which now acts as a permanent source of financial assistance for Member States in financial difficulty, with a lending capacity of up to €500bn, is an embryonic fiscal capacity; • The ECB has adjusted itself to difficult circumstances, showing that it is not a clone of the Bundesbank. For instance, it adopted a much more proactive stance with an American type QE policy whilst acting in a fully independent way; • There is now some ‘Federal’ control on Member States’ budgetary policies; • A banking union (so that banks do not have to be bailed out with taxpayers’ money) has been set up; • Germany has gradually accepted the principle of economic governance (but will France accept a great leap towards further integration?); • The policy environment, as well as policy credibility, has improved; • In the case of Greece, no debt repayment is required until 2022-23. Right now the problem of Greece is not debt. What is needed is restoring growth, boosting confidence, carrying out reforms, boosting investments;
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• With the Banking Union (BU) and the Capital Markets Union (CMU), which is an EU plan to mobilise capital in Europe and channel it to SMEs and infrastructure projects, a deepening of the EMU has been operated in these key areas. There are still some issues, though. There is no Eurozone agreement with regard to deposit guarantees and Germany in particular is opposed to this principle as it fears it would have to pay for others. CMU scope goes beyond the euro area but is short of concrete projects; • Last but not least, although support for Europe is at an all-time low, support for the euro remains steady: 73% in Germany, 67% in France, and an average 68% in the euro area. This is a big paradox: on the one hand there is great anger with the EU, on the other stable support for the euro.
… but a lot remains to be done Despite recent achievements, there are still substantial tasks ahead to effectively consolidate the EMU, as the current status quo cannot guarantee its long-term sustainability (Pisani-Ferry 2013). The euro area has been in a crisis mode for too long. It still suffers today from low internal demand and an external surplus, essentially in Germany, which fuels structural deflation. Due to the financial crisis and the insufficient response of the euro area to address it, the EU has lost almost a decade of progress, while the rest of the world has moved forward. Hence, there is an urgent need for further qualitative improvements. There are indeed a range of issues and choices that policymakers and political leaders need to face to stabilise the EMU whilst addressing the often structural lack of competitiveness encountered among Eurozone members. These issues and policy choices cover important domains: • The need for structural reforms, not only reforms of the labour market, health system, or pension reforms in some Member States (France, for instance, urgently needs to carry out domestic reforms which France has consistently avoided for three decades (Lamy 2014; Aghion et al.2015)), but also ‘second-stage’ reforms focusing on boosting growth and productivity and promoting human capital, as these will provide long-term gains. Education and training are critical to productivity and must be a central preoccupation. Investing in human capital is the key ingredient in making growth more inclusive. • A need for more investment and innovation. Structural reforms are needed to address national barriers, but also investment barriers. There is insufficient investment in the euro area, and it is almost a decade that Europe underinvests. Chronic underinvestment has generated an investment gap and an innovation gap, resulting in a lack of competitiveness. Lack of competitiveness needs to be addressed both through investment and structural reforms. Tackling the investment issue will allow to address the innovation gap and redress competitiveness. High savings and extremely low interest rates are clear indications of these serious gaps in the economy. There are potentially up to 150,000 small and middle-sized enterprises (SMEs) which could potentially benefit from EU investment plans and investment platforms to boost projects in the Single Market. • The need to adopt a cautious differentiated approach adapted to the diversity of national economies within the euro area. It would be wrong to make one-size-fits-all reforms: there is a need to differentiate and to consider each particular case. Germany and Greece, Portugal and Ireland, Italy and Finland, cannot all be restrained in a similar straightjacket. A differentiated approach here does not mean an ‘à la carte’ cherry-picking: it reflects a pragmatic approach that takes stock of the diversity of national economies in a euro area that still has some way to go to match the criteria defined by Mundell (1961) for an Optimum Currency Area (OCA). In any event, such approach should remain cautious, in view of the tendency by some Member States (currently France, Italy and Spain) to raise spending in the current recovery after having cutting it in the recession. Consolidating in the downswing, then expanding as soon as the recovery is in sight, is like putting the cart before the horse.
EU à la carte?
• Finally, and most importantly, the need to establish effective transnational governance and policy coordination, particularly between monetary, economic, structural and fiscal policy, in a growth-friendly approach. Too little progress in terms of fiscal policy, and the current status quo, means that the ECB has had to take extraordinary action well beyond what was its initial brief. In some respect what the ECB has had to go through just because fiscal policy is deadlocked and because structural reforms have not been sufficient seems Kafkaesque. More than ever Europe needs more structural reforms and appropriate fiscal coordination to support the ECB’s efforts. All the above points are not only fully sensible: they are crucial, and their combined effect is highly desirable to achieve a paramount aim: more growth, through more effectiveness. Growth is the key: despite a favourable economic environment with low oil prices, historically low interest rates, a weaker euro exchange rate and low borrowing costs, recent economic recovery has only brought limited growth in the euro area. One of the recurrent arguments of the "LEAVE" campaign in the UK referendum on the EU is the lack of growth and structural reforms on the European mainland. This may have been one of the very few rational arguments used by Brexit advocates in a referendum campaign dominated by false promises and misrepresentations, but this was nonetheless a genuine concern among British voters who traditionally mistrust the Continent. With regard to the last point concerning transnational governance and policy coordination, these two elements cannot be disentangled. They are worthy of more attention. The economic case for EMU still needs to be made. In the EMU’s earlier years too many Member States forgot that the EMU was not just about monetary union, but also about building up an economic union. The Euro area has been successful in establishing a monetary union, now backed up with a banking union. But although the crisis has brought a consensus that economic union is necessary, this remains to be done. The current deadlock, however, is caused by the combination of two taboos: a French taboo with regard to transfers of sovereignty. And a German taboo with regard to establishing a transfer union. Completion of the euro area therefore faces two obstacles: a sovereignty issue combined with an issue of solidarity. Without breaking this deadlock no progress will be possible.
Policy coordination: an absolute must for ECB and broader EMU efficiency But let us come back to the need for better policy coordination. Monetary policy and other policies go hand in hand. However, there is a lack of policy coordination, which, in recent years, has cost several points of GDP and many jobs. At the most recent Brussels Economic Forum early June 2016, Mario Draghi called unequivocally for broader policy coordination. He rightly pointed out that the ECB’s monetary policy is working in isolation, as the only game in town. But the ECB’s QE policy (a massive bond purchase plan of €80bn/month until at least March 2017) is a two-edge sword insofar as on the one hand it is necessary action, but on the other it reduces urgency. The ECB wants euro area countries to stir up growth, but QE has taken the pressure off for politicians to take action. As a result EU rules have to implement often unpopular measures. Although these rules were toughened up during the sovereign debt crisis, the EU Commission has struggled to enforce them against the will of governments reluctant to coordinate their fiscal policies. EU deficit-cutting rules are often stretched, or even breached, by some Member States’ budget plans. Massive ECB buying of Eurozone government debt has reduced governments’ fears of financial market retaliation for bad policies. Coordination mechanisms work less efficiently under reduced market pressure. Political leaders tend to feel that the short-term political cost of engaging into effective structural reforms is too high. Their instinct is often to boost consumption, since the effects are visible to voters more rapidly. Taking unpopular steps to reform labour laws, pension systems, health care, would be greater, longer-lasting benefits, but only years later.
An economic union: a prerequisite for the EMU’s future In order for monetary policy to be less alone in economic policy, the euro area needs a fullyfledged economic union with a Eurozone government. Institutions are vital and may contribute to restoring trust in the EU. As Jean Monnet said, ‘Nothing is possible without men, but nothing lasts
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without institutions.’ In this regard, rules are in place which are often constraining, but rules are not enough: too many Member States have, too often, played a non-cooperative game. If Eurozone members want a true economic policy, they need to establish strong institutions. This is not an ideological issue but a practical one based on common sense. It is not a call for more Europe either, but a call for more growth and jobs, and for more stability to face new crises. However, such proposals are difficult to implement because they touch the heart of national sovereignty. Progress continues to be made, for instance the Economic and Financial Affairs Council (ECOFIN), meeting on 16-17 June 2016, agreed on an agenda to strengthen banking union with risk reduction and deposit protection, with a clear roadmap to implement these measures. But we are still at the beginning of an economic union. More transnational governance is needed in the EU, but even more so between the Member States that share their monetary sovereignty. The need for cohesion and further integration of the euro area generates de facto a two-speed Europe. It also leaves only some limited room for internally differentiated policy. But deepening the EMU should not lead to creating new barriers between countries that are inside and outside the euro area. In that respect the EU will need to tread carefully.
An investment union An investment union would provide a solid backup to an economic union. The EU already has features in place which, articulated together, can provide the backbone for such a union, based on President Juncker’s investment plan, on the European Investment Project Portal (EIPP) and on the European Investment Bank (EIB). EC President Juncker’s investment plan of €300bn is a move in the right direction as it aims to provide a favourable investment environment. It is not only timely, but also innovative insofar as it moves away from grants and subsidies towards loans and bank guarantees and uses EU budget resources. The EIPP brings together investors and borrowers. And furthermore, thanks to the EIB, the EU already has its own investment bank.
The importance of trust The challenge faced by political elites across the euro area is about convincing everyone, not just eurosceptics, of the wisdom of making further steps towards integration. Concrete solutions are needed, but in addition to this Europe needs a vision which should be inclusive, creative, and ‘global-local’ in order to re-establish confidence in the European project. Ultimately Europe’s biggest challenge is to preserve its competitive position on global markets, and this can only be achieved with a vision relying on trust and determination. Losing an election should not be political elites’ first and foremost consideration when the country’s long-term interest and the wellbeing of citizens is on the balance. Trust is also a major stake in the euro area when it comes to fiscal risk sharing. Risk sharing has been underdeveloped with regard to sovereign debt. It is only recently, under the aegis of the ECB, that sovereign debt purchases have taken place. Without progress towards a political union, or at least a more integrated euro area, this will remain an obstacle. In this regard, northern European citizens will need to understand that a bailout is not a gift, but an economic loan. Mistrust is also an issue between France and Germany, who launched the EMU. When France talks with Germany about economic coordination in the euro area, Germany has a suspicion: that it is a French trick not to pursue domestic reforms. Mistrust is a real problem. In fact, BOTH domestic reform and European coordination are needed (Trouille and Uterwedde, 2013).
EU à la carte?
In conclusion Finally, a number of simple recommendations need to be formulated to improve the workings of EMU without postponing action any longer. At the last Brussels Economic Forum 2016 on 9 June, Mario Draghi made the following statement: ‘There are many understandable political reasons to delay structural reform, but there are few good economic ones; the cost of delay is simply too high’. What this means is that the current status quo is not an answer to the problems that Europe faces today. In this context, the ECB has been stretched, left alone, and severely criticised. The main obstacle to the consolidation of the EMU is not economic, but political. The main obstacle to investment is not financing. It is structural. The main obstacle to a qualitative leap forward towards transnational governance is insufficient trust. Europe has all the required ingredients to make out of the EMU a global success apart from one: political will. Reforms will have to be implemented. These reforms should be well coordinated, comprehensive, innovative, and ‘society-minded’ ones. One precondition for public opinions to regain faith in the European project is to show evidence of the EU’s ability to deliver growth and jobs. It will be difficult for the ECB’s non-conventional policies to stretch beyond the stormy waters where it currently sails without experiencing diminishing returns, possibly even perverse downside effects. Eurozone Member States have to take the initiative and do their homework. Priority must be given to strategies with emphasis on innovation, R&D, and structural reforms. ECB monetary policy, combined with the Juncker Plan, will continue to help, but it is clear that their combined effect will not be sufficient to make up for a prolonged lack of action on the part of Member States. If the EU is to avoid a repeat of the crisis, it must urgently undertake reforms and address the issue of governance. The recent Five Presidents’ Report (Juncker et al 2015) conveyed a similar message with its call for a new convergence process among euro area Member States to move towards best practices and structural reforms. Real Eurozone governance has to be backed up with: • • • • •
A proper budget for the euro area; A Eurozone sub-Parliament with specific competence for the euro area; A Finance Minister for the euro area, who would also act as the President of the Eurogroup; A specific representation of the Euro area at the G20, the IMF and the World Bank; Adopting the simple or qualified majority rule depending on the issue concerned.
Measures inherent to EMU should also be backed up by other measures in favour of growth and job creation in the framework of the Single Market (Monti 2010): • Measures towards the liberalisation of commercial services; • Measures to make digital markets more European, rather than having to deal with 28 national regulators; • Measures to Europeanise capital markets; • Financial measures to help innovative startups (many of which are incubated in EU universities but are underfunded). Some of these reforms could be adopted reasonably promptly, without treaty change, whilst others would require more time and effort as they imply a change in institutional architecture. Will European leaders follow Mario Draghi’s advice? Or else, will another crisis of the magnitude of the one unleashed by the collapse of Lehman Brothers be necessary to come to terms with national political deadlock and, at last, generate long-awaited consensus? In a post-Brexit Europe, there is little space for procrastination and a huge need for action.
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References Aghion, P., Cette, G. and Cohen, E. (2014) Changer de modèle. De nouvelles idées pour une nouvelle croissance. Odile Jacob, Paris. Draghi, M. (2016) On the importance of policy alignment to fulfil our economic potential. Fifth Annual Tommaso Padoa-Schioppa Lecture at the Brussels Economic Forum 2016, Brussels, 9 June. Juncker, J-C. et al (2015) Completing Europe’s Economic and Monetary Union, June. Kaufmann, P. and Uterwedde, H. (2015) Quel policy mix de sortie de crise pour la zone euro? Vers de nouvelles convergences franco-allemandes. IFRI, Vision franco-allemande no25, January. Lamy, P. (2014) Quand la France s’éveillera. Odile Jacob, Paris. Monti, M. (2010) A new Strategy for the Single Market: At the Service of Europe’s Economy and Society. Report to the President of the Euroepan Commission, Brussels, 9 May. Mundell R. A. (1961) A Theory of Optimum Currency Areas, American Economic Review, November. Pisani-Ferry, J. (2013) La crise de l’euro et comment nous en sortir. Fayard, Paris. Trouille, J-M. (2016) Politiques économiques et monétaires européennes. La France, maillon faible de l’alliance franco-allemande? In Les 50 ans du Traité de l’Elysée 1963-2013, Le couple franco-allemand dans la construction européenne, Larrade, J-M. and Leclerc, S. (eds.), L’Harmattan, Paris. Trouille, J-M. and Uterwedde, H. (2013) Frankreich, Deutschland und die europäische Wirtschaftspolitik: Kooperation mit Hindernissen, in: Frankreich Jahrbuch 2012 – Deutschfranzösische Beziehungen: Entwicklungslinien und Funktionswandel. Springer VS / dfi Wiesbaden.
EU à la carte?
REFLECTIONS ON ACADEMIC DISCUSSIONS ABOUT THE EUROZONE CRISIS Paulo Vila Maior Universidade Fernando Pessoa
[email protected]
Abstract This contribution is the outcome of presentations and discussions that took place within the working group of Economic and Monetary Union. I start by briefly addressing issues concerning the diagnosis of the current Eurozone crisis and then I move to a critical analysis of proposals for reform put forward by some speakers and discussants. It is my understanding that most of these proposals, while possibly desirable from a normative point of view, side-line political circumstances required to make them feasible. This leads to the final part of the analysis, where the role of academics within the context of a crisis that affects the European Union is discussed, particularly when they interact with practitioners. I ask whether academics’ expertise can detach itself from the political context, and to what extent ambitious proposals for reform that do not anchor on political institutions’ (at the EU and the national level) willingness are meaningless.
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1. The (obvious) diagnosis: the model of Economic and Monetary Union is flawed The Jean Monnet Seminar “EU à la Carte”, held in Malmo was an opportunity to bring academics and practitioners to discuss a prominent issue on the development of European integration such as differentiated integration. I was within the working group on the prospects for taking the Eurozone out of the long-lasting crisis. All speakers and other members from the working group involved in the discussion agreed that the Economic and Monetary Union (EMU) designed at the Maastricht Treaty was flawed at the outset. An extensive literature (economists, political scientists, lawyers) points at the same direction. The diagnosis was reassessed by speakers and discussants. Amidst the (almost) consensual perception that the European Monetary Union (EMU) was biased from the beginning, notably for the absence of shock-absorbing mechanisms in case of asymmetric shocks, I was puzzled by the insistence of hammering down the Eurozone for not matching the Optimum Currency Area (OCA) theory lessons. Despite some sectors in the literature still use OCA theory to measure the rationale of the EMU (Artis, 2003; Sapir, 2016), concluding that the Eurozone was deemed to be unsustainable for failing several of the requirements of the OCA theory, I find it difficult to use this theoretical framework as the appropriate theoretical framework for measuring why the EMU failed to deliver. The European monetary union falls outside “conventional monetary unions” to the extent that it does not match a sovereign country but instead brings together several countries with deep-rooted national sovereignty and a political and cultural setting where national currencies were deeply embedded. Recent strands of the literature recognised the inappropriateness of the OCA theory and revised it in order to claim that, from the theoretical point of view, the EMU falls short of success. Instead of using OCA, the literature uses “embedded currency areas” to point out the reasons of why the EMU failed so far (McNamara, 2015). The discussion around the sources of the Eurozone crisis was, to my understanding, disappointing to the extent that speakers and discussants were not aware of recent developments of the literature and some pegged to the OCA theory to measure how unsuccessful the EMU is. Furthermore, discussions aiming at comparing the Eurozone (or the European Union at large) with other countries, notably when the federalisation of the EU was at stake or when the discussion brought to the surface risksharing within the Eurozone and co-related solidarity issues, it seemed that discussants were far from recognising the uniqueness of European integration and how inappropriate it is to engage on strict comparisons with other federal experiences (Burgess, 2000). The third remark points out a bias on the discussion, because I found it too much focused on an economic analysis of the Eurozone crisis. Maybe members of this working group were mainly economists. The exception came from the input of one of the speakers (Roberto Di Quirico), who warned that, as a political scientist, he envisaged “gouvernement économique” as the outcome of recent developments within the changing nature of the governance of the Eurozone. Yet I disputed the assertion, and asked whether a recent theoretical development (new intergovernmentalism) (Bickerton, Hodson and Puetter 2015) better captured Eurozone governance changes, since developments on the Eurozone governance model, especially the prominence of EU institutions representing national interests and bilateral summits before important European Council meetings, show a reinforcement of EU competences without entailing a corresponding reinforcement of supranational institutions’ powers. This was the only moment when a political science analysis was introduced to a discussion largely dominated by economists. My claim is that an inter-disciplinary discussion of the Eurozone crisis is needed, aiming at a comprehensive political-economic analysis of the ontology of the crisis. The discussion generally emphasised what are (in my view) the right conclusions (the shortcomings of the EMU), despite the theoretical framework for reaching that conclusion fails to adjust to the specific context of European integration at large, to the EMU in particular. At some point, the discussion was redundant and outdated, as if it was necessary to highlight the obvious – and here “obvious” stems from the literature on the foundations of the EMU and on the roots of the Eurozone crisis. Maybe for this reason, the discussion on future options to take the Eurozone out of the crisis was affected by flawed analytical tools.
EU à la carte?
2. The split between academics’ prescriptions, political landscape and citizens’ perceptions Participants in the working group put forward their suggestions to remedy the EMU. The goals of the recommended reforms of the Eurozone were twofold. On the one hand, to overcome the effects of the ongoing crisis, which becomes urgent considering the spill-over effect from the Eurozone crisis to European integration as a whole. On the other hand, reforms aim at changing the EMU with a view, in the future, that is changing the architecture of the European monetary union in order to make it suitable for future crises. Many proposals aired throughout the sessions. Some argued that the focus should be on current accounts’ monitoring, and not so much with the current political-economic orthodoxy that is only concerned with fiscal policy discipline. Others claimed that solidarity within the EU must be an ingredient of European integration in order to arm the EMU with tools that lower risks coming from asymmetric shocks. Risk-sharing leading to a system of shared responsibility on the issuing of public debt, a union of transfers similar to other countries where fiscal federalism is at work, a larger EU budget, references to the “five presidents’ report” that paves the way for the creation of Euro-bonds all were avenues of reform for the EMU suggested by speakers and discussants. My perception is that the assumptions supporting the shortcomings of the Eurozone model suffer from theoretical inconsistencies. These assumptions are to a large extent outdated; they are based on unsubstantiated comparisons with federal countries elsewhere; and they suffer from disciplinary bias, that is, the unwillingness to foster a dialogue between different social sciences’ disciplines. These pitfalls lie at the heart of proposals for reforming the Eurozone that might make sense within tight and not empirically controlled laboratory of ideas. The problem with these proposals is that they seem to ignore whether political conditions are met in order to make them feasible. Correspondingly, they seem to bypass a very important pre-requirement for political legitimisation, because they are not concerned with electorates’ reactions. I will look to both conditions below. Firstly, it is understandable that academics act as triggers of ideas. It is not unprecedented that academics’ ideas are frontrunners as engines of social change. I am not disputing here that as academics we must only take stock of conditions conveyed by the straightjacket of reality. Yet, the limits of boldness must be taken into consideration. Having said this, political circumstances act as the plateau where consistent and feasible proposals are thrown into the table. I recognise that crises usually encompass in themselves a potential of change, and this aspect also applies to the current EU crisis. Nevertheless, many of the proposals advanced by members of the working group must be checked against the political conditions that currently shape European integration. The context is largely influenced by an intergovernmental shift in EU politics. Not only institutions representing national interests were reassured in the outcome of several episodes of the Eurozone crisis, but also major political decisions were the outcome of a few national leaders’ meetings. Despite the influence of the European Central Bank (ECB) must be acknowledged, the increased influence of the European Council, the Council of Ministers and the Ecofin Council is key to understand political decisions throughout the Eurozone crisis. Perception on national governments’ political willingness is therefore crucial. The evidence, consensually recognised, is that key actors in the most influential Member States do not accept solutions that go against national interests. Even if a clash of national interests is recognised, for instance, in issues regarding the introduction of solidarity allowing solutions such as a union of transfers, Euro-bonds, a mechanism of risk-sharing that pools Member States’ public debt to some extent, or even a strengthening of the EU budget, all these proposals meet the political opposition of those Member States that are expected to finance one (or more) of these alternative solutions. The problem, which is the image of the current status of European integration, is that national leaders and governments, especially in wealthier Member States, are not ready to give their consent to a solution that asks their taxpayers to contribute with higher sums to the construction of an alternative, deeper solution of European integration. This is not nothing than admitting a political constraint, bearing in mind the political landscape that covers most European states. Academics’ ideas, as stated before, can obviously run in the front of recognisable political conditions. Sometimes the line between ideas that can turn into ingredients of a polity and a utopia is thin. It is difficult, under such conditions, to understand where ambitious proposals of change are feasible
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and where they are nothing but dreams. My point is that, as academics, we should be able to judge whether proposals for reform which we take as desirable meet the crucial test of (political) feasibility. That is when the above mentioned proposals for the reform of the Eurozone face the dilemma of impossibility, at least when we measure the ongoing political landscape in the EU. Considering the incremental intergovernmental turn in EU issues, and recognising that national authorities refuse to act as brokers of ambitious solutions because their outcome is estimated as a backlash for national interests, conditions to turn desirable political proposals into feasible ones are far from being met. The discussion, then, can shift towards how regrettable it is that richest Member States lack the desirable stance of inter-Member States solidarity. From the standpoint of ideas, and of the ontology of European integration (at least viewed from the Europhile’s approach), solidarity as a precondition for the deepening of European integration, and in particular to cushion the EMU against future crisis, is acceptable. Nevertheless, I argue that such standpoint cannot influence the debate when academics and practitioners interact, because there are no political conditions for that spill-over effect to take place. If the European Commission encompasses some proposals for reform coming from participants in the working group, and since national governments’ willingness does not point at the same direction, academics are giving their indirect input to the political isolation of the European Commission. The problem with ambitious alternatives to reform the governance of the EMU clashes against many and influential Member States’ unwillingness to do so. Academics might discuss what to do in order to make the EMU more efficient and fair. In this case, an ideological disclaimer is advisable. Academics are obviously influenced by ideas, beliefs and, therefore, it is acceptable they present their normative preferences. Within an event where some connection between academics and practitioners is expected, I find these tempting proposals as lacking the proper context. If academics act this way in the current political context, it is very likely that they end up by discussing with each other. Secondly, citizens’ perceptions are crucial for the legitimacy of political decisions. Thus, academics must also incorporate the perception about citizens’ perceptions when they put forward proposals that might impact on citizens’ welfare. Proposals that make sense from a purely intellectual approach must also be tested against citizens’ beliefs and disbeliefs. This is linked, to some extent, to the obstacles raised by national governments, especially in those countries that are expected to give their financial input to the ambitious proposals put forward by academics. In these countries, indeed, politicians’ reluctance to deepen European integration, or to give their say to an ambitious reform of the Eurozone, goes hand in hand with the perception of how their constituencies might react in case the EMU changes accordingly. Both actors (national politicians and national electorates) are intertwined. The symbiosis acts, nevertheless, both ways. On the one hand, national politicians might influence, or even educate, national citizens and convince them of the benefits of a different, deeply attached to the value of solidarity, the EMU. At the same time, national politicians are urged to act on behalf of their electorates. Citizens’ perceptions are a crucial aspect for national governments’ political decisions. When a profound transformation of the Eurozone architecture is at stake, this requires a favourable decision of national governments. It is therefore clear the link between a decision within the political arena of the EU and the national level: the first impact on the second, and the second (or the consensus of national governments) is a precondition for the successful achievement at the level of the EU. Changing peoples’ perception is not an easy task. It is a cumbersome, time-consuming process. It requires a steady process of changing mentalities, which in turn calls for a transparent process of conveying rightful and accurate information to the public. Academics are prepared to play a role in this process. I find it more difficult for academics to act as triggers of political change. I am not denying the historical record where, frequently, political decisions were the outcome of the diffusion of ideas towards the political elites. Nowadays academics must refrain from doing so, especially because political conditions are not favourable for them to influence politicians (not to mention that despite ideological preference might emerge, academics’ stance should be impartial as much as possible). As such, the discussion of ambitious proposals of reform of the Eurozone within the specific context of a Jean Monnet Seminar sponsored by the European Commission seems meaningless. At some point – I must admit – I was feeling as we, as academics, were involved on a dialogue of peers as if we were disconnected from the outside world.
EU à la carte?
3. The role of academics in the context of European Union crises The previous analysis raises the important question of academics’ role when the EU faces a crisis. The upfront answer is to say that academics have a pedagogical role to play. They are expected to explain, in an accessible manner so that the average citizen understands, when and why the crisis emerged, what were the political-economic measures implemented, what were the options at stake, the implications of political-economic decisions, maybe to bring into the discussion a normative dimension when they decide to tackle the distributional effects of political-economic decisions. This is a role of utmost relevance, as in times of crisis citizens seek for reliable sources of information that help them to understand what is at stake and how they can be affected. Academics must also be prepared to face the challenge of difficult questions raised by concerned citizens, notably when asked about the possible solutions to the crisis. When this happens, academics are expected to enlighten citizens about the many alternatives ahead, as well to inform them of the likely consequences of each option. At this point, one has to recognise that academics have their preferences also. Therefore, it is reasonable that he/she addresses controversial issues through a normative approach. As more impartial the academic is, it is hardly difficult to offset normative underpinnings that allow him/her to have a position on the issue at stake. In this context, academics are not expected to act on behalf of political bodies. That is to say, intellectual freedom is the key tenet of the articulation between academics and the public. It is wrong to accept academics as an extension of political institutions that they must commit to basic principles and policies enacted by these institutions. If that is the case, intellectual freedom is compromised. Most likely, in that case, the pedagogical role academics are expected to perform is also compromised. Yet, intellectual freedom operates on the other way around: whenever academics find committed to official policies of political institutions, and when they follow the rationale of such policies, it makes no sense to curtail academic’s intellectual freedom just because it is not wise that members of the academia stick to the political mainstream. What is relevant here is the basic principle of intellectual freedom as well as the consideration of the impact of this principle on the relationship between academics and political institutions. It is wrong to exclude a heterodox academic (so to speak) from the discussion, of even from the dissemination of relevant information to the public, on the basis of his/her heterodoxy. This code of conduct works both ways: on the one hand, political institutions should respect academics’ intellectual freedom, and should even host the input of academics that open the discussion to plural ideas; on the other hand, academics must be committed to intellectual honesty and not be engaged on an intentionally biased position with the aim of indoctrinate the audience (when they are requested to discuss issues related with the Eurozone crisis in particular, and the EU in general). Academics might also be asked to give their input to political institutions, either at the national or at the EU level. It is commonplace that political institutions seek for academics’ expertise. Academics should be aware of the political constraints underneath the task they were asked for. In comparison with the pedagogical role academics perform towards the general public, their commitment when expertise is asked is of a different nature, especially when academics face the glare of their potential influence into prospective political-economic solutions. Again, it is undisputed that academics, as individuals, are permeable to ideological preferences. Yet, when they are asked to provide expertise to political institutions they must be aware of the circumstances of the political setting. They must be prepared to adjust their advice to the context and to estimate the likelihood of effects to the public in case their solutions are incorporated in public policies. The difference between academics’ pedagogical role and their role as experts that advise political institutions is not negligible. Commitments and responsibilities differ when both roles are compared. In acting as pedagogical actors or as providers of expertise to political institutions, academics must be aware that both roles might be entrapped with path-dependency. That is to say, when they help citizens to understand what is at stake, they might trigger a certain understanding of the issues and their implications. As such, there is an educational task tied to this participation in citizenship activation; especially if political institutions’ actors are reactive to citizens’ demands or perceptions and adjust public policies accordingly. To this extent, academics must be careful when they are asked to give their input as pedagogical actors. Another connection in this dialectical process takes place. As providers of expertise to political institutions, and as long as it is likely that their proposals
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are converted into public policies, academics might play an influential role on citizens’ welfare. When policies change as the outcome of academics’ expertise, their impact on citizens is open to scrutiny. Thus, academics cannot evade the fact that they are detached from the society, as it is frequently said when critics claim that academics live in an ivory tower. In this triangular relationship (academics-political institutions-citizens) some complexity looms, especially when an academic becomes a practitioner or the other way around, or when an academic faces him/herself as an ordinary citizen. What is important is that academics do not envisage themselves as academics only. They are one of the actors of the triangular relationship, but their role goes beyond their participation as academics. They are embedded in an interchangeable role, since they are, first and foremost, citizens as well. It is therefore of great relevance that the expertise provided to political institutions, or the pedagogical role performed when articulating with citizens, does not neglect that in the end of the day academics are citizens as everybody else. These reflections came to my mind as I realised at some point, when discussions on the working group were taking place that some academics plummet into the deep waters of disconnection with the real world. I am not underestimating the much appreciated input of academics to human knowledge, especially when they supply inventive solutions that raise better living standards, whether they are measurable or not. What matters is that academics do not imprison themselves in possibly intellectually attractive waters of mere theoretical discussion between peers, especially when the articulation between academics and practitioners is expected to take place. This is likely to be the outcome when academics fall in the trap of discussing the sex of the angels, or when their theoretical underpinnings lock in an outdated or unfeasible setting. If that is the case, academics might find themselves locked in their own irrelevance.
References Artis, Michael J. (2003), “Reflections on the optimal area currency (OCA) criteria in the light of the EMU”, in International Journal of Finance & Economics, vol. 8, n. 4, pp. 297-307). Burgess, Michael (2000), Federalism and European Union: The building of Europe, 1950-2000, London: Routledge. Bickerton, Christopher J., Hodson, Dermot, and Puetter, Uwe (2015), “The New Intergovernmentalism and the Study of European Integration”, in Bickerton, Christopher J., Hodson, Dermot, and Puetter, Uwe (eds.), The New Intergovernmentalism: States and Supranational Actors in the Post-Maastricht Era, Oxford: Oxford University Press, pp. 1-49. McNamara, Kathleen R. (2015), “Forgotten Problem of Embeddedness: History Lessons for the Euro”, in Matthijs, Matthias and Blyth, Mark (eds.), The Future of the Euro, Oxford: Oxford University Press, pp. 21-43. Sapir, André (2016), “Dealing with the EMU Heterogeneity: National vs. European Institutional Reforms”, in Caselli, Francesco, Centeno, Mário and Tavares, José (eds.), After the Crisis: Reform, Recovery and Growth in Europe, Oxford: Oxford University Press, pp. 73-88.
EU à la carte?
THE FISCAL POLICY OF THE EU COUNTRIES IN TIME OF CRISIS Jarosław Kundera Jean Monnet Chair University of Wrocław
[email protected]
Abstract In the situation of deep crisis such as the one of 2008 the EU countries have carried out policies to restore Macroeconomic equilibrium including via various fiscal instruments. They have not opted for the classic methods of fight against the crisis by increasing public expenditure, but, rather, favored austerity programs to restore budgetary balance by increasing taxes and reducing budgetary expenditure. .Taking into consideration the economic consequence of these fiscal policies, the main objective of this article is to examine the evolution of the budgetary revenue and expenditure in the EU Member States during the economic crisis. On the basis of the statistical data the analysis shows that the EU Member States significantly reshaped the tax structure during the crisis with noticeable shift from direct taxes to indirect taxes as a less harmful for economic growth. .Increasing the consumption taxes in the EU countries was accompanied by “fiscal devaluation” in direct taxation due to companies income tax (CIT) rates reduction. Furthermore the economic crisis has influenced not only the budgetary revenue in the Member States but also the budgetary expenditure, where their share in Gross Domestic Product (GDP) after a short-lived increase finally has been reduced. Empirical estimates for the euro area have revealed that taxes changes appeared to imply lower multiplier than public spending, so tax increase usually entails lower effects on GDP and unemployment than austerity policy.
Key words: Austerity program Euro area Direct taxes Indirect taxes Fiscal and Expenditure multipliers
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Introduction Fiscal policies in the EU member’s countries were considered as one of the most important methods of overcoming the economic crisis and condition of their returning on the path of economic growth. The Maastricht Treaty obliging the Member States to comply with the rules as far as a balanced budget and public debts and not exceeding the level of the budget deficit over the 3% and public debt over 60% in reference with GDP (Protocol No 5). After 2008 the EU Member States burdened by excessive debt and budget deficits were forced to restore the balance to the Maastricht level with the implementation of austerity program that includes, inter alia, an increase in several taxes or a reduction in budgetary expenditure. In the euro area the monetary policy is steered by the European Central Bank, hence is beyond the reach of each of the countries and their individual needs, so conduct of coordinated fiscal policy has gained in importance on both the expenditure and revenue during the crisis. According to textbook definition, fiscal policy means the use of taxation and expenditure to achieve economic ends as tax structure and government expenditure create a pattern of incentives to determine how resources are allocated (P. Maunder, D. Myers, N. Wall, R.leRoy Miller, 2000, 486487). Budgetary policy of the EU member countries has an important role for macroeconomic stabilization and needs to perform at least a twofold aim: firstly it has a shock-absorption function at the national level, and secondly it allows the establishment of optimal budgetary spending for all the euro area (R. Baldwin, Ch. Wyplosz, 2004, 382). After 2008 taxes and government spending are also essential tools to overcome the emerging economic downturn, particularly where budget deficits and excessive borrowing led to the fracture of the public finances. Need to change fiscal policy became apparent in the EU Member States, because changes to taxes and budget expenditure could not only stimulate the growth of investment and production in individual states, but also have positive in the partner countries only when the actions acts in a harmony. The increasing awareness of the interlinkages of the EU economies in the time of crisis has led to an acknowledgement of the need to detailed examination of the evolution of the tax systems. Therefore, the main objective of this article is to examine the evolution of the tax system in the EU Member States during the economic crisis to answer the question of what changes have been made in the fiscal policies of the EU countries to overcome the crisis of the euro area.
1. The amount of taxes in the EU member countries. The EU countries belong to areas with high levels of tax burdens that put them in an inferior competitive position on the international markets. The overall tax ratio (the sum of taxes and social security contributions) as % of the GDP in the UE-27 amounted in 2015 to 35.7%, that is high not only compared to the USA (22.2%) and China (22%), but also compared to the other main trade partners as Japan (28.3%) or Switzerland (29.4%). Wide disparities in tax levels also exist across the European single market (see in table 1). The tax burden in the highest-taxing EU Member States is over 75% higher than in the least taxing one. The highest taxes are paid by the inhabitants of Scandinavian countries with Denmark, having 49% of its GDP in the form of taxation, and Sweden with 45.8%. On the next places are Belgium where participation of taxes in GDP is 45.4%, France 44.6%, Finland 43%, Italy is 42.6%. Overall tax levels are in general higher in the EU-15 than in new Member States. The lowest level of taxes in GDP is in Lithuania 20.9%, followed by Croatia 26.6%, Romania 28.1% and Slovakia 29.5%. High taxation in many European countries is related to the applied model of the welfare State, but even in the Nordic countries the burden of taxes over the past decade has been reduced on average in relation to GDP from 51.5% to 45.8% (in Finland the share of taxes fell by 5.1 p.p., in Denmark about 1.8 pp.). These tax reductions may be one of the secrets of the Scandinavian countries resistance to the last economic crisis Tab. 1. Tax as % of GDP according countries in 2015. Country
tax as % of GDP
Austria
43.4
Belgium
45.4
Bulgaria
34.4
EU à la carte?
Country
tax as % of GDP
Croatia
26.6
Cyprus
39.2
Czech Republic
36.3
Denmark
49.0
Estonia
32.3
Finland
43.6
France
44.6
Germany
40.6
Greece
30.0
Hungary
39.1
Ireland
30.8
Italy
42.6
Latvia
30.4
Lithuania
20.9
Luxembourg
36.5
Malta
35.2
Netherlands
39.8
Poland
33.8
Portugal
37.0
Romania
28.1
Slovakia
29.5
Slovenia
39.3
Spain
37.3
Sweden
45.8
United Kingdom
39.0
European Union
35.7
United States
26.9
China
22.0
Japan
28.3
Switzerland
29.4
Data based on Heritage Foundation (2015). “2015 Macroeconomic Data” and Index of Economic Freedom, Heritage Foundation.
Fiscal policies differences between the EU Member States are applied to indirect taxation as well as to direct taxation and social contribution. While most EU-15 Member States raise roughly equal shares of revenues from direct taxes, indirect taxes and social security contributions, new EU Member States (with the exception of Malta) display a lower share of direct taxes in the total. For many, especially the new EU Member States indirect taxes are the primary source of revenue: Bulgaria 55.4%, Hungary 45.5%, Romania 45.2.%, Lithuania 44.7%, Cyprus -43.8%, Poland 43.5%, but for the EU-15 Member States the share of indirect taxes in general tax revenue is less than 40%, and Germany even less than 30%. Direct taxes are, in turn, the most important source of income in Denmark (62.7%), Finland (38.2%), just as important as indirect taxes the source of revenue in Italy (34.9%), Spain, (30.9%), Germany (29.4%), or the Netherlands (31.5%), but they have the least importance of the three count revenue sources in Bulgaria (18.8%), Hungary (22.6%), Lithuania (10.8%), Poland (21.9%), Latvia (27.1%), Estonia (19.9%), Greece (25.2%), Slovenia (21.8%), Slovakia (19.1%), France (25.8%), the Czech Republic (20.8%) and Belgium (18.8%). The social contribution, which provides an important element of the competitiveness of any economy, differs also as source of public revenue from the small income the share of 18.1% in the general tax incomes in Sweden, 18.7% in the United Kingdom, 18.1% in Malta, to as many as 43% of income revenue for Slovakia, 40.1% in Slovenia, 39.3% for France, 45.2% in the Czech Republic, 40.8% in Germany.
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It is considered that indirect taxes are the simplest form for a certain and quick public income. They have a strong link with economic turnover; their sensitivity to cyclical fluctuations is particularly large. The statistical data show that the differences are very large in indirect taxes between the EU countries: from 9.8% in Spain to 11.5% in Ireland, 11.8% in Latvia, 11.9% in Lithuania, 15.6% in France, 15.5% in Italy and up to 18.6% in Sweden. Similar large disparities also exist between EU countries when it comes to consumption taxes: from 8.7% in Spain, 9.9% in Luxembourg to 15% in Denmark, 14.8% in Hungary. The highest proportion of indirect taxes copâred to the GDP are in Hungary, and inside the EU-15 in France and Italy, but also in countries of the South – Malta and Cyprus – as well as in the Scandinavian area, which may be associated with the economic policy strategy and social preferences. Overall across the EU-27 the share of indirect taxes in GDP amounted to 13.5%, which is slightly more than in the euro zone (13.1%), just slightly larger was also the part of consumption taxes in GDP in the EU-27 (11.8 %) than in the euro area (11.7%). (Tax reforms in EU Member States 2012).
2. Changes in share of indirect taxation in total taxation the EU countries. In the period of economic downturn fiscal policy changes depend on the specific situation crisis that hits the countries. Fight against crisis may rely on both an increase in taxes and lowering taxes, and evolution of individual taxes affects of course the structure of the budgetary revenues. The arithmetic EU-27 countries average shows that the tax rate on consumption increase by 1.5 points in only four years of crisis at around 21%. In 2008-2012 most of the EU-27 Member States have raised the level of indirect taxation that are regarded as the least harmful for economic growth among the major tax types. Table 2 shows that the growth of indirect taxes in the general income tax was particularly high in Hungary (+ 11.2%), Latvia (+5.9%), Romania (+5.5%), Lithuania (+5%), Estonia (+3.6), Sweden (+3.5%), the UK (+3.5%), Greece (3%), Finland (2.4%). Only in Ireland (-1.8%) France (-0.2%), Cyprus (-2.2%), Luxembourg (-1.1%) Malta (-1.2%), the Netherlands (-0.9%), Portugal (-1.5%) have reduced the share of indirect taxation in the global tax revenues during the crisis. Tab. 2. Share of indirect taxation in total taxation the EU in the period 2008-20112012 Country Belgium Germany Estonia Ireland Greece Spain France Italy Cyprus Luxembourg Malta Netherlands Austria Portugal Slovenia Slovakia Finland Bulgaria Czech Republic Denmark Latvia
Share of indirect tax in total taxation 30.5 33.1 42.6 40.8 42.4 33.4 34.9 34.5 44.0 32.5 42.4 31.5 35.0 43.1 38.5 38.6 32.9 55.3 33.8 37.0 44.1
35.0
Change in 20082011-2012 0.9 0.5 3.6 -1.8 3.0 2.5 -0.2 1.7 -2.2 -1.1 -1.2 -0.9 1.2 -0.5 -0.1 1.7 2.4 0.1 3.1 0.9 5.9
EU à la carte?
Country
Share of indirect tax in total taxation
Lithuania Hungary Poland Romania Sweden UK EU 27 EA – 17
44.5 47.2 42.8 47.2 39.6 37.5 34.9 33.8
50.8
42.3 38.5
Change in 20082011-2012 5.0 11.2 0.7 5.5 3.5 5.7 1.1 0.5
Source: Tax reforms in EU Member States 2011, European Economy, Luxembourg2012/6, p.94; Taxation trends in the European Union, Eurostat 2014, Luxembourg, p.20-21
The increase in the tax, concessions and rates differences creates of course numerous opportunities for tax evasion in the single market. After Schengen agreement tax avoidance was a major problem in the exchange between the EU Member States: the total tax losses due to the fiscal fraud ranging from 170 to 250 billion euro, that correspond to 1.8-2.25 % of the Member States GDP and about 10% of all their VAT revenue (Opinion, 1995,5). While for example in Germany the VAT gap was assessed at 1% of GDP and 12% of potential VAT revenue, in Austria as 1.2% of GDP and 13% of VAT revenue, tax evasion were much more intensive in new EU countries like in Hungary where the gap represented 3.7% of GDP (3.7 billion euro) that means 30% of the total VAT revenue, in Slovakia the gap was 4% of GDP and 37% of the total VAT revenue, in the Cheech Republic was measured at 2.7% of GDP and 28% of potential VAT revenue (V.Takacs, A.Mate, S.G.Nagy, 2015, 148- 151). Therefore it is thought that the best solution for tax avoidance practices would be application of uniform tax rates between partners with the least amount of exemptions. Table number 3 compares the VAT revenue in the EU countries with the revenue that would accrue if all private consumption were taxed at the standard rate and all revenue were effectively collected. Standard rate include most of the goods and preferential rates applied to goods and services considered to be particularly important socially (primary goods, drugs, public services). As we see from data of the last column in the EU countries there are large savings from VAT and its collection after the standard rate. A low value of the ratio indicates that exemptions, reduced rates or tax evasion have a significant impact. If all countries give up with reduced rates and the increase efficiency of the VAT collection, their tax revenues increase, on average, by about 50%. The lowest level of pointer to countries such as Greece, Italy and Spain means that changing the system of VAT reduced rates; and rising to the standard would increase importantly their budget revenue. Tab. 3. VAT rates in the EU 2014/2015 and revenues as a percentage of revenues at standard rate Country Belgium Germany Estonia Ireland Greece Spain France Italy Cyprus Luxembourg Malta Netherlands Austria Portugal Slovenia Slovakia
2014 - 2015 standard rates 21 19 20 23 23 21 20 22 19 15 18 21 20 23
21 19 20 23 23 21 20 22 5/9 15 5/7 21 20 23 22 20
2014 - 2015 preferential rates 6/12 49.1 7 54.7 9 72.2 9/13,5 55.8 6,5/13 42.8 4/10 45.3 5.5/10 48.8 10 40.4 93.1 6/12 93.9 57.2 6 58.8 10 61.0 6/13 50.0 22/9,5 66.4 20/10 51.4
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2014 - 2015 standard rates
Country Finland Bulgaria Czech Republic Denmark Latvia Lithuania Hungary Poland Romania Sweden UK EU 27 EA – 17
24 20 21 25 21 21 27 23 24 25 20
2014 - 2015 preferential rates 10/14 57.9 69.5 15 57.5 no 62.0 50.2 55.2 5/18 55.3 5/8 50.5 53.5 6/12 57.7 5 46.6 50.3 50.1
24 9 21 25 12 12 27 23 5/9 25 20 18.7
Tax reforms in EU Member States 2011, European Economy, Luxembourg 2011/5, p.110 www.europa.eu, 1 July 2014; National delegates - position as at 1 January 2015
3. Changes in the direct taxation in the EU countries during the crisis. Overall the decrease in budget revenue in the EU during the crisis period was more linked to the indirect than direct taxes. The rate of the Personal Income Tax (PIT) paid by individuals during crisis period increased only slightly during the crisis. In the EU, the top personal income tax amounts to 38.1% on average, but this rate varies substantially country by country ranging from a minimum of 10% in Bulgaria, 15% in Czech Republic and Lithuania, 16% in Romania, 19% in Slovakia and 21% in Estonia up to 59.7% in Sweden, 54.6% in Denmark, 52% in Spain and in Netherlands, 50% in Austria and 45% in UK (table 4). In the period 2008-2012 eight EU Member States had increased top tax rate on personal income (Greece, Spain, France, Italy, Luxembourg, Portugal, Sweden, UK) while four countries had decreased it (Denmark, Hungary, Poland, Finland). The increase was in particular noticeable in Greece, from 40% to 49% and Spain from 43% to 52%, while the decrease was noticeabe in Hungary from 40% to 20.3% and Denmark from 62.3% to 55.4%. The comparatively lower taxation of labor in new Member States symmetrically tends to improve their economic competitiveness and boost the share of consumption taxation. Tab. 4. Top statutory tax rates on personal income Belgium
2008
2009
2010
2011
2012
2015
53.7
53.7
53.7
53.7
53.7
53.7
Bulgaria
10.0
10.0
10.0
10.0
10.0
10.0
Czech Republic
15.0
15.0
15.0
15.0
15.0
20.1
Denmark
62,3
62.3
55.4
55.4
55.4
55.6
Germany
7.5
47.5
47.5
47.5
47.5
47.5
Estonia
21.0
21.0
21.0
21.0
21.0
21.0
Ireland
41.0
41.0
41.0
41.0
41.0
40.0
Greece
40.0
40.0
49.0
49.0
49.0
42.0
Spain
43.0
43.0
43.0
45.0
52.0
49.0
France
45.8
45.8
45.8
46.7
46.8
45.0
Italy
44.9
44.9
45.2
47.3
47.3
47.8
Cyprus
30.0
30.0
30.0
30.0
38.5
35.0
Latvia
25.0
23.0
26.0
25.0
25.0
24.0
Lithuania
24.0
15.0
15.0
15.0
15.0
15.0
Luxembourg
39.0
39.0
39.0
42.1
41.3
43.6
EU à la carte?
2008
2009
2010
2011
2012
2015
Hungary
40.0
40.0
40.6
20.3
20.3
16.0
Malta
35.0
35.0
35.0
35.0
35.0
35.0
Netherland
52.0
52.0
52.0
52.0
52.0
52.0
Austria
50.0
50.0
50.0
50.0
50.0
50.0
Poland
40.0
32.0
32.0
32.0
32.0
32.0
Portugal
42.0
42.0
45.9
50.0
49.0
48.0
Romania
16.0
16.0
16.0
16.0
16.0
16.0
Slovenia
41.0
41.0
41.0
41,.0
41.0
50.0
Slovakia
19.0
19.0
19.0
19.0
19.0
25.0
Finland
50.1
49.1
49.0
49.2
49.0
49.0
Sweden
56.4
56.5
56.6
56.6
56.6
59.7
United Kingdom
40.0
40.0
50.0
50.0
50.0
45.0
Norway
40.0
40.0
40.0
40.0
40.0
46.9
Iceland
46.1
46.1
46.0
46.0
Source: Taxation trends in the European Union, Eurostat, Luxembourg 2012; Top statutory personal tax rates and top marginal tax rates for employees, OECD, stats.org./index.aspx.data.
During the economic downturn increase of course in pressure to taxes the people with the highest incomes to share the cost of the crisis. In this way, tax policy was going to bring the distribution effects, reduce the resulting from excessive income differences. Many Member States have increased personal income tax to speed up fiscal consolidation. Hikes in statutory rates have often been implemented on a temporary basis and they have taken the form of general surcharges or a solidarity contribution for high income earns (Belgium, Greece, Italy, Cyprus, Luxembourg, Portugal and Spain). Solidarity contributions are levied on high income: Italy and Portugal levy surcharges on high income at rates of 3% and 2.5% respectively, Belgium brought in a 4% solidarity charges on financial income above a threshold. Greece, Cyprus and Spain have increased progressively taxes for all income brackets and Greece is also considering an additional charge to the wealthiest citizens. Similarly like income taxes the diversify was the share of social security contribution among the EU Member States: more than 40% of the budget revenue in the Czech Republic, Slovakia, Germany, Slovenia, less than 20% of the income of Denmark, Sweden, Malta, UK. In most Member States social security contribution account for a much greater share of labor taxes then personal income tax. On average about two thirds of the labor taxes consists of non- wage labor costs paid by employees. Only in three countries: Denmark, Ireland and the UK were personal income tax a relatively large part of the total charges paid by labor force. In Poland, Greece and Slovakia less than 20% of charges paid on labor force consisted of personal income tax (Tax reforms 2012/6, 20). During crisis in the EU countries tax reliefs were granted to low and medium income earners. The special focus was concentrated on incentives for vulnerable groups. The second next to the work an important production factor for overcoming the economic downturn is capital and obtained by him the profits that a significant impact is its level of taxation. At the begin of the crisis the tax on capital had decreased considerably since 2007 to 2010 in the EU but it stabilized in 2010 when the tax on capital and business income clusters was around 20% in the EU countries (Tax reforms, 2012). This average hides however significant differences in taxable capital between the Member States. Table 5 shows that the adjusted statutory tax rate on corporate income still varies between the EU Member States with a minimum of 10% in Bulgaria and Cyprus, 12.5% in Ireland, 15% in Lithuania and Latvia to 34.41% in France, 30.18% in Germany, 35% in Malta, 33% in Belgium. Although some countries fought the crisis through a reduction in taxes on corporate income, the other measures have typically increased the tax burden on capital. During the euro crisis only in two the EU Member States raised CIT taxes (Italy, Portugal), while eight countries lowered taxes on business profits (Czech Republic, Greece, Luxembourg, Malta, Netherlands, Finland, Sweden, United Kingdom). The average rate of CIT in the EU Member States was 24% in 2008 while 23% in 2013. Tax reduction of CIT coincided with a period of particularly out of the crisis after 2013, when the twelve EU countries have reduced the taxes on businesses by 2015, including some as far as the United Kingdom 30% ro 20%, Greece from 35%
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to 26%, Sweden from 28% to 20%, Finland 26% to 20%. Some the EU countries apply attractive tax advantages for foreign investors and SME, such as the Baltic States where in Lithuania the rate of 10% is applied on the interest and royalty income paid to non-resident companies. Some Member States introduced tax relief on investments in physical capital or R+ D, whilst restricting the deductibility of other items (operational loses). Tab. 5. Adjusted top statutory rates on corporate income in 2008- 2015. 2008
2009
2010
2011
2012
2015
Belgium
34.0
34.0
34.0
34.0
34.0
33.0
Bulgaria
10.0
10.0
10.0
10.0
10.0
10.0
Czech Republic
21.0
20.0
19.0
19.0
19.0
19.0
Denmark
25.0
25.0
25.0
25.0
25.0
23.5
Germany
29.8
29.8
29.8
29.8
29.8
30.2
Estonia
21.0
21.0
21.0
21.0
21.0
20.0
Ireland
12.5
12.5
12.5
12.5
12.5
12.5
Greece
35.0
35.0
43.0
30.0
30.0
26.0
Spain
30.0
30.0
30.0
30.0
30.0
28.0
France
34.4
34.4
34.4
34.4
36.1
34.43
Italy
31.4
31.4
31.4
31.4
31.4
27.5
Cyprus
10.0
10.0
10.0
10.0
10.0
Latvia
15.0
15.0
15.0
15.0
15.0
15.0
Lithuania
15.0
20.0
15.0
15.0
15.0
15.0
Luxembourg
29.6
28.6
28.6
28.8
28.8
29.2 19.0
Hungary
21.3
21.3
20.6
20.6
20.6
Malta
35.0
35.0
35.0
35.0
35.0
Netherland
25.5
25.5
25.5
25.0
25.0
25.0
Austria
25.0
25.0
25.0
25.0
25.0
25.0
Poland
19.0
19.0
19.0
19.0
19.0
19.0
Portugal
26.5
26.5
29.0
29.0
31.5
29.5
Romania
16.0
16.0
16.0
16.0
16.0
16.0
Slovenia
22.0
21.0
20.0
20.0
20.0
17.0
Slovakia
19.0
19.0
19.0
19.0
19.0
22.0
Finland
26.0
26.0
26.0
26.0
24.5
20.0
Sweden
28.0
26.3
26.3
26.3
26.3
22.0
United Kingdom
30.0
28.0
28.0
26.0
24.0
20.0
Norway
28.0
28.0
28.0
28.0
28.0
27.0
Iceland
15.0
15.0
18.0
20.0
20.0
20.0
Source: Taxation trends in the European Union, Eurostat, Luxembourg 2012, and p.29
One can say that the EU Member States undertook sizeable consolidation needs to increase their tax revenues during the crisis. If governments need to increase taxes, it is better than to achieve it through the increase in indirect taxes, which are less harmful for investment or work than direct taxes. Many researches support the claim that a move from income taxation to consumption taxation would raise the rate of long term economic growth. The European Commission research shows that a 1% GDP consolidation achieved by raising consumption taxes would lead to an initial decline in GDP of only 0.1-0.2% and in the long run the GDP would be higher by 0.1-0.4% in comparison with no consolidation scenario (Tax reforms, 2011/5, 54.). D. Botman and S. Danninger stimulated the impact of the German tax reforms assuming an increase in VAT rates partly compensated by lower payroll taxes and a corporate tax. In their conclusions the initial negative effects on GDP growth in Germany would turn slightly positive in the medium turn (Botman D., Danninger S., 07/46/ 2007.). For Italy shift from taxing labour to taxing consumption should reduce disincentive in labour market and lead to an increase in the level of employment and output (Annicchiaro B., Dio B., Felici F., Nucci F., 2011, 1).
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Generally, EU countries have moved this way their tax systems during the crisis, when they mostly increased taxes which inhibit less economic growth. This was particularly the case of countries heavily affected by the crisis uch as Greece, Spain, Portugal or Ireland. The potential to taxes increase was considered to be high if: tax to GDP ratio was relatively low and there was scope for increasing the least distortionary taxes. Table 6 shows estimates of increase in tax charges in the EU countries in the medium and long term with the aim to reach budgetary equilibrium and reduction of the public debt, in accordance with the Maastricht requirements. The indicator of fiscal sustainability gap in the medium term S1 is considered high if more than 3, which corresponds to the very top of the indicator distribution. The indicator of fiscal sustainability in the long term S2 is high if more than 6, which corresponds to the very top of the indicator distribution. Both indicators signify that initial budgetary position component of the sustainability gap (initial budgetary deficit) and the long term budgetary projections are very unfavorable. Tab. 6. Sustainability GAP and primary balance Country
S1 medium term
S2 long term: initial budgetary position ageing component
Belgium
6.2
7.5
0.5
7.0
Germany
0.6
1.8
-0.5
2.3
Estonia
-2.1
2.1
1.2
0.8
Spain
3.7
4.3
2.3
2.0
France
3.0
2.2
1.3
0.9
Italy
-0.9
2.8
-3.4
0.5
Cyprus
2.3
5.5
-0.2
5.7
Luxembourg
0.3
9.8
1.2
8.7
Malta
2.9
6.1
1.3
4.8
Netherlands
4.1
7.9
2.4
5.4
Austria
2.3
3.7
0.2
3.5
Slovenia
2.2
7.5
0.6
6.8
Slovakia
4.4
8.6
3.5
5.1
Finland
1.2
4.9
0.3
5.1
Bulgaria
1.7
2.6
0.4
2.2
Czech Republic
0.4
4.9
1.1
3.8
Denmark
0.6
3.3
0.5
2.9
Latvia
1.9
0.7
0.9
1.6
Lithuania
0.1
4.3
0.8
3.5
Hungary
0.7
0.54
0.5
1.0
Poland
0.1
1.5
0.5
1.0
Romania
1.5
3.6
0.1
3.5
Sweden
2.9
1.8
1.1
2.9
UK
5.1
5.2
2.6
2.5
EU 27
2.2
2.9
0.7
2.3
EA – 17
2.1
2.4
0.3
2.2
Source: Tax reforms in EU Member States 2012, European Economy 2012/6, p.58
S1 correspond to the required adjustment of the primary balance until 2020 to reach public debts of 60% and the debt threshold fixed in the Treaty by 2030. As one can see in the table 6 Belgium, Spain, UK, Slovenia, Netherlands need a strong fiscal adjustment to make their public finance sustainable in medium term. As far as long term perspective is concerned fiscal adjustment was particularly high in Belgium, Luxembourg, Spain, Netherlands, Slovenia, Slovakia, Czech Republic, UK, and Lithuania. Fiscal adjustment in Poland in both the short and long term in order to public finances sustainability has been much more than the average requirements in the EU and the euro area. Among euro area Member States Belgium, Spain, Luxembourg, Malta, the Netherlands, Slovenia, Slovakia and the UK faced particular consolidation challenges due to serious sustainability issues both in the medium and long run. At the same time Spain, Malta Slovenia and Slovakia
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showed some overall tax space (relatively low tax to GDP ratio) which might be used to contribute to consolidation on the revenue side.
4. Evolution of government expenditure in the EU countries during crisis. Economic crisis has a significant impact not only on level and structure of taxes but also on budgetary expenditure.The euro area crisis has affected the public spending in Member States by at least four main factors: 1) automatic stabilisers reaction to the crisis; 2) introduction of discretionary measures and increase spending; 3) fall in budgetary revenue; 4) austerity programs. During the crisis the euro area countries tipped the austerity tendency and reduced the share of budgetary expenditure in the GDP of 51.2% to 49% in 2009-2013 and to 48.8% in 2015. In 2008- 2015 even deeper decreased share of public expenditure in the GDP of EU Member States from 51.1% to 48.2%. Among the euro area countries, particularly the share of Estonian government expenditure in GDP decreased from 45.2% to 39.1%, in Greece from 53.8% to 50.5%, Italy with 52.0% to 50.69%, Portugal from 49.7% to 47.89%, in Spain with 46.3% to 42.04%. Of concern was the decline in the share of budgetary expenditure in GDP in Germany with 48.1% to 43.87% given the huge role in stimulating demand across the European single market. Austerity programs have not only carried out the countries of the euro area, but also the other EU countries, such as Romania where the share of public expenditure in GDP decreased to 25.5% from 33.8%, UK downgraded the share of public expenditure in GDP from 46.3% to 40.3%, Sweden from 54.7% to 50.1%, or Poland from 47.7% to 41.8%. Tab. 7. Government expenditure of the EU Member States in 2009 – 2015 (as % of GDP) Year Denmark Estonia Ireland Greece Spain France Lithuania Malta Netherland Poland Romania Slovakia Hungary Italy Slovenia United Kingdom Belgium Bulgaria Czech Republic Germany Cyprus Latvia Luxembourg Austria Portugal Finland Sweden
2009 57.8 45.2 48.8 53.8 46.3 56.8 43.8 43.5 51.6 44.5 41.1 41.5 51.5 52.0 49.3 46.3 53.7 40.7 44.9 48.1 46.2 44.5 43.0 52.9 49.7 55.9 54.7
2010 57.6 40.6 66.8 50.0 45.6 56.5 40.9 43.3 51.3 45.4 40.2 40.0 49.4 50.6 50.3 47.3 52.7 37.4 44.2 47.9 46.4 43.9 42.4 52.6 51.2 55.2 52.2
2011 57.8 38.2 48.8 50.0 43.6 55.9 37.5 43.0 50.2 43.6 37.7 37.4 48.6 50.0 50.9 48.3 53.2 35.2 43.4 45.7 47.3 39.1 42.0 50.5 48.7 53.7 51.1
2012 58.6 41.2 44.1 49.7 42.4 56.3 36.8 44.4 50.8 43.1 36.2 37.7 48.6 50.4 48.7 49.3 53.9 35.2 43.3 45.6 46.0 38.1 43.6 51.4 47.7 54.3 52.1
2013 56.6 39.3 43.1 50.6 42.0 56.2 36.1 43.8 50.8 42.4 35.4 37.3 47.6 49.5 47.9 50.3 53.7 35.3 43.1 45.2 45.3 37.0 44.0 50.6 46.1 54.7 51.8
2015 54.4 39.1 35.6 50.5 42.0 57.0 34.1 44.8 44.5 41.81 33.8 41.8 49.0 50.7 44.5 40.3 53.4 37.8 42.0 43.9 36.5 41.8 52.0 47.9 58.7 50.0
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Euro area – 17 EU -27
51.2 51.1
51.0 50.6
49.4 49.1
49.4 48.9
49.0 48.4
48.8 48.2
Source: Report on Public Finances in the EMU, European Economy 2012/4, Luxembourg 2012, p.2, www.statistica.com/ statistics/263220/public-spending-ratio-in eu countries, 2016-02.26
On the basis of the statistical data we can find, that the EU countries have not opted for the classic methods of fight against the crisis by increasing public expenditure. The overall support of the EU Member States finances was substantial in critical period 2009- 2013, as measured by the deterioration in the governments balance amounted to 5%. After 2013 the EU Member States rather stabilized budgets in austerity program by public savings or increased taxes. In the EU only three Membe States increased their budget expenditure share in GDP during the period 20092015: Finland from 55.9% to 58.73%, France from 56.8% to 57.01%, Malta from 43.5% to 44. 86% (see table 7). Belgium and Slovakia have maintained the level of public expenditure in relation to GDP more or less at the same level. Other countries have reduced significantly the share of spending in GDP budgetary due to stabilization program. Some like Ireland, UK and Portugal after a short-lived increase in public expenditure finally reduced their expenditure relative to GDP.
5. Expenditure multipliers and fiscal space Increasing taxes may not be harmful for getting out from crisis, if the increase in taxes is used to increase the expenditure. So called balanced budget theorem says that a change in real GDP is equal to the change in government purchases when government purchases and taxes change by the same amount and in the same direction (Roger A. Arnold, 1996,. p. 207). However, in the short term consolidation might have negative impact on aggregate demand and growth before the positive impacts from reduced interest payments kicks in. The main factors driving the success of a budgetary consolidation in reducing the debt ratio are the value of the fiscal multiplier. The fiscal multiplier measures the reaction of the economic output to a budgetary expansion or consolidation. Tax and transfer multipliers used to have a smaller short term impact then government expenditure. A euro spend by any governments is euro spend, but euro tax cut is a euro partly saved and partly spent (Peter, S. Heller, 2005, 3-5 ). There is growing conviction that fiscal multipliers are not linear and become larger in crisis period. Tab. 8. Expenditure multipliers in euro area countries Short term
Medium term multiplier
Germany(1960-1974)
0.36
0.28
Germany ( 1974-2004)
0.62
1.27
Studies
Sample multiplier
Perotti ( 2004) Heppke – Falk (2006) Baum - Koester (2011)
Germany (1976-2009)
0.7
0.69
Benassy-Quere-Cimadomo (2006)
Germany ( 1971-2004)
0.23
-0.23
Biau- Girard (2005)
France (1978-2003)
1.9
1.5
Giordano (2007)
Italy (1982- 2004)
1.2
1.7
De Castro (2006)
Spain (1980-2001)
1.14-1.54
0.58-1.04
De Castro- H. de Cos (2008)
Spain (1980 -2004)
1.3
1.0
De Castro – Fernandez (2011)
Spain
0.94
0.55
IMF (2005)
Portugal ( 1995-2004)
1.32
1.07
Perotti (2004)
UK ( 1963-1979)
0.48
0.27
Benassy-Quere –Cimadomo (2006) UK ( 1971-2004)
0.12
-0.3
Burriel (2010)
0.87
0.85
Euro Area ( 1981-2007)
Source: Report on Public Finances in the EMU, European Economy 2012/4, Brussels 2012, p. 123
Fiscal and spending multipliers were quite different between the EU Member States as well between the USA as in euro area. Expenditure multiplier for the euro area as a whole was higher than in the USA and UK. Government consumption multipliers were lying between 0.5 and 0.8 in most of the EU member countries; larger multipliers correspond to cuts in their government wages and government investments, while smaller multipliers correspond to VAT and labor tax increases.
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Table 8 summarizes some of the available empirical evidence in the literature concerning fiscal multipliers to government expenditure shocks in the case of Germany, France, Italy, Spain, and Portugal. Public expenditure multiplier differs clearly among the euro area Member States in the long period 1960- 2007. Short term - one year multipliers usually ranks between 0.4 and 1; for longer period the dispersion is even higher. Much higher multiplier was obtained for France, Italy, Spain and Portugal than for Germany. The government spending shocks displayed little persistence and the influence on the economy in the case of Germany (multiplier is somewhat below 0.7) as well as spending multipliers were usually found to be low in United Kingdom (from 0.12 to 0.48). For France, Italy, Spain and Portugal one year spending multiplier was above unity, whereas they turned out to be fairly persistent, so fiscal consolidation might have influenced negatively the economic growth in these countries. Tab. 9. Critical first year multipliers in the EU Member States at constant interest rates in 2011. Cyclical semi elasticities
Debt in 2011
Critical multiplier
Belgium
0.51
98.0
0.7
Bulgaria
0.33
16.3
2.0
Czech Republic
0.36
41.2
1.3
Denmark
0.65
46.5
0.9
Estonia
0.30
6.0
2.8
Ireland
0.44
108.2
0.7
Greece
0.42
165.3
0.5
Spain
0.43
68.5
0.9
France
0.53
85.8
0.7
Italy
0.49
120.1
0.6
Cyprus
0.43
71.6
0.9
Latvia
0.30
42.6
1.4
Lithuania
0.29
38.5
1.5
Luxembourg
0.44
18.2
1.6
Hungary
0.44
80.6
0.8
Malta
0.38
72.0
0.9
Netherland
0.62
65.2
0.8
Austria
0.47
72.2
0.8
Poland
0.38
56.3
1.1
Portugal
0.45
107.8
0.7
Romania
0.32
33.3
1.5
Slovenia
0.45
47.6
1.1
Slovakia
0.33
43.3
1.3
Finland
0.58
48.6
0.9
Sweden
0.61
38.4
1.0
United Kingdom
0.46
85.7
0.8
Source: Report on Public Finances in the EMU, European Economy 2012/4, Luxembourg 2012, p.138.
Overall most of the empirical estimates for the euro area have revealed that the tax shocks usually entail lower effects on GDP than public expenditure. The success of government’s policy to increase taxes depends however also on so called fiscal space: to be effective fiscal consolidation must have a certain freedom of manoeuvre in budgetary policy. P. Heller defined fiscal space as “room in a government’s budget that allows it to provide resources for a desired purpose without jeopardizing the sustainability of its financial position or the stability of the economy” (Peter, S. Heller, 2005, .3-5). Table 9 shows the estimated critical multipliers for the EU 27 for 2011 taking into consideration the reaction of automatic stabilizers to the change in growth induced by budgetary consolidation. Given the size of the fiscal multiplier in the EU countries each partner should have taken into account its critical size, which may not be exceeded. If the multiplier is very high, then too ambitious a program budgetary consolidation may have brought about prolonged recession and an increase in debt.
EU à la carte?
Table no 9 shows that nearly all the cyclical elasticities of semi figures fall below critical multiplier. In some countries the space to increase taxes is even much (Estonia, Latvia, Lithuania, Luxembourg, Austria, Slovenia, Slovakia) but the other countries, such as France, Ireland or Italy could no longer afford to further boost up tax without exceeding the critical multipliers during crisis. Particularly large were the differences between the cyclical semi elasticities and critical multiplier in Bulgaria, where the level of public debt was just 16.3%, in Estonia, where the level of public debt was only 6% in reference with GDP. Greece was a unique country in the euro area where short run debt could increase even its composition between expenditure and revenue would be balanced.
Conclusions In a situation as deep a crisis as 2008 the EU countries took the entire package of activities to restore macroeconomic equilibrium comprising various instruments from the fiscal policy. During the crisis the majority of the EU partners used taxation to consolidate their public finances, but the increase in the tax to GDP ratio appeared fairly modest and the tax increases did not cover equally all taxes nor acted in the same way for all partner countries in their consolidation effort. Overall the euro crisis reshaped the tax structure of the EU Member States with noticeable shift from direct taxes to indirect taxes as a less harmful for economic growth. Roughly half the EU Member States raised their VAT rates. Increasing the consumption taxes in the EU was accompanied by “fiscal devaluation” in direct taxation. The rate of income tax companies CIT progressively declined and tax reduction coincided with a period of particularly out of the crisis after 2013. The rate of the PIT, tax paid by individuals during crisis period, increased slightly on the solidarity basis but among the EU countries prevailed a policy to reduce tax on labor aimed mainly to increase work incentive. The economic crisis has influenced not only budgetary revenue in the EU countries, but also budgetary expenditure. Only three EU Member States increased budget expenditure share in GDP, while in other countries the stabilization programs have reduced the share of spending in GDP; some countries after a short-lived increase in public expenditure finally reduced their expenditure relative to GDP. Due to the low value of fiscal multiplier the tax increases in the EU countries might have had a moderate impact on economic activity during the period of crisis. The level of GDP and a deep recession in euro zone could have been the result of the method of restoring fiscal balance by reducing more spending than increase taxes. Confronting the crisis the EU would be much more effective when that was not carried out by the Member States individually, but together at the EU level. There are valid arguments for jointly imposing discipline and budgetary stabilization coordination as well as optimal budgetary spending in all area in the time of crisis.
References Annicchiaro B., Dio B., Felici F., Nucci F., Macroeconomic modelling and the effects of policy reforms: an assessment for Italy using ITEM and Quest, 2011 Ministry of Economy and Finance Working paper Arnold R.A., Economics, New York 1996, p.207. Baldwin R., Wyplosz Ch., The Economics of European Integration, Berkshire 2004, Botman D., Danninger S., Tax reform and debt sustainability in Germany: an assessment using the Global Fiscal Model, IMF Working Paper 07/46/ 2007. Heller P, S., PDP/05/4 , IMF Policy Discussion Paper, Fiscal Affairs Department, March 2005,p.3-5 Krajewska A., Podatki w Unii Europejskiej, PWN Warszawa 2010., 2015 Macroeconomic Data and Index of Economic Freedom, Heritage Foundation. Maunder P., Myers D., Wall N., R.leRoy Miller, Economics explained, London 2000, Protocol No 5 on the excessive deficit procedure; European Union. Selected instruments taken from the Treaties. Luxembourg 1993,
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Opinion on direct and indirect taxation. Economic and Social Committee of the European Communities, Brussels, 20-21 December 1995, Report on Public Finances in the EMU, European Economy 2012/4, Luxembourg 2012, p.2, www. statistica.com/statistics/263220/public-spending -ration-in eu countries, 2016-02.26 Takacs V., Mate A,.Nagy S.G, Changes in tax structures in European Union Member States (in) Society and Economy in Central and Eastern Europe, Journal of the Corvinius University of Budapest, November 2015, vol. 37. Taxation trends in the European Union, Luxembourg 2012, Tax reforms in EU Member States 2011, European Economy, Luxembourg2012/6, Top statutory personal taxes rates and top marginal tax rates for employees, OECD, stats.org./ index.aspx.data
EU à la carte?
DIFFERENTIATED INTEGRATION FOR GROWTH Ton Notermans Tallinn University of Technology
[email protected]
1. Introduction While the division of post-1945 Europe into a Soviet and Western zone removed the possibility and incentive for inter-European wars, integration served as a tool for the West European states to promote economic recovery, beginning with the EPU and OEEC and followed by the ECSC and EEC (Milward 2000). More than six years after the onset of the Eurocrisis, the EU manages to convince fewer and fewer people that integration still serves that purpose. With persistent low growth, high unemployment, rapidly increasing inequality within and between the Member States and seemingly incessant demands for budget, social security and wage cuts, while billions are spent on bank bailouts, especially the economically less advantaged than joined by an increasingly fearful middle class, have come to see the EU as the problem rather than the solution. The result is a revolt against European political elites that threatens to bring populist and integration critical parties to power in more and more Member States, threatening to turn even such traditionally Europhile countries as Italy, the Netherlands and France into Europhobes. For the EU institutions, as well as many scholars, the only solution to the current problems is a further transfer of competences to the community in order to achieve a “genuine monetary union” (E.g. Enderlein et al 2012; Juncker 2015, Legrain 2014; Matthijs & Blyth 2015; van Rompuy 2012) “Completing the euro” is generally seen to require three new sets of unions; a financial union, a fiscal union, and an economic union, while a political union is assigned the task of signing-off this technocratic design. While the 5 presidents may have an institutional interest in advocating more competences for the EU as the antidote to any conceivable problem, such an approach would seem dangerously short-sighted- In essence the EU faces the same task Western Europe needed to confront after 1945, namely to convince its population that democracy and capitalism are compatible. That, however, requires a pragmatic approach that sees integration again as what was intended to be from the start, namely a tool that promotes the prosperity of the Member States rather than as an end in itself. After 1945, the Member States, with economic integration as a crucial element, succeeded admirably as the so-called Trente Glorieuses were marked by high growth, low unemployment and social inclusion. Given the failure of the current EU, this paper asks if the post-war successes of Europe may still hold valuable lessons. The remainder of the paper is structured as follows. Section two argues that market fragmentation and policies of de-financialisation rather than financial union will provide a sounder basis for a stable economy. Section three argues that addressing the forces that hold back private investment by means of financial deregulation, debt reduction and an end to austerity are more urgent than the creation of a EU fiscal policy capacity. Section four claims that a differentiated vertical industrial policy is the most appropriate tool to address the structural weaknesses of the peripheral countries while completion of the single market and the promotion of wage flexibility instead are apt to exacerbate problems of economic divergence and deflation. In analogy with the Bretton Woods system, section five argues that the common currency would need to be equipped with a safeguard mechanism allowing Member States to temporarily exit in case of fundamental disequilibria. Section six concludes with a plea for an outcome-oriented and differentiated form of integration.
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2. Financial Union: Fragmentation for Stability Though commonly called the sovereign debt crisis, a better label would be the second financial crisis of the 21st century. In Spain, Ireland and Cyprus the crisis was sparked by excessive private debt with the rise in sovereign debt being consequences of the bail-out of the financial system. The label sovereign debt crisis might be more appropriate for Portugal and Greece. Yet, it takes two parties to create debt. The escalation of Greek debt happened because investors failed to undertake adequate creditworthiness appraisals, accumulating highly risky positions in the confidence that a public bail-out would be orchestrated if necessary (Abelshauser 2010). In short, the Eurocrisis is another example of botched financial de- and re-regulation similar to the Nordic and Japanese crises of the early 1990s and the East Asian crisis of 1997 (Turner 2014). Many Member States sought to liberate their financial industry in the hope of creating a competitive new growth pole (Buckley & Howarth 2010). On the European level this attempt to catch up with the US financial industry was complemented by the Single Market in Financial services. Concentration and interconnectedness of European financial markets was further stimulated by EU Directive 361/1998 and the introduction of the euro itself. The former did so by abolishing controls on intra union capital flows while the latter removed the exchange rate risk that could serve to tame such flows. Nor, was financial fragility solely the result of deregulation. During the first decade of the new millennium e.g. the EU issued a set of directives that actively sought to promote trade in repos and derivatives through so-called safe harbour clauses (Perotti 2011). Though financial and monetary integration itself was the main cause of the Eurocrisis, one will look in vain for any EU statement expressing doubt whether further financial integration serves the needs of prosperity. The banking union is not designed to reduce financial fragility but to break the so-called doom loop in which bank bail-outs undermine the sustainability of public debt, while conversely the loss of confidence in public debt threatens to wipe out bank assets. The break this circle, a single resolution mechanism and resolution fund was required, but his in turn would not be feasible without centralised supervision. Given the small size and the national compartmentalisation of resolution funds, it is doubtful whether the current setup of the banking union can break the link between sovereigns and banks (Fazi & Iodice 2016), but even if political opposition to its completion could be overcome, the banking union does little to reduce financial fragility. The EU’s plan for a capital market union may instead increase fragility further. The basic motivation for the CMU is to stimulate EU-wide capital markets given the impaired lending ability of the banking system. However that solution ignores some of the main lesson of the financial crisis. First, that the originate-to-distribute model inherent in derivatives increases the overall risk exposure. Secondly, that long intermediation chains and lack of transparency created financial institutions too interconnected to fail. Third, that intense competition and removal of cross-border barriers exacerbates the problem of financial institutions too big to fail. More important perhaps, there is no convincing evidence that financialisation in any way has promoted growth (Cournède et al 2015, Wyplosz 2010). In contrast, the Trente Glorieuses stand out for their absence of any noteworthy financial crises. That stability was achieved via two different models with one common element. Between the financial reforms inspired by the Great Depression and their gradual dismantlement since the 1980s, the US banking system was guided by the principle of small is beautiful (Neely 1994). Not only did it require a horizontal compartmentalisation between investment banking and deposit talking institutions, the system was also characterised by geographic fragmentation via the interdiction on interstate banking and a highly varying patchwork of state-level banking regulation (Hendrickson 2011). In Europe, national boundaries had a similar fragmenting effect, while the potential fragility of its universal banking model was contained by tight financial repression allowing the authorities to directly intervene in the amount and type of lending undertaken. The common element in both models was the discouragement of financialisation. In a financial system that serves the real economy by lending for productive purposes debt and GDP should move in tandem (Werner 2005). Yet, the reforms undertaken in Europe and elsewhere have done nothing to promote de-financialisation. Indeed as research by the McKinsey Global Institute (2015) shows, debt to GDP ratios has increased in all advanced economies since 2007. The result is that European economies have further moved into a speculative position, in the sense that an escalating debt to GDP ratio implies that income streams may not guarantee debt service such that debtors must
EU à la carte?
speculate on favourable movements in asset price for their position to be sustainable (Montanaro & Tonveronachi 2012). In sum, the historical record would suggest that rather than completing financial integration, economic stability and growth would best be served by fragmentation, financial repression, cartellisation and de-financialisation.
3. Fiscal Union: Promoting Investment The initial effort to repair the cracks in the euro focused on centralising fiscal policy in order to eliminate the free-riding behaviour to which the incomplete supranationalisation of the EMU allegedly gave rise. However, the policy of debt reduction has spectacularly failed. The attempt to reduce debt by a combination of fiscal austerity, structural reforms and internal devaluation had much larger effects on GDP than initially expected such that debt to GDP ratios actually increased (Blanchard & Leigh 2012).With the exception of Germany, Malta and Latvia, general government gross public debt as a percentage of GDP is higher in 2015 as it was in 2010, while private debt build-up has continued unabated in most cases. (1) As the crisis progressed, fiscal austerity alongside fiscal profligacy, came into focus as a problem that might require a supranational fix. The argument was not a new one as it followed logically from the short-term framework of OCA theory. With monetary and exchange rate policies no longer available, asymmetric shocks would have to be addressed by fiscal policies. As such this implied that the SGP made the EMU over-complete as more leeway would be needed for national fiscal policies. Yet, the high level of public debt and the inability to roll it over some member countries had experienced, suggested that countercyclical fiscal spending should be managed through a federal budget, in analogy to the fiscal federalism of the USA. Proposals for an EU fiscal capacity were already present in the van Rompuy report, and also are part of the proposals of the five presidents, albeit in a watered-down version. However, history does not suggest that fiscal federalism might able to return Europe to growth. Not only is it hard to detect any Keynesian response during the Great Depression, demand management played at best a minor role in the Trente Glorieuses. Instead, growth was based on high levels of investment with little need for demand management (Battilossi et al 2010: 361). It can be argued that the age of Keynesian policies only started in earnest in response to the economic dislocations of the 1970s, but there they proved ineffective. Indeed the end of the Trente Glorieuses has given rise to almost permanent budget deficits in Western Europe, but the one thing this continuous deficit spending has not done is to restart growth. Instead of an EU fiscal capacity, growth-oriented policies should be oriented towards removing the factors that depress investment. This would direct the focus to such issues as the need to address the large and growing debt overhang that serves to reduce the incentive to borrow and the ability to lend, the set of financial regulations aimed at stimulating speculative over productive investment, the continued insistence on fiscal contraction and the loss of competitiveness experienced by many peripheral economies since the introduction of the euro, as well as the need for a growth oriented monetary policy.
4. Economic Union: Industrial Policy In line with the IMF adjustment programmes of old, macroeconomic assistance served the function of crisis management while structural reform was to make economies resilient. Yet, the evidence that structural rigidities are the main cause of Europe’s economic ailments is chequered. In 2009, e.g. Boeri and Garibaldi declared the end of Eurosclerosis. Yet one year later, and notwithstanding substantial flows of structural and regional funds for decades, southern Europe was diagnosed as being riddled with structural rigidities. Similarly, the origins of the Eurosclerosis debate lay in the urgent need to invoke rigidities as an explanation for why macroeconomic disinflation had led to a pronounced reduction in growth. The theory held that the real effects of monetary inflation would (1) Source for public debt figures: AMECO. Source for total debt/GDP ratios: McKinsey Global Institute 2015: 3.
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be temporary, or non-existent if central banks were credible. To save the dogma that monetary policy has no real (as opposed to nominal) effects it became necessary to invoke rigidities, but as e.g. Barry Eichengreen (2007: 272) and Olivier Blanchard have argued, increased unemployment did not coincide with any notable proliferation of labour market rigidities. The EU’s own experience in the Baltic States during the sudden stop of 2008 should have provided some additional fuel for doubt. Though already amongst the most flexible and liberalised economies in the EU, absorbing the shock proved highly costly in term of output and unemployment, while their (partial) recovery in fact had little to with their superior wage flexibility (Kattel & Raudla 2013). Instead, the high variability of economic performance relative to the gradual change in structural conditions would strongly suggest that the poor performance of Europe, both since the disinflations of the 1980s and since the current crisis has macroeconomic determinants. Moreover, as Ricardian trade theory teaches, lower productivity is no hindrance for a country to participate profitably in international trade. The competitiveness obsession that instead underlies the EU’s approach has re-enthroned the absolute advantage theory where, a country in analogy to a firm can only thrive if it produces better or cheaper products than its rivals. The implication of that mercantilist view either is that the EU will necessarily be divided into winners and losers and thus there can be no common interest in trade integration, or that the EU must engage in a zerosum fight with rest of the world. But not only will the enforced structural adjustment in GIPS countries fail to reach its goal without an appropriate macroeconomic complement, the effort to increase wage flexibility by trying to undermine collective bargaining such that wages could allegedly fall to their market clearing level is counterproductive as it is rapidly becoming a source of deflation. (2) Though the five presidents’ suggestion for more integrated EU labour markets might serve to reduce some of the deflationary pressures through outward labour migration, completion of the single market might serve to exacerbate another problem that continues to plague the EU, namely increasing disparities in national per capita GDP. While the single market, complemented by regional policies was expected to provide a powerful impetus to income convergence, this has not happened (Table 1). Full trade integration between countries at widely different levels of development tends to cement disparities. That trade integration does not solve problems of structural weakness but that an industrial policy is required was something the original six were well aware of. Indeed, France, not in small part to the efforts of Jean Monnet, is one of the most successful examples of catch up by means of industrial policies. Unlike the current form of structural policies the industrial policies of the Trente Glorieuses were not assigned the futile task of undoing the macroeconomic effect of austerity by removing rigidities but had the purpose of increasing per capita GDP by upgrading the industrial structure, while being embedded in a growth oriented macroeconomic framework. And unlike the EU’s current cohesion policies which have a predominantly horizontal orientation, industrial policies are vertically oriented to specific industries while the most successful ones use strict performance criteria. Table 1: PPP per Capita GDP Relative to EU(28) Average, in 2014 EKS Dollars (%) 1985
1990
1995
2000
2005
2010
2014
96,8
90,7
87,1
86,6
72,2
Southern Europe and Ireland Cyprus
73,7
87,4
Greece
96,2
92,3
92,9
92,8
98,3
92,4
74,5
Ireland
86,3
97,9
116,4
146,4
149,7
131,5
132,5
Italy
128,6
133,0
137,1
126,2
114,7
105,4
97,4
Malta
61,0
71,0
86,2
89,9
86,3
89,8
96,7
Portugal
74,8
87,1
91,3
91,2
82,5
80,5
74,0
Spain
90,9
100,6
107,1
107,7
104,7
99,6
92,7
Estonia
59,9
55,8
43,8
53,5
69,2
67,7
80,0
Latvia
63,7
63,0
35,2
39,5
54,4
53,3
62,9
Baltic Countries
(2) Recovery from the Great Depression, it may be recalled, in many instances involved policies to reduce nominal wage flexibility in an effort to halt deflation
EU à la carte?
1985
1990
1995
2000
2005
2010
2014
71,5
66,4
38,5
40,9
53,5
55,3
64,2
Bulgaria
58,2
46,7
43,1
35,6
42,7
49,2
52,5
Croatia
93,6
77,0
54,6
55,4
59,9
59,1
55,9
Czech Republic
86,8
85,5
80,2
74,1
79,6
83,9
83,6
Hungary
84,2
74,0
64,7
63,8
70,1
67,4
70,2
Poland
54,1
43,7
46,9
50,9
52,7
63,9
70,3
Romania
66,6
50,2
42,8
35,9
42,5
47,7
51,0
Slovak Republic
63,9
59,8
56,2
55,1
62,0
74,2
78,5
Slovenia
101,4
79,3
77,1
79,6
84,1
88,4
86,8
Austria
131,4
134,4
140,6
136,0
130,1
132,7
135,8
Belgium
130,0
133,3
138,3
132,8
126,9
129,2
130,1
Denmark
149,9
142,1
153,1
146,3
136,2
129,1
126,6
Finland
119,3
123,7
115,5
122,8
122,3
121,7
118,5
France
126,1
127,9
129,7
122,9
114,8
111,3
110,2
Germany
136,0
137,2
144,0
132,2
120,1
123,9
129,4
Luxembourg
207,2
242,3
268,5
283,7
274,1
277,1
275,9
Netherlands
139,2
140,4
148,6
148,1
136,1
138,8
133,8
Sweden
135,5
134,1
131,5
131,1
129,9
130,0
130,8
United Kingdom
110,1
114,0
119,3
115,1
115,2
110,3
113,1
Lithuania Eastern Europe
Western Europe
Coefficient of Variation of PPP per Capita GDP EU 28
0,36
0,42
0,51
0,52
0,47
0,45
0,44
EU 15
0,26
0,28
0,30
0,33
0,33
0,35
0,37
Source: The Conference Board Total Economy Database, own calculations.
Many of the traditional tools of industrial policy like indicative planning, selective credit allocation and local content or technology-transfer rules might violate EU law, or at least stand in opposition to the spirit of completing EMU. Nevertheless, the cementing of a core periphery divide cannot but further undermine the EU’s legitimacy. In other words, the survival of the EU, also in this case may depend on the ability to abandon the one-size-fits-all approach by means of a mitigation of the level playing field principal (3) and a reorientation of its cohesion policies. Moreover, the EU might play a critical role in solving the Achilles heel of industrial policy, namely close links between the executive and industry leading to allocation of support on clientelistic principles while doing little to promote convergence. Especially in view of the corporate state capture that plagues many East European countries (Innes 2014), the EU might be essential for the successful execution of such policies. Moreover a policy that provides tangible result might instead strengthen EU output legitimacy by confronting corrupted national elites, rather than provoking more of the virulent antiintegration response to the current attempts to safeguard and complete the euro.
5. Monetary Union: Flexibility for Growth The main argument against a common currency is that it prevents differences in wage growth from being corrected by external devaluation thus giving rise to a permanent divergence of competitiveness to the detriment of the South European EMU members (Johnston & Regan 2016; Streeck 2015). In theory the issue could be addressed by a full liberalisation of wage setting. Alternatively, a rule requiring Member States to keep their NULC in line could be incorporated into the EMU (Flassbeck & Lapvitsas 2015). However, apart from the high political and economic costs it will entail, fully flexible wage bargaining in slack labour markets promotes deflation. Having the growth of nominal unit labour costs determined at the central level of the EMU would not seem (3) That would be perfectly possible under Article 27 TFEU
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feasible because of political opposition of the surplus countries and because it involves taking wage determination out of the market thus rendering unions and employers’ associations irrelevant. Table 2: NULC, Exports and GDP
NULC, % Change
Export Volume, % Change
Real GDP, % Change
1998–2008
1998–2015
1998–2008
1998–2015
1998–2008
1998–2015
Germany
2,1
18,2
100,3
143,7
16,9
23,9
Austria
10,6
28,0
82,6
99,2
26,8
30,8
Finland
16,7
38,8
99,5
76,1
38,2
30,8
Belgium
19,3
32,2
57,4
89,0
25,4
31,8
France
19,8
33,0
45,6
70,3
22,4
26,4
Netherlands
23,8
36,7
68,4
105,6
27,8
28,5
Sweden
23,8
41,7
74,0
94,1
34,2
48,8
Portugal
29,1
24,6
54,4
96,5
17,4
10,7
Italy
30,0
42,9
33,5
42,5
13,0
4,8
Cyprus
36,2
34,7
19,4
26,9
50,3
36,2
Luxembourg
37,2
59,0
117,2
167,1
53,6
77,9
Spain
39,7
33,3
55,0
89,2
42,1
35,9
Ireland
40,3
12,3
115,6
209,5
73,2
94,0
Greece
43,0
35,6
106,6
88,7
40,9
4,4
Source: AMECO, own calculations
Table 2 lists labour costs, export volumes and real GDP for 14 countries since 1998. Developments up to 2008 do lend some support to the contention that North European countries were better able to contain wage costs than their southern neighbours. However, France with a relatively fragmented industrial relations system performed better than traditionally corporatist countries such as the Netherlands and Sweden, while Luxembourg and Ireland performed worse than their bargaining systems would have suggested. Moreover, there is no clear correlation between wage cost growth and export volume. German exports did double between 1998 and 2008 but the country is outperformed by Luxembourg Ireland and Greece. Accordingly the scenario of German hyper-competitiveness driving the southern countries into crisis is not really confirmed by the data. Rather, the data would suggest that the main costs of adhering to the euro derives primarily from the speculative excesses and massive macroeconomic imbalances it engendered, with high growth rates and the hypertrophy of the sheltered sector fuelling stronger wage growth. Perhaps even more important, the Eurozone adjustment strategy, has proven to be extremely costly internal devaluation, austerity, structural reform and the insistence that debts be paid in full perpetuated the crisis, made sovereign debt reduction illusory while undermining growth prospects as much of the industrial structure in countries such a Greece was destroyed while many better educated people migrated to other EU countries. An alternative strategy was pursued in Iceland involving a partial default on the debts of the banking system, modest fiscal austerity, a substantial devaluation of the currency and the use of exchange controls to stabilise financial markets. Though the liabilities of the Icelandic banking system amounted to roughly 10 times GDP before the crisis, the country has weathered the crisis considerably better than the GIPS countries. In addition to financial reforms that prevent such imbalances from occurring, this suggest that the EU could have spared itself much of the economic costs, political polarisation and loss of legitimacy if EMU, had included an escape clause providing for temporary exit in the case of fundamental disequilibria together with a mechanism for restructuring public and private debt. (4) Competitiveness is a relative terms such that an external devaluation of southern Member States come at the expense of the northern surplus countries. Though such zero sum policies may be justified by the need to redress the damage done by the creditor-led adjustment strategy, in analogy (4) Having the ECB buy part of the bad debts that are currently laming the financial system would currently seem the least costly road towards debt restructuring.
EU à la carte?
to the effects of the breakup of the interwar gold standard, dissolution of the euro might help to promote growth. Peter Temin (1989) has argued that adherence to the interwar gold standard regime created low growth expectations as internal balance would always be sacrificed for the sake of external balance. The countries that abandoned the gold standard during the first wave in 1931-1932 were able to recover by changing the expectations of the actors. When the second wave of countries abandoned the gold standard in 1936, this did not kill the recovery in the first wave countries, but it instead also allowed them to refocus expectations towards growth. Dissolving the euro might have similar effect as it would equally signal the end of a regime that has been geared to sacrificing growth for the sake of potential inflation and debt service. In particular, flexible exchange rates in southern Europe would most likely put enormous pressure on the northern countries to reduce their current account surpluses by stimulating domestic growth instead of seeing them reduced by a rapidly appreciating currency that will destroy their export sectors. However, since adoption of the euro in most southern countries served the goal of restoring domestic political coherence in a system riven by distributional struggles, exiting from the euro would only be advisable to the extent that it does not lead to a resurgence of the previous constellation. Though escalation of inflation as a result of the removal of the fixed exchange rate would seem a remote risk in the current constellation, promoting growth under an independent currency would require a high degree of national consensus on the need to channel resources to private sector recovery. Though it would remove the immediate pressures on nominal wage and spending cuts, many of the sacrifices made during the crisis could not be undone. Greece may not be Iceland and an unconstrained Greek government may be unable to ward off requests for rent seeking and unproductive spending leading to a scenario of further economic destabilisation through a currency that progressively loses trust. Paradoxically perhaps, Wolfgang Schäuble’s much maligned proposal of temporary euro exit might provide a remedy as it could enlist the overt distrust in the national political class and the consequent support for Europe to promote a policy of economic recovery. The recognition that several south European economies suffer from a fundamental disequilibrium that will require devaluation together with real (as opposed to nominal) clear criteria for a reintegration of the devalued currency, might invert the growth depressing effects of the current regime while setting a clear objective that would serve to maintain domestic political coherence.
6. An Outcome-Oriented Union The specific form monetary integration took in the EU was shaped by the disintegration of the post-war consensus. The external constraint of irrevocably fixed currencies under central banks that had shed al responsibility for growth, accompanied by pressures for structural reforms and containment of public debt served the need of those countries plagued by political fragmentation, labour militancy and a sum of claims on the national product that far exceeded the total. By serving as a political scapegoat while holding out the promise of prosperity and modernisation tighter integration simultaneously furnished a shared goal and a set of constraints that provided for the second rescue of the nation state. At the same time it allowed the Northern Member States to execute the export led growth model that had come to give coherence to their polities after a less severe crisis of governability in the seventies. Yet, that rescue of the nation state had sown the seeds of the union’s demise. The different incentives that had driven northern and southern countries into the EMU via the snake and the EMS condemned the union to imbalances from the start. The institutionalisation of remedies that might have been an appropriate answer to the problems of the seventies inflated the size of future problems. Ever tighter economic integration became a means instead of an end losing sight of the fact that Europe can only survive if it provides economic prosperity while enjoying political legitimacy. Removing much of the remaining obstacles to the single market may have increased the discipline exerted over the single Member States but it came at a price of promoting economic divergence. Fixed exchange rates and capital account convertibility may similarly strengthen market discipline over individual economies, but in combination with the de- and re-regulation of European financial markets, it became a recipe for further imbalances and crises. While combating the crisis by adherence to the fixed exchange rates and no debt relief for fears of relaxing spending constraints and the attempt to further increase
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market pressures in the “deviant“ southern economies through structural reform might have made sense in a 1970s environment, in the Eurocrisis it became a recipe for a further intensification of disparities. The issue thus is not simply one of Europe being to diverse for the straight jacket of common rules but just as much a problem of the straitjacket of the EMU and single market in financial services themselves creating economic and political polarisation. It took the combined shocks of the Great Depression, the interwar political polarisation and the Second World War together with the systemic competition with the Soviet Union to lead European governments to the realisation that capitalism and democracy can only be made compatible if inequality is kept at tolerable levels by providing jobs and welfare. As this lesson was unlearned the form of European integration that had served to cement this return to the Pre-Great Depression capitalism inevitably saw it legitimacy fade away. Though the Commission’s increasingly embattled position is forcing it to concede to more differentiated forms of integration, there are precious few signs that the lessons from a previous period are being relearned. The fear of operating without an external constraint keeps the southern Member States in the euro. Financial reform is still firmly set on a path to more integration, more interconnectedness and more fragility while the SGP and structural reform might become ever harder to enforce, neither the political will nor the institutional capacity for a meaningful industrial policy is present. With an outcome-oriented EU that takes a pragmatic approach to integration for the sake of economic prosperity, social inclusion and, in the end, political stability nowhere in sight, Europe’s prospects look bleak. In the end a might take a shock similar to the interwar period of escalating polarisation within and between European countries for the EU to rediscover its original purpose.
References Abelshauser, W. (2010), “Die Erblast des Euro – Eine kurze Geschichte der Europäischen Währungsunion”, Aus Politik und Zeitgeschichte 43: 39-45 Battilossi, S., J. Foreman-Peck & G. Kling (2010), “Business Cycles and Economic Policy, 1945– 2007” In: S. Broadberry & K. H. O’Rourke, eds., The Cambridge Economic History of Modern Europe Volume 2: 1870 to the Present. Cambridge. Cambridge University Press. Blanchard, O. & D. Leigh (2012). “Are We Underestimating Short-Term Fiscal Multipliers? IMF World Economic Outlook, October 2012: 41-43. Boeri, T. & P. Garibaldi (2009), “Beyond Eurosclerosis”, Economic Policy, July 2009: 410 – 461. Buckley, J. & D. Howarth (2010), “Internal Market: Gesture Politics? Explaining the EU’s Response to the Financial Crisis” Journal of Common Market Studies, 48, Annual Review: 119–141. Cournède, B., O. Denk, P. Hoeller (2015). “Finance and Inclusive Growth”, OECD Economic Policy Paper, June 2015 No. 14, Paris: OECD. Eichengreen, B. (2007), The European Economy Since 1945. Princeton NJ: Princeton University Press. Enderlein, H., et. al. (2012), “Completing the Euro.” Notre Europe Studies & Reports 92. Paris: Notre Europe. Fazi, T. & G. Iodice (2016), Why further Integration is the Wrong Answer to the EMU’s Problems: The Case for a Decentralized Fiscal Stimulus. Flassbeck, H. & C. Lapavitsas (2015), Against the Troika. London: Verso. Hendrickson, J. M. (2011), Regulation and Instability in U.S. Commercial Banking. New York: Palgrave Macmillan. Innes, A. (2014), “The Political Economy of State Capture in Central Europe”, Journal of Common Market Studies, 52(1): 88-104. Johnston, A. & A. Regan (2016) “European Monetary Integration and the Incompatibility of National Varieties of Capitalism”, Journal of Common Market Studies 54(2): 318–336. Juncker, J-C. et al (2015), Completing Europe’s Economic and Monetary Union. Brussels: EU.
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Kattel, R. & Ringa R. (2013), “The Baltic Republics and the Crisis of 2008–2011”, Europe-Asia Studies, 65(3): 426-449. Legrain, P. (2014), How to Finish the euro House. London: Centre for European Reform Matthijs, M. & M. Blyth, eds., (2015), The Future of the Euro. Oxford: Oxford University Press. Mckinsey Global Institute (2015), Debt and (not much) Deleveraging. London: Mckinsey. Milward, A. (2000), The European Rescue of the Nation State. 2nd Edition. London: Routledge. Montanaro, E. & M. Tonveronachi (2012), “Financial re-regulation at a Crossroads: How the European Experience Strengthens the Case for a Radical Reform Built on Minsky’s Approach”, PSL Quarterly Review, 65(263): 335 – 383. Neely, M. C. (1994), Going Intestate: A New Dawn of US Banking, St. Louis: Federal Reserve Bank of St. Louis. Available from: https://www.stlouisfed.org/publications/regional-economist/ july-1994/going-interstate-a-new-dawn-for-us-banking Perotti, E. (2011), ‘Systemic liquidity risk and bankruptcy exceptions’, CEPR Policy Insight No. 52. London: CEPR Streeck, W. (2015), “Why the euro divides Europe”, New Left Review 95: 5 - .26. Temin, P. (1989), Lessons from the Great Depression. Cambridge MA: The MIT Press. Turner, A. (2014), “Something Old and Something New: Novel and Familiar Drivers of the Latest Crisis”, In: P. Clement, H. James & H. Van der Wee, eds., Financial Innovation, Regulation and Crises in History, London: Pickering & Chatto 2014. Van Rompuy, H. (2012), Towards a Genuine Economic and Monetary Union. Brussels: EU. Werner, R. A. (2005). New Paradigm in Macroeconomics. Basingstoke: Palgrave Macmillan. Wyplosz, C. (2010), “Financial Restraints and Liberalization in Postwar Europe”, In: G. Caprio, P. Honohan & J. Stiglitz, eds., Financial Liberalization: How Far, How Fast? Cambridge: Cambridge University Press.
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WHAT IS THE BEST INSTITUTIONAL FRAMEWORK FOR THE EUROZONE FOR IT TO FUNCTION IN AN EFFICIENT MANNER? “…make quantitative conditions compulsory on any country having an adverse balance of payments so that it cannot overrun the constable.” J.M.Keynes
George D. Demopoulos Jean Monnet Chair Athens University of Economics and Business
[email protected] Nicholas A.Yannacopoulos University of Piraeus
Abstract The main drawback of the Eurozone is the lack of an adequate mechanism to correct imbalances following a shock. In fact the creditor countries are reluctant to adjust, transferring the cost of adjustment to the debtors that have no other alternative but to deflate and allow unemployment to rise. But when the debtors internally devaluate, without an offsetting internal revaluation by the creditor countries, the general outcome will be a union-wide deflation. In order to avoid this suboptimal outcome, the participants have to agree to coordinate their activities. Such an agreement will be stable if the individual rationality of the Member States does not dominate global rationality, a condition that it is not met today.
The views expressed in this paper are those of the authors and do not necessarily reflect those of the institutions they are affiliated with.
EU à la carte?
1. Introduction The main drawback of the Eurozone is the lack of an adequate adjustment mechanism to correct the observed payments imbalances among the Member States. Such a mechanism of adjustment requires coordination of economic activities. Coordination of macroeconomic policies means that countries with a balance of payments deficit have to contract their economic activity, while countries experiencing a balance of payments surplus have to follow policies that stimulate their domestic demand. Thus imbalances are corrected and the equilibrium in the currency area is restored. Otherwise (if the surplus countries insist on keeping their surpluses) the cost of adjustment is born entirely by the deficit countries, and the net result is a deflationary bias, leading to economic recession and unemployment. Obviously “a Political (federal) Union” cannot be founded on such an unstable economic background. The question then is whether there is an automatic mechanism that corrects imbalances among the Member States (and therefore renders any attempt to run a balance of payments surplus self-defeating) or, in the absence of such a mechanism, an agreement could be reached by the members of the union to coordinate their policies. The purpose of this short note is to argue that in monetary unions (as in any fixed exchange rate regime) there are no automatic processes of adjustment (Demopoulos and Yannacopoulos, 2016, 2012), and that it is necessary to introduce the appropriate institutions or rules (through an agreement) that will bring a simultaneous pressure on both creditors and debtors to correct their imbalances. In the next section of this note we discuss the negative effects of asymmetric adjustments, while in the third section we outline the possibilities of such an agreement.
2. Asymmetric adjustments Europe’s monetary union may be described as a group of countries sharing a common currency but without fiscal integration. The union members adopt a decentralised mode of behaviour, which means that each country’s objective is to maximise its own utility, without considering the effects of its policy on the others. Classical economists argued that (in a decentralized economic system) imbalances that may appear are corrected through monetary flows that automatically bring adjustments of price levels and activity between the debtor and the creditor countries, which eventually reverse the pressure. The defects of this view do not lie so much on its assumptions (validity of the quantity theory of money, perfect price and wage flexibility) but on the fact that it postulates that both creditors and debtors behave according to the “rules of the game”, which say, that a country with a balance of payments surplus should have an expanding money supply and a country with a balance of payments deficit a contracting money supply (symmetric behaviour). In reality the behaviour of the countries, in a fixed exchange rate regime, is asymmetric: the process of adjustment is compulsory only for the debtor and optional for the creditor (Keynes 1980). The creditor has the options of hoarding its surpluses (by compressing domestic spending) or adjusting, while the only option for the debtor is to deflate and allow unemployment to rise. This asymmetric behavior is evident in the eurozone (Eichengeen 2012). Surplus countries like Germany feel less pressure to adjust than their deficit counterparts. In fact, during the crisis, severe austerity measures were imposed on the deficit countries of the union, while the creditors continued to follow policies aiming at balancing their budgets. The deficit countries have been forced to reduce their wages and prices (internal devaluation) without compensating wage and price increases (internal revaluation) by the surplus countries. The net result is a deflationary bias that explains the high level of unemployment in the south. And since deflation increases the real burden of the debt (both public and private), the result is to leave the heavily indebted nations of the euro area between a rock and a hard place (Eichengreen 2012). This situation is reminiscent of the Stackelberg game, with the surplus country acting as a leader and the deficit country as a follower. In this game the leader has to decide whether to defend its surplus in its current account or to adjust. The follower (the deficit country), informed of the leader’s choice, chooses its own action from its set of actions. If the leader chooses to defend its surplus (as it usually happens), the options for the follower is either to deflate or to abandon the currency area. The first option open to the follower (remain in the union and deflate), may lead to sub-optimal results for the following reasons:
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(i) Deflation redistributes real income from debtors to creditors. And if we assume that the marginal propensity to consume of the debtors is higher than that of the creditors, then this redistribution leads to a decline in aggregate spending and, consequently, to a decline in aggregate demand, leading to a backward sloping aggregate demand curve (Tobin, 1980). In this case, supply side policies, popularly referred to as structural reforms, are counter-productive as a number of authors (Eggertsson, 2010; Eggertsson et. al., 2013; Demopoulos and Yannacopoulos, 2015) have demonstrated. Furthermore, the long run favourable effects of the supply side polices (emphasized by Eggertsson et al., 2013) are questionable, because deflation renders debtors liquidity constrained, and therefore unable to optimise their inter-temporal consumption function. (ii) Deflation, though it may improve the conditions of the balance of trade, is likely to worsen the terms of trade, reducing further the welfare of the deficit country. However, there is another issue that needs consideration in this context. Heavily indebted members of the monetary union have to transfer large amounts of money to their creditors, in order to repay their debts. This rebalancing problem can and should be considered from the vantage point of view of the transfer problem, initiated by Keynes (1929) and Ohlin (1929), in the context of German reparation payments after the First World War (Corsetti, et. al., 2013). The debtor in order to transfer money to the creditor, has to run a balance of payments surplus, i.e., to make its exports cheaper relative to its imports. This may worsen the debtor’s terms of trade, adding an excess burden to the direct burden of the payment. (Demopoulos and Yannacopoulos, 2015). To this, one may add that a prolonged period of transfer of resources from debtors to creditors (as in the eurozone today) “will run up to the lack of political legitimacy, much as it did in Germany after World War I” (De Grauwe, 2013b, p. 18). (iii) Deflation may lead to liquidity crises. In fact, as De Grauwe (2011, 2013a, 2013b) and De Grauwe and Yuemei (2013) have emphasized, deflationary macroeconomic policies lead to recession and (through the operation of automatic stabilizers) to an increase in budget deficits. Increased budget deficits increase the distrust of the markets as to the ability of the country to service its debt. This is because the members of the euro zone borrow in a currency, the supply of which do not control, and therefore they cannot guarantee bondholders that cash will be available at maturity. The European Central Bank that could, in principle, provide that liquidity (acting as a lender of last resort) is reluctant to do so, for a combination of statutory, political and ideological reasons. The distrust of the markets leads to bond sales. Liquidity is drawn from national markets, domestic interest rates increase drastically, forcing authorities to apply even more budgetary austerity, which in turn leads to a more intense recession. Thus, the deficit country finds itself in a situation, characterized by austerity programmes that fail to reduce budget deficits, because they lead to a downward economic spiral and punishing interest rates (Demopoulos and Yannacopoulos, 2012a, 2013a). If the domestic deflation fails s restore external equilibrium, then the deficits in the current account accumulates, and this may lead to a massive outflow of capital and bank runs. Eventually, some members of the currency area may be forced to leave it (the second option), if they believe that the cost of leaving is lower than the cost in remaining in the currency area.
3. Policy coordination and some concluding remarks These inefficient outcomes can be removed if the members of the currency area coordinate their policies: austerity in the deficit countries has to be matched by budgetary stimulus in the surplus ones. Coordination requires an agreement among the participants. This agreement has to introduce the appropriate institutions in the monetary union that brings a simultaneous pressure to both creditors and debtors to correct their imbalances. This agreement (if reached) is stable if it cannot be challenged by anyone. This is possible when the self-interest of each member of the currency area taken individually (individual rationality) is also good for the union as a whole (group rationality) (Demopoulos and Yannacopoulos, 1998, 1999, 2012b). This condition is not likely to be met today. In fact Germany, and the other surplus countries of the euro area, may be reluctant to sacrifice their positions as creditor nations. But if individual rationality dominates, imbalances and their negative effects on the currency area (deflationary bias and unemployment) remain.
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A monetary union with these shortcomings is not viable. We believe that imposing a single currency without, at the same time, providing the system with an adjustment mechanism to correct imbalances among the Member States was an economic mistake. Europe is not an optimal currency area. The imposition of a single currency in a heterogeneous area without geographical mobility deprived the member countries the flexibility to adjust in times of economic distress. At this point it is useful to recall that economic flexibility was one of the characteristics of the Keynes plan for an International Clearing Union (Keynes 1980; Demopoulos and Yannacopoulos, 2013). In accordance with the Keynes plan the member countries retained their national currencies. All international transactions of the member countries, giving rise to a surplus or deficits in the balance of payments, should be settled through “clearing accounts” held by the central banks of the member countries in an International Clearing Bank (ICB). Central banks of the member countries would buy and sell their national currencies against credits and debits with the ICB. These balances would be held in an international form of bank money, the “bancor”. National currencies have a fixed but adjustable value relative to “bancor”. Deficit counties are allowed to depreciate their national currency relative to “bancor”; they would be charged interest on excessive deficits. Surplus countries may revalue their national currencies in terms of the “bancor”; they will be charged rising rates of interest on surpluses above a certain limit. Thus, the adjustment of the balance of payments may take the form of capital movements, since the only way for the surplus country to avoid paying high interest rates to the union is to lend its surpluses to the deficit countries.
References Corsetti, G. , Martin, P. and Pesenti, P. (2013), “Current account rebalancing and international transfers (immaculate or not)”, Vox EU, 31 January. De Grauwe, P. (2011), “The governance of a fragile eurozone”, CEPS Working Documents. http.//www.ceps.eu/book/governance-fragile-eurozone. De Grauwe P., and J. Yuemei (2013), “Self- fulfilling crises in the eurozone: An empirical test”, Journal in International Money and Finance, 34, 15-36. De Grauwe P. (2013a), “Design failures in the eurozone: Can they be fixed?”, LEQS paper No 57/ 2013, London School of Economics and Political Science. De Grauwe P. (2013b), “The creditor nations rule in the eurozone”, published in S. Tilford and P. Whyte (eds) The Future of Europe’s economy. Disaster or deliverance? Center for European Reform. Demopoulos, G.D. and A.N.Yannacopoulos (1998), “Stability in a monetary union: theoretical considerations”, published in C. C. Paraskevopoulos (ed) European Union at the Crossroads, Edward Elgar, Chaltenham, UK, Northampton, MA. USA. Demopoulos, G.D. and N.A. Yannacopoulos (1999), “Conditions for optimality of a currency area”, Open Economies Review, 10(3) pp. 289-303. Demopoulos, G.D. and N.A.Yannacopoulos (2012), “Global macroeconomic imbalances”, in N. Vettas, T.Lianos and N. Baltas, eds, Policy Studies for the Greek and the International Economy, Athens, I. Sideris Publisher, pp. 117-130. Demopoulos, G.D. and N.A.Yannacopoulos (2012a), “The myth of expansionary austerity”, Working paper series, 09-2012, Athens University of Economics and Business. Demopoulos, G.D. and N.A. Yannacopoulos (2012b), “Unstable monetary unions”, Working paper series 10-2012, Athens University of Economics and Business. Demopoulos, G.D. and N.A. Yannacopoulos (2013), “Global imbalances and equilibrium adjustment mechanisms”, Working paper series 14-2013, Athens University of Economics and Business. Demopoulos, G. and N.A. Yannacopoulos (2013a), “Expansionary austerity policies: conditions for their validity”, Working paper series, 16-2013, Athens University of Economics and Business.
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Demopoulos, G.D. and N.A. Yannacopoulos (2015), “Deflationary adjustment processes and the effectiveness of structural reforms in monetary unions”, The Journal of Business and Economic Studies, Vol. 21, No1-2, pp.1-13. Demopoulos, G.D. and N.A. Yannacopoulos (2016), “Why macroeconomic coordination may not be possible in a monetary union: A game theoretic approach”, The Journal of Economic Asymmetries, 13, 69-73. Eggertsson, G. (2010), “The paradox of toil”, Federal Reserve Bank of New York, Staff Reports, No 433. Eggertsson, G., A. Ferrero, and A. Raffo (2013), “Can structural reforms help Europe?”, Board of the Governors of the Federal Reserve System, International Finance, Discussion Paper No 1092, November. Eichengreen B (2012), “Implications of the euro’s crisis for international monetary reform”, Journal of Policy Modeling, 34, 541-548. Keynes, J.M. (1980), Activities 1940-44: Shaping the Post War World: The Clearing Union, in The Collected Writings of John Maynard Keynes, Vol. XXV, (ed. By D. Moggridge), Macmillan and Cambridge University Press, for the Royal Economic Society. Keynes, J.M. (1929), “The German transfer problem”, The Economic Journal, 39,1-7. Ohlin, B.(1929), “The German transfer problem; A discussion”, The Economic Journal, 39, 172-182. Tobin, J. (1980), Asset Accumulation and Economic Activity,Yrjo Jahnsson Lectures, Oxford: Basil Blackwell.
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EUROPEAN UNION ‘À LA CARTE’. IS DIFFERENTIATED INTEGRATION THE WAY FOR MORE EUROPE? Danuta Kabat-Rudnicka Krakow University of Economics
[email protected]
Abstract The main thesis of this essay is that we need the revision of the constituting treaties in order to ‘constitutionalise’ the changes that have been made next to or outside the European Union legal order. They must be written in the treaties as binding rules for each and every state. Even if not all states participate in the measures adopted it is important that these measures are in the treaties for the Member States not taking part in and even more for the countries that strive for the membership in the European Union, just to be aware of its aims, its aspirations and its common future. These are the fundamentals, the common basis, identifying and making special and unique this supranational entity, even if in the short run we agree on opt-outs, exemptions, special treatments, etc. In the context of the recent crisis differentiated integration proved to be a good thing since it made possible the European Union undertakes immediate, ad hoc measures. What is even more important is that it proved that change is possible in areas that until now have been shelved. Since we have monetary union, economic union and common fiscal and budgetary policies are necessary. This is a logical consequence of the setting up of the monetary union, otherwise the system will not work as the recent crisis has clearly shown. Change is possible, change that becomes an inherent feature of the European Union, change that leads to a more integrated, a more coherent structure, a federal entity, however, not a federal state (sic!), characterised by a shared-rule and a self-rule, common policies and national reservations, integration and cooperation, supranationalism and intergovernmentalism.
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Is differentiated integration the way for more Europe? According to Frank Schimmelfennig differentiated integration refers to the fact that the European Union legal rules are not equally valid in each and every Member State (1). So, is differentiated integration a good or a bad thing, should we strive for a more differentiated Union, for l’Europe à la carte or rather do everything to avoid it? He also rightly believes that differentiation facilitated integration by allowing reluctant Member States to stick with the status quo while integrationfriendly Member States were not blocking from moving forward (2). In the integration history we have many examples of differentiated integration, even the monetary union is one of them – one of the building blocks of the integration enterprise. And since not all Member States participate in this project, so the rules do not apply equally to all of them. Prima facie we can agree that differentiated integration is a good thing since it allows those who want to go forward, to proceed with more integration, to strive for a closer union, for a political entity. Differentiated integration also makes possible proceed on ad hoc basis, create special regimes under the European Union law or next to it. What is even more important differentiated integration cannot be a bad thing since it is an inherent feature of the European Union for it is written in the treaties under the guise of enhanced cooperation (3). However, in the long run all states should strive to take part in all integration measures and at least in these that constitute building blocks as four freedoms and economic and monetary union. Other issues can be left for the Member States’ regulations according their legal, political and social cultures.
Differentiated integration: the economic and monetary Union and other policy fields There are two issues the recent financial and economic crisis drew attention to. The first issue is that the economic union is needed in order to close an ambitious project of the economic and monetary union. We do have the monetary union; however, we do not have the economic union, which is indispensable for the proper functioning of the monetary union. In the economic domain only some coordinative measures are foreseen next to an open method of coordination – hence integration through coordination in place of integration through law. Since the European treaties do not provide for the conduct of a common economic policy, so it is up to the Member States to regulate it. However, on the other hand, the treaties make economic policy a matter of common interest – a commitment addressed to the Member States to coordinate their economic policies. The second issue is that the European Union was unprepared for such a crisis as the recent one since there are hardly legal basis that make possible undertake common countermeasures in such situations. So, some measures were taken while bypassing the European Union treaties. Additionally, there has been a change of the art. 136 of the Treaty on the Functioning of the European Union carried out under the simplified treaty revision procedure. The European Union was not prepared or just not ready for such serious perturbations since the European treaties did not provide for appropriate legal basis that would allow the European Union to undertake joint coordinated remedial actions in a situation of a deep economic crisis. It must be said that the European Union was designed for ‘a good weather’ as if its architects did not let the idea that an economic power such as the European Union is can find itself in such a serious crisis. The characteristic feature of anti-crisis measures undertaken by the European Union was that they were conducted outside the European treaties and thus did not entail any major change in the treaties. Initially, the Member States made recourse to international law agreements and only then undertook joint measures. The measures adopted were not only limited to the euro area states but they remain open to the non-euro area countries in which most of them participate. The said (1) Frank Schimmelfennig, Ever looser union? Differentiated integrated in the EU, speech delivered at the Jean Monnet seminar on “EU à la carte?” Is differentiated integration the way for more Europe?”, Malmö, 19 June 2016. (2) Ibidem. (3) See: art. 20 Treaty on the European Union.
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measures bring about changes that have an impact on the institutional balance and contribute to the formation of a new institutional architecture as well as they affect the integrity of the whole structure. New institutional arrangements such as the banking union or measures undertaken to proceed with the fiscal union constitute an integral part of what is used to be called new economic governance. The novelty of many solutions, i.e. the adopted countermeasures is that they interfere with the past logic, while making possible the permeation of various instruments, forms and legal regimes. The European Union is becoming more and more heterogeneous and its differentiation, which denies the hitherto thinking in terms of uniformity, allows nonetheless for better adaptation and greater efficiency of operations, especially in difficult situations to which undoubtedly the financial crisis belongs. It must be clearly said that without the pressure resulting from the necessity to undertake immediate countermeasures, there would be no reform of the European Union economic governance since many measures, both within the European treaties and next to them, would simply not be undertaken. Moreover, the recent crisis revealed the lack of solidarity and of the political will to undertake joint measures. So, we have the situation that not all Member States participate in the measures adopted, which makes the European Union more diverse and more fragmented and thus less transparent, less comprehensible and more distant for the general public. What is even more important: some measures are bypassing the European Union legal framework not being anchored in the European treaties even though common institutions have a role to play. When it comes to ad hoc instruments we had to deal, on the one side, with an instrument of the European Union law, i.e. the European Financial Stabilization Mechanism, on the other, with an instrument established outside the European Union treaties, i.e. the European Financial Stability Facility. Next to and in their place, the European Stability Mechanism was established by concluding an international law treaty, which however involves the European Union’s institutions such as: the European Commission, the Court of Justice and the European Central Bank. Hence we have a more heterogeneous structure, i.e. we have to deal with different legal regimes, namely with regulations that are foreseen in the treaties (and thus they are subject to the European Union law) and with measures that take the form of international law treaties. And so, this is subject to an open criticism, especially when Member States avail themselves of international law instruments while at the same time making use of the European Union’s institutions as well as when they set up special regulatory regimes such as European supervisory authorities. It must be said that differentiated integration interferes with the proper political dynamics and complicates integration processes even if in the short run it proves to be effective and is welcomed. As a matter of fact measures adopted for the euro area states have implications for the non-euro area countries since their aim is not only to support states that are in financial difficulties but also they form part of the European Union’s new economic governance. Besides institutionalised summits of the euro area states with the president of the eurogroup result in the strengthening of the euro area states, even though non-euro area countries participate in the measures adopted that first and foremost are addressed to the euro area states. Next to measures that were undertaken in the form of direct financial aid provided for the countries adversely affected by the crisis, some structural reforms were carried out under the new economic governance to which the European semester belongs, whose aim is the common accord on the Member States’ annual budgets, then the so called six pack, which strengthens the measures adopted in the Stability and Growth Pact and whose aim is the reduction of macroeconomic imbalances and finally the Fiscal Pact, which is meant to increase the Member States’ budgetary control. It should be emphasized that although these measures are essentially taken in view of and are aimed at the euro area countries, they have some effect on non-euro area states that nolens volens participate in them. Differentiated integration may also lead to the ‘renationalization’ of common policies what can be observed in an energy and a foreign policy sector and thus to undermining solidarity and to weakening the European Union as a whole. It must be said that Member States consider energy
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as their own strategic domain, comparable to the one of foreign policy (4). Nonetheless, the European Union must proceed with its own common energy policy, diversify energy sources, reduce dependence on external suppliers; in short it must strive for the creation of a genuine energy union. As regards borders and defence, the European Union must work out its own common policy towards the external world in order to secure its external borders, to cope with refugee (economic, war and others) problems while at the same time actively participating in solving urgent, immediate problems in different parts of the world that adversely affect Europe. In short, the European Union must be actively engaged in and have its voice heard on the international scene. At the very moment it is not the time for setting up a political union let alone a political union in the form of a state-like entity. The European Union can well proceed under the given institutional structure and legal framework while making use of the institution of close cooperation and consensus based policies when necessary.
Concluding remarks Differentiated vs. more unified Europe, which option is to be chosen depends on the time length and the area concerned. In the short run we can agree that differentiated integration is a good thing since it allows the others, the willing and the able to proceed with more integration while not being constrained by the veto. However, this cannot lead to the petrifaction of the status quo, in other words special, exceptional treatment must be temporary not permanent. Even though flexibility proved to be a good thing, in the long run all Member States should strive for a common unified standard. And as for policy domains, as is well known European integration is characterised by some fundamentals, building blocks, an integrative core that cannot be waived, so there must be one standard for all. However, the situation is slightly different when we enter the sphere of high politics; here it can be even necessary to agree on a temporary special treatment since otherwise it will not be possible to go further. As regards the crisis the measures the European Union has recently adopted were necessitated by the situation, so they are rather random but they prove that change is possible. The European Union is becoming more heterogeneous but its diversity, which denies the preached so far philosophy of uniformity allows nonetheless for a better adjustment and a greater effectiveness (5), what however does not mean that we should stand down from striving for one unified standard. In short, there must be one standard for the material core, e.g. we cannot waive the said four freedoms (see the recent discussion concerning free movement of people) and, as a matter of principle, in the long run all states should strive for the membership in the monetary union (even if some have opted out). Besides, rules, principles and procedures that were adopted in order to deal with the financial crisis should all become the European Union law in order to be applied equally to each and every state since they deal with the financial and budgetary Member States’ policies. There is another salient reason for having them as binding European Union law, namely, being part of the acquis communitaire they will have to be taken over and to be adhered to by the states that want to become members of the European Union. In the current situation should we strive for a more integrated Europe, for a political union, or even for a finalité politique in the form of a federal Europe, a federal state-like entity? Is it a proper time and do we need it just now? Not necessarily. It must be underlined that the process of European integration, i.e. its depth and its breadth, its dynamics and its intensity depends first and foremost on the political will of high contracting parties - the Member States, even if we can agree on some spill-over effects. However, it must be clearly said that the European Union is already a political entity, a federation but not a federal state (sic!) (6). It is a federation where Member States remain sovereign and at the same time accept a new entity with an international legal personality, a federation, which is based on the treaty and not on a hierarchical order, which does not have a (4) Simone Tagliapietra, Building Tomorrow’s Europe. The Role of an “EU Energy Union”, “Review of Environment, Energy and Economics”, 13 Nov. 2014. (5) Danuta Kabat-Rudnicka, Zmiana systemu rządzenia w UE w świetle działań antykryzysowych, „Studia Europejskie”, nr 1, Warszawa 2016, p. 120. (6) Danuta Kabat-Rudnicka, Zasada federalna a integracja ponadnarodowa. Unia Europejska między federalizmem dualistycznym a kooperatywnym, Lettra-Graphic, Kraków 2010.
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competence-competence and whose law prevails only in areas assigned to it. It is a non-state federation, a peoples’ Union or a community of peoples as some want to see it (7). Summing up, the treaty reform is needed even if only to write in what high contracting parties have agreed to while bypassing the European Union legal framework, what ipso facto will mean more integration. However, any change must lead to a simpler, a more precise and a more comprehensible law and an open, a more accountable and a more transparent European Union. There should be one standard for all states (at least in core areas) and a better use should be made of just given institutional setup and of existing legal provisions. Last but not least, on the one hand, the European Union should respect Member States’ identities whereas, on the other, Member States should adhere to their commitments.
(7) On the community of peoples see: Sander Luitwieler, The Distinct Nature of the European Union, “Philosophia Reformata”, vol. 80, iss. 1, 2015, p. 123–139.
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THE CHANGING FACE OF EUROPEAN SECURITY ARCHITECTURE Nicolae Păun Jean Monnet Chair Faculty of European Studies, Babeş-Bolyai University
[email protected]
Introduction According to the 10th annual Global Peace Index, we are currently further away from world peace that at any time in the past 10 years and there are now only few countries in the world which can be considered entirely free from conflict. (1) Although Europe is still considered to be the most peaceful region in the world, its security architecture is currently undergoing structural changes due to a series of negative evolutions which comprise increased interdependencies, new threats and challenges in the strategic vicinity of Europe. Moreover, several external factors have affected the national security strategies of the Member States and produced unexpected effects within the EU. The EU struggled with crises of identity and security as the number of major terrorist incidents increased. The European migration policy and the European solidarity were highly affected by the mass migration generated by the collapse of the state in Libya and Syria. On top of all these, the polarity of the European system took a critical turn when Russia contested the European order signalling a resurgence of its irredentist aspirations. Conversely, the escalation of the Russian threats contributed to increased NATO militarisation which triggered the greatest military manoeuvre since the end of the Cold War. In this context, the EU eastern enlargement which seemed to be a project of integration and stabilisation has succeeded to deepen the East-West division, determining the main power poles to compete on political and military fronts. If after the Russian-Georgian war in 2008 no one could have imagined another severe conflict within the Black Sea region, the Russian line of action has followed more or less the same pattern in 2014 when the Ukrainian conflict erupted. Thus, in 2016, the focal points of the current EU threats are the Islamic state on the southern flank and Russia on the eastern one. The recent terrorist attacks in Europe and the illegal annexation of Crimea represent strategic demands for a more active and effective EU defence policy. Last but not least, all these diplomatic and security issues are being accentuated by the current ideological division created by UK’s decision to leave EU.
The evolution of the EU security agenda Although the general objective of all 27 Member States is to have a peaceful environment within and outside the EU borders, their foreign policy interests vary on a series of specific security measures being very difficult to identify a genuine EU common security policy. Up to now, the EU has focussed on top-down peace-making, humanitarian assistance and post-conflict reconstruction. (2) The EU depends on capable and willing Member States to launch and to carry out an operation under the auspices of its common security and defence policy which become operational only in 2003. Currently, the leadership void created by Britain’s departure is expected to be filled by Germany
(1) Adam Withnall, Global Peace Index 2016: There are now only 10 countries in the world that are actually free from conflict, The Independent, 2016, http://www.independent.co.uk/news/world/politics/global-peace-index-2016-thereare-now-only-10-countries-in-the-world-that-are-not-at-war-a7069816.html, accessed 12.06.2016 (2) Human Security Study Group , From Hybrid Peace to Human Security: Rethinking EU Strategy towards Conflict, http:// europa.eu/globalstrategy/en/europe-peace-project, accessed 12.06.2016
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and France, countries that have always pushed for expanding EU’s integration to include military policy. (3) Following the end of the Cold War and the subsequent conflicts in the Balkans, it became clear that the EU should have the military capacity to respond to international crises autonomously. Thus, the Cologne European Council of 1999 marked the birth of the EU’s common security and defence policy. (4) A key development was the “Berlin Plus agreement” which gave the EU, under certain conditions, access to NATO assets and capabilities. Furthermore, civilian and military means may be used by the EU to fulfil the so-called “Petersberg tasks”, that include “joint disarmament operations, humanitarian and rescue tasks, military advice and assistance tasks, conflict prevention and peace-keeping tasks, tasks of combat forces in crisis management, including peace-making and post-conflict stabilisation”(Article 43(1) TEU). (5) In 2003 the former High Representative Javier Solana was tasked by the Member States to develop a Security Strategy for Europe. The document entitled ‘A Secure Europe in a Better World’, analysed for the first time the EU’s security environment and identified key security challenges and subsequent political implications for the EU. Since 2003 the EU has launched some 30 peace missions and operations contributing to stabilisation and security in Europe and beyond. In 2009, the Treaty of Lisboan included both a mutual assistance and a solidarity clause and allowed for the creation of the European External Action Service (EEAS) under the authority of the High Representative of the European Union for Foreign Affairs & Security Policy/Vice-President of the European Commission (HR/VP), Catherine Ashton. (6) Starting with 2009, the High Representative of the European Union for Foreign Affairs and Security Policy offers an annual report to the European Parliament on the main aspects and basic choices of the Common Foreign and Security Policy (CFSP). Looking back, the stabilisation of the Western Balkans represented the main drive in the process of creating the CFSP being regarded as a key factor for establishing political stability, security and economic prosperity. Nowadays the Western Balkan countries still share problems related to “ widespread corruption, the presence of organised crime, the lack of an independent and/or functioning judiciary, and the deep politicisation of public administration, but recently many of the countries in the region have made significant steps in the EU accession process.” (7) As Lange has summed up some of the most important developments in this sense begun back in 2013 when Serbia signed an administrative agreement with the European Defence Agency. Then on 27 October 2015, the European Union signed a Stabilisation and Association Agreement with Kosovo. Subsequently, Bosnia and Herzegovina concluded a Framework Participation Agreement (FPA) in 2015 after years of stalled negotiations and submitted its application for membership on 16 February 2016. Most notably, Belgrade opened its first chapters (chapter 32 on financial control and chapter 35 on other business, starting with the item on normalisation of relations between Serbia and Kosovo) in enlargement negotiations on 14 December 2015. Furthermore, in December 2015, Montenegro received an invitation to begin accession talks with NATO. (8) In 2016, the focal points of the current EU threats are the Islamic state on the southern flank and Russia on the eastern one. The recent terrorist attacks in Europe and the illegal annexation of Crimea represent strategic demands for a more active and effective EU defence policy. However, as Keohane argued, political interest in Member-State capitals in the EU defence policy has been declining and “if this strange dichotomy continues, it will demonstrate the increasing irrelevance of the EU defence policy for international security, and will hamper the ambition of the EU global strategy to have a full-spectrum set of foreign policy instruments and more comprehensive foreign policies.” (9) Therefore, the EU has already thought about creating new security instruments adjusted (3) Max Fisher, After ‘Brexit,’ Some in E.U. Push Military Unity, but Voters Focus on Threats Within, The New York Times, 2016 http://www.nytimes.com/2016/07/02/world/brexit-eu-military-union.html?_r=0, accessed 12.06.2016 (4) Panos Koutrakos, The EU Common Security and Defence Policy, Oxford University Press, 2013, http://ejil.oxfordjournals. org/content/24/4/1257.full, accessed 12.06.2016 (5) Ibidem (6) http://eeas.europa.eu/csdp/about-csdp/index_en.htm, accessed 12.06.2016 (7) Sabina Lange, The Western Balkans: back in the EU spotlight, Brief Issue, EUISS, 2016, http://www.iss.europa.eu/ uploads/media/Brief-9_Western_Balkans.pdf, accessed 12.06.2016 (8) Ibidem (9) Daniel Keohane, The paradox of EU defence policy, Vol. 8, No. 9 2016, http://www.europeangeostrategy.org/2016/03/ the-paradox-of-eu-defence-policy/, accessed 23.06.2016
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to the new security environment. Probably one of the most important measures that are being taken at the moment is represented by the ongoing work on the EU Global Strategy on Foreign and Security Policy.
The EU Global Strategy on Foreign and Security Policy The first European Security Strategy (ESS), A Secure Europe in a Better World, was adopted in 2003. Since then more than a decade has passed and the world has changed dramatically. Meanwhile EU has enlarged in 2004, 2007 and 2013, many changes have occurred in its neighbourhood (the Arab Spring, the Ukrainian crisis) which have strongly impacted its foreign policy, the financial crisis affected the investment in European defence, the refugee crisis, last but not least the results of the British referendum has challenged the European unity. All these changes have reiterated the fact that the creation of a new ESS was long overdue. Consequently, Federica Mogherini, the High Representative of the European Union for Foreign Affairs and Security Policy, has immediately announced her intention to prepare a new European Security Strategy (ESS). After extensive consultations, the text of the new strategy was released on 28th of June 2016. The strategy has been issued under the title Shared Vision, Common Action: A Stronger Europe, a title which suggests the need for increased action, unity, engagement, responsibility, partnership and thus become stronger. In the opening remarks, Mogherini states that “the purpose, even existence, of our Union is being questioned. Yet, our citizens and the world need a strong European Union like never before. Our wider region has become more unstable and more insecure. The crises within and beyond our borders are affecting directly our citizens’ lives. In challenging times, a strong Union is one that thinks strategically, shares a vision and acts together. This is even more true after the British referendum. We will indeed have to rethink the way our Union works, but we perfectly know what to work for. We know what our principles, our interests and our priorities are. This is no time for uncertainty: our Union needs a Strategy. We need a shared vision, and common action.” (10) The strategy acknowledges the new EU inside and outside challenges and urges to identify the appropriate means for facing them as well as the importance of strengthening the partnerships that are already in place. In that sense, it emphasise the repercussions of the Ukrainian conflict and of the protracted conflicts in the Wider Black Sea region, it underlines the necessity to include new fields of joined-up external action as to include energy, cultural and economic diplomacy. Another important element of the strategy draws attention to the intention of intensifying the transatlantic cooperation through NATO in order to address the above mentioned conflicts. For the purpose of our discussion we will focus on these three aspects: the significance of the Black Sea region for the EU security, the salience of the energy security issue and the importance of the transatlantic partnership.
The importance of the Black Sea region for the European security agenda The recent strategy reminds us that it is important to finally recognise the importance of a vital area that is located at the crossroad of all these conflicts, an area that allows for a high degree of political manoeuvring and military planning necessary for both theatres of conflict: the Black Sea region. In 2014, George Friedman from Stratford noted that the Black Sea is the geographic organising principle of several problematic areas. “The sea is the southern frontier of Ukraine and European Russia and the Caucasus, where Russian, jihadist and Iranian power converge on the Black Sea. Northern Syria and Iraq are less than 650 kilometres (400 miles) from the Black Sea.” (11) Unlike the Americans, the Europeans seem to fail in understanding the necessity of constructing a coherent strategy for this region. Therefore, I argue that too much time has passed since the European Union (10) EU Global Strategy on foreign and security policy, Shared Vision, Common Action: A Stronger Europe , https://europa. eu/globalstrategy/sites/globalstrategy/files/eugs_review_web.pdf, accessed 03.07.2016 (11) George Fiedman, Ukraine, Iraq and a Black Sea Strategy, Stratfor, 2014, https://www.stratfor.com/weekly/ukraine-iraqand-black-sea-strategy, accessed 23.06.2016
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has neglected this area of outmost importance for its strategic interests. The fact that more than 5 years have passed since the European Parliament called for the adoption of an EU strategy on the Black Sea without developing it, represents probably the best evidence that supports these concerns. Moreover, the academic interest in this area is far from being significant, very few PhD theses are developing researches in this field. I myself coordinated only three theses on this region in the last decade. It is my belief that politicians and academics alike have failed to recognise the true potential of this region. Although the EU failed to create a clear strategy for this region, it developed several policy instruments and processes that target different areas: enlargement to South East Europe and Turkey, the European Neighbourhood Policy (ENP), the Black Sea Synergy (BSS), the Eastern Partnership (EaP), the four “common spaces” and the Partnership for Modernisation with Russia. None of these proved to be very successful in stabilising the region or increasing the regional cooperation. As argued by Acikmese, “Eu’s role as a security actor in the region is merely an illusion, even though it created a paper tiger with its hundreds of pages of Black Sea and/or eastern neighbourhood strategies.” (12)
The significance of the Black Sea region for the European Energy Security Representing the meeting point between European Union (the second largest gas consumer in the world) and Russia (the largest gas producer in the world), the Black Sea region become an area of outmost importance for the broader energy games. The recent intensification of the energy security issue (the gas trade interruptions in 2009 and 2014) underlines the fact that the Black Sea region represents not just the transit zone of various gas transportation projects between the Caspian area and Middle East to the European market, but also a focus of energy security action which holds the key for a successful implementation of a common European energy policy. After the latest geopolitical events that took place within the Black Sea region, the need for uniting efforts on energy front could not be stronger. Unfortunately, it took several energy crisis and two major military aggressions to unify the interests and efforts within a very heterogeneous European energy policy landscape. After the death of Nabucco and South Stream (the two main gas pipeline projects that were meant to transit the region) the entire energy strategic planning was reconfigured. One of the major steps forward was made by the EU which announced the creation of the European Energy Union and invested more financial resources into constructing its main diversification plan: the Southern Corridor. Additionally, financial resources were also offered for implementing an interconnected network between its members. The degrees of energy dependency within this region are very different. Some of the riparian states have high levels of dependency on energy resources coming from Russia and thus are vulnerable when it comes to take cooperation decision both in the economic and political fields. They have also very different political statuses, some of them are part of the euro-atlantic structures or aspiring members while some are still tributary to the political orientations put in place during the Soviet system. This factor exacerbated the number of regional frozen conflicts and maintained a tensed regional climate. It is thus obvious that EU should configure a clear strategy for this region as soon as possible, since the stabilisation of this region represents a prerequisite of a successful implementation of its security agenda.
2016 NATO Summit in Warsaw The forthcoming EU Global Strategy will most probably sync with the transformations that will be brought by the NATO’s Warsaw summit in July this year which “is shaping up as one of the most consequential in NATO’s history. The summit comes at a critical time for the European security and the cooperation between NATO and EU represents an area where the summit is expected to deliver (12) Sinem Akgul Acikmese, “The EU’s Black Sea Policies: Any hopes for Success?”, Euxeinos, no.6, p. 22, accessed 23.06.2016
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a substantial step ahead.” (13) Besides strengthening deterrence measures that have been already taken, the agenda of this summit contains discussions regarding the creation of a NATO Black Sea fleet and granting the status of NATO associate partners to Ukraine and Georgia. In the context of the volatile situation in the eastern part of the continent, this edition of the summit must be decisive in terms of sending a strong message to Russia. “The European security paradigm has been fundamentally challenged when Russia illegally annexed Crimea and violated a number of agreements (UN Charter, the Helsinki Accords, the Budapest Memorandum, and the NATO-Russia Founding Act) that stabilised the European security for decades.” (14) The gradually strengthened regional position of Russia within the Black Sea region at the detriment of all the regional cooperative efforts made so far by other regional actors renewed its drive for regional hegemony. NATO and Russia have very profound and persistent disagreements. NATO’s decision to suspend all practical civilian and military cooperation with Russia remains in place. Political and military channels of communication, however, remain open. Following the April meeting of the NRC, the Secretary General emphasises the necessity and usefulness of political dialogue among nations that share the same Euro-Atlantic area, especially in times of tensions. However, he makes clear this does not constitute a return to business as usual. (15) Similarly, in a 2015 European Parliament press release, it has been argued that “the EU must critically re-assess its relations with Russia, which are profoundly damaged by Russia’s deliberate violation of democratic principles, fundamental values and international law with its violent action and destabilisation of its neighbours.” (16) In a similar vein, in May 2016, while underlining the importance of implementing the Minsk deal, Federica Mogherini stated that “for a long time, we considered Russia as a strategic partner,” that is no longer the case, although it remains a strategic country.” (17) Additionally, the German government has recently updated the guidelines of its national security policy and affirmed that Russia “is no longer Germany’s partner, but its rival” and now is one of the main threats.” (18) One measure that is expected to be taken during this summit is the acceleration of Europe’s security regionalisation. The last decade has showed us that focusing on the internal crisis while neglecting the problems that lay at EU’s periphery means omitting the actual cause of many other future crises. After Brexit it became even more obvious that a strong Union must offer security inside as well as on its borders and the new strategy clearly articulates that. The more the EU remains inward-looking and solely preoccupied with its internal crisis, the more fragmented and vulnerable to outside pressure will become.
References Adam Withnall, Global Peace Index 2016: There are now only 10 countries in the world that are actually free from conflict, The Independent, 2016, http://www.independent.co.uk/news/ world/politics/global-peace-index-2016-there-are-now-only-10-countries-in-the-worldthat-are-not-at-war-a7069816.html, accessed 12.06.2016 Daniel Keohane, The paradox of EU defence policy, Vol. 8, No. 9 2016, http://www. europeangeostrategy.org/2016/03/the-paradox-of-eu-defence-policy/, accessed 23.06.2016 EU Global Strategy on foreign and security policy, Shared Vision, Common Action: A Stronger Europe , https://europa.eu/globalstrategy/sites/globalstrategy/files/eugs_review_web.pdf, accessed 03.07.2016 (13) Mitch Hulse, NATO’s Warsaw Summit: ‘Failure is Not an Option’ http://www.atlanticcouncil.org/blogs/new-atlanticist/ nato-s-warsaw-summit-failure-is-not-an-option, accessed 12.06.2016 (14) Liviu Tatu, Defence Matters, http://defencematters.org/news/nato-official-russia-changed-security-paradigmeurope/832/, accessed 23.06.2016 (15) NATO website, Relations with Russia, http://www.nato.int/cps/en/natolive/topics_50090.htm, accessed 23.06.2016 (16) European Parliament, http://www.europarl.europa.eu/news/en/news-room/20150604IPR62878/Russia-is-no-longer-astrategic-partner-of-the-EU-say-MEP, accessed 22.06.2016 (17) World Bulletin, http://www.worldbulletin.net/world/172894/libya-unity-govt-pleads-for-arms-to-fight-isil, accessed 03.07.2016 (18) Ukraine Today, http://uatoday.tv/politics/germany-says-russia-is-no-longer-our-partner-but-rival-667145.html, accessed 03.07.2016
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George Fiedman, Ukraine, Iraq and a Black Sea Strategy, Stratfor, 2014, https://www.stratfor.com/ weekly/ukraine-iraq-and-black-sea-strategy, accessed 23.06.2016 http://eeas.europa.eu/csdp/about-csdp/index_en.htm, accessed 12.06.2016 http://www.europarl.europa.eu/news/en/news-room/20150604IPR62878/Russia-is-no-longer-astrategic-partner-of-the-EU-say-MEP, accessed 22.06.2016 Human Security Study Group , From Hybrid Peace to Human Security: Rethinking EU Strategy towards Conflict, http://europa.eu/globalstrategy/en/europe-peace-project, accessed 12.06.2016 Liviu Tatu, Defence Matters, http://defencematters.org/news/nato-official-russia-changed-securityparadigm-europe/832/, accessed 23.06.2016 Max Fisher, After ‘Brexit,’ Some in E.U. Push Military Unity, but Voters Focus on Threats Within,Panos Koutrakos, The EU Common Security and Defence Policy, Oxford University Press, 2013, http://ejil.oxfordjournals.org/content/24/4/1257.full, accessed 12.06.2016 Relations with Russia, http://www.nato.int/cps/en/natolive/topics_50090.htm, accessed 23.06.2016 Sabina Lange, The Western Balkans: back in the EU spotlight, Brief Issue, EUISS, 2016, http://www. iss.europa.eu/uploads/media/Brief-9_Western_Balkans.pdf, accessed 12.06.2016 Sinem Akgul Acikmese, “The EU’s Black Sea Policies: Any hopes for Success?”, Euxeinos, no.6, p. 22, accessed 23.06.2016 The New York Times, 2016 http://www.nytimes.com/2016/07/02/world/brexit-eu-military-union. html?_r=0, accessed 12.06.2016 Ukraine Today , http://uatoday.tv/politics/germany-says-russia-is-no-longer-our-partner-butrival-667145.html, accessed 03.07.2016 World Bulletin , http://www.worldbulletin.net/world/172894/libya-unity-govt-pleads-for-arms-tofight-isil, accessed 03.07.2016
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PERMANENT STRUCTURED COOPERATION AS A FORM OF DIFFERENTIATED INTEGRATION Francisco Aldecoa Luzárraga Jean Monnet Chair Universidad Complutense de Madrid
[email protected]
Abstract In the last several years, there has come about a considerable worsening in the perception of European risks and threats. There are even some who believe that this is the worst moment since the end of the Cold War, and even since the Second World War. The entry into force of the Lisbon Treaty facilitates new instruments for the development of defence policy, such as the Defensive Alliance, Article 42.7, and the Permanent Structured Cooperation, Article 42.6, among others. As a consequence of the French request, after the Paris terrorist attacks, the Foreign Affairs and Defence Council, activated on 27 November 2015, the Defensive Alliance Clause as for Article 42.7 of the Treaty of the European Union (TEU), equivalent to Article 5 of the Washington Treaty of the Atlantic Alliance. An important step would be taken in the development of Common Security and Defence Policy, and it would serve to make credible the activation of the Defensive Alliance, at the same time enhancing crisis management capacities. It will be one of the tools that make the territorial defence of the European Union possible. The launch of permanent structured cooperation can be a good example of differentiated integration, which is a way to apply a two-speed approach among Member States who wish to and can fulfil certain capability criteria, a situation equivalent to that of the economic and monetary union. This will be one more step toward more Europe.
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1. General Considerations, especially after the Brexit (23/06/2016) After the results of the British referendum on Brexit, held on 23 June of this year, the answer to the question of whether Europe needs to be more a la carte or with more differentiated integration is even clearer. There is no more Europe a la carte, and the goal is to strengthen differentiated integration. In recent years, there has been a considerable worsening in the perception of European risks and threats. There are even some who believe that this is the worst moment since the end of the Cold War, and even since the Second World War. This perception led to the June 2015 European Council giving a mandate to the High Representative to draft a Global Strategy on Foreign and Security Policy, which has been presented to the European Council and is awaiting adoption. The goal is not just to update Javier Solana’s Security Strategy, “A secure Europe in a better world,” but to practically write a new one, taking into account the worsening of the situation mentioned before. The entry into force of the Lisbon Treaty facilitates new instruments for the development of defence policy, such as the Defensive Alliance, Article 42.7, and the Permanent Structured Cooperation, Article 42.6, among others. As a consequence of the French request, after the Paris terrorist attacks, the Foreign Affairs and Defence Council, activated on the 27th of November 2015, the Defensive Alliance Clause (Article 42.7 of the TEU), equivalent to Article 5 of the Washington Treaty of the Atlantic Alliance. The launch of permanent structured cooperation can be a good example of differentiated integration, which is a way to apply a two-speed approach among Member States who wish to and can fulfil certain capability criteria, a situation equivalent to that of the economic and monetary union. This will be another step toward more Europe.
2. The Worsening of European Risks and Threats Over the last several years, it has become commonplace to reflect on the growing worsening of the security environment on the borders of the European Union, particularly the Eastern and Southern neighbourhoods. These observations have been voiced in specialized publications on security and defence, as well as included in the strategies of the Member States. This situation especially worsened progressively throughout 2014, with the birth and growth of DAESH, the self-proclaimed Islamic State, and as a consequence of the use of force by Russia. Nevertheless, it is noteworthy that mass media does not seem to be aware of the seriousness of the situation; even with the terrorist attacks in France in November 2015 and in Brussels in March of this year. Specifically, the threats we are talking about are those in eastern Ukraine; conflicts in Syria and Iraq, with the escalation of the Islamic State terrorist organization; crisis in Libya and the terrorist threat in Africa, particularly in the Sahel, Libya, and the Horn of Africa. On the other hand, one must mention the risks of growing illegal emigration and the appearance of mafias in the Mediterranean, linked to the drama of the flight of hundreds of thousands refugees that is taking place in the aforementioned countries.
3. Activation of the Defensive Alliance To the degree to which this set of threats is directed at the entire European Union, and not at each individual Member State, an effective response must come from the European Union. Thus it is indispensable that the application of the Common Security and Defence Policy is developed. As mentioned before, the entry into force of the Treaty of Lisbon facilitates new instruments for the development of the defence policy, such as the Defensive Alliance (Article 42.7) and Permanent Structured Cooperation (Article 42.6).
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Article 42.7 states that “If a Member State is the victim of armed aggression on its territory, the other Member States shall have towards it an obligation of aid and assistance by all the means in their power, in accordance with Article 51 of the United Nations Charter.” The setting in motion of this clause (which, as has been said, is equivalent to Article 5 of the Treaty of the Atlantic Alliance and was activated in November 2015 following France’s request in the wake of the terrorist attacks in Paris) is not at all easy since the European Union lacks a permanent military organization that would have sufficient capacity to carry out this task – as does NATO – and could manage defence in the face of aggression. For this reason, in the recent resolution of the European Parliament on the Global Strategy on Foreign and Security Policy, approved on the 13th of April 2016, it is said that the activation of Article 42.7 of the TEU must serve as a catalyst freeing the potential of all Treaty dispositions related with security and defence.
4. Permanent Structured Cooperation (Article 42.6 TEU) In Article 42.6 the Treaty provides for permanent structured cooperation, stating that “Those Member States whose military capabilities fulfil higher criteria and which have made more binding commitments to one another in this area with a view to the most demanding missions shall establish permanent structured cooperation.” With that, a solid juridical base is established to be able to develop a permanent structure in the area of defence, formed by a number of states that meet the specific capacity criteria. These capacity criteria are outlined in Protocol 10, included in the Treaty on European Union. In the same way that Article 42.7 on Defensive Alliance is the equivalent of Article 5 of the Treaty of Washington, this clause (42.6) can be considered its development, in a sense that it puts in motion a military organization equivalent to NATO. However, while the Atlantic Alliance and its organization are intergovernmental in character, and hence its decisions are taken unanimously, in the case of permanent structured cooperation the situation is somewhat different and can be interpreted as being not only intergovernmental cooperation, but that it leads to or may lead to differentiated integration, since its decisions are taken by qualified majority, as established by the Treaty.
5. Toward a Political Agreement in the Area of Defence In Jean Claude Juncker’s Government Programme entitled “A new start for Europe,” approved with the support of 60% of the European Parliament (Popular, Socialist, and Liberal parliamentary groups), there is established an objective of the European Union becoming a more powerful actor on the world stage. To this end, it is stated that we must work “on a stronger Europe when it comes to security and defence matters. Yes, Europe is chiefly a ‘soft power’. But even the strongest soft powers cannot make do in the long run without at least some integrated defence capacities.” It makes a concrete reference to the permanent structured cooperation when it states that “the Treaty of Lisbon provides for the possibility that those Member States who wish to can pool their defence capabilities in the form of a permanent structured cooperation.” Recently, there have been approved different parliamentary resolutions, in which the activation of permanent structured cooperation is requested, keeping in mind the international situation which we find ourselves in, among them the Resolution of the 12th of March, on the High Representative’s annual report and that of the 21st of May on the application of Common Security and Defence Policy. There is no doubt that the Global Strategy on Foreign and Security Policy must be discussed and possibly adopted by the European Council in September. Some elements in the area of security and defence shall be incorporated into it.
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6. A Window of Opportunity for permanent structured cooperation In 2008, during the French Presidency, and shortly before the entry into force of the Treaty of Lisbon, this clause was about to be put in motion, but for various reasons, among them the intensification of the economic crisis and British doubts, was not implemented. From the strategic point of view, the current situation is an opportunity to resolve the aforementioned setting up of the permanent structured cooperation, since today the United States and the Atlantic Alliance look favourably upon Europe taking responsibility for its own security and defence. Now, with the British referendum of the 23rd of June, the negative result opens not just a window of opportunity during the next six months, but a real need to resolve this question in a satisfactory manner until some months before the 2017 elections in France and Germany, since there will be neither elections, nor other international commitments that would make it difficult for the European Council to take important decisions. Therefore a good date could be the European Council of December 2016.
7. The Step from Crisis Management to the Defence of the Union’s Borders Until now, the Common Security and Defence Policy has shown results in the strengthening of crisis management operations, although not in territorial defence. The activation of the clause of the Defensive Alliance (Article 42.7) will have application for the entirety of the European Union borders. The launch of permanent structured cooperation can serve to make credible the Defensive Alliance through its linkage with territorial defence, and thus with the defence of the Union’s borders. At the same time, it could strengthen crisis management outside the Union’s borders through peacekeeping and peace enforcement missions. Moreover, it could be a good moment to develop the Global Strategy on Foreign and Security Policy and defence sub-strategy, in a sense of developing differentiated integration through permanent structured cooperation (Article 42.6). With this, another step will be taken with respect to bilateral cooperation between Member States in the area of defence, which appear more like the idea of Europe a la carte, which in my view, should be discarded. In this sense, the European Parliament resolution of the 13th of April 2016 on the Global Strategy on Foreign and Security Policy, states with precision in paragraph 3 that “the borders of each Member State are the borders of the Union, and should be defended as such.” Therefore, the resolution is referring to the defence of the Union’s borders.
8. The Effects of Brexit on Differentiated Integration There is no doubt that Brexit poses a serious problem for the European Union, since it has negative effects on the economy, on society, on European and British citizens, and on politics, including the possible split up of the UK, and the EU itself where there exist some political forces in various countries, which affirm the need for new referenda. However, it may be a great opportunity for the continuity and deepening of the European Project, since it clarifies the process, putting a federal “roof” on the European construction, which the UK has been hindering for years. This deepening is necessary in the economic area, especially through the development of the economic and monetary union, together with the banking and fiscal unions, but also in the area of security and defence. The new situation that emerged as a consequence of the negative results calls for a negotiation that would try to get the British citizenry more involved in the European Project, with the goal of
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once again becoming a Member State within reasonable time. It is not the moment to take revenge and make this new situation more difficult for the citizenry. Rather, the disengagement would be, in my opinion, only in the area of not participating in European institutions. In this sense, in the area of security and defence, it is important for this cooperation to continue, and specifically with the step toward differentiated integration, the way is prepared for possible incorporation of the UK.
9. Permanent structured cooperation, a Step Toward “more Europe” through Differentiated Integration Advancement in the European construction toward “more Europe” will be a reality if differentiated integration in the area of defence is launched through permanent structured cooperation. It will be another step in the strengthening of intergovernmental federalism, which implies a union of states and citizens. With this initiative, the European Union is consolidated as a global actor that deals with the unresolved issue of defence, since a global actor that wants to play a leadership role in global politics cannot depend on third parties in the area of defence and security, having to assume responsibility in this field. From the analysis it follows that the worsening of threats in Europe demands a joint response by the European Union. The Treaty establishes an instrument for that purpose – Permanent structured cooperation – which allows for the next step in this formalization, overcoming the situation of successive a la carte bilateral agreements. Moreover, there exists a political agreement among the three great forces – populists, socialists, and liberals – which represent 60% of the European Parliament about the launch of the differentiated cooperation. As mentioned before, there is a sixmonth window of opportunity for the European Council to adopt this necessary decision. A reference must be made to the current structure of the European External Action Service – within which there exists an Under-Secretary-General, Pedro Serrano de Haro, who is in charge of the Common Security and Defence Policy and whose organization is practically equivalent to a ministry of defence – and which needs a strong arm, which is precisely permanent structured cooperation, to make the defence policy credible. Finally, in my opinion, the way forward is permanent structured cooperation as a way of differentiated integration, and at no time Europe a la carte. This is even more important after the negative results of the British referendum. It must be reiterated that there exists a legal framework that enables differentiated integration. There is a strategic necessity for the EU to face the news risks and threats confronting Europe. There exists a political consensus regarding the need for a political commitment in this direction. The only thing lacking is a political decision that would make this differentiated integration a reality as soon as possible.
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STRENGTH AND WEAKNESS OF CSDP: LESSONS FROM EU-CHINA SECURITY COOPERATION Emil J. Kirchner Jean Monnet Chair University of Essex
[email protected]
Abstract By considering the experience of a case study on EU-China security relations, helpful insights can be drawn for the topic of differentiated European integration. As the case study demonstrates by breaking down the EU’s security policy into different areas the scope and depth of EU security relations with other states can be more meaningfully assessed; showing in which areas the EU is able to successfully achieve cooperation with other states and in which it is less able to do so. Importantly, the findings of the case study also indicate that the a la carte attributes associated with the EU’s security and defence policy can produce collective, if not progressive, results in some security areas, whilst failing in others.
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Introduction By looking at an actual case of EU security cooperation with China, many of the issues that surround the development of CSDP, as well as its supposed a la carte character, such as its supposed intergovernmental character, its lack of a defence component and its ambiguous relationship with NATO, can be effectively illuminated. At the same time, by illustrating how the EU cooperates with one of the rising powers (China) and seeks a security presence in Asia, and by examining various areas of security cooperation (military and non-military security aspects) interesting observations can be drawn about the role of the EU as an international security actor. In the following attention will first turn to an examination of the key characteristics of CSDP, seeking to distill some of its collective aspects from what is largely considered its a la carte nature. It will then relate CSDP to a more differentiated examination by adopting ten different security policy areas and by analysing these in EU-China security cooperation. In the last section of the paper the main results of that case study will presented and lessons drawn for the a la carte characteristics of the CSDP.
Views on CSDP: pros and cons When reviewing CSDP as a distinct EU policy, a la carte principles seem to outweigh the collective character. This can be demonstrated in terms of a number of its key components, such as its intergovernmental attributes, the lack of a defence component, the ambiguous relationship with NATO, and its weak external presence. However, it is important to examine these components in more detail in order to show that they not only entail a la carte characteristics and weaknesses, but also contain collective aspects and progressive developments. A brief review of the pros and cons of the components in questions will be applied in the following. First, with regard to the intergovernmental character of CSDP, the unanimity principle is usually identified as its major feature. But this neglects the fact that abstentions in CSDP decision-making are possible. Moreover, the unanimity principle has not prevented the adoption of collective decisions such as the establishment of a number of civilian-military operations, or a sequence of European Security Strategies (first in 2003, updated in 2010, and renewed in 2016). Second, with regard to defence, despite attempts to establish a European Army or to strengthen the defence component (e.g., 1953 and 1999), no concrete EU defence posture exists. Nonetheless, EU states have been able to agree to structured cooperation, in the form of a number of bi-laterally or regionally agreed battle groups, and to form the European Defence Agency, dealing with procurement issues. Third, with regard to NATO relations, there is the informal invocation of the United States three impositions on CSDP developments, which are not ‘to duplicate’ NATO assets, not ‘to decouple’ from NATO operations, and not ‘to discriminate’ against NATO obligations. However, the EU can under the ‘Berlin Plus’ arrangement borrow NATO assets for its military operations. Yet, it is also important to point out that this arrangement has experienced limitations due to Turkish objections of lending NATO assets for EU purposes. Fourth, with regard to the CSDP’s external presence, yes there have been failures in establishing a joint policy or military operation in the Iraq invasion of 2003, the Libyan conflict of 2010, and the current Syrian conflict. On the other hand, the EU has undertaken over 30 civilian-military missions, mostly in Europe and Africa, and has been able to adopt sanctions against Russia after the annexation of the Crimea and the ensuing conflict in the eastern part of the Ukrainian. As this brief exercise has shown, a more detailed analysis of key CSDP characteristics enables a more balanced picture of its so-called a la carte nature and reveals the occurrence of collective aspects together with mere intergovernmental activities. Such collective activities can be further evidenced when different areas of EU security policy are considered and related to EU external relations. To illustrate this, examples of a recent study on EU-China security relations (Kirchner et al, 2016) will be used. Considering different areas of EU security policy also helps to overcome the complexity, if not ambiguity, which is usually associated with CSDP as a whole. It also offers more analysis on why the EU is effective in some rather than in other security areas. The case study by Kirchner et al identifies the following ten security areas: (1) military security; (2) regional security; (3) nuclear proliferation; (4) terrorism and organised crime; (5) climate and energy security; (6) human security; (7) civil protection; (8) cyber security; (9) economic security; and (10) migration and immigration.
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As the case study by Kirchner et al demonstrates, EU-China security cooperation varies across the ten security areas. The following highlights the areas where EU-China security cooperation is particularly well advanced, the areas where it is least well advanced, and the areas that have a mixture of well and less well advanced levels of security cooperation.
1. Areas with considerable levels of EU-China security cooperation. Economic Security Drivers for the considerable levels of EU-China cooperation in this sector is the mutual interest by the EU and China to promote trade interests and secure trade routes, and the adherence to World Trade Organisation standards. What prevents EU-China security cooperation to reach even higher levels in this area lie in the difficulty over granting market economy status to China, and making progress on the negotiations between the two partners on a Political and Cooperation Agreement. Regional Security Both the EU and China express concerns for stability in their respective neighbourhood, and both have Central Asian interests, which converge in Chines attempts to establish the One Belt One Road initiative and in EU plans for infrastructure projects, via the Juncker Plan, in Eastern Europe and parts of Central Asia. However, there are also potential counter developments, such as the renewed links between China and Russia and Russian attempts to establish the Eurasian Economic Union (EEU) Energy/Climate Change The willingness of both the EU and China to work more closely in this security area was demonstrated at the recent Paris conference on climate change. Civil Protection There has been close cooperation between the two partners on for example natural disasters and health issues, whilst also recognising that differences prevail, in part because of different working preferences when dealing with this issue, i.e., civilian tools in the EU’s case and military measures in China’s case.
2. Areas with low levels of EU-China security cooperation Counter-terrorism/Organised Crime Issues such as definitional differences over what are to be considered terrorists; the application of intellectual property rights, or the alleged smuggling of goods by China have kept EU-China cooperation at a low level. Cyber Security Differences over the open internet access (the EU’s preference) versus government control (China’s preference) have largely prevented any meaningful level of EU-China cooperation in this sector. Human Security Deep-seated differences over human rights: issues individual (EU) versus collective (China) rights have kept security merely to a level of dialogue or intentions. Immigration/Migration Security Whereas the EU has growing concerns with massive migration/immigration influxes into the EU, China is pre-occupied with preventing emigration or a “brain train’.
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3. Areas with mixed levels of EU-China security cooperation Military Security Encouraging in this sector is the EU-China anti-piracy naval cooperation in the Gulf of Aden. On the other hand, the continued arms embargo of China and differences over sovereignty and territorial integrity remain severe obstacles for any closer security cooperation. Nuclear Non-Proliferation The successful outcome of the nuclear agreement with Iran, in which the EU through the office of the High Representative played a lead role (setting the agenda of the talks), has demonstrated that EU-China cooperation is possible in this security area. However, the lack of EU involvement in the Five-Party Talk with North Korea, in which China plays a lead role, indicates the difficulties that remain in this particular sector. While generalisations are difficult and the situation continues to evolve, it can nevertheless be concluded that there is a significant – and perhaps surprising – amount of security cooperation between the EU and China. There are, as shown, variations across the many dimensions of security relations, and there tends to be greater cooperation in areas of non-traditional security rather than in the kind of hard security issues in which the EU and China have very different attitudes and capacities. In the final analysis, the EU and China are partners with a considerable degree of convergence in their perceptions of threats, with varying levels of cooperation across a range of security dimensions, all of which has developed against the background of a maturing strategic partnership providing the context for the conduct of regular security dialogues. The achievement of the existing level of cooperation is significant given the fundamental differences and numerous obstacles that such cooperation faces. In the context of global changes and instability in many regions, there are no certainties with regard to future developments; but based on where the EU and China find themselves in the mid-2010s, there are good reasons to be moderately optimistic about the future prospects of security relations between these two partners.
Conclusion The experience of the case study on EU-China security relations (Kirchner et al 2016) provides some helpful insights into the topic of differentiated European integration. It demonstrates that by breaking down the EU’s security policy into different areas the scope and depth of this policy can be more meaningfully assessed; showing in which areas the EU is able to successfully achieve cooperation with other states and in which it is not. This also suggests that the Common Security and Defence Policy (CSDP) should be assessed in a broad sense, combining both military and nonmilitary security areas in the EU’s policy application Importantly, the findings of the case study also indicate that the a la carte attributes associated with the EU’s security and defence policy can produce collective, if not progressive, results in some security areas. A main lesson therefore to be drawn from this case study is that by studying EU security relations with other states through a series of separate sectoral analyses, a more differentiated assessment can be established about its success and failures.
References Kirchner E., Christiansen T. and Dorussen H., EU-China Security Relations: from Convergence to Cooperation?, Cambridge University Press, 2016 Kirchner E., Christiansen T. and Dorussen H., EU-China Security Cooperation in Context, European University Institute Working Paper RSCAS 2015/31.
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UKRAINE AS A BRIDGE TO RUSSIA. WHAT CAN THE EU LEARN FROM THE PAST POLISH POLITICAL STRATEGIES FOR THE EASTERN NEIGHBOURHOOD? Tomasz Kamiński (1), Marcin Frenkel (2) University of Łódź
[email protected]
Abstract Russian interventions in Donbas and annexation of Crimea have triggered a fundamental revision of the EU policy towards Easter neighbourhood, including Russia. The main goal of this paper is to develop discussion about the EU strategy towards Russia by presenting political concept named “The Giedroyc doctrine”, created by Polish intellectuals on exile, when Poland was under Soviet domination. Although created a few decades ago, some elements of this doctrine are still surprisingly relevant today and may contribute to contemporary European debate. In particular we argue that strengthening the prosperity, stability and security in Eastern Europe is possible only when Russia transforms itself into a prosperous and democratic state. Autocratic and neo-imperial Russia undermines any major pro-Western political changes in the region. Therefore, successful transformation of Russia into stable, prosperous and democratic state should be included into the long term vision of European politicians who intend to keep Europe secure. All political activities in the Eastern neighbourhood should be subordinated to this. It means that economic support for Ukraine and strengthening cooperation with this country should not be a goal itself. The westernisation of Ukraine ought to be perceived only as a beginning of political transformation of the whole region.
(1) Tomasz Kamiński works as an Assistant Professor at the Faculty of International and Political Studies, University of Łódź (2) Marcin Frenkel is a PhD candidate at the University of Łódź
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Introduction Political situation in Ukraine after the Maidan revolution in 2014, for example the convincing victory of moderate parties and the total defeat of fascist movements, have proved that there is a great pro-European momentum which can lead to a sustainable change of the political as well as the economic system in this country (Dragneva, Wolczuk 2015; Peacock, Cordner 2016). Russian aggressive political response to the pro-western moves in Ukraine may be understood as an attempt to protect their traditional zone of influence, but also as an another step to defend Putin’s regime. The westernisation of Ukraine would undermine foundation of Russian system and encourage political change in this country. It was the fear of street protests spreading from Ukraine to Russia, which led Putin to use all means, including military force, to undermine new government there. As Bridget Kendall noticed (Zawisza 2015): This was done to prevent Ukraine from serving as a case-study of what could be achieved through popular protest or to provide an example of “another Poland: prosperous, modern, democratic and western”. Consequently, the war in Ukraine is no longer only about Ukraine but also about transformation in Russia. Russian leaders “exploited every post-Soviet and neo-Soviet atavism and made it real because an alarming proportion of the population believes it. This is how they have refuelled their regime” (Judah 2014). Russian conflict with Ukraine leads to destabilisation of the Eastern European neighbourhood and creates security threat to the EU. Aggressive behaviour of Russia is perceived by some of the Member States as a direct danger to their statehood. Poland and particularly Baltic states, with their strong Russian minorities, are afraid of being the next aim of Putin’s neo-imperial policy. This “Russian threat” was the driving force behind NATO’s decision to deploy its military forces to the region, taken during the Warsaw Summit in 2016, but it also had an impact on the EU policy towards Russia and other Eastern neighbours (Jones, Foy 2016). The Ukrainian war has triggered a fundamental revision of the EU policy towards Russia. The previous policy is widely perceived as failure and now the EU is searching for the new long-term strategy towards Russia – the one that can be accepted by all Member States, traditionally divided and prioritising their bilateral economic relations above commonly shared strategic interests (House of Lords 2015). Some key elements of this new approach were indicated in the new security strategy of the EU (European Union 2016) and other documents (European Leadership Network 2016). The main aim of this paper is to contribute to this discussion about the EU strategy towards Russia by presenting political concept created by Polish intellectuals in exile, grouped around the “Culture” (in Polish: Kultura) magazine published in Paris, when Poland was under Soviet domination. This political idea, called “Giedroyc’s doctrine” after the surname of its main advocate and editor-inchief of the magazine, had a huge impact on Polish foreign policy after 1989. However, created a few decades ago and obviously not for the purposes of the EU, it is still surprisingly relevant and some elements may feed into contemporary European debate. In particular we argue that strengthening the prosperity, stability and security in Eastern Europe is possible only when Russia transforms itself into a prosperous, democratic state. Autocratic, neoimperial Russia is going to undermine any major pro-western political changes in Ukraine, Belarus, Georgia and other post-Soviet republics. Therefore, the successful transformation of Russia into a stable, prosperous and democratic state should be the long term vision of European politicians aiming at ensuring security of Europe. All political activities in the eastern neighbourhood should be subordinated to this. It means, that support for changes in Ukraine and strengthening cooperation with this country should not be an end in itself. The westernisation of Ukraine should be perceived only as a lever for the political transformation of the whole region. The paper is divided into three parts. In the first section, we provide an overview of the political strategy towards Russia proposed by the “Giedroyc’s doctrine”. In the second part we briefly describe current EU policy towards Russia. Finally, we try to apply the “Giedroyc’s doctrine” to the current situation in the European Union and we analyse those elements which seem crucial for contemporary discussion circled around Russia and the EU.
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Giedroyc’s Doctrine Established in 1946 in Rome and soon after moved to Maisons-Laffitte, small town in the suburbs of Paris, the magazine “Culture” became the most influential Polish independent “think-tank” during cold war era. It is not a common thing that a small group of intellectuals on exile creates a strategy that later becomes a country’s core doctrine of the foreign policy. When in 1989 Tadeusz Mazowiecki – the first non-communist prime minster in Poland since World War II – took the office, so called “Giedroyc doctrine” became a road map for the new government (Dębski 2006). At that time no one could have presented and therefore no doubts were raised. Through the last twenty seven years the understanding of the “The Culture” ideas has been very often shallow or deformed. In this paper we are trying to deconstruct the original Giedroyc concept, which can be summarised in five crucial points: 1) Preserving post war border lines in Europe 2) Support for independence and democratisation of Ukraine, Lithuania and Belarus (ULB) – ceasing Polish-Russian rivalry for these territories 3) Establishing good relationships among East European countries 4) Decrease of the tension in the region – Russia is losing its role as a gendarme as well as it is no longer under the threat of western invasion 5) Opening door for liberalisation of Russia Russia was a key point of reference in the whole doctrine. This country was perceived as a biggest menace to Poland. Implementing these points should have lead to change Moscow’s role in the European politics: from disruptive to stabilising factor. Thus the security of Poland should have increased. Jerzy Giedroyc and his major columnist – Juliusz Mieroszewski were aware that there is no alternative for Warsaw but to sustain a dialogue with Russia. While some groups of the post war political emigrants were dreaming of a nuclear war which would have wiped Russia out of the world map, the others were thinking of a buffer zone beyond the eastern border. On the contrary Mieroszewski stated (1966b): Thinking logically there are only two options. The one is to defeat Russia and the other is to settle with Russia. Since we are not able to defeat them we must settle with them. To make the settlement possible we need to change Russia. The “Culture” believed that the only way to secure Poland and the rest of Europe from conflicts went through a process of democratisation and liberalisation of Russia. Giedroyc and Mieroszewski never shared a fatalistic point of view according to which Russia was doomed to be totalitarian state and so the undemocratic government would have been the only possible partner for a dialogue with Europe. They were deeply confident that liberal changes in Russia were possible. The West should have strongly supported the liberal opposition – no matter how weak it was – and undermined the information monopoly of the state’s propaganda. The liberal dissidents should have not been bypassed in the dialogue between Russia and the West (Mieroszewski 1973). The besieged fortress syndrome had been always a perfect tool to mute the inner ferment and to unite the society against the enemy abroad. Breaking the information wall was the starting point for the active eastern policy of the West. The Maisons-Laffitte group had no doubts that Russia could have been reformed only by the Russians themselves. The West’s task was to provide them with proper fuel and friendly environment. Giedroyc assumed the process of creating pro-European and democratic party in Russia would have taken decades but there was no other way to secure continent from war. In Mieroszewski opinion – words were more effective than guns or any other means (Mieroszewski 1966a): “In the final balance, the victory is not to defeat but to win over the enemy. To win over means to convince”. Today we would say that he advocated soft rather than hard power. The call for a dialogue with Russia issued by „Culture” has never meant avoiding tough topics and hiding war crimes of the past. As well as the cessation of Polish-Russian rivalry in the Eastern Europe should have not meant a subservience of one country to another. Giedroyc and Mieroszewski always underlined that no agreement with Moscow could have been made behind the back or at the expense of ULB states. Every such deal would have been a seed for a new conflict in the future.
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According to Giedroyc, strong support for independence of ULB countries was not an end in itself but a removal of potential sphere of conflict between Russia and the West. For ages these territories have been conquered either by Polish kings or Moscow tsars. The tension caused by the western threat has been always strengthening totalitarian authorities in Kremlin. Once the Eastern Europe countries were free and independent – they do not belong to Poland neither to Russia – the cause of conflict would have disappeared. The “Culture” was aware that the people of Belarus or Ukraine were in the Russians’ eyes akin to their own nation. Successful transformation into democracy of the independent ULB countries would be a contagious pattern for the Russian society. So the liberalisation/westernisation of the system in Minsk or Kiev was a step towards political change in Russia. “Giedroyc doctrine” was a complex solution for the “Gordian knot” of Eastern Europe. Common approval of post war borderlines erased conflicts between Poland and its neighbours. Thus Russia was losing its role as a regional gendarme. The support for the independence of ULB states was ceasing the Polish-Russian rivalry for this territories. This ease of the international tension was opening the door for democratic and liberal changes within Russia. The West should have not lost any chance to accelerate this process, using mostly soft-power tools.
The EU’s current policy towards Russia For many years the EU policy towards Eastern partners was based on the European Neighbourhood Policy (ENP) and special “strategic partnership” with Russia (Börzel, Lebanidze 2015; Haukkala 2015). The EU aimed at political and economic transformation and modernisation of its Eastern neighbours, but has never invested enough resources to be effective in this process. Limited budget, half-hearted political actions and lack of coherent approach among the EU members made the Eastern policy a failure and questioned the ability of the EU to project its normative power (Nielsen, Vilson 2014). The case of Russia is particularly evident because regardless to signed agreements, eg. lastly “The Partnership for Modernisation (P4M)” in June 2010, the relation deteriorated and no “modernisation” took place (Romanova, Pavlova 2014). Aggressive Kremlin’s policy towards Ukraine questioned the fundamental assumption of regarding Russia as a “strategic partner” for Europe (Gotev 2016). It has also changed “the Grand Narrative of EU–Russia relations” that includes the EU’s repeated attempts at “constructive engagement” with intension to bind or tie Russia into Europe and its key institutions (Haukkala 2015). The events in Ukraine, annexation of Crimea and military intervention in Donbas region, forced the EU to take extraordinary political actions against Russia. From the beginning of Ukrainian crisis in 2014 European policy towards Russia was based on economic sanctions, firm political disagreement on partition of Ukraine. Political consensus between Member States on the policy response seems now to be fragile but is surprisingly longlasting. Moreover, this policy could be considered successful to some extent. Russian aggression on the territory of Ukraine was stopped and European choice of Ukraine confirmed in form of the Deep and Comprehensive Free Trade Agreement (DCFTA) that came into force at the beginning of January 2016. Economic sanctions, together with falling oil prices, seem to be detrimental to Russian budget. One of the visible economic effects of sanctions is the dropping value of the rouble (33 roubles per dollar in June 2014 and 65 roubles two years later). Such fall in the value of the national currency is going to lead to higher inflation and shrinking currency reserves. In the long-term it should limit Russia’s military capabilities, as well as political and economic foundations of the regime. There is no doubt however, that the policy of sanctions is a short-term response rather than a longterm solution. Therefore, the EU is in need of a new strategy towards Russia with clear goals to reach and a vision for future relations. Despite official unanimity (Council of the European Union 2016) the actors of the European foreign policy have different views on Russia. Even though elaborating in this topic stays outside the scope of this paper, we should note that official positions presented by the Member States have spread between the following extremes: the appease and engagement policy vs. containment policy. The former one is supported by those states (e.g. Greece or Italy) which have close economic relations
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with Russia and are distant enough from Eastern border, hence do not fear aggressive policy of Kremlin. The latter is promoted mainly by Poland and Lithuania - states that feel directly threatened by Russians. The majority of states are somewhere in between these two extreme positions. Due to this fact, the official EU position presented in the recently published European Security Strategy is rather moderate and comprises elements of both “engagement” and “containment” approaches. In the short section devoted to Russia the EU named it “strategic challenge” rather than partner but also invite to cooperation calling for “selective engagement” (European Union 2016). Managing the relationship with Russia represents a key strategic challenge. A consistent and united approach must remain the cornerstone of EU policy towards Russia. Substantial changes in relations between the EU and Russia are premised upon full respect for international law and the principles underpinning the European security order, including the Helsinki Final Act and the Paris Charter. We will not recognise Russia’s illegal annexation of Crimea nor accept the destabilisation of eastern Ukraine. We will strengthen the EU, enhance the resilience of our eastern neighbours, and uphold their right to determine freely their approach towards the EU. (…)In addition to those foreign policy issues on which we currently cooperate, selective engagement could take place over matters of European interest too, including climate, the Arctic, maritime security, education, research and cross-border cooperation. Engagement should also include deeper societal ties through facilitated travel for students, civil society and business. In another form this approach was presented by the Council of European Union that agreed in March 2016 on five principles guiding the EU’s policy towards Russia (Council of European Union 2016): 1) Implementation of the Minsk agreement (3) as the key condition for any substantial change in the EU’s stance towards Russia. 2) Strengthening relations with the EU’s Eastern Partners and other neighbours, in particular in Central Asia. 3) Strengthening the resilience of the EU (for example energy security, hybrid threats, or strategic communication). 4) Need for selective engagement with Russia on issues of interest to the EU. 5) Need to engage in people-to-people contacts and support Russian civil society. Both documents demonstrate rather consistent approach that presents EU disapproval, on the other hand acknowledges interdependencies between these two parties, which in turn encourage reconsidering mutual cooperation in various forms. This moderate and balanced position is a good starting point to develop a strategic vision of relationships with Russia. In the next section we try to adopt some elements from the “Giedroyc’s doctrine” that may be taken into consideration when reflecting on the EU policy towards Russia.
“Giedroyc’s doctrine” and the long-term goals of the EU Eastern policy The primary long-term goal of the European foreign policy towards eastern neighbours can be summarised as strengthening the prosperity, stability and security in Eastern Europe. The EU has been trying to achieve this goal by inspiring and supporting political and economic transformation in the Eastern European countries. This goal is rather not controversial, but unfortunately the situation on the Eastern border of the EU is far from stable and secure and neighbour states are rather not prosperous. The main reason of such situation is long-term, consistently aggressive policy of Kremlin, which has been trying to undermine every European effort in the region (Saari 2014). We assume that Russia also in future will have political, military and economic instruments to destabilise post-Soviet countries that lie in the grey zone between Russia and the West. It is a good starting point for applying “Giedroyc’s doctrine”, which was created in times when position of Moscow was even stronger than today.
(3) At a summit in Minsk on 11 February 2015, the leaders of Ukraine, Russia, France, and Germany agreed to a package of measures to alleviate the ongoing war in Ukraine. See more e.g. Sasse 2016.
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Considering the “Giedroyc’s doctrine” five of its components seem applicable to the present situation in the EU. 1. Transformation of Russia is conditio sine qua non. Successful transformation of Russia into stable, prosperous and democratic state should be the long term vision of European politicians aiming at ensuring security of Europe. Russian policy towards region has proved that prosperous, stable and secure Eastern Europe is possible only when Russia transformed itself. Autocratic, neo-imperial Russia is going to undermine any major pro-western political changes in Ukraine, Belarus, Georgia and other post-Soviet republics. As a consequence, the EU cannot put Russia in brackets when promoting deep and sustainable democracy, accompanied by inclusive economic development of Eastern European countries. 2. Normalisation is the main aim Every Eastern policy of the EU should aim at building good relationships with Russia. Development of economic and political bonds is in the interest of both sides and the vicious circle of confrontation should be avoided. Therefore, normalisation of relationship with Russia should be always high on the EU political agenda. Almost all political activities in the Eastern neighbourhood should be subordinated to this goal. However, it should not be regarded as “Russia first” policy, which already proved ineffective, but rather “Russia too” policy that emphasise the need of political change in this country in order to stabilise the whole region. 3. Independence and territorial integrity of post-Soviet states is out of question Full acceptance of the post war border lines in Europe and the independence of post-Soviet states should not be discussed with Russia but treated as a precondition for any political deal with Moscow. Consequently, European leaders should act firmly against any attempts to forcefully redraw borders of Ukraine. Kremlin has to be assured that no border changes are going to be accepted by the international community. 4. Ukraine is a bridge rather than a buffer Europe should not try to build “a buffer zone”, in a form of friendly, western-oriented post-Soviet countries, which isolates Russia. Conversely, support for changes in Ukraine and strengthening cooperation with this country should not be an end in itself and westernisation of this country should be perceived only as a leaven for the political transformation of the whole region. Deep liberal changes in Ukraine could create a chance to build “a bridge to Moscow” that help to prevent Russian isolation and consolidation of autocratic Putin’s regime. Therefore, strong political and economic support for Ukraine in the upcoming years should be the cornerstone of European Eastern policy. The EU should insist on the full implementation of Association Agreement, demand deep political reforms in Ukraine and support it fully with technical assistance as well as financial aid. Successful reforms in this country could be a pattern for the whole region, including Russia. 5. Only Russians may change Russia Setting long-term goal of transforming Russia, the EU should be very clear about its limited, supportive role. The process of transformation has to be initiated and implemented by Russians themselves. However, awareness of existing limitations should not be alibi for passiveness and apathy. Pro-western revolution in Ukraine gave the new evidence that European soft power is not a myth, but can be a real political instrument. “European dream” forced thousands of Ukrainians to pour out on the Kiev’s streets to protest against political regime that wanted to reject association with the EU. Many of them were killed – during the revolution in Kiev or later when fighting against Russian intervention forces in Donbas. Never in the history had so many people sacrificed their lives for the idea of the European integration. That is why, the EU and European Member States should not resign from development of various contacts with Russian society. People-to-people contacts, in form of promotion of European culture, students exchange programmes, academic cooperation etc. may, in long run, be very beneficial to the EU’s political goals. Jerzy Giedroyc never claimed that his strategic ideas were easy to implement or that his plans may have succeeded any time soon. On the contrary, he tried to think globally and set plans in the
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long-term perspective. It did not refrain him, however, from every day, mundane work of turning big ideas into reality. This combination of down-to-earth approach with big thinking is probably a must as far as policy towards Russia is concerned. Nothing can be achieved fast, we need decades rather than years, but it should not discourage us from acting. This is maybe the most important lesson that the EU can learn from the “Giedroyc doctrine”.
Conclusions Poland likes to claim its expertise as far as relationship with post-Soviet countries is concerned. It is to some extent true but many Polish political ideas, with a famous exception of the Eastern Partnership, are regarded by the western partners as anti-Russian and finally rejected. Jerzy Giedroyc, married with Russian actress, knew Russia and was a kind of Russophobe. Due to this fact, his political ideas were not anti-Russian. He did not believe that Russian fate is already determined and the state condemned to be imperialistic, non-democratic and aggressive. Today, when the EU experiences the rapid deterioration of relations with Russia, his ideas from the cold war times, seem surprisingly fresh and up-to-date. The EU cannot continue that “half-hearted approach” to Russia (Haukkala 2015) but should rather search for a change. European political strategists may make use of the ambitious “Giedroyc’s doctrine” and adjust it to contemporary European context. It can be a good base for great transformation of Eastern neighbourhood into prosperous, stable and secure region, which stays in compliance with long-term interests as well as liberal principles of the EU. It is worth to note that some elements of the current European policy towards Russia, particularly firm condemnation of border changes and stressing the role of people-to-people cooperation, are in line with the ideas presented in “The Culture” magazine. We have proposed two important considerations that stem from “Giedroyc’s doctrine”. Firstly, stabilisation in the region is not possible without transformation in Russia. Secondly, the recognition that successful liberal changes in Ukraine could create a chance to build “a bridge to Moscow” that helps to prevent Russian isolation and consolidation of autocratic Putin’s regime.
References Börzel T, Lebanidze B. (2015), European Neighbourhood Policy at the Crossroads: Evaluating the Past to Shape the Future, Maxcap Working Paper Series, 12. Dębski S. (2006), Polityka wschodnia mit i doktryna, “Polski Przegląd Dyplomatyczny”, Issue 3 (31), p. 5-18. Dragneva R., Wolczuk K. (2015), Ukraine between the EU and Russia. The Integration Challenge, Palgreve MacMillan. European Leadership Network (2016), What is the future for EU–Russia relations? A survey of European Leadership Network members for the EU’s Global Strategy on foreign and security policy, May. European Union (2016), Shared Vision, Common Action: A Stronger Europe A Global Strategy for the European Union’s Foreign And Security Policy, https://europa.eu/globalstrategy/en Council of the European Union (2016), Outcome Of The Council Meeting, 3457th Council meeting, Foreign Affairs, Brussels, 14 March 2016 Giedroyc J. (2006), Autobiografia na cztery ręce, Warszawa. Gotev G. (2016), EU to label Russia a ‘strategic challenge’, EurAcive.com, May 31, http://www. euractiv.com/section/global-europe/news/eu-to-label-russia-a-strategic-challenge/ Jones S,. Foy H. (2016), Nato show of unity masks domestic divisions, „Financial Times”, July 10. Haukkala H. (2015), From Cooperative to Contested Europe? The Conflict in Ukraine as a Culmination of a Long-Term Crisis in EU–Russia Relations, „Journal of Contemporary European Studies” , Vol. 23, Issue 1, p. 25-40.
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House of Lords European Union Committee (2015), The EU and Russia: Before and Beyond the Crisis in Ukriane, 6th Report of Session 2014-2015, HL Paper 115. Judah B., Putin’s Coup. How the Russian leader used the Ukraine crisis to consolidate his dictatorship, „Politico”, October 19, 2014, http://www.politico.com/magazine/story/2014/10/ vladimir-putins-coup-112025.html#ixzz3HRLKZf3l Kowalczyk A.S. (2014), Wena do polityki. O Giedroyciu i Mieroszewskim, Warszawa. Nielsen K., Vilson M. (2014), The Eastern Partnership: Soft Power Strategy or Policy Failure?, “European Foreign Affairs Review”, Issue 2, p. 243–262 Mieroszewski J. (1997), Finał klasycznej Europy, Lublin. Mieroszewski J. (1966a), ABC polityki, “Kultura”, Issue 4(222) Mieroszewski J. (1966b), Tysiąc lat i co dalej, “Kultura”, Issue 7-8 (225-226) Mieroszewski J. (1973), Polska „Ostpolitik”, „Kultura”, Issue 6 (309) Peacock R, Cordner G. (2016), “Shock Therapy” in Ukraine: A Radical Approach to Post-Soviet Police Reform, Public Administration and Development, Volume 36, Issue 2, p. 80–92. Romanova T., Pavlova E. (2014), What Modernisation? The Case of Russian Partnerships for Modernisation with the European Union and Its Member States, “Journal of Contemporary European Studies”, Vol. 22, No.4, p. 499-517. Sasse G. (2016), To Be or Not to Be? Ukraine’s Minsk Process, Carnegie Europe, March 2, http:// carnegieeurope.eu/strategiceurope/?fa=62939 Saari, S. (2014), Russia’s Post-Orange Revolution Strategies to Increase Its Influence in Former Soviet Republics: Public Diplomacy Po russkii. “Europe–Asia Studies”, vol 66 (1), p. 50–66. Zawisza T. (2015), Bridget Kendall: Is Putin afraid of a Russian Maidan?, Cambridge Globalist, http://cambridgeglobalist.org/2015/05/22/bridget-kendall-is-putin-afraid-russian-maidan/
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ENVISIONING EUROPEAN DEFENCE À LA CARTE Jan Joel Andersson (1) EU Institute for Security Studies
[email protected]
Abstract Europe is underperforming in the field of defence. In spite of the ongoing wars and terrorist threats in and around Europe, and in spite of the many decisions that European governments have taken individually and collectively in the EU and NATO, we have not yet done what it takes to significantly improve Europe’s military capabilities. In this paper, five possible future scenarios for European defence are outlined. Drawing on a larger collaborative study conducted at the EU Institute for Security Studies in 2015-2016, this paper describe what European defence might look like a decade or two from now in order to point out the choices and decisions that need to be made today. A key assumption underpinning these scenarios is that the future of European defence will be of Europeans’ own making rather than the outcome of external pressures and events. Moreover, the paper highlights the fact that, whatever the future evolution of European defence policy, defence cooperation — which could take shape in many different ways — is essential if Europe is to be a global security actor in its own right. “Defence matters” has become a well-established mantra in capitals across Europe. After more than two decades of ‘strategic time-out’ characterised by budget cuts and limited expeditionary crisis management abroad, European leaders are once again said to focus on how to defend their territories, citizens and open societies. Three major developments, in the East, South and West, have pushed defence back onto the agenda in Europe. While each of these recent developments is driven by different dynamics and root causes, they combine to underline the urgent need for Europe to re-think and re-organise its defences. The Russian occupation of Crimea demonstrates that Europe is facing a revisionist state in the East prepared to use armed force and hybrid warfare to change borders; the terrorist attacks in Paris and elsewhere show the deadly combination and linkages of home-grown terrorists and chaos in Europe’s southern neighbourhood. At the same time the United States’ ‘pivot’ to Asia means that Europe must assume a greater responsibility for its own regional security and defence. However, despite spending a considerable amount of money on defence, Europe is consistently underperforming in this field. In spite of the ongoing wars and terrorist threats in and around Europe, and in spite of the many decisions that European governments have taken individually and collectively in the EU and NATO, we have not yet done what it takes to significantly improve Europe’s military capabilities. Despite years of complaints about the lack of deployable troops and strategic enablers such as transport aircraft, aerial tankers and helicopters, all of these categories
(1) Dr. Jan Joel Andersson is Senior Analyst at the EU Institute for Security Studies. He works on military capability development, defence industry issues and transatlantic relations. Previously, Jan Joel was Senior Research Fellow at UI – the Swedish Institute of International Affairs in Stockholm - where he served as Programme Director (20062010) and Head of Development (2010-2011) before his appointment as Dragas Distinguished Visiting Professor of International Studies at Old Dominion University in Norfolk, Virginia (2011-2014). He has also worked as a senior analyst and consultant in private industry and in the office of a US Senator on Capitol Hill in Washington, D.C. Educated at the United World College of the Adriatic in Italy and Uppsala University in Sweden, Jan Joel received his MA and PhD in political science from the University of California at Berkeley as a Fulbright scholar. His recent publications include ‘The Race to the Bottom: Submarine Proliferation and International Security,’ U.S. Naval War College Review, and ‘Nordic NATO,’ Foreign Affairs.
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have seen large reductions over the past decade and a half (see annex). Europe’s defence capability shortfalls are as well-known as the possible solutions – but we are simply not implementing them. If European governments were to start acting now, the future of European defence could still look like that envisioned in past statements and decisions. For example, in the conclusions from its summit meeting in December 2013, the European Council called on EU member states to deepen defence cooperation and remained ‘committed to delivering key capabilities and addressing critical shortfalls’. Most of the same European heads of state and government met a few months later at the North Atlantic Council (NAC) summit in Wales in September 2014, where they agreed to reverse the trend of declining defence budgets and reaffirmed their commitment to provide ‘the resources, capabilities and political will’ required to ensure that the NATO alliance remained ready to meet any challenge. European governments could even go beyond what has been formally agreed at recent summit meetings and take even further-reaching steps. Indeed, European Commission President JeanClaude Juncker is not the only, nor the first, but certainly the most prominent recent proponent of a European Army. European governments could alternatively choose another course, by concentrating all of their defence cooperation in NATO. They could also decide to scale down the rhetoric to match the reality of current military capabilities, focusing on peace keeping operations instead of defence collaboration in all of its dimensions. What is often forgotten is that even if the governments of Europe do none of the above, it will still change the future of European defence. The result of inaction will not be a standstill, but a further degradation of European capabilities. There are many reasons for Europe’s underperformance in the military field. There is an evergrowing literature dedicated to explaining and understanding why the military dimension of European defence collaboration remains largely rhetorical. Instead of repeating previous arguments, my contribution to this debate is to outline five possible futures of European defence. Not in order to advocate or to rule out any single one of them, but to illustrate that all of these could occur depending on what we do now.
Envisioning European Defence The five futures outlined in this paper summarise and draw on a project entitled “Envisioning European Defence. Five Futures” developed by four collaborators and myself and published as a Chaillot Paper by the EU Institute for Security Studies in March 2016. (2) The report and its scenarios provide an overview of the state in which European defence might find itself sometime in the near future. They were not written with a particular date in mind, but all take place in at least one or even two decades out. The report does not endorse a specific future as either the most desirable or the most likely; it is not a piece of advocacy. Our aim was to develop plausible and coherent descriptions of what European defence might look like in order to point out the choices and decisions that need to be taken today. Each of the five futures presented is by necessity driven by a number of assumptions. We tried to make these assumptions as visible as possible, and worked hard to avoid ‘silver bullets’ or ‘perfect storms’ which either magically solve difficult problems or force leaders into an unavoidable direction. Perhaps the biggest assumption that we made was precisely that the future of European defence will be of our own making rather than the outcome of external pressures and events. That we indeed assume the future is of our making is important to point out, simply because many do not agree. Many believe that the US, Russia or China dictate events (forcing a weak Europe to follow), or that multiple crises will hamper our ability to be proactive (leaving us to just muddle through), or that the pressures of austerity will make it impossible to spend more on defence (as if it were not a political choice), etc. In contrast to these views of Europe, we believe that it is up to us Europeans to shape our own future defence and we hope to help suggest what it could look like. (2) Jan Joel Andersson, Sven Biscop, Bastrian Giegerich, Christian Mölling and Thierry Tardy, Envisioning European Defence. Five futures, Chaillot Paper No. 137, Paris: EUISS, 2016, http://www.iss.europa.eu/publications/detail/article/ envisioning-european-defence-five-futures/
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Five futures The first future, entitled ‘Bonsai Armies’, illustrates the consequences for European defence in the near future if European governments continue to apply the same logic and behaviour they have since the end of the Cold War, which has led to a loss of over 20% of military capabilities between 2008 and 2014, with further losses likely. In this future, Europe’s threat environment becomes more dangerous because its military weakness invites other powers to challenge and exploit it. With the EU and NATO marginalised as facilitators of cooperation, every government chooses to specialise individually in the area it can afford, or which it considers to be its national core need. However, as specialisation takes place by accident or default rather than by design, the resulting niches cannot simply be linked together into a coherent force, but instead coincidentally form limited areas of overlapping or complementary national capabilities. In this future, cooperation is seen as the only way to maintain access to deployable assets as national capabilities in most areas are no longer large enough to be relevant. However, uncoordinated military capability cuts also reduce the scope for cooperation. The second future, which we call ‘Defence Clusters’, envisions what European defence would look like if European governments would simply have done what they said they would do over the past few years. In this future, European governments invest in EDA projects to develop and acquire European strategic enablers, and pool and share capabilities in clusters. While some of this is already happening, the pace is by far not as intense as one would expect when compared to official statements and announcements. However, picking up the pace could still bring about such results. Yet because we did not live up to our own exhortations for over a decade, many opportunities have been lost. In this future, Europe has some more autonomy of action than it has today, but it would still face severe limitations that would prevent it from dealing with many likely crisis situations independently. The third future, named ‘Peace Operations’, bases its premise on the fact that over the last fifteen years, operational European defence collaboration has mainly taken the form of EU CSDP operations at the lower end of the military spectrum. In many European states, this conception of defence has by and large prevailed over a more traditional warfare-oriented approach. In this future, we look at European defence collaboration as a fully developed and equipped peace operations policy that takes precedence over any other conception of defence, and that is part of an effective Comprehensive Approach. The EU abandons the most demanding types of defence integration and military operations, European defence and armament cooperation only exists insofar as it relates to peace operations (logistics, medical support, strategic airlift, etc.). Territorial defence and the use of the military in kinetic operations are the responsibility of states acting individually, in ad-hoc coalitions, or within and through NATO. The fourth vision, called ‘European NATO’ depicts European defence as being firmly integrated with NATO. In this future, NATO and the transatlantic alliance with the United States is the undisputed core of European defence collaboration. EU member states no longer pursue autonomous military crisis management or defence ambitions; they do, however, utilise NATO’s structures and assets for autonomous European operations. The European caucus in NATO is no longer judged to be a threat to NATO’s unity, but rather an enabler of European leadership. The EU’s CSDP military structures are integrated in the transatlantic structures of NATO, while the EU pursues civilian crisis management activities. NATO is committed to fulfilling four core tasks, namely collective defence, military crisis management, cooperative security, and resilience building. The fifth future is that of a ‘European Army’. The idea of supranational European defence collaboration dates back to the very beginning of integration efforts in Europe after World War II. In parallel with the emerging European Coal and Steel Community, French Prime Minister René Pleven called for a European Defence Community (EDC) and the creation of a European Army under a supranational authority in October 1950, to be funded by a common European defence budget. Although it was never realised in the 1950s, the basic ideas behind the EDC are arguably even more valid today. No single European country is able to manage on its own the violent conflicts, hybrid warfare challenges and sophisticated cyberattacks taking place in and around Europe on its own. As a worsening security situation around the world is creating an international division of labour in the provision of crisis management and military security, the pressure increases on Europe to do more on defence. In this future, strained national budgets and external shocks trigger
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intensified military integration as the only way for Europe to play a meaningful military role in its own immediate neighbouring areas, let alone on the global stage.
Choosing a là carte? The choices we make today have consequences for tomorrow. The five scenarios summarised in this paper are not the only options and some of them can be combined. Importantly, not all states in Europe must agree to enact new policies. A core group of European countries could initiate new initiatives with other members joining later. For example, organising European defence outside of the current EU treaty framework would not be unprecedented, and indeed similar to the original Schengen agreement on the abolition of internal borders between five EU member states (Belgium, Germany, France, Luxembourg and the Netherlands) in 1985. This mini‑lateral intergovernmental cooperation was later incorporated into the EU framework following the signing of the Treaty of Amsterdam in 1999. By that time, the Schengen area had gradually expanded to include nearly every EU member state. However, in whichever plausible future we can imagine, defence cooperation, which could take shape in many different ways, is necessary if Europe is to be a global security actor in its own right. In addition, the role of the United States is destined to remain important, both as a reference point for Europe’s ambition and also because Europeans are more likely than not to remain partially dependent on capabilities and leadership from across the Atlantic. In fact, the five futures presented here could be categorised according to two dimensions: the degree of European capacity for action and the degree of security policy autonomy. Just as in the past two decades, the next two decades of European defence will likely focus on capacity and autonomy. I wish to draw attention to four questions that we believe must be addressed by decision-makers in any future European defence arrangement: 1. Capabilities: What purpose do military instruments serve in the context of European defence and what capabilities are necessary to fulfil that purpose? European military capabilities have fallen dramatically since the end of the Cold War, and will remain limited for quite some time. Moreover, the full impact of defence spending cuts over the past several years has yet to be felt. 2. Resources: How many are enough and how should they be spent? The degree of improvement and the effectiveness of European defence will depend on what European governments decide regarding resources. Some European countries are indeed increasing their defence budgets, but the key is not defence spending per se, but rather the effective translation of resources into capabilities. 3. Cooperation: Which framework to aim for? The countries of Europe cannot defend themselves individually; all alternative futures presented above therefore envisage some form of cooperation. A key question is whether European governments are willing to make cooperation a core design feature of European defence or if they will continue to use cooperation mainly as a reactive alternative to compensate for capabilities already lost. 4. Coherence: How important is European coherence in contrast to national influence? A capable European defence framework depends on individual countries aligning with others. However, this requires a trade-off between European coherence and national influence. European governments must therefore decide on how much defence they need and how much national influence they want. After more than two decades of ‘strategic time-out’ and budget cuts, defence matters in Europe once again. Facing a rapidly deteriorating security environment in and around the continent, it is hard to imagine a more urgent time than now for the citizens and leaders of Europe to start envisioning the future of European defence and choose wisely.
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AN ECONOMIC VIEW OF ENERGY CHALLENGES IN THE EU: FROM THE PAST TO THE FUTURE Nuria G. Rabanal University of León, Spain
[email protected]
1. Introduction There is a strong relationship between economic growth and energy because it is an essential part of the production costs structure in any economic activity. In 1951, six European countries decided to pool their interests in two key areas of the economy to create a Community designed to replace conflict with cooperation and prosperity. Energy was one of those areas, and solidarity was one of its founding principles. Almost sixty-five years later, energy is still a major political and economic priority. Energy has been the cause of many conflicts – the Yom Kippur war in 1973 or the Iraq war in 2003- and the main factor of hard economic crises which have enduring effects on the economy beyond the short time. The firm connection between energy and economic growth has made of self-sufficiency energy capacity, a key element in the design of any energy strategy which has the aim to secure stable economic cycles in the long term. The purpose of this paper is to show the main facts of the EU energy, a general view of the EU strategy and finally, to highlight the necessity to rethink some energy topics.
2. The EU Energy scenario At the global level, our energy structure relies heavily on conventional fuels (IEA, 2015) (see figure 1). According to the main global energy demand perspectives, not only will the EU increase our dependency on imports. Furthermore, the higher dependency will be simultaneously accompanied with less political and economic influence for next decades. As a consequence, the EU must search for a way to maintain its economic power at global level. Fig 1: World Total Final Energy consumption by fuel (1971-2013)
Source: International Energy Agency. 2015
Beyond world context, the starting point of the EU energy situation in Europe can be summarised in the following points:
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• EU has a small energy self-sufficiency capacity in conventional energy sources. According to the last dates (Eurostat, 2015), almost the 16.7% of EU-28 power generation comes from natural gas, and only the 9.1% comes from oil. However, the EU-28 is the third world energy consumer. Fig. 2 Production of primary energy EU-28, 2013
Source: EUROSTAT, 2016
• The EU is the second economy in the world and third energy consumer at a global level. This fact is important because it shows the EU dependency on imports and the necessity to strengthen the foreign policy with energy partners. Fig. 3 World Gross Inland Consumption by Region
Source: EU Energy Statistical Pocketbook 2015
• EU imports represent the 53% of a cost around EUR 400 billion. This date not only has an economic impact on the global EU expenditure but also shows the vulnerability of the EU economy to cope with external energy shocks. China, Russia, Norway and the United States are essential to ensure secure supplies of energy at competitive prices for Europe.
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Fig 4. EU Imports by Country Region
Source: EU Energy Statistical Pocketbook 2015
• EU spends over EUR 120 billion per year on energy subsidies often not justified. The Energy subsidies (Alberici, Boeve, Breevoort, Deng, & Förster, n.d.) are a tool of public authorities that have been used for decades. Fig 3 shows the total support provided not only by Member States but also at EU level. Public interventions to aid the energy sector are one way for governments to achieve social, economic and environmental objectives. Significant support for conventional fossil fuel technologies – coal subsidies- was put in place over the last decades to accomplish specific policy goals. The social impact of the restructuring process, the reduction in energy dependency, the decrease in energy poverty or the avoidance of the competitive disadvantage of energy-intensive industries from increased energy prices are an example. At the same time, there are reasons to support new renewable technologies including environmental considerations (climate change, air pollution, and other environmental damages) and the security of the supply through diversification and the creation of new employment and export opportunities. Fig 5. Total support provided in the EU 28
Source: ECOFYS report 2014
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• Wholesale electricity prices in the EU are still 30% higher than in the US. European residential electricity prices have historically exceeded U.S. prices, and the gap has widened in recent years. In 2013, according to the International Energy Agency (IEA) the average residential electricity rates in the EU countries were more than twice the rates in the United States. Taxes and other user fees, investment in renewable energy technologies, and the mix and cost of fuel have an influence on electricity price. Figure 4, shows a comparison between electricity prices in the EU and the USA. Electricity prices have a bearing on the competitiveness of our industry, particularly in energy-intensive industries. The European Commission (European Commission (EC), 2014) points out that the movements to decarbonise electricity generation have led to strong growth in wind and solar power, which has had an enormous impact on grids and energy production costs. The movement of gas and electricity sectors from public monopolies to liberalized markets made up competitive private companies where consumers bear the cost of new energy investments. • Energy prices have an influence on GDP and competitiveness of the EU industry, particularly in energy-intensive industries. If we take as a reference the case of oil prices, the estimations shows (Vrontisi, Kitous, & Saveyn, 2015) that a decrease in the oil price from US$100 to US$50 may lead to a GDP gain of about 0.7%. A 50% reduction in the oil price may generate up to 3 million additional jobs about 1.3% of the total labor force in the EU28. Fig 6- Change in average residential electricity prices in the EU and the USA
Source: US Energy Information Administration report
• EU has an enormous potential for renewables, but it is necessary to increase the investment rates. 2015 was an extraordinary one for renewable energy (REN21, 2016) -an estimated 147 gigawatts (GW) of renewable power capacity was added in 2015with the largest global capacity additions have seen to date, although challenges remain, particularly beyond the power sector. 2015 was a year of first and high-profile agreements as commitments by both the G7 and G20 to accelerate access to renewable energy and the year of United Nations General Assembly’s resolution dedicated to Sustainable Development Goal on Sustainable Energy for all. At EU level, 26% of the EU’s power is generated from renewables.
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Fig 7. Renewable capacities in world, EU 28, BRICS and top seven countries .
Source: REN21, 2015
3. The EU Energy Policy strategy In many countries, the energy sector is being reorganised to make markets more competitive and compatible with the environment. The different rhythms of economic growth besides the changes in the dynamic of the markets, the endowment of a productive factor and the technological change, have made the energy strategy design into a complex task in which there are elements to keep in mind and diverse viewpoint that could be adopted around their future. In the European Union future depends on a secure, affordable and ecologically sustainable supply. However, the energy supply has two dimensions: one external dimension and one internal dimension. Externally, the European Union must fill a gap between domestic production and economic demands with the objective of managing external dependence. Internally, European Union needs to balance supply and demand with the consideration of environmental, social and safety dimensions. The long-term tendency is that the energy dependence will increase more and more despite the reduction of the rate of the population’s growth and the efforts of European authorities to develop energy efficiency policies. For these reasons, any consideration of the future of Europe’s energy supply has to include two new factors that have recently emerged: climate change and the establishment of a progressively integrated energy market. The EU in its Green Paper (European Commission (EC), 2006) makes a reference to the Energy Strategy for the future. For its definition, the EU considers the weakness in current energy supply and tomorrow’s priorities. The traditional approach to the security supply problem is to concentrate on increasing supply both internally and externally. The EU bases its energy strategy in controlling the growth of demand with horizontal and sectorial policies and managing supply dependence with the development of less pollutant energy sources, more relations with producer countries and promoting energy efficiency. Chart 1 shows key features of the EU Energy Strategy.
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Chart 1 / Guidelines of The EU Energy Policy Development of less pollution sources
Internal supply
Preserving access to resources
Mantaining competition
Managing supply dependence
Energy solidarity
External supply
Dialogue and cooperation with producer countries Strengthening supply networks
Introducing more competition in energy market
Horizontal policies
Eliminating distorsions between membe states and producers with tax measures
Promoting energy saving schemes
Promoting new technologies
Controlling the growth of demand
Revitalizing the railways Reorganization of transport sector Sectorial policies
Rationalization in the use of private cars Energy saving in buildings
Source: own elabotation from Green Paper.
In this way, enhanced gas to gas competition on an integrated European market could be conducted to uncoupling the price of gas from that of oil. In the Stockholm meeting, the European Council assumed the objective of opening markets on gas and electricity taking into account the requirement to satisfy user needs and the necessity of transparency in the market through appropriate regulatory instruments. In an increasingly open market, taxation is still the most flexible and efficient tool for encouraging operators to change their behaviour. The fiscal instrument should aim to eliminate political distortions at Member State level and distortions between energy producers, encourage more energy saving and lead to the internalisation of damage causes to the environment. Even thought industry, particularly the energy-intensive sector, has made considerable progress in achieving high
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levels of efficiency. European Commission presents (1) a plan to save energy and diversifies sources by improving energy efficiency. In this sense, technological programmes play and important role in providing the basis for energy efficiency technology. The principal focus of the Community’s action has been the SAVE (2) programme which helps to build the necessary capacity and infrastructure for energy efficiency and to improve policy analysis providing support for pilot actions and information dissemination activities in areas of appliances, buildings, education and training, industry and transport. It is i transport sector where the greatest efforts must be made to reduce emissions and energy dependence (3). A responsible policy for managing dependence must also consider internal and external supply. From an internal point of view and taking into account the position of traditional energy sources, sustained efforts should be made to promote the increase in penetration of new and renewable energies in EU economies. It means, above all, mobilising aid to promote their development and use. Renewable sources can only reach a sufficient level of competitiveness if they receive subsidies for a relatively long time. The nuclear option must be examined regarding its contribution to the security of supply and greenhouse emissions reductions. For this reason, EU´s energy policy is supporting research in this field at the time that supports the closure and dismantling of reactors which cannot be modernised. Moreover, the EU is examining the ways of treating the question of nuclear safety after the enlargement process. The European Union also is using its political and economic influence to ensure flexible and reliable external supply conditions. How? Mainly establishing and ongoing dialogue with producer countries to greater transparency on the market and obtain stable prices. Also, it is also necessary to have a supply network with security guarantees. Consequently, the European Union is promoting the construction of new oil and gas pipelines that make possible to import oil and gas from Caspian Sea basin and the southern Mediterranean, improving the security of supply by diversifying geographic sources of supply. Security of supply needs to be supported by a horizontal policy which ensures that energy prices reflect real costs and encourages energy saving. To strengthen the internal market in gas and electricity, the EU needs more competition between national energy operators and the introduction of new regulatory powers and reasonable transit costs. In this way, enhanced gas to gas competition on an integrated European market could be conducted to uncoupling the price of gas from that of oil. In the Stockholm meeting, the European Council assumed the objective of opening markets on gas and electricity taking into account the requirement to satisfy user needs and the necessity of transparency in the market through appropriate regulatory instruments.
4. Conclusions and ending questions to debate The European Union has implemented a complex energy policy with the aim to increase the selfsufficiency capacity together with sustainability. Energy security based on solidarity and trust, a fully integrated European energy market, the promotion of energy efficiency which contributes to the moderation of demand, the transition to decarbonising economy with research, innovation and competitiveness are the keys but, where are the weaknesses of European Union Energy Strategy? The European Union has progressed in the liberalisation of energy markets, but we are still far from the levels to ensure better prices for consumers. It would be necessary to focus on the search for new measures and tools. Studies show (Bortolamedi, 2013) that reducing carbon emissions and increasing the use of renewables has an ambiguous impact on overall energy security. Reducing carbon emissions improves energy intensity and net import dependency while makes fuel mix diversity and mix supplier diversity worse. Fossil fuels are replaced by renewables, and coal is substituted for gas. That implies a more concentrated fuel mix towards gas and a more concentrated supplier mix (1) See COM(1998) 246 final . Energy efficiency in the European Community: Towards a strategy for the rational use of energy. (2) SAVE: Specific Actions for Vigorous Energy Efficiency. (3) More about this theme can see in European transport and energy policy: an overview of forthcoming proposals.
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towards gas suppliers with an inherent risk. It is true that gas offers a way for next decades, but the European Union must think in the long term strategy. As the European Union strives to reach its climate and energy targets for 2020 and beyond, the nature of the energy security challenge is changing. There are uncertainties (Choices, 2015) surrounding the EU energy system, around future demand as well as the impact of the new technologies and the location of generation. The January 2009 gas crisis showed the lack of physical interconnections and the poor functioning of the EU internal market with the several Member States facing severe energy shortages for several days. Has the Electricity and gas network the adequate development in the case of shock? Moreover, connected with the EU defence policy, in this sense, has the European Union one “plan” in the case of terrorist attack to energy infrastructures and internal electricity interconnections? A grand deal of progress has been made since 2007 pointing to a single European energy policy. However, these programmes should not make us forget the risk linked to the current trend towards a forceful return to nationalism in the energy field in Europe. In this respect, a European Energy Community must be constructed regarding the uniting factor of European solidarity among all actors. Can be considered the nationalism a threat to energy solidarity principle? During the crisis, a new energy topic emerges in countries affected by austerity and GDP decrease: energy poverty. Beyond the sometimes narrow principle of subsidiarity relied on in this area and the simple dissemination of a good conscience the EU should come up an operational definition and the definition of specific efforts to combat this problem. What should be these efforts and in which direction? The transatlantic relationship with the US, which has always incorporated energy security, is under discussion (Correljé & van der Linde, 2006) too. The consequences of the current tensions between EU and US are for the EU energy interest. The main question is then as to whether the EU can accept the consequences of carrying out an independent policy. What is the view about that? We can not forget the feasible “Brexit” and the effects on energy security to the European Union in the case that the UK leaves the European Union, Does the European Union a real plan? What changes will be necessary in the case of “yes”?
References Alberici, B. S., Boeve, S., Breevoort, P. Van, Deng, Y., & Förster, S. (n.d.). Subsidies and costs of EU energy Final report Subsidies and costs of EU energy Final report. Bortolamedi, M. (2013). Energy security indicators : Are they helpful in assessing policies addressing energy security ? Choices, E. U. (n.d.). A Perspective on Infrastructure and Energy Security In the Transition. Retrieved June 13, 2016, from www.energyunionchoices.eu/.../EnergyUnionChoice Correljé, A., & van der Linde, C. (2006). Energy supply security and geopolitics: A European perspective. Energy Policy, 34(5), 532–543. http://doi.org/10.1016/j.enpol.2005.11.008 European Commission (EC). (2006). Green Paper: A European Strategy for sustainable, competitive and secure energy COM(2006)105 Final. European Commission (EC). (2014). Energy prices and costs in Europe COM (2014) 21/2. Eurostat. (2015). Euro area unemployment rate at 11.1%, (February), 3–8. IEA. (2015). Key World Energy. REN21. (2016). Global Status Report, Renewables 2016. Vrontisi, Z., Kitous, A., & Saveyn, B. (2015). The impact of low oil prices on the EU economy. http:// doi.org/10.2791/222885
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EUROPEAN ENERGY SECURITY IN THE AGE OF BREXIT Amelia Hadfield Jean Monnet Chair Director of the Centre for European Studies, Politics/IR Canterbury Christ Church University, Kent, UK
[email protected]
Abstract The concept of EU à la carte is an interesting one. For some, it invokes images of scattered states, unreconciled policies and unworkable objectives. For others, it suggests areas of complementarity that ultimately makes collaboration possible. EU à la carte options wax and wane according to the health of the overall EU enterprise, and the suitability of key mechanisms like integration and governance. When the latter encounter problems in providing collective solutions, then the benefits of flexible à la carte options are routinely suggested. But à la carte operations are risky and complex. As a non-uniform method of European integration, they operate via centrifugal philosophies which generally make a virtue of the peripheral, rather than a necessity of the centre. Can one strike a balance between the deep demands of integration, and a pragmatic use of looser approaches? The EU may need to. Collective approaches typify the EU’s pioneering approaches to climate change, but energy security remains defiantly geopolitical in nature. Whilst energy security continues to be determined by national foreign policy dynamics, à la carte mechanisms may be a helpful way of bypassing the current stasis in Europe’s energy mainframe. Could à la carte go even further? Some of the software and hardware, and even decarbonisation goals of the European Energy Union (EEU) could be accomplished in the short term by allowing Member States to achieve initial goals at different speeds and varying methods. This has the advantage of getting the general structure of the EEU completed, as well as retaining the inputs of non-EU Member States (and those swiftly heading for the exit). But achieving the security of the EEU is a tougher battle, requiring solidarity rather than symmetry. Energy security is the minimum objective, but it requires a maximum of input. À la carte mechanisms may work, but it would have to do so in a way that achieves genuine regional balance and between vulnerable states and the strategic imperatives of the EEU as a whole.
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Introduction Rarely has a conference been more aptly timed, or so appropriately themed. 2015 and 2016 together have seen the use of a number of themed workshops bringing together Jean Monnet scholars and external expertise to explore key topics of real importance. In Malmö, Sweden, between 19-21st June, 2016, the same assortment of academics and experts together explored the prescient possibilities connected to the idea of an EU à la carte, which in simple terms entails a disassociated approach to the current integration-based structure of shared institutions and sovereign Member States. In some areas, like foreign policy, security and defence, as well as energy policy, European cooperation has proved contentious, and accordingly is less deeply integrated than other areas. Initially, I had crafted my talk to suggest that simply being less-well integrated was a far cry from Member States operating by opt-out, or actually opting out of the EU altogether. Now, however, everything is utterly changed. Within two days of our workshop, this is exactly the situation that we as scholars now confront. Brexit is indeed the mother of all opt-outs. And the institutional, political, economic and social repercussions that are to follow are as yet largely unknown. What follows therefore are the assessments on European energy governance that I initially presented at Malmö, augmented many invaluable observations made by colleagues and experts during the seminar, but inevitably coloured by the realities of the Brexit vote that followed a mere two days later.
European Energy Union: Setting the Stage Our Working Group was entitled ‘Energy Union’, and brought together a range of experts from institutes and universities within and beyond the EU. For insights into what constituted the individual presentations, the key themes discussed on day two and the overall conclusions that our Working Group reached with the assistance of our moderator, Marten Westrup from DG Energy, look no further than the pithy observations of our rapporteur, Tim Boersma from the Brookings Institution (1). I based my presentation on work undertaken evaluating the European Energy Union (EEU) earlier in the year, in my capacity as Director of the Energy and Governance Group (E&GG) at Canterbury Christ Church University. (2) Specifically, I worked from some of the key observations in the Briefing Note E&GG produced, entitled ‘Deconstructing the European Energy Union: Governance and 2030 Goals’, which examines the five dimensions of the EEU (energy security, a completed and integrated internal energy market, improved energy efficiency, progressive decarbonisation targets, and research, innovation and competitiveness). (3) The briefing note charts the progress of the EEU from its proximate origins, including geopolitical factors, through its 2015 and 2016 developments, to evaluate the efficiency of the overall initiative in actually promoting change within key aspects of the European energy sector. The results are mixed, as expected. Member States do appear to be largely on board the broad concept of the EEU, particularly after the individualised attention they received from EEU Commissioner, Maroš Šefčovič. However, the key issue of a new and improved form of energy governance – i.e. the specifics of shared or altered authority, in key policy areas, and the division of that authority between the Member States, the European Commission, and other European energy agencies, remains unclear, both legislatively and strategically. Energy security in particular is still an area fraught with tensions regarding the placement, interpretation, and management of energy security within the terrain of other energy and climate competences. Short-term geopolitical outlooks still dominate, demanding a sovereignty-first attitude that has prevented much in the way of genuinely collective ‘actorness’ at the EU level. The connection between the EEU’s five components (4), and the overall trinity of long-term energy security, sustainability and competitiveness that have long been constituted the ultimate goals
(1) Entitled ‘Report workshop European Commission – Energy Union’ (2) For more information on the work of our group since its founding in 2014, head to: www.canterbury.ac.uk/ energyandgovernance. (3) A. Froggatt and A. Hadfield, ‘Deconstructing the European Energy Union: Governance and 2030 Goals’, EPG Working Paper 1507, Energy & Governance Group CCCU and UKERC, London, 2015. (4) Further info on the European Energy Union, including key EU documents can be found here: https://ec.europa.eu/ priorities/energy-union-and-climate/state-energy-union_en.
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for Europe’s energy terrain remains unclear. The mechanism of governance, by which to pull these components together, and operationalize them, also remains currently too vague to be of genuine assistance. Is energy security therefore – and indeed all the key components of the EEU – destined to remain a disparately managed, rather than collectively organized endeavour? At this point, yes. As far as energy security goes, EU à la carte remains the main mechanism. To illustrate this argument, as well as to set the stage for the ‘what if’ Brexit scenario, I suggested that each of the EEU’s five components could be examined through the lenses of variable integration (rather than its structured EU variant), with opportunities for differentiated rather than centralised governance. Each of these five components is briefly analysed in the next section.
EEU à la carte (5) 1. Energy security, solidarity and trust operates as the most geopolitically-oriented of the EEU’s five strategic dimensions. It arises primarily from the energy security = foreign policy dynamic that has become the hallmark of European energy policy, seen most explicitly in the 2014 European Energy Security Strategy (EESS). (6) This document comprised a shopping list that Member States and the European Commission had to undertake in the wake of increasing east-west geopolitical tensions, primarily between Gazprom and a range of EU Member States, as well as the European Commission, complicating the buying and selling of natural gas. The 2014 EESS made clear that Lisbon Article 194 concerning the need for EU Member States to operate in a ‘spirit of solidarity’ was not to be taken lightly, but rather a guiding principle for all aspects of energy cooperation between MS. The problem is that solidarity still operates too loosely. It is neither a guiding, nor governing principle, and remains more of an aspiration: a long-term goal to be aimed for only when short-term geopolitical exigencies have been dealt with. This is not a particularly cynical reading of the article, but a realistic appraisal of Member State behaviour that has typified European energy relations since the adoption of the Treaty of Lisbon in 2009. Member States remain firmly committed to retaining choice over their national energy mix, suppliers, methods of delivery and payment, as well as the range of foreign policy decisions that foreground those energy choices. These decisions have been taken by each Member State in a manner largely independently of each other rather than collectively or even in a coordinated fashion. While some Member States have indicated a willingness to work more closely together in building a Union dynamic regarding energy security, others remain defiant in pursing energy security with maximum national latitude. The outcome is a framework that is arguably à la carte in nature. Things may get worse before they get better. The geopolitical tensions that encourage Member States to behave egoistically, rather than collectively, have never been higher. Indeed, the EU’s energy actors could be heading toward a ‘perfect storm’ in which market-driven political decisions remain defiantly short-termist, material and retaliatory in nature. This in turn has politicised, and could soon entirely securitize the supply-demand dynamics that foreground basic energy relations. Can improved governance prevent a full-blown EEU à la carte? Possibly. Both key documents emerging from the EEU package, as well as external observers (7) have hinted strongly at the need for more robust top-down governance, i.e. with the European Commission itself operating in various guises as the guardian of Lisbon’s ‘solidarity’ clause: (1) energy contract watchdog; (2) collective gas purchaser; (3) chief EU negotiator with third parties on a range of issues (e.g. third-party access, pipeline construction); and (4) a regulatory actor on intra-EU competition, connectivity and even regulatory issues. Such a setup would see the European Commission effectively forcing the Member States to collaborate collectively. However, the Member States are undoubtedly likely to fight back. The outcome will signal as much about the appropriate form of governance ultimately (5) Second, in terms of the visuals of EEU à la carte, and the placement of a non-EU UK within, alongside, or external to the EEU, the options remain unclear. Solidarity-driven structures suggest a concentric circles setup, with an inner ring, outer circles, and periphery, the central mechanism being willingness to commit to a particular form of top-down governance. (6) http://ec.europa.eu/energy/en/topics/energy-strategy/energy-security-strategy (7) See for example: https://www.euractiv.com/section/energy/interview/eu-adviser-energy-union-should-take-holisticapproach/
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desired for the EU’s energy union as it will the final strategic objectives of the EEU itself: whether they be far more deeply integrated than at present, or a look reminiscent of the à la carte option. 2. A fully integrated energy market entails the balance of improved energy software (legislation) and hardware (infrastructure) across the EU. There is at present a desperate need to complete both the range of regulations and directives, and the physical inter-connectors in a manner that is not coterminous with national boundaries, but representative instead of market-based needs and regional requirements. An EEU à la carte structure appears less likely here, as EU legislation as a whole permits little real leeway in the overall objective of completing an internal gas and electricity market. The flexibility in applying directives, as well as case-specific treatment may however yield greater flexibility in how individual Member States go about achieving that final goal amongst themselves (and the degree to which the Commission is seen as friend or foe in this endeavour). Directive-led approaches may encourage the national particularities of energy markets and security to be dealt with on the Member States’ terms, at least in the short to medium term, allowing them leeway in terms of connectivity, cooperation and overall shared commitment to the software and hardware of the EEU. An EEU à la carte here would perhaps indicate instead the degree of market completion, in terms of a deep or light market across two or three (or more) Member States, and between regions. The ability of non-EU players, including the Balkans, Turkey, and by 2018-20, the UK to support obligations to EEU software (e.g. the European Community Treaty) and commitments to hardware (e.g. extant and future pipeline, cable and interconnector projects, plus LNG hubs and ports) seems a manageable prospect. 3. The various energy efficiency goals revolve around reducing demand-side requirements across a host of sectors by virtue of key national targets, few of which can be adjusted within the current EU 2030 climate change legislation. Indeed, the point of the legislation to replace any EEU à la carte tendencies with a level playing field upon which all players are equally situated, both at the EU-level and internationally (Paris 2016 COP-21 commitments). Further, the EU’s identity as a ‘green actor’ including its negotiating power, and the legitimacy of its overall climate diplomacy entirely is dependent upon the singularity of this selfsame actorness. Thus while EU Member States may approach their commitments differently, and even fail to make key thresholds, EU institutions (principally DG Clima) will likely fight hard to reduce any sense of à la carte approaches affecting the EU’s overall achievements of its climate goals. The Brexit outcome however, is more likely than any other factor, to undermine key aspects of this commitment. As mentioned in the presentation, there are positives and negatives here. The positives represent the pioneering actions that Britain has produced within energy and climate policy for the past decade and a half. As recently argued by Buchan and Keay, ‘EU policy has actually followed the direction of UK policy, first with liberalization of the EU energy market in order to foster cross-border integration and competition, more recently with intervention in the energy market in order to foster low-carbon generation’. (8) Accordingly, the UK is likely to continue its leading role in both energy efficiency and decarbonising the economy (see below), simply because national low-carbon structures and goals are now well-established within Britain’s own national strategies (witnessed as early as 2000 in the Royal Commissions on Environmental Pollution, its 2003 cap and trade scheme, and 2008 Climate Change Act). The negatives take the form of doubts over the future of the COP21 pledges undertaken by the EU, on behalf of all its Member States, including the UK, in December 2016. Will a Brexit decouple the UK from the EU’s COP21 pledges? If so, the EU’s ability to project its green actorness to 2030 and 2050 will likely be temporarily undermined, while the UK will struggle – at least initially – to demonstrate how its individual contributions can make a genuine impact globally. The overall question for both energy efficiency and decarbonisation is therefore the degree to which the UK can still be counted - in both energy trade, and target-setting terms as effectively still ‘within’ a European structure. If so, then its non-MS status may not matter that much, as long as it is deemed (and willing to be seen as such) to operate within the broader terrain of European climate and energy structures. Determining the most appropriate ‘model’ for the UK in terms of political, trade, and energy relations was an exercise that animated both sides of the Referendum argument, and is now the prime objective of the new May government. Models (8) D. Buchan and M. Keay, ‘The UK in the EU – Stay or Leave? The balance sheet on energy and climate policy’, Oxford Energy Comment, The Oxford Institute for Energy Studies, February 2016, p. 2.
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allowing a closer rather than more distant relationship between the UK and the EU in terms of trade, investment, commerce, and a shared energy market include European Economic Area (EEA) or similar scenarios. As commentators have argued, an EEA option would be ‘economically and environmentally preferable but politically unattractive’, whilst a free trade-based option may be ‘politically preferable’ but in terms of long-term prosperity and climate goals, ‘economically and environmentally unattractive’. (9) 4. In terms of decarbonizing the economy within and across the European Union, the main aim here is not dissimilar from that of energy efficiency. This goal is foregrounded in the emergent objectives of climate policy, but with a clearer focus on the process, as well as the policy of reducing the overall usage and production of carbon within markets, industry and commerce. Here again, historic leadership regarding market-friendly mechanisms to reduce emissions may allow the UK to work alongside the EU, rather than in opposition to it. Indeed, Buchan and Keay’s suggestion that in terms of national renewable targets, emissions trading structures, and anti-pollution directives, ‘EU constraints on UK energy policy are minimal’, suggests not only that an EEU à la carte structure already exists, but that the UK can find a positive post-Brexit location within it. (10) 5. Research, Innovation and Competitiveness indicates the intellectual value at the heart of the EEU as it relates to research-based consortiums and private sector advances, boosted by major funding packages by the EU (e.g. Horizon 2020) and its Member States. Taken together, research, innovation and competitiveness represent the message of the EEU, rather than its modus operand; telling us rather more about the critical thinking needed to foreground the hardware of the EEU, rather than strategic decisions around its legislative software, or its governance mechanisms. Here again however, the outcomes may ultimately be positive. The UK remains second only to Germany in obtaining H2020 funding, a large portion of which operates within the area of climate and energy innovation. (11) If flexibility can be applied by the European Commission regarding the classification of key non-EU states such as the UK in terms of preferred partners, rather than generic associates, then much cutting-edge British research and innovation can continue to support the overall objectives of research, innovation and competitiveness within the EU itself, as well as the EEU. This will ensure that the EU’s own goals can in turn impact positively on the UK’s ability to remain materially and intellectually within the broad contours of both the EU and the EEU.
Conclusion As argued above, the EEU is still devoid of a clear understanding of, or application of governance. Governance is critical. It remains the central method by which authority and action are operationalised across key policy areas and EU and national institutions. In short, governance should provide a clear indication of a competence-based division of labour in each policy area; but as yet Member States and major private sector energy actors are still missing that blueprint as it pertains to the EEU. Bearing in mind the current exigencies of Brexit, it is now crucial not only to identify how and where the current players of the EEU are to cooperate strategically, but also the areas in which the UK can work, both within and without the EEU. IN terms of EU-UK relations, much now depends on the ability of the tripartite Brexit team put together by British Prime Minister Theresa May to negotiate a clear timetable, and a workable structure for both the UK and the EU. From the perspective of climate change and energy security, the recent UK cabinet upheavals are also instructive, signalling a more market-driven, industrial-led attitude to energy relations, and a rather separate approach to climate diplomacy. (12) (9) Michael Grubb and Stephen Tindale, ‘Brexit and Energy: Cost, Security and Climate Policy Implications’, EINOTE produced by UCL, May 2016, p. 5. See also ‘Impact of a Brexit on the energy sector’ by Norton Rose Fulbright, June 2016 (available online). (10) Buchan and M. Keay, op. cit., p. 3. (11) See for example: https://www.russellgroup.ac.uk/media/5253/58-russell-group-briefing-on-european-fund-forstrategic-investments.pdf (12) One major change has already been seen in the shift of energy, climate and business areas, with the former Department for Energy and Climate Change scrapped, and its brief merged into the new Department for Business, Energy and Industrial Strategy, under the leadership of Greg Clark. Environment remains a separate portfolio, headed up by former PM challenger, Andrea Leadsom.
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THE ROLE OF TURKEY IN THE EUROPEAN ENERGY SECURITY CAN TURKEY COME UP AS AN ENERGY HUB IN THE MIDDLE EAST? Bahri Yilmaz Jean Monnet Chair Sabanci University-Istanbul
[email protected]
Abstract This paper aims to examine the role of Turkey in the European energy market in the context of European Energy Security and we will attempt to answer the following basic questions: − What will the future role of Turkey be in the European energy market? − As is usually argued, can Turkey play a leading role as an energy hub or an energy corridor/transit land in the European Union’s energy security? − Can Turkey satisfy expectations of the EU for its energy security in the future? − Is Turkey irreplaceable as a transit land, through which natural gas and oil from Russia, the Middle East, the Caucasus and Central Asia, are brought to the global energy markets? − Who are other political and economic competitors in the region?
EU à la carte?
Introduction World Energy reports published in the last years by International Energy Agency (IEA), US Energy Information Administration (EIA) and BP reviews indicate the growing role of Turkey in world energy markets both as a regional energy transit hub and as a growing consumer. It is argued that Turkey can play an increasingly important role in the transit of oil and natural gas. Turkey is strategically located at the crossroads between oil-rich Former Soviet Union and Middle East countries, and the European demand centres. Turkey holds a strategic role in natural gas transit through its position between the world's second-largest natural gas market, continental Europe, and the substantial natural gas reserves of the Caspian Basin and the Middle East. We aim to examine the role of Turkey in the European energy market and in the context of European Energy Security we will attempt to answer the following basic questions: What will the future role of Turkey be in the European energy market? As is usually argued, can Turkey play a leading role as an energy hub or an energy corridor/transit land in the European Union’s energy security? Can Turkey satisfy expectations of the EU for its energy security in the future? Is Turkey irreplaceable as a transit land, through which natural gas and oil from Russia, the Middle East, the Caucasus and Central Asia, are brought to the global energy markets? Who are other political and economic competitors in the region? What are the common interests of the EU and Turkey in the Energy Security? The International Energy Agency (IEA) defines energy security as “the uninterrupted availability of energy sources at an affordable price. Energy security has many dimensions: long-term energy security mainly deals with timely investments to supply energy in line with economic developments and sustainable environmental needs. Short-term energy security focuses on the ability of the energy system to react promptly to sudden changes within the supply-demand balance.” The Energy Ministers and their representatives of Canada, France, Germany, Italy, Japan, the United Kingdom, the United States, and the European Commissioner for Climate Action and Energy, met in Hamburg on 11 and 12 May 2015 to discuss in strengthening collective energy security and to decide upon further initiatives to effectively improve sustainable energy security of G7 countries and beyond, taking into account recent market developments. In the final communiqué of the meeting it is clearly stated that “…We regard diversification as a core element for energy security… We aim to further diversify the energy mix, energy fuels, sources and routes. We believe that this will help to improve the resilience of energy systems in the short, medium and long term against supply disruptions and we remain deeply concerned about the on-going instability in Ukraine, which poses a much broader threat to energy security in the region. We call for an immediate resolution of the crisis and reiterate our affirmation that energy should not be used as either a means of political coercion or as a threat to security…’’. On the other hand, the Turkish Ministry of Energy and Natural Resources declared in a recent strategy document for 2015-2019 that the primary aim of Turkey is to realise its own energy security. To this end, Turkey has for objective to diversify its energy supply routes and source countries; increase the share of renewable and include the nuclear in its energy mix; take significant steps to increase energy efficiency; and contribute to Europe’s energy security. Obviously, the most pressing energy security of supply issue for the EU and Turkey is the strong dependence from a single external supplier, namely Russia. This is particularly true for gas. Henceforth, the economic interests of the EU and Turkey largely overlap with each other. In other words, both sides follow a policy of reducing dependency by diversifying transit routes.
Import Dependency of the European Union The European Union is one of the poorest regions in primary energy resources in the world economy and it is heavily depended on import of energy supplies from other producer countries. According the figures of the EU Commission 2014 ‘The EU`s share of world energy production is only 6.1% and in world consumption is almost 13 percent in 2012. The EU external energy bill represents more than €1 billion per day (around €400 Billion in 2013) and more than a fifth of
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total EU imports. The EU imports more than €300 billion of crude oil and oil products, of which one third from Russia. In plain language, today, the EU imports 53% of the energy it consumes. Energy import dependency relates to crude oil (almost 90%), to natural gas (66%), and to a lesser extent to solid fuels (42%) as well as nuclear fuel (40%). According to studies by the European Parliament, in 2013 Russia provided 43.2 percent of the European Union’s gas imports, 31.38 percent of its oil imports, and 26.7 percent of its coal imports. As oil and gas exports to Europe account for almost 52 percent of Russia’s federal budget income (US$515 billion), This dependence leaves them vulnerable to supply disruptions, whether caused by political or commercial disputes, or infrastructure failure. For instance, a 2009 gas dispute between Russia and transit-country Ukraine, left many shortages. According to the baseline-scenario made by the EU Commission, the EU’s import dependency will increase continuously until 2030, reaching 90 percent in the oil and 73 percent in the gas sector. Baltic States and some Central Eastern countries are also heavily reliant on a single supplier, including some that rely entirely on Russia for their natural gas.
Import Dependency of Turkey As same as the EU, Turkey is also heavily depended on imports of primary energy resources. Oil has been one of the main energy sources in Turkey, accounting for 27% of the country’s total primary energy supply (TPES) in 2012. Iran was the largest supply source of crude oil with 39% of the 2012 total, followed by Iraq (19%), Saudi Arabia (15%) and Russia (11%). The share of natural gas in the country’s TPES significantly increased to 32% in 2012. The Russian Federation was Turkey’s largest supplier, representing 58% of total imports in 2012 followed by Iran (18%), Algeria (9%) and Azerbaijan (7%). Turkey’s natural gas imports are dependent on .long-term contracts. In 2011, the transformation sector was the largest consumer of natural gas, representing about 48% of Turkey’s total gas consumption, while the industry and the residential sector represented 22% and 20% respectively. The country imported 23% of its total coal supply in 2012. Almost all of Turkey's coal imports are hard coal, which Turkey does not produce in sufficient quantities. Russia, Australia, and the United States are the main suppliers of Turkey's hard coal. Turkey is playing an increasingly important role in the transit of oil supplies from Russia, the Caspian region, and Iraq to Europe, with the Turkish government deriving significant revenues from the transit fees. Turkey has three domestic crude oil pipelines and two major international oil pipelines to meet demand in Turkey and to transport exports: Two major international pipelines run through Turkey: Kirkuk-Ceyhan Pipeline and Baku-Tbilisi-Ceyhan Pipeline. There are also three domestic pipelines: Ceyhan-Kırıkkale Crude Oil Pipeline, Batman-Dortyol Crude Oil Pipeline and Selmo-Batman Crude Oil Pipeline .The total length of crude oil pipelines in the country is about 3 374 km with a combined handling capacity of about 2.8 mb/d in 2012. Turkey is also home to one of the world's busiest chokepoints and significant volumes of Russian and Caspian oil move by tanker via the Turkish Straits to Western markets. Approximately 3.0 million barrel per day (bbl/d) flowed through the Bosporus and the Dardanelles in 2013 (approximately 2.5 million bbl/d of crude oil and 0.5 million bbl/d of petroleum products There are four international gas pipelines in operation with a total import capacity of some 46.6 billion cubic meters (bcm): the Russia-Turkey West Gas Pipeline with a capacity of 16 bcm via Kofcaz on the border with Bulgaria; the Russia-Turkey Blue Stream Natural Gas Pipeline with a capacity of 14 bcm via Samsun on the Black Sea; and the Baku-Tbilisi-Erzurum Pipeline with a capacity of 6.6 bcm through Georgia via Ardahan. The country also exports natural gas to Greece through a pipeline with a maximum capacity of 2.4 mcm/d. Estimations made by IEA Turkey's energy demand have increased rapidly over the past few years and likely will continue to grow in the future. Demand for natural gas in order to meet these
EU à la carte?
demands, Turkey will need to Increase its natural gas consumption considerably. Turkey’s stateowned gas supplier, BOTAS, recently predicted that Turkey’s gas demand will rise to 70 bcm by 2020. According to the International Energy Agency (IEA), energy use will continue to grow at an annual growth rate of around 4.5% from 2015 to 2030, approximately doubling over the next decade. The IEA expects electricity demand growth to increase at an even faster pace.
What is all about? Gas and oil producers from the Middle East, the Caucasus, Central Asia and Russia are undoubtedly developing energy projects to increase their gas and oil export across transit countries to European and world markets. It is obviously that not only consumer countries but also /producer countries aims to diversify the import/export of gas and from/to different regions in order to reduce its dependency on a single country. Contrarily, Russia wants to diversify its gas transportation routes by circumventing the Ukraine and Belarus. At the same time, the EU countries want to break their own dependence on Russian gas suppler by transporting non-Russian gas across Turkey, instead of through Russian territory. At the same time, the EU countries want to break their own dependence on Russian gas supplies by transporting non-Russian gas across Turkey, instead of through Russian territory. It is obviously that key elements of Turkey’s and EU’s overall energy security policy are diversifying its long-term supply contract portfolio, forming an energy hub from Central Europe and the Middle East to Europe, increasing natural gas storage facilities, cutting back contractual supplies and fuel switching to alternative fuels for power generation. What is the Role of Turkey in the European Energy Security? The critical question is: What might the role of Turkey be in the European energy market? Turkish policy makers in Ankara strongly believe that Turkey is going to become a leading and dominating energy hub through the transportation of natural gas and oil from the Caspian region, Iran, Iraq and the Gulf states to the European and world markets. Turkey’s energy policy has on two main goals: Firstly, the country wants to satisfy its increasing demand for energy resources through diversification of gas and oil imports from the different suppliers in order to reduce its one-sided energy dependency on Russia. Secondly, Turkey wants to play an important role in the European and global energy market as an energy hub and transit country for one simple reason: Turkey’s proximity to regions with 70 percent of the world’s proven oil and gas reserves. According to statistics, around one-third of worldwide crude oil production and almost one-fifth of worldwide natural gas production (excluding Russia) were exploited in the region in 2008. In the same year it is estimated that two-third of worldwide crude oil reserves and currently half of the natural gas reserves lay in the Middle East. Turkey initiated and took a part of two main projects in order to satisfy its own and the EU expectations. One of them was the Nabucco pipeline (, named after the opera by Verdi) which is supported by the EU and the USA, is an alternative route to Russian deliveries to Europe via the Ukraine. The 3,300 kilometre pipeline aims to bring Caspian gas to western European energy markets and to diversify the current natural gas suppliers and delivery routes for Europe, by pumping gas from Erzurum in Turkey to Baumgarten an der March in Austria. It is estimated that the pipeline will have a total cost of around € 9 billion; the capacity lies at approximately 30 bcm of natural gas yearly with the expectation that the pipeline will be in operation by 2014-15. Meanwhile discussions have focused upon connecting the Caspian countries’ huge natural gas reserves to the Nabucco pipeline in order to export their gas to Europe. The Nabucco project has failed because of two reasons: the first question was how will the Nabucco pipeline be filled and from where will sufficient quantities of gas be secured in order to close the gap in European long-term demand for natural gas? The second question was how the cost of project would be financed? Now the Turkish government is trying to replace it with a new project called Trans-Anatolia Natural Gas Pipeline (TANAP) Project, designed to transport 6 bcm/a natural gas to be produced from Shah Deniz Phase-II of Shah Deniz Consortium (SDC) to Turkey and 10 bcm/a to Europe via Turkey, was signed on 24 December 2011.
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In the current ongoing political and economic debate, the certain misperception arises concerning a difference between energy hub and energy corridor/transit corridor. In economic terms, the energy hub means that a country can buy energy resources from producers’ country and sell them to consumers. It is can determine the energy prices in the international energy market. The country itself is as a part of international energy market. In other words, it is not a price taker and one of the main actors in the markets. It has a sufficient and well established infrastructure to store and to transport the energy to the world market. Turkey’s role in the global and European energy market as energy hub or as a transit country will be closely connected not only with economic factors but also with the external and internal political and economic development both in and around Turkey. Now we will look at external and internal determinants which may influence the role of Turkey in the energy market through the setting of transit routes of energy resources from the region to Europe
Internal factors At the beginning of 2014 Turkey, South Africa, Brazil, India and Indonesia are among the five fragile countries in global economy. The vulnerability assessments of these countries are based on their growth rates, interest rates, inflation, the current account deficits and the value of their national currency. For the time being Turkey seems to have neither a sufficient financial and human capital nor a well-functioning infrastructure. It is notably that actors of the market, producers, consumers, governments and multi-national oil companies would not allow Turkey to play a dominating and a leading role in the European energy market. Therefore Turkey is expected to take on the role of a transit country between consumers and suppliers by collecting transit revenues, royalties, and satisfying its own energy demand. From political point of view the resolving of the so called “Kurdish issue” is vitally important to transport gas and oil from Eastern and south-eastern Anatolian to European markets. If the Kurdistan Workers' Party (PKK) targets gas pipelines in the eastern and south-eastern part of Turkey, the continued fighting between the PKK and military forces may damage Turkey’s prospects of becoming a key energy transport land to Europe.
External Factors For the time being there are three main sources to transport oil and natural gas from the region to the world market which are Iraq, Azerbaijan and Iran. The Iraq-Turkey gas pipeline project is one of the attractive projects on the agenda. In fact, Iraq after the planned withdrawal of the American forces from Iraq in 2011, it is not possible to make any predictions on the political and economic development in Iraq. The country has been divided into three parts and there is no consensus on the distribution and exploitation of energy sources among the federal states. On the other hand, Gulf producers are transporting their oil and gas by using sea routes and therefore they do not show any interest exporting their products overland. Iran could be taken into consideration as one of the possible transport routes, both to Turkey and the Gulf. For the transportation of Iranian natural gas to Turkey by a gas pipeline, Necmettin Erbakan, the former Turkish Prime Minister, signed a US$23 billion gas supply deal with Iran, committing Turkey to a 20-year contract and the construction of a 1000-mile pipeline between the two countries. The gas deal has been strongly criticised in the American press and is regarded as a direct challenge to one of the Clinton administration's central foreign policy goals, which aimed at isolating Iran as a state that sponsors terrorism and seeks nuclear weapons. For these reasons Washington, with the help of the D'Amato Act, wanted to penalise foreign companies that invest US$40 million or more a year in the oil and natural gas sectors of such a country. Now due to recent rapprochement between Washington and Teheran, as Tara Shirvani pointed out in the Harvard International Review (HIR) that Iranian gas could be transported from the South Pars gas field to the city of Bazargan at the border of Turkey and then it would cross Turkey before reaching Italy.
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Transportation of gas and oil from the Caspian region and Azerbaijan via Georgia and Turkey to the Mediterranean Sea, Georgia is very important as a land corridor connecting Turkey with Azerbaijan and the Caspian region. Turkey's main interest in relations with Baku lies in the possibility of transporting Azeri oil from Baku through Georgia to Turkey and to the Mediterranean Sea (BTC). For relations between Turkey and the Central Asian states, Transcaucasia has been seen as a passageway and plays the role of a bridge. Therefore, peace and stability in the three countries, namely Georgia, Armenia, and Azerbaijan will best serve Turkey's economic and political interests. One of the main issues and controversies between Ankara and Moscow concerns the transit routes of oil and gas from Central Asia and the Caspian Sea to the world market. Moscow was adverse to the construction of BTC and insisted that the new oil and gas pipeline should cross Russian territory. Currently, Russia seems to be determined to continue to control this important economic weapon so as not to lose the economic benefits of the oil and gas business. If the transportation of natural gas from Iran, Iraq and Caucasus could be put in force, Russia will try to export natural gas over Turkey by the pipelines South Stream and Blue Stream II in order to hinder the natural gas from the Middle East to Europe. In the short run, Russia will continue playing a dominant role in the European and Balkan energy markets as long as the main oil and gas suppliers Iran and Iraq remain out of the game. Turkey is not a major energy producer and heavily dependent on importing two-thirds of its natural gas from Russia. Noticeably, Russia reduced natural gas prices slightly on the demand of Ankara last year; most interestingly, Turkey signed an agreement with Russia in 2010 to build Turkey's first nuclear power plant in Akkuyu, on the Mediterranean coast. The plant would have four units with a total capacity of 4.2 gigawatts and begin operating around 2020. Russian investors, namely Rosatom, agreed to finance a large proportion of the project.
Unexpected Russia-Turkey Tension On November 24, 2015, Turkey shot down a Russian warplane near the Turkish-Syrian border. Ankara says the aircraft ignored warnings and violated Turkish airspace. Turkish military officials claim that two of their F-16 jets were scrambled and therefore brought down the Russian plane with a missile strike. Moscow insists that its jet remained within Syrian airspace. Both sides say they have hard evidence to back up their accounts. Putin has called Turkey’s action a “stab in the back.” There are obvious potential consequences for relations between Russia and Turkey, which share close economic ties, particularly since European sanctions on Russia had come into effect. Turkey is a popular tourism destination for Russians. It includes a ban on the recruitment of Turkish nationals by Russian employers and a food import ban on certain categories of products, as well as a ban on charter flights in both directions. With such moves, Moscow aims to put economic and military pressure on Turkey. Certainly, relations between Ankara and Moscow will not improve any time soon. Now the question remains: What impact will this dispute have on energy relations between the two countries as well as on Turkey’s energy security? The Turkish government is gradually becoming aware of the risky price of its one-sided dependency on imports of Russian oil and gas as well as the costs of this for the country in the coming years. Thus, in recent years the Turkish government has started to intensify its official visits to fossil energy producing countries such as Azerbaijan, Qatar, Saudi Arabia, and Turkmenistan in order to reduce its dependency on Russia and diversify its energy imports. For the time being, gas supplies, the pillar of bilateral trade between Turkey and Russia, have remained untouched; however, the development of “Turkish Stream,” a joint pipeline project between Turkey and Russia, is likely to be frozen. As fossil fuel prices are decreasing around the world, continuing to impose economic sanctions on Turkey does not seem like the most rational strategy for Russia in the future. In plain language, Moscow has heavily depended on energy exports, and half of its national budget consists of energy revenues. Therefore, it would not be a clever move for Russia to continue to isolate Turkey and potentially lose one of its best customers.
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RECONSIDERING INTEGRATION AFTER BREXIT Antonio C. Pereira Menaut Jean Monnet Chair Universidad de Santiago de Compostela Celso Cancela Outeda Jean Monnet Chair Universidad de Vigo
[email protected]
Abstract (1) Brexit has opened the debate about the future of the link between UK-EU and, as well, about the configuration of the EU. On the horizon is outlined a scenario of institutional reforms that force to reconsider European integration, specifically, its political inspiration. The main purpose of the following pages is to draw attention to the “Europe à la carte” which is already a reality. It is necessary to reconsider the political inspiration of integration. This is not consequence of the need or the destination, but of agreements between citizens and free countries.
(1) Partly, the arguments here presented can be seen in detail in Pereira-Menaut, A.C. and Cancela-Outeda, C. (2012). Resetting the European Union Constitutional Engine, Universitätsverlag Regensburg. The translation from the original has been financed by the Jean Monnet Chair “Understanding the EU in the 21st century”.
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Could it be possible to abandon the differentiated European integration? Jean Claude Juncker was asked about the consequences of Brexit triumph for the UK and he answered, “If you are out, you are out”. There are many similar statements in the media and after the triumph of Brexit we have heard voices that reject the use of the formula of “cherry picking” or the “EU à la carte” to reconcile the UK. Even though we are in the middle of the dialectical exchange between winners and losers, between London, Brussels and the other European Capitals, does this mean that the integration approach will be changed? We still do not know if the spirit of those statements, maybe made at the highest point of “heat” of the moment, will fade away in some months or, on the contrary, will be consolidated. Apparently, they are inspired in a strict and binary conception of integration. If this means that the UK will be apart from the EU institutions, this could be admissible, but if this means that all links will break and there are not any possible alternatives (“out is out”), is not admissible. In practice, it is difficult to carry out this last possibility. Playing with words, is possible to say that in the current EU “out is in” (non-Member States as Liechtenstein, Switzerland, Norway or Iceland participate in the single market) and “in is out” (Member States that do not participate in the European Monetary Union or the Schengen Agreement) because the European integration is now a differentiated integration. The implications of an eventual exit of the UK of the EU are not clear. Still, the forceful statements are premature because the number of queries widely exceeds the number of safe answers. What impact may have Brexit on differentiated integration? Or, on the contrary, could Brexit bury the “EU à la carte” and the flourishing of more rigid integration concepts? During these weeks, there are speculations with various alternatives. While some prevent the dissolution of the EU, others talk about the “leap forward” in integration (federalisation and creation of the United States of Europe) and a third alternative would be the configuration of a highly integrated central nucleus around the Eurozone and an exterior free trade zone. Be that as it may, is the moment to reconsider towards which integration models is the EU heading. The “EU à la carte” or the differentiated integration is a reality. There are numerous examples; in some cases, its base is in the constitutive treaties (Charter of Fundamental Rights, EMU, Schengen, Defence, Area of Freedom, Security and Justice...), in other cases, in the deriving rules. This evidences the heterogeneity (politically, economic, social...) among the Member States of the EU and the diversity on the conception of integration. This is not only a question of rhythm (speediness/ slowness) but conceptual (which union model). The differentiated integration makes possible that different Member States of the EU can select the political sector where they are willing to participate. It is usual to differentiate between two modalities. One being the EU of the variable geometry (makes possible those groups of Member States chase a concrete goal and, at the same time, allows others to decline its participation). The other one being the EU of variable speeds (the states assume the achievement of certain objectives according to their own rhythms or velocities, that is to say, temporarily aside). The differentiated integration began to take shape, since the enlargement to the centre and the East. In that moment it was assumed that could be inconsolable differences among the Member States and that there should be a mean to resolve stagnation. This is why the Amsterdam Treaty incorporated the reinforced cooperation (unlike the opting out clauses, this tool is oriented to integration progress). Currently, the Lisbon Treaty incorporates cooperation in the Article 20 of the TEU (in defence, is prevented the structured cooperation, Article 46 of the TEU). This is a proceeding that makes possible that, at least nine Member States establish an advanced integration in a specific material field, without the participation of the rest of the EU members. Thus, a group of Member States can progress according to their rhythms or objectives different from the established for those that do not cooperate in reinforced cooperation. This proceeding was conceived to overcome deadlock situations caused by a state or by a reduced group of states that do not want to be involved in a normative measure. It has been used in different fields. In Primary Law are specific provisions gathered over time for certain states. It is necessary to mention the second opportunity conceded to Denmark (1992, 1993) or Ireland (2001, 2008) regarding the negative result of the convened referenda in order to ratify the reform treaty.
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After Brexit triumph, the predictable activation of Article 50 of the TEU should lead to the formal “exit” of the EU and the consequent repositioning of the UK in relation to the integration process. How will affect the British “exit” to the current EU configuration, settled in the differentiated integration? From the typical obstructive point of view of the UK, some consider that now it will be possible to advance towards an “ever closer union” among the Member States (even highlight the existence of an identity and ethic values, similar to a state); thus, the “EU à la carte” would succumb, before or after. Others consider that is the moment of the preservation of the “EU à la carte”. Apart from the political positions, the sequence of the facts (agreement on the UK participation conditions in the EU of February 2016 and negative result of the referendum) compromises the feasibility of the “EU à la carte”. After all, is the first time that the formula of the “tailored suit” fails. Now is not the time to think or reflect on a concrete political-institutional configuration but to do it on possible integration models that inspire it with wide perspective.
Models of integration, where to find inspiration? Humankind has been making political integrations since the start of history. Minor, previous political communities have joined to create a new and bigger one in many occasions and in several different ways. Although Greece failed to do so, Roman integration was so successful that it still lingers in our minds. From this point of view, the EU is not original: although specific and idiosyncratic, it does not lack precedents; it is not an Unknown Political Object — and this should be taken not as a disappointment but as a relief. The German Court in his energetic Lissabon Urteil (2009) seems to disapprove of a «too federal» or «too dense» kind of integration and prefers rather a confederation. Yet, it is not only the EU, but also Germany, Spain, France, the UK and the US, that are the results of their respective processes of integration; it is clear, then, that there can be several models of integration. In spite of all being cases of integration, the French model, which brought about the most monistic political community ever to exist, cannot be put in the same conceptual shelf as British, American or even Spanish integration before the 18th c. How are those models of integration? - The first alternative could be put out as follows: should the EU toil for a thin or for a thick integration? Do we integrate political institutions, currencies and public law systems, or rather values and lifestyles from beer mugs to anthropological models? The first integration is thin, not affecting too much the people, private law systems, cultures and social fabric; it is rather formal and institutional. The second is dense (as Kokott said) (2) or thick: not only does our political community joins a greater one, but many aspects of the everyday, personal lives of the people are affected. Suppose a EU citizen busily writing a paper like this at his home. He stands up to rest for a while, looks around, and suddenly realises that the office chair in which he seats, and the computer he uses, and Google, and the mortgage he pays monthly for his house — all have been regulated in a way or another by the EU. European regulations pervade more and more realms of a personal, cultural and even ethical nature. (3) Conversely, if integration is thin it affects mostly the political and administrative institutions, not necessarily the people — at least, not in the short term. It is typical of modern Spain to see integration as well as his opposite, separation, as totalising options, which makes integration similar to unconditional surrender, and separation similar to Apocalypse — a dramatic aspect of which other political cultures are free, as one can see in England and Scotland lately. As for Scotland, former First Minister Alex Salmond insisted in achieving independence of Scotland political institutions, not separating persons or families. As for the EU, article 50 TEU seems to conform to it, although lately things look rather like extra Europam nulla salus, as if European integration were a matter of necessity — there can be no other possibility left — and determinism — there can be no other way to integration —, not of consent and free
(2) Kokott, Advocate General at the Court of Justice of the EU in Luxembourg, wrote that the energetic, perhaps exaggerated reaction of the German Constitutional Court in its Lisbon ruling (30-VI-2009, 2BvE 2/08), had to do with the ‘density’ of European integration. By comparison, U.S. and Canadian integrations began at the formal and institutional levels and kept on being not very dense for centuries. We borrow the thin/thick distinction from Taking the Constitutions Away from the Courts, by Mark Tushnet (Princeton, 2000). (3) More than federal regulations in the United States, one wonders? When the EU is 50 years old, it seems to be much more of a regulator than the United States at 150.
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will. These features (extra Europam nulla salus, rigidity, perfectionism) are statist in nature, and the Union should avoid indulging in them. Second alternative: integration as an official event, starting by a new, formal Constitution after the American way, versus integration through economics, after the functionalist mode, seeking above all to create a community of specific interests. Some have speculated that the failed Constitutional Treaty or in its absence the Lisbon Treaty, represent the abandonment of the functionalistic method. Now that the Lisbon Treaty is in force we can say that some steps have been taken along that line (4), but on the whole it keeps on being predominantly functionalist, incremental and piecemeal. (5) Third model of integration: pyramid versus umbrella/ceiling/roof. Integrating several polities may be like building a pyramid (everything flows from top to bottom, with a single peak) or, conversely, like opening a big umbrella and taking shelter under it. In the second case, it is like pooling together the pre-existing political communities in a new and bigger common polity under a common ceiling which sets the limits to Member State competencies — a high ceiling which allows for much selfgovernment, but inviolable like a red line never to be trespassed. Pyramid: everything comes from the only top. Umbrella or ceiling: as far as one is under the umbrella, one does not get wet; things do not necessarily come from the top. The ceiling or roof is the limit, not the source that everything comes from. Consider the noted U.S. Supreme Court decision Brown v. Board of Education of Topeka (6). Like other similar absorptions of inferior powers by a central, higher authority, it operated as if lowering the ceiling, thus reducing the amount of self-government of the state of Kansas. Yet, the powers that Kansas kept were their own, not decentralised nor imposed from the top of the pyramid. We select an American example because the United States were, and to some extent still are, a case of integration under an umbrella or roof. Although with little in common among them, the Roman Empire, the Sacred Roman Germanic Empire, the Austro-Hungarian Empire, the British and even the Ottoman Empire have not been pyramid-like. However, the recent financial crisis is prompting much pyramid-like governance in the euro zone. The fourth alternative is to integrate by accommodating pluralism, versus integration by homogenising. For, the EU in this respect professes one thing but does another. While proclaiming pluralism and even promotion of sub-state identities (7), in practice often shows a homogenising effect that, in the end, does not seem too bad to certain sectors of Brussels and some Member States, used as they are to uniformity at home. The Union proclaims the principle of subsidiarity, but with little real content, and not much respect in practice so far. The Lisbon Treaty ensures compliance through national parliaments, but how effective they may be in Member States with no great parliamentary tradition it is still to be seen. The fifth alternative would be to conceive of integration as the addition of a new and higher, level or tier of government and laws without substantially altering the pre-existing ones, versus making the new, higher one to capillary pervade all inferior levels. As far as the distribution of powers is concerned, the second approach leads to a totum revolutum that usually favours central governments, as lower governments cease to have exclusive jurisdiction over any important matter. Under this kind of integration, core competencies serve as a hound, which tracks up and down all levels of government (European, national, sub-national, local) to gain top to bottom competence on matters rather than on territories. Central competencies (European, in this case) penetrate all layers in a capillary way and govern even the minutiae. This also occurs when goals or values are to be achieved one way or another regardless who may be competent and regardless how many (4) The TEU has become intelligible and even readable, pillars have been eliminated, legal acts and competencies are clearer, and the Charter of Fundamental is now legally enforceable. (5) We would refer the reader to the wording of the TFEU, to the fact of keeping the Charter as a separate document, to the Explanations of the Charter, and to the resulting special relationship of the Charter with the ECHR. (6) This important ruling turned segregation in schools unconstitutional (347 U.S. 483; 1954). As usual in such cases, it also had the side effect of diminishing the amount of self-government enjoyed by Kansas — segregated education was allowed by a Kansas act of the 19th c. — and the local governments — the racist school was municipal. (7) The TEU, the TFEU and the Charter of Fundamental Rights solemnly embrace pluralism and respect of diverse identities in many provisions, and the Maastricht Treaty did the same, but facts suggest otherwise. As a general comment, on the whole the EU rather acts as a force for uniformisation. Fundamental rights, understood after the European current fashion, tend also to homogenise because they nearly make up an anthropological model or an ethical code. The financial crisis is prompting uniformity. When the Union does not bring about much uniformity to a Member State it is usually due to the national constitution and political culture.
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layers of government have to be trespassed. Governing by goals and values, as the Treaties do — although proclaiming the opposite —, tends to that effect, distorting the principle of conferral that emphatically states that the EU will have no powers than those expressly attributed in the Treaties (principe d’attribution), and will always respect Member States «constitutional identities». In past centuries, integration was frequent but it often took place as a rather de facto process of putting a new tier on. Before the State, many a case of integration consisted mostly of adding a new layer of a military or administrative nature without destroying the former ones, which was tantamount to give up the goal of achieving a unitary state, not to say a single demos, society and culture. When Portugal liberated from the Spanish monarchy in 1640, so throwing away what for our present purpose could be the equivalent to the highest layer, the institutional and social fabrics (i.e., the lower tiers) were intact, including its colonial arrangements that kept on different from the Spanish ones. The possibility could not be disregarded that illiterate persons living in remote villages of Brazil, and even of metropolitan Portugal, did not notice if their Kingdom was ruled by Philip the II of Castile, or, for that matter, that, eighty years later, if the Kings of Castile were ceasing to have any powers. Their personal lives hardly noticed those alterations. When Canada achieved complete independence, the suppression of the highest layer was not at all traumatic for the lower ones, that were already living on their own institutions and resources — in the British Empire, to prepare its territories for a substantial degree of self-government, not excluding independence, had become the standard criterion. The sixth alternative distinguishes between intergovernmental integration versus federalist integration. (8) Because of the deteriorated position of the European Commission, some have seen in Lisbon a triumph of intergovernmentalism over federalism, as if in a hypothetic German reform the roles were growing of both the Bundesrat and the Bundestag but not of the federal government. There is some truth in that view, yet enhancing the role of Parliament, making codecision the ordinary procedure, increasing majority and decreasing unanimity, plus the new President, the Charter of Rights, etc. — all of them are developments of a federal nature. It should be noted that those who currently defend federalism seem to accept many centralising, hierarchical and monistic elements, while they hardly emphasise other equally federal elements such as the covenant and plural nature of federalism, or the original sovereignty of its members. They grant Europe a higher degree of centralisation than existed in Great Britain, Canada or the US until recently, and more than Spain in its pre modern past. (9) In any integration, intergovernmentalism, if beyond a reasonable dose, could harm the amount and pace of integration. Which are those "reasonable doses”? Being impossible to give a precise answer, suffice it to remark that not all intergovernmentalism prevents the existence of a common political community, as the South African example shows. “Relations between governments” are not the same as “relations between sovereign and independent States”. In fact, theories of intergovernmental relations were born in the US to explain the relationships between their three levels of government (local, state, federal), because relations among them were not simply hierarchical. Thus, federalism and intergovernmentalism are not necessarily mutually exclusive, although we cannot ignore that sometimes — depending on context, depending on who speaks or writes — intergovernmentalism in today Europe is a dialectical weapon with a meaning close to «internationalism», poorly reconcilable with any substantial increase in integration. Another aspect that we must not ignore is that under the intergovernmental label other public bodies — mostly parliaments and peoples — tend to be neglected, as it was only too clear in 2011. Merkel, Sarkozy and the Commission imposed their policies to the people and parliaments of Italy, Greece, Portugal, and, up to some extent, Spain. On the whole, Lisbon did not choose clearly an integration model to the dismissal of others. The Treaties contain self-contradictory provisions (conferral and subsidiarity on the one hand; implied powers and expansive values, goals and rights on the other, etc.). Add the reactions to the financial crisis and one will conclude that the pyramid model has the upper hand, with its (8) “Intergovernmental” is not necessarily “international” or “transnational” though often used to that effect, whereby, should there exist any dose of intergovernmentalism, integration would deteriorate. The South African Constitution deals with intergovernmental relations — i. e., between national, provincial and municipal governments — none of them international. (9) Fueros, foralismo and multiple monarchies were de rigueur till the Bourbon dinasty came to Spain (18th c.). Now they are not only defunct but obliterated from the Spanish memory but for a handful of traditionalist thinkers.
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escort of top-to-bottom policies, statist way of doing things, thick integration, goals and values, and homogenization. The kind of integration triumphant in the euro zone these days seems to be admitting of no end other than becoming a relatively centralised State. These developments lead us to question what sort of European integration do we want and how close? The US had faced similar crossroads in the 19th c. In Germany in 1993 the Bundesverfassungsgericht decided that Germany retains its sovereignty and that the EU which should be understood as a confederation (Verbund, not Bund) of sovereign democratic States. So the final word in Germany ultimately lies with its Constitution and its Constitutional Court. Karlsruhe examined the question of democracy in the EU and, insisting upon the principle of subsidiarity, criticised the European doctrines of implied powers, “useful effect” and Kompetenz-Kompetenz. Sixteen years later, when the Lisbon Treaty was about being ratified by Germany, the Bundesverfassungsgericht (BVG) issued another ruling (the Lissabon Urteil, 30 June 2009) crafted in similar, perhaps even harder, terms. In both rulings the BVG favours European integration, not excluding its constitutional dimension, but it would produce a strange creature of a mixed intergovernmental, confederal, and federal nature; pluralistic, not too thick, nor very pyramid-like, but rather similar to the addition of a new storey upon the previous ones (the Bund and the Länder). Their statehood, their constitutional identities and a substantial degree of self-government should be preserved, whatever the phase and pace of integration. Even the statehood of the German Länder has to be maintained.
Now, what? EU “à la carte” with political inspiration After Brexit is necessary to gain perspective on what is happening. Now it is not the moment to stick to monolithic visions of integration or start a scape forward leaning on a fruitless voluntarism. There is not a unique integration model but the election of one or another will bring political consequences. The previous reflections pretend to clarify, enrich and amplify the approaches on European integration. In the light of this, the EU should be able to reorganise the diversity without imposing uniformity. It should be considered that the aim is to build a political association of people and free countries in terms of the agreement and consent, the political argument before the need or destiny. The “EU à la carte”, even though should be maintained, nourishes from state and pyramidal approaches. As O’Sullivan wrote, “to save the EU, try the flexible, experimental approach know approach as `variable geometry´: more Europe for some countries, less Europe for others”. Maybe what should be changed is its political-philosophical inspiration.
References Kokott, J. (2010). "The Basic Law at 60", German Law Journal, 11, 99-114. O´Sullivan, J. “The European Union works best a la carte”, WSJ, 6 de mayo de 2016. Pereira-Menaut, A.-Cancela-Outeda, C. (2012). Resetting the European Union Constitutional Engine, Universitätsverlag Regensburg. Pereira Menaut, A. (2016) “Please leave–a letter to the UK from the scorched lands” http://capx.co/ please-leave-a-letter-to-the-uk-from-the-scorched-lands/ O´Sullivan, J. “The European Union works best a la carte”, WSJ, 6 de mayo de 2016. Schimmelfennig, F. (2016) “Key notes Ever Looser Union? Differentiated Integration in the EU?”, Jean
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À LA CARTE EUROPE? NEITHER NEW UNDER THE SUN, NOR DEFINITIVE Eduardo Perera Gómez Jean Monnet Chair University of Havana
[email protected]
Abstract There has been a permanent debate between the roles of nation and supranationality, between intergovernmental and federalist approaches, as well as between neo-functionalist and realist ways of interpreting the European integration process throughout its history, a debate which continues so far. Even the europhoric period at the beginning of the 90s saw national interests diverging from the general trend. Opt outs gave way to a European Union of variable geometry as the less harming solution to current problems that gained momentum as a result of the growing number of Member States. The financial crisis beginning in 2008 deepened the “à la carte” approaches to the functioning of the EU in different fields. Although there are few doubts about the survival of the Euro, many questions arise regarding prospects for a common foreign, defence and security policy and for the EU itself. The author considers that the present one is mostly than a transitional stage toward a realignment of forces and trends inside the EU. No state is a single rational actor. Nor it is the European Union which, despite being a political community and having limited state-like functions, is not a state at all. However, it is frequently seen and referred to as such. Accordingly, the EU is many times judged from outside for what it has not yet achieved, and not for its outcomes. And yet, it is expected to get results exceeding the capacities of its Member States. Thanks to their integration in the EU, these states have almost completed the construction of a single market, with a common currency for most of them, and found common grounds of activity and policy-making in other areas. At the same time, they have not been successful in building up a common projection in particularly important fields like foreign, security and defence policies, which still work, and probably will during an indefinitely prolonged period of time, through intergovernmental cooperation. This situation reflects the permanent debate between the roles of nation and supranationality, between intergovernmental and federalist approaches, as well as between neo-functionalist and realist ways of interpreting the European integration process throughout its history, a debate which continues so far. As there is not a single point of view concerning European integration, it is not possible to neglect that, when one side of the academic or political community favourable to a deeper supranational integration intervenes in favour of this development, the other one tries to push in the opposite direction. Ultimately, what it is about in this process is the relative position of actors representing each of these two viewpoints in the balance of power inside the EU. The EU is generally attributed more virtues than it really has and more mistakes than it commits; both the former and the latter are usually rather the consequence of Member States' individual
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actions. This points to the relevance that, despite progress in the supranational field of European integration, Member States still have in the decision-making process. In a paradigmatic contribution to intergovernmental theories about integration −The European Rescue of the Nation State, London, Routledge, 1992− British historian Alan Milward (1935-2010) considered European integration as an instrument that helped weakened nation-states to meet the challenges of national welfare. Governments coming up to this mechanism thus claimed their legitimacy to their citizens and contributed to reaffirm the principle of the nation-State. Beyond the provocative spirit of this book −because of its thesis and because its publication the eve of the entry in force of the Treaty of the European Union− and the objections that could be presented to it, Milward called attention on the two levels of sovereignty supporting European integration, as well as on the pre-eminence of states as determinants and beneficiaries of the process. Despite the gradual erosion of their power by other actors of different nature, states remain being protagonists of international relations, the main representatives of sovereignty, above sometimes very strong extra political influences. There are no political structures overlapping them permanently and, whether they exist, it is as a result of a transfer of competences. Even in such cases states seem to retain, as a last resort, the capacity to impose their rule. This is evident in the case of international intergovernmental organisations of little internal cohesion as the Organization of the United Nations but eventually also in an integrationist experience such as that of the EU. There is no doubt that if the EU may show itself today as the most advanced integrationist experience on a global scale, it is due to its supranational dimension, based on Law and generating Law as well as to an institutional body different from that of the Member States. There could potentially exist alternative formulas but it is difficult to speak about true integration without transfers of sovereignty −some sensitivities would ask to talk about shared sovereignty− which express themselves through a particular institutional framework. Thus, if a distinctive element can be found in the EU it is not only the building up of a solid common pillar erected on the foundations of the common market, but the very existence of a European Commission acting on behalf of the Members States and representing something that can be identified as the "common interest". Even in this case, it is necessary to make some exceptions. Firstly, an institution such as the European Commission, the expression par excellence of the EU supranational dimension, can only act on behalf of the Member States in the areas of competence that they have agreed to it. Secondly, these fields of competence are potentially reversible, although it is not the rule. Thirdly, final decision belongs to the Council, intergovernmental representation of the Member States.
"À la carte" Europe? Systemic crisis beginning in 2008, with its epicentre in the most peripheral states of the Eurozone has unleashed always latent nationalist trends at different levels, as evidence that times of economic crisis, depending on their magnitude, lead to reevaluations and more or less proportional resizing in the social and political fields. When in 1973 oil prices increased three times, triggered the crisis that had been quietly incubating in the heart of the Welfare State and gave way to the replacement of Keynesian model of accumulation by the neoliberal one, the then European Economic Community (EEC) saw itself almost immediately plunged in a decade of stagnation −"euroesclerosis"− in which progress of integration was braked by all kinds of nationalist perceptions. This situation was overcome in the mid-80s, not only by the economic recovery, but by applying at the EU framework the neoliberal strategy promoted by European think tanks. The Single European Act and the Maastricht Treaty constituted the response of the moment to the challenges of the crisis, materialized in the free movement of goods, services, capital and labour and a monetary policy (the Euro, supported by a Central European Bank, inspired on the Bundesbank) to constitute a single European market. Even in this case there were national interests diverging from the general trend: the United Kingdom, Denmark and later Sweden refused to integrate the single currency. Denmark opted out Common Foreign and Security Policy as a condition for a second national referendum on the TEU. Opt outs gave way to a European Union of variable geometry, which was offered to public opinion as the
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less harming solution to current problems. Nevertheless, it has gained momentum as a result of the growing number of Member States. With the crisis beginning in 2008, the EU has gone through a period of "survival", reminder of the so-called eurosclerosis from mid-70s to mid-80s of the 20th century. This time, by contrast, the domestic management of the crisis dominated the scene as part of exhausted neoliberal logic without any visible alternative. Implemented austerity policies generated long periods of deprivation, basically for the peripheral countries, with no cushion mechanisms at EU level.
Not only an economic crisis The EU, the scheme of integration forged in the continent since the end of the Second World War and reinforced in the 1990s was never before questioned as it is now. Part of its identity crisis is evidenced by the stagnation of the supranational development of the process, due to the resurgence of nationalisms, mainly from the temporary abandonment of the community method and cooperation and solidarity between Member States. Not only the solutions to the economic crisis have had a national approach, but even on those fields where an integrated image has tried to be shown, as it have been the case with the austerity policies, there has rather been a clear division between the subjects of these policies and their objects. A weakening of the EU as a mechanism ensuring stability for its members became a consequence, shown by the extent of the crisis, the multiple failures of cohesion at the time of redistributing its loads and the fact that, despite integration, differences between Member States continue being remarkable. Thus, to the classical contradictions resulting from a process of integration at different speeds between different countries, the crisis has incorporated opposed visions of an "austerity Union" in the south − meaning States with no financial discipline, living beyond their possibilities − and "the Union of transfers" in the North, to refer to the Member States working within the framework of a model economic order. This situation cannot be dissociated from the deterioration of the democratic legitimacy of the EU. In 2014, the German minister of Finance, Wolfgang Schaeuble, acknowledged that the countries of the Eurozone very often marginalized the EU institutions in the decision-making process, something that related in particular to the European Parliament (EP) (1) which had been outcast from the main decisions on the crisis. Furthermore, disrespect of the citizens for the EU institutions has been exacerbated because of the anti-crisis packages, which have further eroded public support for the process of integration. Euroscepticism has increased in different scales: social, State, institutional, and a noticeable imbalance between trends towards renationalisation and integration has become more evident. Anti-Europeanism in different degrees and nuances −anti-integration, anti-Euro, anti-federalism− has become a point in the daily agenda for many traditional political forces. The European People's Party, for example, adopted its election manifesto for the EP 2014 elections arguing against "a centralized Europe that cares for every detail of the lives of persons", calling for a more "prudent" EU enlargement policy and posing that EU citizens only should have social benefits if they work in the countries in which they live. (2) In practice, the number of parties − or trends within them − promoting the "euro-sceptic" cause from the left to the right has grown. The 2014 elections to the European Parliament were a thermometer of this trend and an evidence of the onslaught present EU is exposed to from everywhere: the right accused the Union of being "ultra-regulated" in a way it undermines competitiveness, while the left complained about its character as a vehicle of neoliberalism; creditor countries accused it of communitarising debt while debtors of imposing austerity. This voting was like an award for the far-right and various nationalist forces. The Front National (FN) in France and the United Kingdom Independence Party (UKIP) in the United Kingdom defeated (1) “Schaeuble sees need for separate eurozone parliament”. http://euobserver.com/institutional/122884. Consulted on 29/01/2014. (2) “Centre-right group adopts election manifesto”. http://euobserver.com/tickers/123392. Consulted on 08/03/2014.
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ruling forces in European voting. In Hungary, results erected Jobbik as the second national political force, while Golden Dawn in Greece and Partij voor de Vrijheid (Freedom Party) in the Netherlands reached third place in their respective domestic scenarios. Alternative für Deutschland (AfD) in Germany and another group of political forces until then without representation in the European Parliament reached high results also in various countries, as left parties did in Greece and Italy. Common to all of them was euro-scepticism or anti-European feelings, which for the first time gained 20 percent of the seats in the EP, and pushes for structural reforms of the EU. The disparate interests they represent as part of the broad discontent with current EU give them not a very large room for manoeuvre to have a sound success, but a force not to be neglected, if it is considered together with the 57% abstention in the elections, the important political fragmentation shown and the rejection of the traditional parties by the voters. Secessionist proposals of different range have been seeking implementation by referendum in Catalonia, Scotland and elsewhere, although not recognized by their respective central governments; they coexist with more or less intense long lasting nationalist problems in Wales, Flanders, the Basque country. More recently, the options raised in the United Kingdom by the ruling Conservative Party for a review of the relationship with the EU led a scarce 1% of the British population in favour of Brexit to win the referendum whose result will supposedly, for the first time in the European integration history, make a Member State to abandon the club. The paradox is that the same government forced to get off the Union by their citizens opposes Scotland and Wales willingness to become independent from the British crown. In this context, where the identification of common areas for further integration between Member States has become especially difficult, some of the more publicised EU achievements have been openly questioned also: the Euro, Schengen and the free mobility of persons, enlargement and the Common Foreign and Security Policy (CFSP). In the case of the euro, many difficulties have been present since its very inception. It is not surprising, considering the distortion between states with a common currency, from one side, and without neither harmonic nor common economic policies, from the other side. Unlike US dollar, the euro is not supported by a single political structure, which is one of its main weaknesses. Disagreements and contradictions emerge among eurozone states about the euro. In practice, the euro is a common project but splits the European Union. On the other hand, integration has created a very large economic space, whose internal borders have not been removed completely. Fiscal policy, for example, remains largely a national issue. Thus, structural and institutional arrangements in the euro area come into tension precisely when there is a fiscal crisis and governments are unable to pay public debt. Then, in order to safeguard the common currency, maintain financial stability and the foundations of economic and political integration, member countries have to come up to save the debtors and set patterns of adjustment at the national levels. The contradictions involved in this functional dichotomy arising out of unwillingness to cede full national control are evident. However, in its short existence the euro has been able to overcome many obstacles, such as the logical initial mistrust of consumers and markets before the substitution of the historical currencies of the countries involved, mostly stable, competitive and internationally strong currencies; the US reluctance; the enormous speculative pressures of all kinds; various processes of recession, including one coincident with his appearance, and the post 2008 crisis itself, that the euro has left unscathed and the disparity of prices existing between the members of the Eurozone, which affects macroeconomics and generates collateral phenomena, such as bankruptcies and mergers. It would be hard to deny that after its 14 years of physical existence, the euro has an outstanding place in the international markets; enjoys confidence, legitimacy, credibility as a means of payment and has become the second more important means of international reserve. Together with other factors, this would make its collapse highly unlikely: • European integration, or the part of it that has been achieved so far, has been favoured by capital −supported by political elites− more interested than any other sector of European societies in the disappearance of borders and main beneficiary of the cost savings introduced by the common currency.
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• The euro is not only a symbol of Europe's richness, but also one of the most successful of its unity, paradoxical it may be that it is not a project shared by all the Member States. Quoting Polish Foreign Minister Radek Sikorski: "The Eurozone is the 'real' EU". (3) The single currency is not an example of fictional, subjective and discursive unity, but of an actual unity −although not complete− of the economies involved, without precedents in History. Along with the single market and the enlargement to the East, it has been the most significant fact in favour of European integration in post-war History. Its failure, even at selected national levels, could erode the integration as a whole. • Even though it is not possible to establish an automatic connection between both elements, how could be possible to conceive a development of the CFSP without the success and expansion of the Economic and Monetary Union? It should not be forgotten that, if some credit can be given to the neo-functionalist logic of spillover effect, progress of integration in a particular field creates pressures for the integration in other areas. In the case of the EMU it is the most advanced, tangible, and probably irreversible integrated area of those currently in force and the one laying the foundations for completing the economic integration among the Member States of the Eurozone and potentially boosting their political integration. • The irreversibility of the euro is also based on a calculation of costs. The price of a "reverse gear" would be so high, that it isn't even possible to consider it. Who would pay for the enormous cost of the withdrawal from the euro by any of its members, the removal of its part in the basket that makes up the single currency and the issuance of a new currency that would probably be inserted with great disadvantage in international markets? Would German and French banks, main creditors of countries affected by the crisis, be more willing to see deteriorate the value of the debts or to experience the consequences of their nonpayment? This requires also taking into account the apparent paradox that the peripheral countries of the EU are probably at a disadvantage within the Eurozone, considering the comparative weaknesses of their economies, but they would sure be worse off. • The euro is stable, even more than many of the currencies in its basket, both with respect to inflation and to its course against the dollar. And this is said by the Germans themselves, whose economy is the mainstay of the single currency and whose banks are the main European creditors. • As an additional element, last but not the least, new Member States have adhered the Eurozone during the financial crisis. (4) Thus, the so-called "crisis of the euro" is a crisis of the state debt of some Eurozone countries, not actually a crisis of the Euro. It is indeed a crisis of some of the economies of the Eurozone, part and expression of a systemic crisis. And, at the same time, a good argument for countries like Germany, which consider themselves guarantors of financial and economic discipline of the EU, to enforce the conditions that were decided by Member States in order to adhere to the Economic and Monetary Union. Regarding the CFSP, the crisis has contributed to proportionally lower its degree of priority and the volume of resources allocated. The effect has been a sort of renationalization of foreign policy, worsened by a decrease in cohesion and confidence among Member States, many of them concentrated in their own bilateral relations with third countries, in particular with emerging powers. Individual EU Member States relations with third States −China and Russia are very good examples of this− have gained momentum instead of EU-third partners' bilateralism at the expense of EU's image, deepening the gap between its international projection and the foreign policies of the Member States. It is not exceptional at all, anyway. Beyond the undeniable successes of an integration process becoming a theoretical paradigm, lack of integration in the fields of foreign policy, security and defence has avoided the EU to confirm itself as a real global player. According to certain indicators, EU undoubtedly keeps a remarkable international position. With a scarce 7% of world population, it generates around a third of global GDP and trade; it is the second investor and the first donor to the Official development assistance (ODA). Its Member States have
(3) “Eurozone is the ‘real’ EU, Sikorski says”. http://euobserver.com/political/122808. Consulted on 22/01/2014. (4) Slovakia in 2011, Estonia in 2013, Latvia in 2014.
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a remarkable presence in NATO, OCDE, OSCE, G-7 and G-20. However, its potential for declining in present international circumstances is considerable. Important academicians like Johan Galtung, Samuel Huntington or Joseph Nye saw in the EU a potential superpower. Nevertheless, they coincided in identifying the lack of political cohesion, deriving from its own hybrid nature, as its main limit. Thus, while there are no doubts about the size and power of the EU in the economic field, it is not possible to say the same in the political area, where respective identities of old European nations arise as an obstacle to further progress in integrating foreign policy. This prevented EU Member States, and the EU as a result, to capitalise the falling down of communism in eastern Europe and the Soviet Union to extend its power and influence and took it to the role played all along the former Yugoslav conflict, to its evident weakness for concreting defined and viable common policies regarding hot global problems, as well as to the inability to solve in a common way problems which are common to its Member States. This has made it the weak partner inside the Transatlantic alliance, under whose flag or that of United Nations, instead of the EU one, most of its peace-keeping missions take place, as one of the ways to disguise its organisational weaknesses in the field of defence, the main of which is the lack of a unified army. There are for the moment twenty eight different approaches to security problems, independently that they could coincide in a twenty ninth one deriving from the identification of common EU threats, what does not seem to be always the case. For western European countries, eastern EU border issues are not, by far, a priority: the so-called Russian threat, debatably as it could be, does not obviously mean the same for every EU Member State. For northern EU States main concerns are not the same as for Mediterranean ones: migration, for example, has become a real menace to the whole EU only after last crisis; previously, it was mainly an issue of Mediterranean countries' concern All Member States do not seem to feel threatened in the same degree by the same problems, as their individual behaviour is conditioned by different domestic circumstances and in a different way by common international factors. Even "last generation" threats such as massive migration flows and terrorism are not perceived and faced alike by every Member State. Different interests, traditions, history and policies are many times stubborn and reluctant to change in favour of putting in common what has been usually considered the realm of High Politics. Many questions arise regarding prospects for a common foreign, defence and security policy. Is the EU moving forward in security and defence? Apparently not for those who would like a fast track solution, may be yes for people thinking on the various EU moves after 1999 Helsinki European Council and on the fact that the EU international projection is not anymore identifiable as an only soft one. Would it be desirable to see the EU emerge as a global military power instead of keeping and reinforcing its role as a civilian power? It is doubtful, at least for most of the outside EU world, although for many different reasons. The cost would be high and it is uncertain if the benefits would worth it; at the same time nothing guarantees that it could give the EU the global relevance many people fear it is progressively loosing which, by the way, European integration gained by other means, not military. Is there a process of renationalization of the EU in which Member States look for à la carte solutions? Probably yes, due to the economic crisis and to the crisis in other areas, to particular experiences as that of Brexit (whose future evolution is yet to be seen) and to constraints imposed by the international situation we are living in, which seems to be a transitional one to another world order, may be a fully and real multipolar one. Is this process of renationalization definitive? I would rather say it is not. The EU has experienced previous cycles of stagnation or even regression but it is hard to think that links established for more than 60 years integrating the economies of the Member States could be broken. A loss of the EU would be an irreparable loss not only for the EU itself and its Member States but for the whole world. Let's then think that this is nothing more than a transitional stage toward a realignment of forces and trends.
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A' LA CARTE OR MENU DU CHEF? WHICH WAY FOR THE EUROPEAN UNION? Adam Tyson Acting Director Directorate General for Education and Culture – European Commission
I am very pleased to be here. This is our third seminar of the series, and talking to people last night at dinner and this morning at breakfast and over coffee, my impression is that you have actually enjoyed yourselves and that the sort of discussions we had in this series of seminars have been more focussed than those at the large meetings we had in the past, and at the big Jean Monnet conferences in Brussels. I feel that the format of these seminars has enabled you to have more exchanges and that working in workshops allowed discussion, debates and differences of opinions to come out a lot more. This is also due to the fact that you have got to know each other and you have heard each other's ideas in different sessions. You have cut through some of the fog, if you like, and you have got more quickly into the meat of the discussion. I am also pleased about the feedback we received about the site visits that you had yesterday. I heard reports about the meetings at the National Bank and at the Royal Defence College, as well as about the interesting visit to the city of Malmö. They have been a great experience, and a fruitful and useful one to better frame your discussions. We want to repeat that in the future as it enables participants to get out of the event premises and go and see something real, enabling academics to talk and discuss with practitioners. I think that has been really positive. We met in Tbilisi, we met in Tunis, and at one point I thought we were going to choose only cities beginning with T for our seminars, but we changed our minds and instead of going to Trondheim, we came to Malmö. In all of these seminars we have focused on a set of policies that we in the Commission have a real interest in hearing your views about, at a point in time where we think they are really useful for us. In Tbilisi we talked about the review of the neighbourhood policy when that review was underway, and you have all seen from the communication of the EEAS how some of those ideas have been reflected in the future strategy, and even more how they will be really implemented in the discussion we have with our partners in Eastern Europe and in the Southern Mediterranean. There is a real feel that the approaches we talked about in Tbilisi are now being put in place. Some of you have also looked at the EU migration package which came out recently. And many of the ideas we have talked about in Tunis, in particular about the social impact of migration, about how to deal with refugees, about integration policies, about dealing with the reaction of our own society to these issues, are all covered in that package.
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When we came to the preparation of this seminar, we asked you for ideas about what you would like to talk about next, and you came with a lot of ideas. There was a lot of support for the idea of "variable integration", "variable geometry" and "à la carte Union". It seemed to us that, in terms of timing, doing something on this issue this week was particularly interesting. Because this is a week in which all of us, I think - and I see it also from the media right across the European Union - are focussing on the question of what sort of EU do we actually want. And there is no clear answer to that question. But most of the answers revolve around the choices between a unified approach - the federalist approach - and an "à la carte" approach. That is where discussions are leading to. Now, some of you will have heard from my accent that I am British, so this is a particularly sensitive issue for me this week – it's possibly going to have an impact on my career - who knows? - so I am taking it personally too. *** When I arrived yesterday I landed in Copenhagen and came here by train and, as in your case probably, the train stopped before getting to the first station in Sweden. We all were waiting for the immigration authority to get into the train and check everybody's passports. There I was with my British passport, waiting to cross from one quite Eurosceptic country to another mildly Eurosceptic country, and it seemed to me that it was just a sort of situation many Brits are in at the moment, a sort of allegory ... being on a bridge and being stopped waiting for my passport to be checked, and when the immigration guy looked at my passport - and he was fine with it - he gave it back to me and just said quietly … "good luck". Yeah. I am going to need it, I think. At this stage I should declare an interest in this question about variable geometry, beyond my own nationality, and that goes back to my early career when one of the first things I did was to work for the British Government on issues related to employment and social affairs in what was then the Department for Employment. I was sent to Brussels as a young official with the instruction to block every piece of social legislation which was put forward by the EU Commission. In those days, the task was quite easy because you needed unanimity to agree to all these directives. But of course I wanted to keep good relations with the other eleven countries that were there at that time and I had to do it in a nice and friendly way, and apologise and come out with good reasons why we should say no to legislation on the information and consultation of workers and all those sorts of things. That was fun for a while. And then my instruction was to negotiate an opt-out on the social chapter that was coming out of the Maastricht Treaty, and I was part of the team that did that. In a way, I played a role in launching the opt-out that was the beginning of Europe à la carte … it is quite a dangerous thing to admit it in this room, I understand that! But then, to compensate for that, I was also part of the team that negotiated the opt-in to the social chapter after the change of Government in London in 1997. The fact is that the very existence of the UK opt-out from the social chapter, even though we later opted back in, made a fundamental change to the way people think about Europe, because it showed that variable geometry was actually possible in practice. It was sold to populations across Europe as an option, at least in countries with significant Eurosceptic populations. We have heard voices here over the last couple of days which have taken a really federalist line, suggesting that maybe we should centralise more and not listen too much to the Member States; and then there are other people saying that the genie is out of the bottle, that things have changed and we have to accept those realities. Some people said, and I heard it from the feedback from the working groups, that variable geometry - differentiated integration - can actually be good for popular support to the European Union as a whole because it reflects the varying realities that exist in different countries. To some extent differentiated integration is normal and has always been a normal part of cooperation in the EU. If we look at the way the structural funds work, it's a sort of a differentiated integration; if we look at the way how Horizon 2020 - that some people consider to be like "reverse structural funds"
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- works, it is arguably differentiated integration, as different countries benefiting from different policies even though they are bound by apparently the same rules. The question we have been discussing over the last couple of days seems to me to be: What do we do now, now that we are at this stage where countries are becoming increasingly aware of differentiated integration? Should we identify some areas which are core and untouchable and allow others were variation is possible? Or should we try to take stock of where we are on the spectrum, and decide whether we should move more towards a federal system or towards an intergovernmental system where people pick and choose the "à la carte" options. And this of course is what the UK Government is trying to do in its own renegotiation in advance of the referendum on Thursday with its demands for protection of the City, with limits to the social welfare access of migrants and the rest of it. Now, what is clear from that negotiation is that the British Government has oversold the possibilities for variation to their own population. It suggested that more differentiation was going to be possible than it was able to achieve in the negotiation. The other 27 countries and the European Institutions came back with a very clear message about what was core for them! That was certainly true when it came to the question of limits on free movement of people. What was especially interesting about that discussion was that countries which in other areas can be quite happy with the idea of a "pick and choose" approach were very strong in defending the right to free movement of their own citizens. It is not a simple issue. It is not simply a case of being able to say that the areas around the four freedoms are the core and the rest can be variable. In each of the different areas, different countries have very different interests depending on where they are coming from. *** In the feedback we had from the working groups this morning, and I thank all the rapporteurs, we have heard about discussions which took place at very different levels of detail. In the group on "economic and fiscal integration" we talked about the big question of asymmetries in different policy fields flowing from differences in economic performance between countries, including within the Eurozone. You discussed the need for monetary union to be balanced with a fiscal and a structural reform union. But you also concluded that the time was not yet ripe for that. Questions were raised about the governance of the Eurozone, and whether or not it needs to be strengthened, emphasising the fact that many of the changes which have been put in place are not based on treaty changes but on very complex systems of sometimes informal government arrangements which leave room for interpretation, may be too much room for manoeuvre and for power plays. Some of you mentioned this morning how things like the open method of coordination, which was discussed yesterday, does not really give you the influence or the control over the way the Member States in particular deal with structural reforms. So, in a context of monetary union there seems to be a need to be much stronger and to have more centralised governance. One of the issues that raises is whether there should be more conditionality in the EU budget allocations in order to provide the incentives for such structural reform. When we came to the energy discussions, we talked about very specific measures that apply in different markets. There were lots of questions about energy efficiency measures and how to apply them even in private homes and work places. That was a very different level of discussion compared to the approach on economic and fiscal issues. One of the interesting points which emerged is how different approaches can still deliver on the bigger social objectives that we have as the European Union. The tensions that can cause do require some closer coordination at EU level and there was that strong message about the fact that only EU cooperation can really produce the future and emerging technologies that we need in order to achieve energy efficiencies, reduced carbon emissions and the rest… When it came to the borders and defence discussion, it was clear that we are coming from a different background. In the other areas we have come to a very great extent from a centralised system and we have added differentiation to that as we go along. When it comes to borders and defence, we have started from much more à la carte system and we are now moving towards,
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possibly, a more coordinated response. A' la carte differentiated integration is the given situation on which we are now trying to build a more common future. Different approaches in different fields. And in each of them the possibility that enhanced cooperation can be the model for a broadened set of EU wide measures in the future, but that the enhanced cooperation itself can lead the way. *** Now, in some ways it is slightly odd for a guy having spent most of his life on education and culture to talk about these big subjects, the Eastern Partnership in Tbilisi, and migration challenges in Tunis, and now the economic and fiscal management of the Eurozone. But I want to give you another example from my own experience, just to show that it is not just on these big issues where you can have this sort of differentiated approach. Many of you who are working in universities will have heard of the Bologna process; you love it or you hate it depending where you come from. I am responsible within the EU for representing the Commission in the Bologna process. One of the things we suggested two or three years ago was to try to make it easier for people who earned a degree in one country to have it recognised in another. We all have this idea within the Bologna area of 48 countries, that if you have a bachelor degree from Romania that it will be recognised as a bachelor degree in France or UK or in Moldova, but that is not what in fact happens. There is no automaticity at all in that process So the Commission proposed that we should set up a small group of countries to work on what we called automatic recognition. Between ten countries (really nine but Belgium came as two), we sat around talking about what happens, what is the real process on the ground, how degrees are validated, accepted between countries. And without going into detail, we worked together for three years and at the end we had achieved three things: Firstly a treaty between the three Benelux countries, that they would automatically recognise all degrees that were awarded by their universities. You might say that was an easy win, they are three countries which have been cooperating for a very long time, they know each other well. But it was not easy at all, in particular because our Dutch colleagues were not convinced of the value of Benelux cooperation at all. But together we pushed and pushed and eventually they agreed to sign the treaty. Second, we have a Nordic - Baltic agreement on the automatic recognition of their degrees. Now again you might think that the Nordics have been cooperating in their Nordic Council for a long time, and that is true. Although they did not technically have automatic recognition, they have a system of intensive information sharing. But they never talked to colleagues on the other side of the Baltic. Now they do, they are working together and have put in place a system for automatic recognition. And finally, we have established a cooperation mechanism among the six countries of the western Balkans. There again you might think that these countries come from the same background, not so long ago some of these countries were actually the same country, so an easy exercise for them? And again, it was not easy at all, given how the countries have grown apart since independence. I have to say that we did not entirely solve the problem in that case, but at least there is now a cooperation process in place. The idea was to try to create these islands of recognition, islands within the Bologna area where automatic recognition was possible. The next stage will be to build bridges between those islands; so we are able to say that if an Estonian degree is automatically recognised in all the Nordic countries why should it be difficult to recognise it in the Benelux and once it is recognised there why not in any other part of Europe. It is creating a momentum, breaking the ice, now building the bridges between the different regions, and that is a very positive story. If we can push like that and we can come to solutions which are Europe-wide, and which are good for all of our citizens, there in a way is the question which is facing my compatriots later this week: how can they find the place in the European Union which suits them and suits the other twentyseven EU Members. And in particular the question which is facing the other countries is: how do we deal with a country which wants to roll back integration. Here we are talking not about the situation
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where some countries want to go on together, a coalition of the wiling, but where one country says that we went too far and that we now need to step back. How might this impact on the EU? And can we even allow that, without undermining the European Union as a whole? Wherever we wake up on Friday morning in our different corners of Europe and the world, that is the question that faces all of us, whether we are researchers in universities or we are policy makers in national governments or international institutions. Because this is the question that is not going away. Whether it is "leave" or "remain", things are not going to be the same again. We have to be able to deal with the demand for special treatment - differentiated integration which we are seeing not just from the UK but also from other countries. So this seminar has been extremely useful for us in looking at those issues in much more depth than we are able to do when we are all tied up with our everyday jobs. It has helped us to step back a little bit and start thinking about what will be on our desks on Monday morning next week when we will enter again into our offices. Thank you very much indeed for your contributions. Have a very safe journey back, across the bridge. Hopefully we will still be joined together on Friday morning ….
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