Public Debate organised by ELIAMEP and the French Institute in Athens, 29/10/2012

In order to solve a crisis one should first appropriately identify the problem. Aiming to contribute to the continuation of a fruitful dialogue around the ongoing crisis in the EU, ELIAMEP and the French Institute of Athens organized on 29/10/2012 an open discussion with Elie Cohen, Research Director of the French Centre National de la Recherche Scientifique (National Center for Scientific Research) and Prof. Loukas Tsoukalis, President of ELIAMEP.

When trying to identify the nature of this particular crisis it becomes evident that in reality we should not be talking about a crisis of the ‘euro’, considering that the currency is even stronger than in the past; nor is it a crisis of sovereign debts; countries like the USA or Japan have a much larger debt.  We cannot even speak about non-compliance crisis; Spain and Ireland have been considered exemplary in the past and yet, today, they are under serious strain.

This crisis is one of governance, brought about by the inherent problems in the institutional architecture, revealing the deep unresolved differences between the economies of the member-states.

A crisis of governance

Looking at the course of events, already at the time of the Lehman Brothers default, two things become clear. First, the initial absence of political will to treat the problem as common and, secondly the absence of tools stemming from the Treaties in order to allow for the adoption of a community solution in a case when a state cannot access the market for financing. On the contrary, the Treaties include a triple no: no bailout, no exit, and no default. without providing any alterative tools. This is the first and basic problem in the institutional architecture. The formation of the « Troika » to organize a bailout help for Greece constitutes basically a short term institutional innovation to go around this triple ‘no’. The element of strict conditionality and the ‘punitive’ aspect of the package, in the eyes of the economists, were a response to the moral concerns vis-a-vis the ‘irresponsible’ member-state.

But the crisis was not solved then, nor after the PSI policy was formulated. Rather, this ‘innovative compromisation’ between political, financial and moral concerns seems to be leading to circles around the problem without ever approaching a solution; fundamentally due to the institutional impediments that still remain to be addressed.

The Maastricht failed ‘bets’

The goals and provisions in the Treaty of Maastricht have been based on a series of assumptions and arguably, lost bets, leading to an institutional architecture that presents an obstacle rather than providing solutions. The first assumption is economic; a single market with a single currency would favor the convergence of the economies at the North-South divide. In reality the result was the opposite, the North continued to be increasingly industrialized with surplus economies while the South continued to accommodate service economies supported by augmenting public debts. Ultimately, this led to a point where the disparities became non-viable. The second assumption was that in an integrated market the flow of capital would be constant. Of course this did not account for the case when one or more states would be considered non-viable; as facts demonstrate in such instances the flow of private capital is instantly halted; and in the Eurozone there is no option of devaluation nor is there a lender of last resort. This creates the paradox of a currency that is domestic and foreign at the same time with no tools available to solve the problem.

A reflection on the responses to the crisis; to what direction?

The crisis did bring changes; nevertheless these have been ad hoc and short term, expressed in a series of institutional innovations intended to go around the Treaty framework that member-states have been unwillingly to reform. A new form of governance was invented from scratch, in which the traditional institutions of the Union, the Commission and the Parliament have been for the most part, absent. In the absence of strong political initiatives, the ECB appeared to be stepping in via the formation of the LTRO and the OMT. However, both cases led once again to the same vicious cycle between banks and states where, basically, the OMT is a form of monetarisation. Rather than providing solution this leads back to the same point; the ECB fundamentally buys the debt of national banks under terms of ‘conditionality’ imposed by executive agents.

Vis-a-vis this ‘patch worked’ executive confederalism, Van Rompuy has put forwards the idea of a stage-based process towards a genuine Economic and Monetary Union based on four building blocks; Budgetary, Monetary, Banking and Political.

When discussing the steps towards a ‘banking union’ things in principle seem to be clear. The twenty-seven coordinated national regulatory authorities are to be replaced by a single European banking supervision system. Yet, the framework of regulation of such an authority has not been specified, including the formation of  a regulatory fund available to the authority. Such a perspective in effect creates more questions. It is unclear how would the necessary funds be yielded and from which sources. Equally, if the banks are to be re-capitalized through the ESM in order to guarantee the deposits, this would practically mean debt mutualisation. Importantly enough Germany rejects such an option for the existing debt leaving the option open, nevertheless, for the future.

In the scenario of an integrating budgetary framework, Germany has clearly underlined the fact that such proposals should also include the element of ‘sanctions’ for non-compliant states, where the Commission could acquire direct control over a state’s budget. Such provisions would effectively create an ‘exceptional federalism’ based on the relevant principle embodied in national constitutions; in the absence of empowered democratic institutions at the EU level this constitutes a challenging case.

A political Union?

All the above problematique, where an ‘institutional innovation’ of last resort ends up to ever-deepening problems leads us to Van Rompuy’s final pillar where a most fundamental and pressing question lingers. What kind of political Union does Europe want?

The choice practically rests on two options. The expansion of the existing « patch worked institutionalization’ approach that allows for the executive deepening of the Union leading to a so-called post-democratic «Executive Federalism». While such an approach may appear to be ‘easier’ as it avoids turning to the currently agitated and hard-pressed peoples of Europe, at the same time it deepens the democratic legitimacy question of the EU leading to post-democratic forms of governance. The second option, thus, would be a kind of ‘soft-federalism’ probably based on the German or the US model. Would the member-states accept, however, the existence of an enhanced federal budget as it is the case in the USA? Current developments on the negotiations of the EU budget demonstrate that we are still far from such scenarios.

Is Habermas’ vision of a democratic federalist reform looking ahead towards a post-national order a viable third option ? Possibly, but it would practically involve a deep reform of EU institutions and the conduct of referendums under the premise that a politically unified Europe should also be deeply democratic; a tricky element given the present circumstances.

When thoroughly analyzing the elements of the problem in Europe it becomes clear that there is no single crisis. The problem is multifaceted and multileveled; political, economic and social. One thing, however, is certain. In contrast to the current approach, any reform efforts need to be coherent, consistent and inclusive reflecting the fact that any answer to all the above questions needs to be long-term and ‘European’.

Click here to watch the event.