The European Council on Foreign Relations

Reinventing Europe: Harold James

Date: 18th January 2012  |  Author: Harold James ,

Categories: Euro Crisis, Reinventing Europe,
Tags: , euro crisis, euro crisis , germany , germany, greece, princeton, debt

As part of ECFR's 'Reinvention of Europe' project, we are running a series of responses from leading thinkers and academics to Mark Leonard's recent paper, 'Four scenarios for the reinvention of Europe'. The paper outlined four possible routes towards solving Europe's current crisis, and argued that Europe's main challenge was to solve the acute euro crisis without exacerbating the chronic crisis of declining European power. In the first in this series of responses, we hear from Harold James of Princeton and the European University Institute.

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Mark Leonard offers a telling analysis of Europe’s contemporary crisis in terms of both – as he puts it – the necessity and the impossibility of integration. Inevitably the diagnosis is more precise than the proposed menu of cures, and indeed if he is really sincere in his “impossibility” thesis there simply cannot be a cure and the patient’s disease is terminal.

Indeed it would be easy to simply conclude that there has been a massive failure of governance – by the Commission, but also by a substantial number of states. Is that failure so large as to put at risk the whole experiment of integration?

The current crisis involves two sets of problems – one is genuinely global, and not particularly European; the other is peculiar to the problem of a monetary union without a corresponding state. 

Both the questions of poor fiscal discipline and of massive financial institutions generating large capital flows that produce perverse effects are global and not simply European issues. Are they a characteristic outcome of economic prosperity or of advanced capitalism? Some smaller countries – especially the Scandinavian states, which had bad banking and fiscal problems in the early 1990s – tackled them then, and are now often (and rightly) regarded as models for reform. If Europe can tackle the problems in a comprehensive way, the initiative would have global resonance as well as local benefits. A solution would strengthen the notion of Europe as soft power, or of leading by example, that was so prevalent a part of the self-confident pre-crisis discourse of the European elite.

Then there are the specifically European difficulties. The pure monetary union is indeed lop-sided, as its makers recognised; and a reform would require some greater degree of fiscal coordination. Because this was not done at an early stage, and because fiscal performance in many countries was allowed to deteriorate before the financial crisis, the remedy needs to be much more encompassing than a solution applied at an earlier stage would have been. There is in short a price to be paid for past mistakes, and it would be foolish to try to pretend that the price can somehow be wished away or made to vanish by ingenious financial engineering (as in some of the leveraging the EFSM proposals).

Above all – because of the bad fiscal legacy – Europe now needs to make a provision for the handling of states that are quite obviously bankrupt; as well as a different set of arrangements for states that are over-indebted but which might be coaxed back to stability. Sovereign bankruptcy is a general issue that has never had a satisfactory solution, for an obvious reason: it involves the recognition that a political unit has decisively and visibly failed. Fortunately in Europe, there are – as a result of the process of integration - institutions that can replace failed national institutions. 

What is now required is a combination of some mechanism for assuming existing debt, as well as for preventing recurrences. In the United States, Alexander Hamilton famously negotiated the federal assumption of states’ debt in 1790, but many states behaved badly in the early nineteenth century, with multiple bankruptcies, until they accepted balanced budget amendments.

Europe would indeed need some fiscal ability of its own if it is to make the monetary and economic union work. It is already a profound peculiarity that in a customs union, customs duties are still nationally administered. Hamilton made federal customs houses the key element of his proposal. A Europeanisation of some part of VAT would be a tremendous advance in combating the massive extent of fraud that is favored by the existing system. Labour mobility is also quite incomplete without a common pensions and benefits system: what happens to the worker who spends five years in France, five years in Greece, and five years in Germany and at the moment is left with a fragmented collection of small entitlements?

There is no reason why such a solution could not command a large measure of public acceptance. In Switzerland, for instance, a debt brake (Schuldenbremse) was accepted by one of the largest majorities ever (84.7%) in a referendum in December 2001. The logic of both solving an acute contemporary crisis and of stopping an irresponsible pile-up of debt from encumbering future generations is fundamentally attractive. It is hard to see how it would encounter a populist backlash. What has produced the populist backlash is the spectacle of political authorities devising technically complicated solutions that are incredible. In short, there is a simple need for states – and for the Commission – to stop treating the public as if they are stupid.

That is why I would be sceptical of some of the ideas set out in the menu of options. Working around existing treaties just looks like more of the same old recipe – a denial of the fact that there is a massive problem. It would not be a surprise if public opinion would just choke on this kind of stuff.

Look back to moments of real crisis. In 1940, Churchill proposed a union of Britain and France in the aftermath of the German attack. In 1950, Adenauer proposed a political union of Germany and France. That is the kind of boldness that is now needed. In the past, it was war, immense dislocation and suffering that produced the dramatic crisis that could weld a nation together. Is the current crisis severe and dislocating enough to generate an analogous effect? The more Europe suffers, the more its people will see that a reform agenda that is just an exercise in incrementalism is also nothing more than an exercise in futility.

Also in this series:

Reinventing Europe: Richard Rosecrance - 'if Greece or Spain did not exist, they would have to be invented. Their participation in the euro keeps the value of the currency down from $1.80 to $1.20 or $1.30 or so, thereby ensuring the success of German exports to the rest of the world.'

Reinventing Europe: Brigid Laffan - 'as the Union intrudes more and more into domestic budgetary and public finance choices, can party politics in Europe adapt to a very different governance regime?'

Reinventing Europe: Charles S. Maier - 'The British can imagine that their banks will suffice, the Germans their autos, but such comparative advantage can dissipate quickly. I’d as soon wager on Greek beaches.'

Reinventing Europe: Georg Sørensen - 'a substantial part of the present euro crisis has less to do with European cooperation and more to do with member states that are fragile, ineffective, have serious corruption problems...'

Reinventing Europe: Chris J. Bickerton - 'Populism, after all, is politics without policies; technocracy is policy without politics.'

Reinventing Europe: Carlos Gaspar - 'In an enlarged “Euroland”, Germany’s pre-eminence could be balanced by a Catholic coalition led by France, Italy and Poland.'

Reinventing Europe: Dimitri A. Sotiropoulos – 'we still live in an era in which the nationalist project is more seductive than any project of integration among nations'

Reinventing Europe: Pawel Swieboda - 'no-one dares to ask the question if the euro is still a political project, as its founders tended to believe, or if it is today about nothing else than damage control'.

Reinventing Europe: Claus Offe - 'Europe is not just needed as a defensive mechanism to prevent the weak being overpowered by the strong, who first administer an austerity cure without then providing the requisite support for recovery.'

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