The Cypriot crisis has made it brutally clear just how bad misgovernment with the EU - and the eurozone - really is. The only way to fix this is for genuine banking, fiscal, and economic union within the eurozone, backed by legitimate political instruments.
Events in Cyprus over the past week have made it brutally clear how bad misgovernment is in the European Union. There are four main reasons that explain why decision making in the EU is ailing:
The system does not resolve the problem. First of all, the system is inefficient when it comes to heading off problems it aims to resolve. On the contrary, it tends to aggravate them, both at the macro and the micro level. In the former, growth stagnates, unemployment continues to rise, and debt, far from being reduced, actually grows. The combination of a diagnosis of the economic downturn that focuses on public debt, a set of prescriptions structured around hard-line austerity, and European leaders with their feet stuck in the sand of domestic electoral politics, has led us into a state of permanent crisis.
In addition to the defective design of the eurozone and a series of bad policy decisions, a decade of laxity has turned the EU into a minefield, with Greece fiddling its statistics; Italy refusing to reduce its debt; Germany flooding its partners with cheap money; Spain feeding a property bubble without end; Ireland inflating its financial sector and engaging in fiscal dumping on its partners; and Cyprus setting up a tax haven at the service of Russia.
The build-up of a series of such toxic problems, together with a lack of effective instruments to fight the crisis, has left us in a situation in which all problems end up becoming systemic in nature. That this is so in the case of Spain or Italy is understandable. But that Greece and even tiny Cyprus can destabilise the whole of the eurozone gives us a true picture of just how fragile the system is, and its lack of security mechanisms.
It is all too evident that the policies designed to get us out of the crisis are not working; also that Europe's institutions and leaders are not up to the job at hand. But still, the EU continues to take complacent small steps, while arrogantly asking for more time and patience. But how much more?
The system is unaccountable. The second reason why the European decision-making system is running out of legitimacy has to do with procedures, transparency and accountability. Here too, the evidence piles up at both the micro and the macro level.
Apparently, everybody knew that Cyprus was the laundry room for Russian black money and a tax haven out of all proportion. We're not talking about the Bahamas here, but an EU territory, part of one of the most regulated areas in the world. Is no one really responsible for our having arrived at this situation?
The bank deposits saga and the to-ing and fro-ing around it also sheds light on how difficult it is to work out who is taking decisions and who can be held accountable for mistakes made. Was the Cypriot government, the eurogroup, the Commission, Germany, or the ECB to blame? Or are all of them equally responsible for the Cypriot bank deposits outrage? We don't know the answer now and nor shall we ever, and so we are unable to demand responsibility.
Here again, what it is true of small decisions is also true of larger ones. Commissioner Rehn, hounded by the empirical evidence and the experts who have questioned the poor results of hard-line austerity policies, has defended himself by sending a letter to member states in which he asked them to keep calm, assuring everybody that we are on the right road. This is the state of democracy in the EU: the substitution of public political debate for an exchange of letters and correspondence plagued with condescension.
The Commission and the European Parliament are out of action. The lamentable state of the European Commission adds a fourth factor to the mismanagement. President Barroso has disappeared under the shadow cast by the president of the European Council, Van Rompuy. Little by little, with great discretion and taking advantage of his inoffensive appearance, this skillful Belgian politician has amassed more power than anybody could ever have imagined. The European Commission, the guardian of the Treaties and the representative of the European general interest, has instead been turned into a kind of Pancho Villa's army, in which every Commissioner acts on their own and interprets their mission in accordance with their own capacities and limitations. Even if all of the Commissioners were equally competent (remember there are no less than 27 of them), this lack of leadership would still be a problem. But the reality is that the quality of this Commission is so asymmetrical that its political role has been short-circuited.
In the face of the Commission's weakness, almost anything of political substance is left in the hands of member states and the European Council. Even supposing all states were equal, we would find ourselves with a serious problem because, as we know, decision-making by committee tends not to be the best way of doing things. Can you imagine if Spain was governed by the Conference of Presidents of Spain's Autonomous Communities, and they had to make the state budget by unanimous agreement? Clearly it would be a disaster! In the European Council the differences of power between member states is so crushing, and have only become accentuated with the downturn, that we are left with something like the law of the jungle, with the strongest imposing their will and the rest keeping quiet, than an executive or legislative organ (and it is supposed to be both of these things).
But among all the institutions, the eurogroup and the ECB take the laurels for opacity and unaccountability. The ultimatum thrown down by the ECB to Cyprus for the latter to come round to the eurogroup's conditions, or else leave the euro zone, is a clear case of the return of the language of power that characterized relations between European states for so long. In a Europe that wants at least to appear to be a democratic state under the rule of law, a decision of this magnitude – showing the door to one of its members – is something that should only be taken by the European Council, in accordance with the European Parliament, following a proposal by the European Commission. Instead it came from the president of the eurogroup, the ECB president, and, apparently, Angela Merkel. This is 2013, not 1914!
- The predominance of national thinking. The final reason that explains the problems of misgovernment and legitimacy is to do with the fragmentation of policy across national systems with differing views of the crisis, national identities, and electoral cycles. We do not have a European democracy because we do not have a European government responsible to Europe's citizens, and nor do we have a European demos which allows for mutual solidarity. Through its prism, the German parliament is right to defend German savers from meeting the cost of Greek or Cypriot excesses. For the same reason, the parliament of Cyprus refuses to commit hari kari by accepting a plan which will never win the backing of the people. This aggregate of rational decisions leads to collective disaster, given that it creates deadlock between contradictory legitimate powers. We have already lived through this in the parliamentary ratification process of the Constitutional Treaty. Faced with the impossibility of reforming the Treaties through fear of deadlock, a great number of decisions are now taken at the intergovernmental level, and we find that, at each stage, a parliamentary fuse blows in some country or other and everything has to start all over again.
However, options exist. In this, the sixth year since the downturn began, the majority of leaders still fail to understand that the euro crisis cannot be managed with seventeen governments, seventeen parliaments, and a European Central Bank with one hand tied behind its back. It might come as a surprise to some, but it is not a knowledge deficit we suffer from. It is not as if we are confounded by a strange virus whose transmission mechanism we cannot work out. What is wrong with Europe is as clear as daylight: if one wants a common currency, there has to be banking union, which means equipping ourselves with European mechanisms for banking supervision, bank deposit guarantees and crisis management. And that requires, in turn, a minimum common tax, and common fiscal policies which do not undercut each other. This too, in turn, requires closer coordination of economic policies and a more vigilant oversight of imbalances which might be building up, for both lender and debtor nations. For reasons which are obvious, all of these tasks can only be carried out by institutions which have won democratic legitimacy before Europe's citizens, not just at the moment of their election, but in each and every decision taken, and under close control. The euro needs an executive and legislative power, and checks and balances between the two, rather than the technocratic rule by committee which we have at present.
Nobody is obliged to take all of these steps towards a political union with enhanced capabilities and legitimacy. Those who want to say "no thank you”, and get off at the next stop can do so. But to carry on with this pretense, that we are on the right road, is a suicidal strategy. Without banking, fiscal, and economic union, and without instruments of political legitimisation, the euro will never be stable. Instead of benefiting its citizens, it will bring them unnecessary suffering. All the rest amounts to Macbeth's melancholic lament about the meaning of life after hearing of his wife's death: “a tale told by an idiot, full of sound and fury, signifying nothing”.
The European Council on Foreign Relations does not take collective positions. This commentary, like all publications of the European Council on Foreign Relations, represents only the views of its authors.