Dalibor Rohac: To form a more perfect Union?

Dalibor Rohac is a Research Fellow at the Legatum Institute

The Franco-German proposal for common economic policy in the Eurozone, presented today at the European summit in Brussels, can be seen as a case of political posturing directed at the German electorate, in order to provide an ex-post justification for the financial aid packages directed at Europe’s ailing periphery, which would be palatable to the domestic audience. If the proposal is meant seriously, however, it would probably represent the most radical change to the post-war European political and economic order.

The proposal includes a common EU retirement age of 67, harmonised corporate taxes, elimination of inflation-indexed wage agreements, and limits on deficits – coupled with tougher penalties for countries that breach the rules. While each of these individual proposals could be evaluated on its own merits – and clearly raising the retirement age and eliminating wage indexation are measures that would have a very solid economic justification – the underlying tone of this proposal is very disturbing.

If adopted, the plan would force Eurozone countries to amend their constitutions to forbid public deficits above a certain level. While an economist might sympathise with the intention to curb irresponsible public spending, this step would essentially mean the end of sovereign nation states in Europe. After all, the very purpose of setting up elected parliaments was to grant them sovereign powers to tax and to decide over public spending. The Franco-German proposal would constrain substantially that power, and would represent a decisive departure from the institutions of sovereign nation-states and representative democracy.

Again, there can be a legitimate discussion about whether such a move is warranted or not. It is certainly possible to imagine persuasive arguments for constitutional checks that would curb deficit spending. Nonetheless, such dramatic modifications to our present political and institutional order should not be a result of a proposal that has been drafted in secret, without any open public discussion, and which – if adopted – would probably be rushed frenziedly through national parliaments to prevent any such discussion.

While possibly signalling the end of the era of standard representative democracy in Europe, this move should not be surprising. It is only a logical extension of the project of a common European currency. In the past, there are not any examples of stable monetary unions that would have taken place without a political and fiscal union. The assumption made by many supporters of the Euro in the late 1990s – namely that it was possible to square a common currency and political and fiscal independence of individual nation states – was thus rather unrealistic to begin with. Clearly, there were many in Europe who hope that the Euro will serve as a motor for further political centralisation, and these people seem to occupy the high grounds in the present debt crisis.

So while the proposal is partly directed to appease German taxpayers, it is part of a much broader theme which we witness in European politics, motivated by the idea that “harmonisation” is always preferable to diversity and that institutional competition between different fiscal, regulatory, and monetary regimes is, in general, harmful.  Obviously, nothing could be further from the truth. Europe’s economic growth cannot be sustained without a perpetual process of yardstick competition and institutional learning. For the sake of Europe’s future, it is necessary that the current movement towards an ever-closer Europe, and political centralisation at all cost, is reversed.

At this stage, there are two possible scenarios how the events in the Eurozone can play out. The Eurozone could be sustained in its present form, at the cost adopting an institutional package similar to today’s Franco-German proposal and massive, Europe-wide, fiscal transfers. Alternatively, we should brace for a disorderly unravelling of the Euro occurring at its periphery – potentially at very high social and economic costs. Needless to say, neither of these two paths is particularly appealing.