Towards a federal Europe

GIULIANO AMATO

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SOME time ago I attended an Italian-French summit on Europe’s future in Paris. The objective was to assess the extent to which our ideas are the same, and above all whether political integration is now no longer a distant dream but instead, as I and many others now believe, a pressing necessity that is also capable of breaching the resistance in France after being hidden for decades behind the ambiguous wording of a ‘federation of nation states’.

This was a totally private meeting since it was the only way to ensure that we could speak with total honesty and, therefore, I am not at liberty to disclose who was present, nor what was said. I can, however, share with you my impressions, and they confirm that patience and commitment are needed so that the winds can blow the European vessel in the right direction.

Perhaps it was also my fault. Maybe I was too impetuous in specifically attacking the wording ‘federation of nation states’. I wanted us all to acknowledge that these words have so far happily hidden the ambivalence of the European hermaphrodite, partly intergovernmental and partly communitarian, while history’s harsh lesson has been and, in fact, is that a euro based on the intergovernmental coordination of sovereign budgets is immensely fragile and we must find the courage to link it to a European federal budget.

In saying this I was also speaking to myself, having on more than one occasion said and written not only that the European Union, although originally set up as an international organization, had never progressed beyond its ambivalent hermaphroditic characteristics, but above all that we should not be content with such a characterization. I was not the only one to consider it the most appropriate for a world in which being ambivalent characterizes the lives of many of us, split between a national dimension and broader ones.

Well, it is I who must now admit that while there may be reasons for institutional duality to exist, the euro’s stability demands much more. Inter-governmentalism certainly does not assure such stability for reasons I have often elaborated earlier, and that I will briefly now summarize. It generates bonds that in each member state are not attributed to a shared will, but to the governments of other member states. Moreover these bonds are perceived as an intrusion, and reciprocal intrusions lead to reciprocal hostility, thereby damaging European cohesion. Finally, the intergovernmental context does not encourage/enable the necessary measures to balance austerity policies, and hence the recessive effects remain without any antidotes.

 

This has led to a totally new situation compared to the past because it has transformed what was once an ideal for visionaries following Spinelli’s school of thought into a need that is as inevitable as it is opportune. Years ago it was difficult to persuade Europeans to agree to a federal Europe, while nowadays there are persuasive arguments – both for the Greeks, subject to internal controls unimaginable for any member state of any federal system in the world and for the Germans and Finns, who feel obliged to personally pay the debts incurred by others. One could ask whether they remember that twenty years ago in Maastricht the euro was created and entrusted to the coordination of national policies in order to safeguard national responsibilities. And whether they have now noticed that the absolute opposite is taking place? That they are now less free and more closely dependent than if they had been part of a federal system? Should one therefore create such a federal system? Should one not link the euro to a federal budget so that it no longer depends on individual states and they can be free even to fail without damaging others?

A few days before travelling to Paris I had discussed this with the Dutch Foreign Minister, Frans Timmermans, and it was his opinion that such an argument could work in his country, which is extremely attentive to balancing the budget. I must instead admit that I was not so successful with my French interlocutors. It may be because France addresses its surplus and its deficits with strong national sentiments it has always shown, even when creating and accepting Europe. Of course, the two convinced federalists, Robert Schuman and Jean Monnet, were both French, but Monnet, a gradualist and a functionalist, in order to gain consensus for his ideas, became an unintentional trailblazer for de Gaulle’s country in Europe. This resulted in a federation of nation states with greater Europeanist emphasis, but confining federalism within a framework of something always to be hoped for, but never achieved.

 

This is rather like what happened on this occasion, and my ideas, far more pragmatic than Spinelli’s idealism, were instead equated to his vision with a friendly smile, even though I was honoured. I instantly thought of the path that would have to be embarked upon to overcome, if ever possible, this tenacious but friendly resistance.

So as to achieve the consensus they aspire to obtain from the French but also from others, the upholders, such as myself, of such a robust European institutional reform, must not make the mistake of placing it at the top of the agenda. One must instead begin with policies for which the need is felt today – to encourage the growth everyone wants, and prove that many of the reforms – be it with respect to energy, telecommunications, innovation or defence – can effectively be pursued only at a European level, while recognizing that at that level we do not have the required competency or the ‘fiscal capabilities’ needed. One must also emphasize that the populism that many complain about has not emerged like Asian flu. It has instead been caused by us, and specifically by policies arising from intergovernmentalism resulting in policies that cannot be implemented and the fact that this occurs because citizens have no say, as power lies with governments and their bureaucracies capable only of imposing fiscal rules. So what is the point of complaining about populism if we are the ones who allow the grass to grow under our feet and then refuse to cut it?

The 2014 electoral campaign for the next European Parliament can be an opportunity for allowing such an awareness to mature. In the meantime all innovation compatible with the existing status and leading towards a possible federalism will be welcome, be this a banking union or the use of very first rules applied to the Union’s ‘fiscal capability’. Once this is achieved, however, it will be necessary to change the treaties, even national constitutions, and perhaps encourage direct elections. This might be requested by the German Constitutional Court, but will not apply only to Germany. That will be the moment of truth, our future’s hic Rhodus. To meet the challenge we will have to persuade everyone, or almost everyone, that Europe is in their best interests.

 

In his February speech to Congress on the State of the Union, President Obama said, ‘Now, most of us agree that a plan to reduce the deficit must be part of our agenda. But let’s be clear, deficit reduction alone is not an economic plan.’ There are some in Europe who believe that the example set by the United States should not be followed because they see there a real repugnance for austerity, supported by the fact that in the end the US always finds someone to buy its treasury notes and everyone manages to survive on the federal debt. But that is not how things stand, and nor is it true that when a member state cannot pay its debts, the federal government invariably pays them.

Months ago, when a number of us called for Eurobonds to be issued to repay the debts of European states experiencing the worst problems, over and over there were references made to the first period of American history, when Alexander Hamilton persuaded Virginia to assume responsibility for the debts of states experiencing problems.

 

Of course, that did happen at the time, but the debts had all been incurred for a common cause, the war of independence, and hence the richer states agreed to pay. Furthermore, though not everyone knows this, never again did the federal government assume responsibility for the debts of states, barring just one exception made twenty years ago for the District of Columbia, over which Congress has special powers. In all other cases, although this issue is not included in the Constitution, a firm ‘no bail clause’ has applied, identical to the one written in our European treaties. It is for this very reason that member states, despite no fiscal compact imposing this on them, individually undertook the task of balancing their budgets.

The consequence is that when faced with an excessive sovereign debt, states adopt strict austerity policies, increasing tax revenue and reducing expenditure. They do not always succeed and history presents cases of states that have gone bankrupt. The effects of austerity policies are always (inevitably) recessive.

So what happens then? Are austerity measures relaxed? Or are people left to be unemployed while services decrease? No. The existence of various levels of governance are used and the pro-cyclical effects of austerity measures are sought to be balanced by countercyclical measures adopted at a federal level, which spends money not in order to pay the states’ debts but to revive their economies.

Those who wish to learn more about this should read the brief but extremely lucid essay by Randall Henning and Martin Kessler entitled ‘Fiscal Federalism: US History for Architects of Europe’s Fiscal Union’, published in a series of essays and lessons by Bruegel. The two authors revisit American history, emphasizing the importance of the macroeconomic stabilizing role played by the federal government and come to the following conclusion, saying, ‘We believe that creating stringent state-level debt brakes in Europe without a capacity for countercyclical stabilization would be a serious mistake.’

 

This is the mistake we have made (intentionally) ever since the euro was thought of, a mistake that makes less sense to correct using common resources to make last minute payments for any given debt than to use the supranational level to balance the albeit necessary austerity with countercyclical intervention.

Paradoxically, we Europeans have at least to a certain extent embarked upon the first path (with the Stability Mechanism, firstly needed to buy government bonds and therefore cap interest), even as we appear to be stubbornly against the second option, at least judging by the most recent meeting held by the European Council.

Last October (2012), I was encouraged by the fact that the interim report prepared by President Van Rompuy, proposed a ‘genuine’ monetary, banking and fiscal union that would also include the attribution at a supranational level of the ‘fiscal capacity’ needed to oppose at a macroeconomic level all asymmetric shocks, included the right to incur debt. I told myself that, albeit twenty years too late, we were finally making progress. Unfortunately, that very same European Council, which subsequently approved a reduction of the common budget, left this proposal – still a favourite only among members of the weak Barroso Commission – locked away in a drawer.

No, it is certainly not possible to continue along this path. I can understand the British, who even after joining the Union never stopped being islanders, but I find it hard to understand Germany, where the imminent elections should not erase the country’s history or its culture, or a correct perception of its own interests. Luckily not all Germans, or all Dutch or all Finns, are of one view. Hopefully, the European Parliament might invert this absurd trend of imposing a less restricted budget on the council.

 

The path of fiscal capacity and, therefore, of a European countercyclical capability, is a long one and certainly not likely to be resolved by the coming elections for the European Parliament.

But those who share this idea and have stated that they are ready to implement the institutional reforms needed to embark on it, must do everything possible to ensure that in the interim the instruments available are used in the best possible way to revive our economies.

So, how will it be possible to restore a little empathy between Europe and the Europeans if, as is now happening, we add European austerity to national austerity, with a gigantic sacrificial ritual in which no one takes any action to mitigate the severity of national budgets with policies that alleviate the consequences on employment and income for the great majority of families? We must be careful, for there is no future for Europe along this path and the time to change direction may be running out. One should learn the lesson taught by America.

 

* This text is a combination of two separate articles, both originally written in Italian and published by the Italian newspaper Il Sole 24 Ore, the first on 20 January 2013 and the second on 17 February 2013.

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