Saturday, October 29, 2016

EU Reform: Which Way Forward (Part II)?

In EU Reform: Which Way Forward I looked at some of the complications of the current situation in the EU.

Now let's look at some of the EU Reform ideas that have floated around in the last few years. I have not seen many concrete ones and a Google search did not help either.

It is true that recent years the upgrades of the EU have focused in banking and financial matters, issues which leave average citizen unaffected (directly). At the same, the ECB is buying bonds of banks in order to help Eurozone growth, causing reaction from eg Germany.

It must also be mentioned that many members are driven by an austerity (ie fiscal discipline) mantra. Growth has suffered and exports ie trade have been relied upon to do the job.

As I suggested in other posts in recent weeks, "It's the Economy Stupid", the Clinton era philosophy applies in 2016 Europe as well.

Let's see what the UK, David Cameron proposed in 2014.
A seven-point plan:
  1. Powers flowing away from Brussels, not always to it. Too generic and theoretical.
  2. National parliaments able to work together to block unwanted European legislation. Was CETA a case for it (Wallonia)?
  3. Businesses liberated from red tape and benefiting from the strength of the EU's own market to open up greater free trade with North America and Asia. The Tories seem to forget that red tape comes from national level too.
  4. UK police forces and justice systems able to protect British citizens, unencumbered by unnecessary interference from the European institutions, including the European Court of Human Rights. A la carte union.
  5. Free movement to take up work, not free benefits. That exists, intra EU migrants have to prove they have the means to support themselves and buy insurance. The UK should have been better read.
  6. Support for the continued enlargement of the EU to new members but with new mechanisms in place to prevent vast migrations across the continent. Well, members such as Germany usually phase workers from members in after seven years, the current Treaty allows them to do so.
  7. Ensuring Britain is no longer subject to the concept of "ever closer union", enshrined in the treaty signed by every EU country.

After the ref, the Polish Prime Minister Beata Szydlo said "We need to build a strong community of sovereign nations. We cannot pretend that there are no crises in the EU, it led to Brexit, we cannot not reach conclusions out of this" (Wirtualna Polska).

Also after the ref, a nine page French-German memo, ‘A strong Europe in the world of uncertainties’, was released by Poland’s TVN broadcaster. The document is said to have been authored by French Foreign Minister Jean-Marc Ayrault and German FM Frank-Walter Steinmeier.

“Germany and France have a responsibility to strengthen solidarity and cohesion within the European Union” despite “different degrees of ambition towards further integration among the member states.
Spoke of:
Bolstering common defense, migration and fiscal ties among the members
Closer cooperation on internal and external security, the migrant crisis, as well as a change in the EU’s fiscal and economic policy.

Other mentions are:

"The EU will in future be more active in crisis management,” the memo reportedly said, proposing to introduce the “European Security Compact” – a number of military means able to deal with emerging crises, including a deployable high-readiness forces, developing common military spending plans as well as investing in conflict prevention. The “European Security Compact” places special emphasis on internal security, mentioning the creation of a “European platform for intelligence cooperation,” improvements of data exchange and the establishment of an EU civil protection corps.

It called migrant and refugee influx to Europe "the central challenge for the future of our continent," saying the bloc must be able to secure its external borders while remaining committed to its humanitarian values. “Europe should stay open to what migration and mobility can contribute to our society”. "A situation in which the burden of immigration is unevenly shouldered by a few member states is unsustainable.”

On financial policy, the paper proposed a future joint budget to "promote the convergence of our economies, achieve sustainable growth that creates jobs, and make progress towards the completion of the European monetary union.” This part of the document also added that “France and Germany have a shared responsibility to build a robust monetary union that is globally competitive."

The fundamentals:

As I said to BBC World before the 2005 French rejection of the Constitutional Treaty, the Single Market is the core of the EU integration.

But as Norway and the other non EU countries that have access to the Single Market have found out, a Single Market is more than a Free Trade Area. One of the key issues, that German and French  officials were quick to point to Boris Johnson and other after the June ref is the free movement of people.

But, I argue, it is much more than that. It is about labour conditions. It is about many other areas of law. And a common trade policy. Economists have argued that a country that opens up its market to trade gains even if others don't reciprocate. But economic reality is not that simple.

The EU needs to make much more economic sense to the average company, the average worker and the average self employed citizen.

Cameron is said to have wanted to propose a temporary cap on non EU workers in the EU but to have withdrawn it because Germany was allegedly against it.

The EU, the European Commission, has the REFIT programme:

"Each year, the Commission launches a set of simplification initiatives within its REFIT programme – drawing on input from individuals, businesses, NGOs, national authorities and other stakeholders. Simplification can take a number of forms.
Changes are made to existing law:
  • codification: all amendments made to a piece of legislation over the years are incorporated into a single new act, reducing volume and complexity
  • recasting: similar to codification, but in this case the legislation itself is amended at the same time as previous amendments are incorporated to form 1 consolidated text
  • repeal: unnecessary and irrelevant laws are removed
  • review/sunset clauses: laws are reviewed or automatically removed after a given period
  • revision: laws are modified to keep them up-to-date
  • directives are replaced with regulations, so that all EU citizens are subject to the same rules and national governments can't add extra requirements
  • laws still in preparation are withdrawn if they become obsolete due to scientific or technical advances or if they are no longer in line with new policy objectives
  • legally binding laws are replaced with lighter alternatives such as voluntary agreements (self-regulation, co-regulation)"
REFIT is very important and should be expanded. But ove-rlegislation and red tape also come from national and sub-national laws in the EU (much like the US). So when public opinion says its wants more sovereignty, it means the right to produce red tape at national level? There are major economic benefits that can come from removal of both EU and national red tape and this must not be left to national and sub-levels, is Wallonia a red tape free region or is globalisation their only concern, for example?

Nationalists have found an easy target in the EU. As the UK example shows, it is very easy to blame the EU (and migrants too) for most if not all evils and that means not only Eurosceptic citizens and parties but media too. Sorry to say, but the BBC played a part over the years in Brexit, not only the Sun, the Mail and the Express. Pro EUer Britons (aka Remainers during the campaign) relied over the years on the European Commission offices in the UK as well as the other institutions to speak out for Europe. The same happens in most if not all other member states.

So is there a way forward that will not cause rejection of the new Treaty by national parliaments or electorates?

In his recent FT article, French PM M. Valls argues inter alia for convergence of tax rates and says it could go forward with just the members that agree. Some media have speculated that a two tier may be in the making, with Euro, Schengen and other common features such an a common tax system (or elements thereof) leaving the non Euro, the Visigrad 4, Greece and may others, eg Ireland in case it does not want to give up its low taxation of companies, in tier 2.

Indeed, that an option. But it will increase the intra-institutional problems of managing two EUs with the same decision bodies.

Hard Reform (as in Hard Brexit):

A much more radical option, albeit remote, exists. To make a new Treaty "take it or leave it", ie states that reject it to have to move into the EEA out of the EU. Sounds too radical, but with 27 members instead of 12 or 15, the EU could afford to make such moves. After all, its main competitor, the US, has a population of 320 mio where the EU27 is at 443 mio. Thus the EU could afford to lose another 123 mio in addition to the UK 65 mio and still be competitive against the US and a strong force in global trade especially if the states that leave (and go to the EEA ie still in the Single Market) have a low GDP/capita. The UK's exit has made this "nuclear" option a bit more feasible, albeit still remote. But that is one solution to the Gordian Knot that the EU has become. And Germany and France may be tempted to pursue such an option if negotiations about the EU's future become too unreasonable, keep that thought in mind.

What is more clear is that the EU has not used it weight as much as it should have. It allowed propaganda to claim it is undemocratic when the exact opposite may be the case. Thus we have come to the absurdity of talking about a union of "sovereign" states. That is hogwash. You have sovereignty if you are in the WTO trade system but when you have a Single Market and want to create a Single Economy that is lip service. What you do need to give the citizens of the members states is say in the policy making but at the end of day, as was the case in the UK ref, 50.1% is the rule (unless there are constitutional rights at stake). There are 81 mio Germans in the EU and every one of them has the same political rights as an individual Luxembourgeois or an Irish or Greek or Hungarian or Maltese.  If 40% of Hungarians (but 98% of those who bothered to vote) do not want non EU people in their midst, then they do not have to be in the EU. Or, to use an even more recent example, if the Polish government wants to do away with the constitution, then the rest of the EU does not have to take it (see article 7 of the Treaty). These may sound harsh, but as Boris Johnson has been told one cannot have the cake and eat it too.

The logic is not ideological but practical. The EU needs a single economy in order to have growth and jobs, a real Single Market and that means a common trade policy, less national and EU red tape, common labour standards and EU labour law, a common minimum wage, a common tax system and many other common features, including a common refugee and immigration policy. Social dumping can take place outside the EU. You cannot employ people in Germany and pay them Greek or Romanian wages, you should be able to pay them lower if they accept it, but at or above minimum wage and collective bargaining agreements, EU ones. Then maybe the Germans, the Dutch and the Finns will accept to have a real federal budget (US style) and fund real and effective regional policy in less developed regions. But forget sovereignty, you cannot have sovereignty and expect the Dutch and the Germans to pay for your roads, your airports, your bridges etc. in a union of sovereign countries.  Greece has found that out the very hard way since 2009. You think the experiment was a random one?

If 50.1% of the EU population wants fiscal discipline, aka austerity, that's the policy. V. Schauble has to defend the economic interest of his national voters, not the Greeks' or the Portuguese. If he was Min Fin of Europe, then his scope would be the EU taxpayer and voter, even better if there is an EU tax system as in the US.

Sovereignty is one thing, national identity and national interest are another. A real US of Europe would remove the former (sovereignty) but not the latter.

This Hard EU Reform scenario will most likely not happen, but use it as a reference one in your thoughts about EU Reform.

More "Soft EU Reform" ideas in a post tomorrow.

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