Monday, April 18, 2016

Once upon a time in Europe

Once upon a time, the European Union was poised to become a federal union. Leaders gathered in a Dutch city and tried to agree. The UK,which never wanted a federal union, disagreed.

Delors, Kohl, Schmidt and others wanted an ambitious union. They did not get it.

They got a single currency for some (which began 10 years later) but under pressure from the UK and others they did not get their federal way. Plus the UK and Denmark got official opt outs from the single currency. The UK also got an opt out from the so called Social Protocol.

They thought they would improve things in later Treaties of the EU. That did not happen. In 2005 for example the EU Constitutional Treaty was rejected by France and the Netherlands. The federal idea had been shaken.

The euro started in 2001 but high interest rates by the ECB created unbalances.

The subprime crisis later hit Europe too.

Enlargement of the EU was partly the cause of slower deepening.

In the meantime, public opinions in the member states changed too.

The EU never got a single tax system or a real budget (comparable to the US). In many member states, fiscally conservative governments wanted an EU that cost less, no matter the cost.

As a result, in 2016, the EU has lost its way.

World growth is slow and the EU has growth troubles. Unemployment is still high in many member states.

24 years have elapsed since the Maastricht Treaty of 2001/2002 and one can wonder what is the reason for having an EU with 20+ different languages, no single tax system, no federal budget, only laws decided at EU level, an EU el cheapo that is.

If the British voters decide to leave the EU in June 23, this may cause similar appetites in other member states.

One solution is for a new EU. A leap forward towards a United States of Europe with those countries that want and can. An EEA type of EU for the rest. Can the EU make such a bold move? Unlikely.

Europe's problem, which led to two world wars, is that it comprises of too many nation states. Europe has too much history. Can it have a (united) future?

The Greece problem serves as a stark reminder that the EU cannot make decisions. For example its insistence of having the IMF in the Greece troika.

The economic logic of the EU is still a hard case to make. EU economies are still too different, too national, too complicated for a central economic policy. Again, without a single tax system, single laws, a single social security system and of course a real federal budget, the EU does not make economic sense. Especially given the liberalisation and growth of TWO trade in recent decades.

Let's see what the Britons decide in June.

I still think the EU needs an IGC very badly.

Thursday, April 7, 2016

More troubles for an unbalanced EU

The rejection of the EU-Ukraine partnership agreement by the Dutch populous, albeit non binding for the Dutch government, serves as a stark reminder of the troubles the EU is in.

The recent decision of the ECB to cut the Eurozone's central interest rate to 0% marks the worry of the EU policy makers regarding lack of growth inside the Eurozone.

In 1959 the EU started as a mere Common Market because the French Parliament rejected a fuller union.

The UK is to make a decision on EU continued EU membership in a few weeks.

Ireland has rejected a new EU Treaty twice.

In 2005, the French and Dutch voters rejected the Treaty of Lisbon.

Swiss voters have rejected EU and EEA membership years ago.

Swedish voters rejected EMU/Euro membership.

Danish voters rejected the Maastricht Treaty and EMU/Euro membership.

19 of the 28 current EU members have joined the Euro, 9 have not. That creates an unstable system.

ECB interest rates with the insistence of the inflation phobia driven Bundesbank have traditionally been high, to avoid inflationary pressures. That has kept the Euro high and has hurt Eurozone industry not only in foreign markets but also (from imports) at home.

There are no single taxation system, no strong federal EU budget, no single social security system in sight. No wonder intra EU migration is very low compared to the US one then. Plus there are some 23 national languages among the EU 28.

No wonder an unbalanced union as the current one faces unemployment and growth problems. And when such problems arise, then many voters vote for nationalist parties and policies.

True, the EU has helped Europe avoid feuds such as another world war. But this peace has come at a price. The EU decision making machine is seen as foreign by many citizens of the EU member states. Member states with a strong social model such as the Netherlands and Germany have revised these models downwards in recent years. For example Dutch unemployment benefits used to be high, now they are significantly lower. Who are the voters expected to blame?

Countries with strong social models such as Sweden, Norway, the Netherlands have attracted intra and non EU migration in recent years and that has promoted xenophobia among the population.

To this day, the EU has 28 distinct countries as members, there is no real union to speak of. Plus the existing EU has produced too many laws, in addition to the national ones. As a result, too many small companies do not like the Single Market, they see it as a threat, not an opportunity.

Problems have brought fiscally conservative parties into government in many EU member states. Their policy agenda has been conservative, austerity driven and as a result anti-EU and de facto xenophobic. The Eurozone's austere economic policies by its members and the ECB have hurt the Eurozone. The 0% rate by the ECB is maybe too late. The Eurozone is damaged goods. The EU is damaged goods.

A No by the UK voters in the coming weeks may be a blessing for the EU. It may force it to take a good look at itself. On the other hand, it may not. Some EU policy makers have a tradition of dismissing reactions in the member states. They will be mistaken to dismiss the Dutch No to the EU-Ukraine agreement.

Ukraine has a right to feel betrayed at a result. But it should realise that the EU is in trouble, not the Ukraine. I spoke to many youths in Georgia a year and a half ago and they are not gang ho about joining the EU. Maybe they realize it is not paradise for countries in trouble. The ex USSR and ex Eastern bloc states that joined the EU went through very dire straits because of the need to follow the EU standards.

What is the solution? It is hard to say. A United States of Europe would be a solution but so far the EU is stuck with a Eurozone of 19 without a common tax or social models. At the same time, not only Greece but other EU and Eurozone member states as well are facing significant growth and employment troubles.

The EU could ask for things at an international level to help deal with its own problems. For example use its size and its internal market as leverage for even more free trade. Free migration should exist to counter balance freedom for capital and goods. People migrate because there is war (refugees) and to seek a better life (economic migrants). Two and a half decades after the fall of communism in the USSR, the world has structural problems. The West has become de-industrialised to a large extent. Migrants want to flow into the de-industrialised US and EU whereas new jobs are being created elsewhere.

These things need to be discussed and debated in the WTO and the UN. Probably they won't. In absence of a global summit on growth and jobs, countries will continue to pursue their own remedies. And the EU will make even less sense.

The EU needs an IGC to decide on its future, with or without the UK. It needs, above all, to start making sense to the European common man.  It probably won't, though.


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