THE ECONOMIC FOUNDATIONS OF THE EUROPEAN PROJECT THE EURO CRISIS AND THE FUTURE OF EUROPEAN INTEGRATION By Peter A. Hall for BBVA, In Search of Europe (Madrid: BBVA 2016) From a long-term historical perspective, the European Union is one of the most distinctive political creations of the late twentieth century–a vehicle for supranational cooperation just short of a political federation but more robust than an international regime. After half a century marked by economic depression and two world wars, the economic community established by the 1957 Treaty of Rome became the vehicle for one of the longest periods of peace and prosperity the European continent has ever enjoyed. However, the European Union is in trouble today, seemingly unable to deliver the peace and prosperity that has always been its promise. The long-running Euro crisis is the most prominent manifestation of its problems. A slow-moving debacle, the crisis has laid bare the fault lines of the European Union. But the problems with which the EU must cope extend well beyond it. Annual economic growth among the 28 member states now in the EU was lagging well before the crisis, at 2.6 percent versus the 3.3 percent growth rate in the U.S. between 1997 and 2006. THE EUROPEAN UNION IS SEEMINGLY UNABLE TO DELIVER THE PEACE AND PROSPERITY THAT HAS ALWAYS BEEN ITS PROMISE Moreover, low birth rates will make it difficult for Europe to achieve high rates of economic growth in the coming years. The old-age depend- ency ratio in the EU is expected to double by 2080, leaving only two people of working age for each one over the age of 65. Immigration of- fers a solution to that problem, but it is meeting fierce resistance in the polities of Europe, where radical right parties opposed to immigration and the policies of the European Union are on the rise. The EU itself lacks an effective policy for coping with boatloads of refugees crossing the Mediterranean in unprecedented numbers. 47 THE EURO CRISIS AND THE FUTURE OF EUROPEAN INTEGRATION Meanwhile, the European Union’s record as a guarantor of peace and democracy in Europe is being tarnished by its inability to prevent a re- surgent Russia, under Vladimir Putin, from absorbing pieces of Ukraine or to deter Hungary, one of its own member states, from sliding back towards semi-authoritarian rule. Of course, Europe has always faced challenges, but to many people, the European Union now seems to be part of the problem rather than the solution. In order to understand why, we need to look back at the evolution of European integration. The Evolution of the European Union From its inception in the European Coal and Steel Community of 1951, institutional integration in Europe has always been multiply motivated. On the one hand, for some, it has been animated by the ideals of an “ever closer union” culminating in the European polity envisioned by its founders, Jean Monnet, Robert Schuman, and Alcide De Gaspari. On the other hand, integration has moved forward only when national governments could see how European institutions would serve their own country’s interests.1 EACH NEW STEP TOWARD INTEGRATION HAS BEEN BASED ON LONG TERM GAINS, EVEN IF THEY REQUIRED SHORT-TERM SACRIFICES Conceptions of national interest are circumscribed by economic and geopolitical conditions, but they are ultimately a social construction. As such, they are affected by the discount rate that governments attach to future gains, by officials' confidence in how a new set of institutions will function, and by a government’s sense of the opportunity costs of moving in one direction rather than another.2 In this respect, visions of what Europe could be influence the pragmatic decisions taken to get there. Charles de Gaulle was not the only leader motivated by une certaine idée de l’Europe. 1 A. Moravcsik, The Choice for Europe (Ithaca: Cornell University Press, 1998). 2 J. Goldstein and R. Keohane, eds., Ideas and Foreign Policy (Ithaca: Cornell University Press, 1993). 48 THE ECONOMIC FOUNDATIONS OF THE EUROPEAN PROJECT Therefore, European integration has often been served by a certain “constructive ambiguity” about what its next steps would mean for each of the member states. For the most part, however, each new step to - ward integration has been based on the perception that it would offer the member states positive-sum returns, namely, long-term gains for all, even if they required short-term sacrifices by some. This point is important for understanding the dilemmas Europe faces today. During the 1950s and 1960s, European integration offered gains that were relatively clear. The European Economic Community provided a vehicle for economic reconstruction and peace in Western Europe. A generation decimated by war took those as superordinate goals. The Single European Act of 1986, which was to create a single continental market by 1992 on the basis of qualified-majority voting, was presented as a means to secure prosperity after a decade of Eurosclerosis.3 The member states knew that liberalization would require some sacrific- es but were persuaded that the long-run outcome would be greater prosperity for all. In large measure, these ends dictated the means used to secure them. Since its core objective was greater economic efficiency, the European Community of the 1960s and 1970s was designed and presented largely as a technocratic enterprise. Of course, national governments retained the final say, and the Community acquired a patina of popular partic- ipation when the European Parliament became an elected body. But the actions of the European Community were legitimated largely by reference to their technical efficiency. The committees of the Council were enjoined to base their decisions on technical expertise, and the Commission justified its proposals on the basis of economic efficiency.4 As the ambit of European decision-making expanded, however, cracks began to appear in this facade. When the EC focused on narrow realms of regulation with few distributive consequences, its policies could be justified on the grounds of technical efficiency. But, after the Single European Act, the liberalizing regulations of the EU began to affect large segments of the workforce, generating losers as well as winners. European officials had complained for decades that their efforts went 3 N. Jabko, Playing the Market (Ithaca: Cornell University Press, 2006). 4 C. Joerges and J. Neyer,. ‘From Intergovernmental Bargaining to Deliberative Political Processes: The Constitutionalisation of Comitology,’ European Law Journal 3 (1997):), 273-99. 49 THE EURO CRISIS AND THE FUTURE OF EUROPEAN INTEGRATION unnoticed. Suddenly, they acquired much higher political visibility, and people who felt disadvantaged by liberalization or globalization began to blame their fate on the EU. The result is a legitimacy crisis from which the European Union has yet to emerge fully. Of course, democratic governments often allocate gains and loss - es among social groups, and they legitimate those decisions on the grounds that the last elections gave them a mandate to do so and the next elections will hold them accountable for their actions. This is the basis for the “political capacity” of democratic governments in contexts where “to govern is to choose.” But the European Union lacks such political capacity. Its Commission is unelected, and its Council strikes deals under a veil of secrecy for which none of its members can readily be held accountable.5 In the treaties of Maastricht and Lisbon, the response of the Euro - pean Union to this legitimacy crisis was to increase the powers of its Parliament while extending the jurisdiction of the EU even further. But complex decision-rules obscure the role of the Parliament, and elections to it are generally decided on national rather than European issues, in the absence of a cohesive continental electorate or Europe-wide par- ties. In the eyes of many of its citizens, the EU continues to look like a technocracy. Europe suffers from the kind of sharp divide between the pays légal and the pays réel once said to have characterized France during the Third Republic. As a result, the legitimacy of the EU turns heavily on its capacity to promote prosperity across the continent. 6 That is why the Euro crisis raises deep political as well as economic dilemmas for Europe. The Origins of the Euro Crisis Like all such initiatives, the decision to establish the Economic and Monetary Union in Europe was multiply motivated: EMU was both an economic and political construction. Officials, such as Jacques De- lors, the president of the European Commission, saw EMU as a way to deepen the single market. President François Mitterrand of France hoped monetary union would reduce the influence that the German 5 S. Cox, What’s Wrong with the European Union & How to Fix It (Cambridge: Polity, 2008). 6 F. W. Scharpf, Governing in Europe (Oxford: Oxford University Press, 1999). 50 THE ECONOMIC FOUNDATIONS OF THE EUROPEAN PROJECT Bundesbank held in the prior European monetary system. Chancellor Helmut Kohl of Germany saw it as a way to bind a newly-unified Germa- ny to Europe, ensuring its trading partners could not gain advantages over German products by devaluing their currencies. Each leader had reasons for pursuing monetary union, even though economists warned that Europe was not an “optimal currency area.” It lacked the capacities to adjust to economic shocks conferred by high rates of labor mobility and social insurance schemes capable of automatically redistributing revenues to regions suffering from recession.7 THE ECB WAS CHARGED WITH MAINTAINING FINANCIAL STABILITY BUT FORBIDDEN FROM PURCHASING SOVEREIGN DEBT The institutions constructed for the new monetary union were mini- mal at best. The new European Central Bank was charged with main- taining financial stability but forbidden from purchasing sovereign debt.