Europe’s future: fragmented implosion, or greater integration?

  • 2011•07•18     Maastricht

    Commentary by UNU-MERIT Director Luc Soete

    As part of an expert group for the European Commission on the “Future of Europe in 2050”, I am currently writing the future policy narratives of three different scenarios: firstly, a “business as usual” scenario; secondly,  an imploding, “fragmented EU” scenario; or, in the third scenario,  a more “integrated EU”. These scenarios have also been explored quantitatively. At first sight, it may not seem the ideal moment for such analysis, particularly as the euro crisis appears far from under control, with increasing doubts as to the capacity of Greece and now Portugal to repay their debts.

    Policy narratives rarely provide useful insights into long-term policy challenges. They can, however, clarify the nature of the most striking trade-offs that policy makers may have to confront in the years to come.

    Business as usual?

    The current uncertainty surrounding the future of the euro zone and other European countries is such that, for once, the traditional, neutral “business as usual” scenario appears rather unlikely. The two alternative scenarios — an imploding, “fragmented EU” or, in contrast, a more “integrated EU”, appear much more realistic. Which one it will be is, of course, very much open for discussion.

    An imploding, fragmented EU?

    For many (if not most) economists, the long-term scenario of European fragmentation today appears to be the most realistic one. The narrative I proposed to my forecasting colleagues was actually very easy to write up. It started from how the basic trust between European states has gradually eroded over time. This predated the euro crisis in many ways, but the rapidly growing financial concerns in strong euro-countries (including Austria, Finland, Germany and The Netherlands) in having to bail out Greece made the mutual distrust amongst European Union Member States suddenly much more visible.

    Another striking example, from a different angle, was the EHEC (enterohemorrhagic E. coli) food poisoning outbreak around Hamburg and the immediate reaction of German health officials to blame “infected” Spanish cucumbers. Three weeks later, French health authorities copied this euro-blaming process, going for British producers of rocket, mustard and fenugreek seeds. Today, the blame has shifted to outside Europe, in the shape of Egypt.

    Only time will tell if the main culprits were fenugreek seeds imported from Egypt in 2009. However, the reaction to EHEC in various European countries illustrates the rapidly growing distrust between Member States.

    Tensions between various European Union Member States were always there as something popular media could make extra money from during football championships. But with the euro crisis, all this seems to have exploded. Of course, the fact that in Europe most popular newspapers remain first and foremost part of nationally oriented media outlets doesn’t help.

    But back to the narrative of the long-term scenario of European fragmentation. Gradually, both in the richer and poorer European countries, the belief in the absolute prerogative of national over European policy-making took form, accompanied by a growing disillusionment with what the EU had actually achieved for European citizens, both on the left and right of the political spectrum.

    As most economists are well aware, those achievements were not just unequally distributed between sectors (growing export as opposed to declining import competing sectors), countries and regions (centrally located countries/regions benefited much more from integration than peripherally located countries/regions), and skilled versus unskilled (the skilled in the centrally located countries and regions benefited much more, the others often had to move to find a job), but also appeared increasingly out of their control: imposed by external organizations and institutions which themselves appeared to have organized their activities fully “under-internal-control” with high, tax-free remunerations and little interference from national policy makers.

    In this narrative, it is ultimately the distance between European citizens and European policy makers that leads to the fragmentation of the EU. One should bear in mind that at the political level, the EU suffers from the fact that administrative constituencies remain national (or regional) even in the case of European elections. Politicians in Europe can never acquire European votes beyond their national or regional circumscription. As a result, defending broader European themes as opposed to national interests in political campaigns is something that doesn’t really pay off.

    Thus, while the overall advantages of European integration, although unequal, remained economically undeniable and well established, those advantages became politically more-or-less invisible. The disadvantages, the contradictions with countries’ own national or regional policy-making preferences became, by contrast, more visible and questioned every day in national public opinion debates.

    Or greater EU integration?

    The alternative scenario started from a similar, but opposite narrative. The future trend is now towards further political and economic integration, again directly as the result of the financial euro-zone crisis. At the political level, there is now, contrary to the previous scenario, a gradual recognition that the financial crisis can only be solved through stronger European (as opposed to national) political representation and control.

    Again, this applies to both the political left and right, to eurosceptics and europhiles. It is, in other words, not a narrative based on a romanticized vision of a European identity — a common European culture, flag or hymn. Rather, it is the outcome of a political realization both among policy makers and broader public opinion that economic integration, and in particular the economic and monetary union with the formal introduction of the euro back in 2002, cannot survive without a certain level of political integration.

    The huge financial investments in each other’s economies, both between euro-zone Member States and with other Member States, leads to the political realization even within the most “euro-skeptic” countries that close mutual control of each other’s fiscal policies, of the functioning of Member States’ internal labor markets and more broadly the sustainability of Member States’ social welfare systems, is in each country’s national interest. What was once politically unthinkable now appears economically the only way forward: further European integration, not out of love but out of necessity.

    External pressures, in particular complaints from the USA, China, India, Brazil, South Africa and some other emerging countries about the EU needing to speak with one voice, further reinforce this trend. Slowly, public opinion and policy makers begin to realize that a number of political integration steps are needed for the EU to fully benefit from its “‘union” status.

    In the meantime, the European Commission (EC) provides the underlying technocratic support for such reforms that also fully benefit from the wide variety of institutions within different European countries. The European Central Bank (ECB) as a centralized European bank, with national banks still in each Member State, is often used as the example, but other decentralized institutional reforms are also explored. For example, in the area of collecting statistical evidence, Eurostat is gradually transformed into a fully decentralized organization exploiting at EU level each Member States’ comparative advantage in one particular statistic. The result is a pragmatic approach to EU reform whereby subsidiarity and additionality are key concepts in providing legitimacy to newly created European, decentralized institutions with locations in different Member States.

    The best performing Member States’ public services take the lead in a new phase of economic integration in the EU: that of public services. As a result, the performance of the public sector in Europe, still responsible for the largest part of GDP, has received a dramatic boost in efficacy and efficiency. Tax revenues increased substantially in some of the southern Member States as tax evasion and large parts of the over-sized black market economy become integrated into the formal national economy.

    All this results in a significant impact on productivity growth for the EU as a whole, as the private sector also benefits from the more efficient public sector.  At the same time, mutual trust in Member States’ national public sector capabilities, culture and ethics receives a boost. European diversity again has a positive connotation across the EU. The EU becomes, internationally, a truly attractive place to live and work.

    So which will it be?

    Writing convincingly about an optimistic European scenario at the present time is, I admit, not an easy task. However, what is striking is that the solution to the various internal as well as external crises confronting the EU today can only be found in a scenario of greater EU integration.

    It is only through further political and economic integration that the EU will be able to provide appropriate responses to crises, both current and future. This not only applies to the financial crisis (as argued above), but also for pandemics such as the EHEC bacteria outbreak where public — and unfounded — accusations between Member States resulted in major European losses in agriculture exports. And if there is one future certainty, it is that pandemics in one form or another will hit humanity in the years to come. Only an integrated Europe, in close interaction with other regions in the world, will be able to provide an appropriate response.

    Similarly, the impact of the Arab Spring and the war in Libya on the spike of immigration inflows to the Italian island of Lampedusa highlighted that the differentiated responses of Member States — with some (such as Denmark) now wanting to reinstate pre-Schengen border controls — cannot be the solution.

    Or what about the nuclear crisis across the globe in Japan, which directly affected Europe’s future fossil fuel energy dependency, as the German government decided unilaterally to quit the nuclear industry? Here, too, it is the lack of a common European response that is most striking. In short, the need for Europe to embrace further integration appears more overwhelming with every new crisis.

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    Originally published as “Exploring Europe’s future in times of crises” on the UNU-MERIT website. See UNU-MERIT Director’s Column for this, and other recent commentary by  Prof. Soete.