Fiscal union: Europe moves ahead

A new Treaty to finish the construction of the euro

“I am sure the euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created”, said former European Commission President Romano Prodi on 4th December… 2001! The current euro crisis does not come from nowhere. It is the crystallisation of risks which were well known by most politicians and economists ever since the creation of the single currency in 1999. What Nicolas Sarkozy and Angela Merkel sought to achieve during the 8th-9th December 2011 EU summit was to finish what was started 20 years ago in Maastricht.

The UK Prime Minister David Cameron opposed his veto to a change in the EU Treaties, after his counterparts refused to accept his demands for a possibility to opt out from European regulations in financial services. Hence, President Sarkozy and Chancellor Merkel agreed with the other Eurozone members to create a separate intergovernmental Treaty open to other EU members, in order to establish fiscal constraints on national budgets, and foster market confidence in the Eurozone.

What a single currency truly means to European integration

This move was essential and constitutes a great step forward in the process of European integration. It shows the strength of this process across time, where each step forward calls for another one: the creation of common interests (the Coal and Steel Community) fostered peace and increased trade, which then called for the suppression of tariff barriers and the creation of a Single European Market, which called for a stabilisation mechanism for currencies in order to ensure stability (the Exchange Rate Mechanism, then the Euro), which brings us to today’s necessity of fiscal and political union. But in this logical process, the single currency is doubtlessly the tipping point. It is the most critical moment of European integration because, as Joseph Schumpeter puts it, “the monetary system of a people reflects everything that the nation wants, does, suffers, is.”

It is one thing to create a single market and a mechanism to coordinate currencies, but it is another, very different thing, to create a single currency. A single currency, if it were to work properly, needs adjustment mechanisms to ensure it plays its role efficiently within the economy. These mechanisms include fiscal transfers. The 9th December Summit established fiscal constraints, but fell short of creating a fiscal union, which would include an important central budget to redistribute wealth and prevent disparities in competitiveness from emerging across regions. Taking common binding decisions on such issues would involve much tighter political union.

Integration is no longer technical; let peoples have their say

Since a single currency requires a very high level of political integration in order to work properly, this pooling together of sovereignty was the logical step ahead. Merkel and Sarkozy understood it, and so did the 15 other Eurozone members and the other EU members who still have the single currency as a goal. Countless people accused financial markets of speculating against Europe. But the extraordinary market pressure on the euro only mirrors what is Europe’s fundamental question: are we one political entity or a group of 27 sovereign member states?

As Europe faces this crucial existential question, it should not take the easy way out (as it sometimes did) and let the peoples of Europe out of the room. In the words of former European Commission President Jacques Delors when he was negotiating the Maastricht Treaty, “this Monnet method was justified at the beginning of the adventure. But, let’s face it, this policy – half-clandestine – was no longer possible and the moment came to break free from the founding fathers’ method.” The intensity of the current crisis situation makes the holding of referenda too risky, but establishing the election of the European Commission President by universal suffrage is a perfectly sensible way to provide democratic legitimacy to someone who has an increasingly important say over European citizens’ lives. If nothing is done, EU leaders should stop wondering why the necessary decisions they take at EU level will get them voted out of office back home.