For a federalism of necessity

, by Aurélien Caron, Jean-Marie Cavada

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For a federalism of necessity

In the coming months and years, the countries of the euro zone will succumb to a major political and social crisis if they do not push integration one step forward.

Indeed, the current crisis in the euro zone does not originate in the Greek crisis, but long before, in the creation of a monetary union without a proper fiscal and economic union. Certainly, public debts have hiked in the last three decades but the cause of the current situation lies in the imbalances between the countries of the euro area.

On the one hand, a group consisting of the northern countries, led by Germany, has built its economy on competitiveness and exports. On the other hand, the peripheral countries have used the low interest rates to fuel domestic demand, and have built their economies on sectors of non-tradables, which are less subject to external competition, such as real estate and construction.

The outbreak of the Greek crisis has shed light on these structural challenges, creating a crisis of confidence in the sustainability of public debts: creditors have realized the unsustainability of imbalances in the euro zone. Interest rates have hit record highs so that a snowball effect is now operating: when interest rates exceed GDP growth, debt is self-maintained, except if significant surpluses are generated. To generate these surpluses, each country has launched drastic rescue plans, while the intervention of the Central Bank has provided a few months respite.

The uncoordinated and one-by-one approach to the rescue plans implemented in Europe make austerity policies incompatible with a pickup in growth. In addition, spending cuts, which aim at generating short-term gains, mainly target social spending and investments, to the detriment of future growth. This climate of uncertainty hinders demand, as households prefer to save in anticipation of future taxes. At the same time, banks restrict lending to the private sector to clean up their balance sheets. Therefore, the economic recovery can neither come from demand, nor from private investment, nor from public procurement. The most indebted countries are doomed to a very low growth, which further aggravates the burden of their debts. Europe cannot solve this crisis without a change of logic. If the current scenario continues, the euro will not be able to resist the centrifugal forces and the rise of populist rhetoric. Its demise will then be a matter of time.

Another way out is possible. It consists in correcting the initial imbalances of the Economic and Monetary Union project, and in completing the text of to overcome the shortcomings of the Lisbon Treaty, in order to go beyond mere coordination between Member States, as it has clearly showed its limits. It consists in denouncing, reducing and gradually cancelling the costs of non-Europe.

This requires first to circumscribe eurozone countries’ past debts by pooling part of them, as it has been proposed, among others, by the German Council of Economic Experts and the Bruegel Institute. This will lower interest rates, and give some breathing space to indebted countries. In this vein, it will be necessary to strengthen cooperation between the European Commission and national treasures within a European Tax Institute with a view to creating a European Treasury, following the example of the European Monetary Institute that preceded the creation of the ECB. This would be another step towards the eventual creation of a government of the European economy with a Federal Minister for Finance.

Then, Europe will have to boost productivity by carrying out structural reforms, in particular in the service sector, and by investing in projects that generate growth. They exist: in the transmission of energy (smart grid) and energy efficiency, in clean transport, in urban planning, in aeronautics, in nanotechnologies, in the digital industry, in cognitive research... industrialists all have advanced European-level projects like these which require funding assistance from all countries. To this end, it is necessary to create projects bonds, i.e. good debt issued only to finance future income-generating projects. The EIB can easily conduct these projects on the basis of proposals made by the European Commission.

Investors will not buy these projects bonds if the means to reimburse them emanate from a voluntary contribution of countries in the euro zone, as it would further increase the burden of their debt. Only a European tax, as part of a federal budget, will provide sufficient credibility to this new tool for growth. It could be financed by the retrocession of one point of VAT, the introduction of a carbon tax and a tax on financial transactions. With these project bonds, it will be possible to raise about 3000 billion euro to invest in future projects, boost a real and sustainable growth, offer a motivating vision of Europe and create the mechanisms needed to resolve the original imbalances.

However, no tax can be introduced without democratic legitimacy, and without overcoming the crisis of confidence between citizens and the European Union by offering Europeans a new perspective for the future. Thus, it is necessary to add a parliamentary dimension to this process: the euro cannot survive without significant political breakthrough. Federalism is the only way to avoid a major crisis that would sacrifice an entire generation. From today, MEPs from the eurozone countries must meet - being opening participation to any other MEPs who should express a desire to be associated to the debates - , and clarify the path to be followed between now and the forthcoming European elections. On the basis of their deliberations, these MEPs shall organize a summit on the future of Europe starting from the Euro zone, which will host delegations of the European Parliament and national parliaments as had been proposed by François Mitterrand to the European Parliament in 1989. This federalism of necessity will give birth to a proper political and social Europe, whose institutions will ensure a balance between fiscal and monetary policies, economic stimulation, the structural reforms needed to enhance competitiveness, and a greater social cohesion.

The survival of the Euro zone involves an economic government and a European growth budget. Federalism is the only way to avoid the disastrous consequences of its disintegration for our standard of living. It will pave the way for Europeans to Europe of justice, solidary and democratic, able to hold its place in the world.


Jacques Attali and Jean-Marie Cavada in France, Giuliano Amato, Emma Bonino, Monica Frassoni, Romano Prodi and Dastoli in Italy, Enrique Baron Crespo in Spain, Ulrike Guerot and Stefan Collignon in Germany

Your comments
  • On 17 May 2012 at 20:43, by I want out Replying to: For a federalism of necessity

    I would agree with a goodly proportion of your analysis and let’s not quibble about minor differences such as the efficacy of a financial transaction tax etc here.

    Where we part company completely is in the solution to the problem, ie federalism brought about by MEPs. I would suggest that there is absolutely no democratic mandate for such a move, indeed over the years we have had referendum results in France, Netherlands, Ireland, Sweden and Denmark against the current direction of travel despite urging of the governments of those countries. And let’s not forget the refusal to hold referendums in a number of other countries for fear of the likely results.

    The current crisis has developed because politics has got ahead of economics ie the Euro should never have been launched as it was, as now agreed by Jacques Delors ( ) Additionally the controls put in place were ignored by everyone, indeed only one country (Luxembourg) actually fully met the conditions set down to join in the first place. With that in mind do you really want to take the last leap and move into a fully federal system with so little public acceptance of such a move? What is the likely public response ?

    I would genuinely fear for public safety, not least of your problems would be political extremism from both left and right with associated wide scale lethal violence. Are you really so sure that the approximately 20% who voted for the National Front in the recent French elections would support you, what about the other nationalist parties around the Euro Zone ? Might you not be taking the final step which results in the final break up of all that you want in an explosion of violence?

    From my other comments as you might expect I would never support the UK joining a Federal Europe and neither I believe would the overwhelming majority of my compatriots, but that is an issue for us and us alone. However, I do not want to see Europe condemned to the sort of cataclysm I anticipate if this federalist step is taken without some genuine democratic authorisation.

    Given the fundamental nature of the change I would sincerely urge you to directly ask the people what they want rather than simply using the discredited political elites who are so out of touch with the ordinary folk.

    A simple question asking the voters whether they want to join a United States of Europe and to cease to be independent countries is needed. Then there is no confusion about the result.

    Please do not repeat the mistakes of the past and carry on without a proper mandate.

    Yugoslavia should be at the front of your minds when you consider the way forward.

  • On 9 June 2012 at 19:10, by Alessio Pisanò Replying to: For a federalism of necessity

    I agree with all of this. But what we need right now it is a concrete step forward by Germany on June 28th. A true YES to Eurobonds would be a real signal of European recovery. Unfortunately Germans do not look agreeing

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