The death of the EU Federalist project?

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The Death of the Federalist Project?
By Anatole Kaletsky
Thursday, May 26th 2005


Why are the people of Europe so angry? The standard answer, as the Germans, French and Dutch all turn against their governments, is that the European project has gone too far and that political elites have over-reached, losing touch with the ordinary people. Their resentment about the loss of national political control to unaccountable Eurocrats of Brussels has finally boiled over. The French may be voting Non to defend their country against a European Union which they now see as a Trojan horse for ultra-liberal Anglo-Saxon values, while the Dutch (and the Danish and British) rejectionists may be driven by exactly the opposite motive, believing that the EU Constitution is trying to ensnare them in a centralised, over-regulated, Gallic state. But far from discrediting the anti-EU movement, this diversity of opposition actually accounts for the power of the revolt.

What people are voting against is not just one or other particular clause of the constitution, nor even its general tenor, whether this is too liberal or insufficiently so. The real bugbear is the idea of any unified Constitution which attempts to impose a single system of government on the whole of Europe and purports to harmonise away the political philosophies, economic preferences and social traditions developed in different nations over hundreds of years.

But before we assume that the federalists will simply give up in desperation, it is worth considering another possible explanation for the popular revolt against European elites. In Sunday's German election, which effectively destroyed Gerhardt Schroeder's government, his recent ratification of the EU constitution was not even an issue and Europe was far from the voters' minds. Two months earlier, the Berlusconi government suffered a similar fate in Italy, a country where Euro-enthusiasm remains undimmed. Why did this happen? In our view the answer is simple: It's the economy, stupid! As regular readers may be aware, we have always argued against economic determinism in British or US politics. But that is because the British and American economies have on the whole been performing well since 1992. Continental Europe meanwhile has become an economic disaster.

The people of France, Germany, Italy and Holland may be angry about globalization or ultra-liberalism or immigration, but this anger reflects a deeper malaise. Their living standards are falling, their pensions are in danger; their children are jobless and their national pride is turning into embarrassment and even shame. In sum, they feel that their countries, which numbered among the richest and most powerful nations on earth as recently as the middle of the last decade, have gone to the dogs under the leadership of the present generation of politicians. And, at least in the economic sense, they are absolutely right.

The relative economic decline of "old" Europe since the early 1990s - especially of Germany and Italy, but also of France - has been a disaster almost unparalleled in modern History. While Britain and Japan certainly suffered some massive economic dislocations, in the early 1980s and the mid-1990s respectively, they never experienced the same sort of permanent transformation from thriving full-employment economies to stagnant societies where mass unemployment and falling living standards are accepted as permanent facts of life. In Britain, for example, unemployment more than doubled from 1980 to 1984, but conditions then quickly improved. By the late 1980s, Britain was enjoying a boom, the economy was growing by 4% and unemployment had halved. In continental Europe, by contrast, unemployment has been stuck between 8% and 11% since 1991 and growth has reached 3% only once in those 14 years.

This dreadful economic performance is more than enough to explain the political angst among Europeans. But what does it mean for the future of Europe? If Europe's economy remains paralysed, then the federalist project is clearly dead, as are all hopes of further significant EU enlargement. But if the economy recovered, the disillusionment with EU politics might quickly vanish.

What could bring about this miraculous transformation? The answer is surprisingly simple. European policymakers could kick-start growth and break the spiral of economic and political pessimism by doing exactly what America did in similar circumstances in 2001. They could drastically reduce interest rates and devalue their currency. As in Japan, interest rates could be reduced all the way to zero and the euro could be pushed down through intervention in currency markets. Such an aggressive policy of monetary stimulation could be guaranteed to revive economic growth, whether or not voters could be persuaded to endorse the labour market and pension reforms which Europe certainly needs in the long- run, but which can actually aggravate economic stagnation in the short term, as Chancellor Schroeder has learned to his cost.

There is only one obstacle to this monetary solution of Europe's problems. That is, of course, the European Central Bank. It is no coincidence that Europe's economic underperformance started with the centralisation of monetary policy under the German Bundesbank from 1991 onwards and deteriorated further with the formation of the ECB in 1999. In fact, the behaviour of the ECB has transformed the euro from a giant step towards European integration into the biggest single obstacle to the further development of the EU.

This is not the place to discuss in detail the ECB incompetence (Charles took a whole book, called Des Lions Menès Par Des Anes, to do that) which largely accounts for the economic and political malaise in Europe today. Suffice it to say that all of the major shocks to the world economy since the ECB was created have originated outside Europe - the internet boom and bust, the terrorist attacks of 9/11, the Iraq oil shock, the US corporate scandals, the rise of China... Yet in every case, the euro-zone has suffered more economic and social disruption than America, Britain or Japan.

If Europe's leaders want to revive any hope of EU integration - or even if they just want to save their own political skins - they have one obvious recourse. The first order of business in any revision of the European Constitution must be to change the objectives of the ECB and bring central bankers under the explicit political control which is taken for granted in Britain, America and Japan. Imposing some political discipline on the ECB would not guarantee popular support for EU integration, but it would at least acknowledge to voters that Europe has now suffered from a decade of economic incompetence bordering on sabotage.


johnmauldin@investorsinsight.com