RETHINKING EUROPE

Edited by Jonathan Eyal

The Federalist Choice for a Continent in Crisis

Royal United Services Institute

OCCASIONAL PAPER

Occasional Paper, May 2012

Rethinking Europe
The Federalist Choice for a Continent in Crisis

Edited by Jonathan Eyal

www.rusi.org

The views expressed in this paper are the authors’ own, and do not necessarily reflect those of RUSI or any other institutions with which the authors are associated.

Comments pertaining to this report are invited and should be forwarded to: Dr Jonathan Eyal, Director, International Security Studies, Royal United Services Institute, Whitehall, London, SW1A 2ET, United Kingdom, or via email to jonathane@rusi.org

Published in 2012 by the Royal United Services Institute for Defence and Security Studies. Reproduction without the express permission of RUSI is prohibited. About RUSI Publications Director of Publications: Publications Manager: Adrian Johnson Ashlee Godwin

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Contents
Foreword Lord Mandelson Introduction: When Democratic and Fiscal Deficits Combine Jonathan Eyal Future Constellations of Europe: Strategic Reflections Werner Weidenfeld The Democratic Inadequacies of the Proposed Fiscal Compact Declan Ganley v 1 11 17

Alexander Hamilton and the Debts that Helped Create the United States 23 Declan Ganley and Brendan Simms Could America’s Founding Fathers Save Europe? Joel Faulkner Rogers and Sean Kirwan A Sceptical Perspective Malcolm Rifkind Europe’s Halfway House Michael Stürmer 27 37 43

Foreword

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ELMUT Kohl once said that the question of European Union was the question of war and peace in the twenty-first century. This sounds exaggerated in part because it has turned out to be true. European integration has transformed Europe in the course of half a century. It has made military conflict between the states of Europe all but inconceivable. And because it is inconceivable, we take its absence for granted. The European Union poses much more troubling and ambiguous questions today. Kohl’s Europe enters the second decade of the twenty-first century in bad shape. At the heart of its problems is an inadequately designed currency union, the weaknesses of which have been terribly exposed by the 2008 banking crisis and the subsequent crisis of sovereign debt. As I write, Greece wobbles on the edge of this currency union, effectively a ward of the EU and the IMF. Most observers now accept that the Eurozone’s flaw was the attempt to create a single currency without the political and fiscal union to support it. Many argue that the only way to resolve the Eurozone crisis now is to take that step into fiscal union. Yet we also know that the reason this union was never seriously attempted in the 1990s is because Europeans remain ambivalent about political federalism in Europe, no matter how successful European economic integration has been up to this point. Europe has solved the war and peace question in the twentieth century, but Europeans are less sure what question the Union is there to answer in the twenty-first. In reality the European sovereign debt crisis and the prescription of a big new leap into fiscal union has exposed the other crisis in Europe – political legitimacy. The challenge for the EU now is to overcome the Eurozone debt crisis in a way that helps resolve this ambiguity, rather than making the crisis of legitimacy worse. This collection of essays deals with precisely this challenge and these questions. How powerful is our sense of European political identity? Can political federalism work in Europe? Can Europe learn from America’s experience of continental federalism? Is Europe’s problem a democratic or delivery deficit at the level of European institutions, or is it a more profound issue of identity and solidarity? If we take the task of securing some form of European Union for the twenty-first century seriously, these questions will have to be answered before we are done. Lord Mandelson Former UK Cabinet Minister and European Commissioner

Introduction: When Democratic and Fiscal Deficits Combine
Jonathan Eyal Europe is rapidly approaching one of the most critical decisions in its postwar history: it can either offer an unlimited amount of cash to failed states such as Greece thereby unleashing high inflation, or it can start ejecting some countries from the euro, and risk the collapse of the continent’s single currency. In both cases, the amount of social and political dislocation which Europe will experience is bound to be unprecedented; quite literally, the continent will be reinvented, almost regardless of which one of the two main options is ultimately adopted. European leaders still like to pretend that the crisis is temporary and containable; plenty of weasel words are being uttered about the crisis being ‘imported’ from the US and being exacerbated by those nasty ‘Anglo-Saxon speculators’ who have taken it upon themselves to destroy Europe for no other reason than, well, they are Anglo-Saxon. François Hollande managed to get himself elected as France’s president with the simple message that handling the crisis was just a matter of the triumph of the will: one can simply stare back at those nasty ‘speculators’ and they will just go away. In fact, the real problem lies with a euro project which was always misconceived. And, as secret German diplomatic documents recently made public indicate, the warning signs were there from the start, known to all the politicians at that time, but still ignored. The history of the euro is a copybook case on how not to construct a continent-wide policy. Told You So It is by now largely forgotten that, when the idea of creating one currency for Europe was first mooted over two decades ago, leading economists reacted with astonishment. In a memorable article published in 1992 in The Economist, Professor Martin Feldstein from Harvard University predicted with astonishing accuracy Europe’s current crisis, largely based on his analysis that a euro currency unit without a single government or a single national budget was bound to fail. But as Feldstein and all his colleagues soon found out, Europe’s leaders were simply not interested in their views. For the impetus that led to the continent’s monetary union was politics at its most basic: raw emotions. In essence, the euro was the result of a deal under which a newly reunified Germany gave up its own currency in order to reassure the rest of Europe that it had no intention to become the dominant power. It was a deal hatched between French president François Mitterrand, born during the First World

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War and obsessed with the tragedies of the Second World War, and German Chancellor Helmut Kohl who believed that his own Germans are part-nation and part incurable disease, people who must have their hands tied behind their backs, for otherwise they would unleash another war. Both leaders knew that the euro amounted to the riskiest project the EU had ever undertaken, as well as being the most audacious currency innovation since the establishment of the US dollar in 1792. But so were the anticipated political rewards: a common currency resulting in a true European union. And the parallels with the US greenbacks made the effort even more worthwhile: European politicians felt giddy at the idea that the euro might supplant the US dollar as a global reserve currency. Compared to such a grand vision, the question of whether the euro could actually work seemed trivial. The historical context of the time when the euro was hatched is the only explanation why otherwise intelligent and educated people fell for such schemes. For these were the heady days immediately after the end of the Cold War, the time when the West’s political model appeared triumphant. European leaders genuinely believed that they walked on water, that they could shape their destiny in any way they wished. Ironically, therefore, just when communism died in Eastern Europe, just when Karl Marx appeared discredited, Western Europe embarked on its biggest Marxist exercise: that of creating a currency which defied all sound economic or political logic, on the assumption that politicians dictate markets, not the other way around. Karl Marx must be smiling from his grave. The Maastricht Treaty which eventually led to the creation of the euro did contain some safeguards: the currency is run by a fiercely independent European Central Bank (ECB), countries which behave irresponsibly cannot expect to be bailed out and penalties are to be applied on nations which exceed specific budget deficit criteria. However, as John Maynard Keynes once warned in the context of the post-First World War settlement, ‘treaties often solve one problem, but cause the next’. And so it proved. The ECB’s narrow mandate to ensure just price stability without any reference to problems such as unemployment or economic growth became part of the euro’s problem. So did many of the targets which Eurozone governments were expected to meet. The problem here is not so much that the safeguards were not adhered to – although they were not – but, rather, that the targets were often plucked out of thin air, with no basis in either sound analysis or classic economic theory. The definition of price stability in the Eurozone as an increase of no more than 2 per cent yearly is one example of such supposedly ‘scientific’ economic targets gone mad. No modern Western economy ever achieved

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this consistently, over a long period of time. In the decade preceding the introduction of the euro, price inflation in the US averaged 3.3 per cent, and in Germany it was 2.8 per cent. So, a totally unaccountable institution like the ECB was tasked with the job of achieving what, at least according to standard historical performance, was ultimately unachievable. The same applied to the famed limit on budget deficits, which was set by treaty at 3 per cent of gross domestic product. Few now remember that this figure was actually simply invented by President Mitterrand in France during the 1980s, and nobody ever explained then – or ever since – why it was significant. In what way would, say, a deficit of 4 per cent of GDP be destabilising to the euro system? No answer was ever provided; the figure became one of Europe’s fetishes, and remains so to this day. Paradoxically, therefore, while the political leadership of the euro remained non-existent, the statistical straightjacket proved too tight. Still, the euro could have worked, had it been limited to a core number of nations whose economies and government standards were roughly similar. But, as hitherto secret German diplomatic documents released for the first time in early May indicate, the decision was taken early on to admit almost everyone into the euro, regardless of their economic condition or record of financial performance. When Germany’s finance ministry warned the country’s leader in 1998 that the admission of Italy into the Eurozone carried ‘enormous risks’, the response from Chancellor Kohl was dismissive: ‘we all share a certain love for Italy’, wrote his top adviser at that time, in an effort to explain why his boss was not prepared to look at the economic facts. The German magazine Der Spiegel, which obtained these secret documents, calls the decision to admit everyone as ‘Operation Self-Deceit’. And for good reasons: it rebounded on the Germans, and may yet doom the euro altogether. Southern European economies have suffered from deep structural problems well before the introduction of the euro: Italy’s governance was always faulty, Spain’s unemployment rates were always higher, and Greece had been in default of its debts for nearly half of its history as an independent state. Yet all were admitted into the euro in the hope that the new currency would persuade them to change centuries-old bad habits. Nothing of the kind happened. The abundance of credit allowed everyone to avoid making structural reforms. And, because interest rates were roughly the same across the continent, nobody noticed that some countries were sinking. The result was that, by the time the crisis struck, Greece was already beyond salvation, while Italy was too big to bail out. Greece Slides Out Although few dare say so publicly, most European leaders now privately accept that the unthinkable is about to happen: Greece will have to leave

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the euro currency. Financial markets are already making preparations for an event they nickname ‘Grexit’. Still, the manner by which Greece departs from the Eurozone and the way the aftermath of crisis is handled will shape Europe’s destiny for years. The continent’s biggest political tests are just beginning. In theory, Greece can still pull back from the brink. Fresh elections in June could produce a government pledged to respect the nation’s obligations. Furthermore, there is no provision in the existing European treaties for a country to abandon the currency. But the reality is that the battle for the soul of Greece is already lost. Two-thirds of the country’s voters seem to support parties determined to stop repaying the country’s debts, while claiming that they also wish to keep the euro. In effect, a majority of the Greek nation wants to have its cake and eat it. The culprits for this curious outcome are Greece’s own politicians, who generated and sustained a collective mood of self-denial. A large number of ordinary Greeks genuinely believe that their country is merely a victim of a ‘plot’ by bankers, who first encouraged Greece to borrow excessively, and are now lending further money at huge interest rates in order to recover their debts. The fact that Greece itself is responsible for its excessive borrowing, or that the country has benefitted from the largest single bailout in history impresses very few. Nor do many Greeks seem to understand that the €200 billion in additional help given to them over the past two years is the hardearned money of other European taxpayers; the view from Athens is that these are funds plucked out of thin air by ‘fat bankers’. Germany, which provided the bulk of the bailout money, gets no gratitude either; some Greeks believe that the Germans should offer the cash for free, as ‘compensation’ for the Second World War. It is now impossible to reverse this poisonous Greek narrative. And it is equally impossible to see how any Greek leader can persuade his own nation to stick with austerity policies which have already slashed the nation’s wealth by a fifth and promise to do exactly the same again by the end of this decade. The conclusion is, therefore, inescapable: default is looming. More ominously, the default will not come in an orderly fashion, as the result of negotiations, but will be a messy affair. Greek politicians such as Mr Alexis Tsipras, the youthful leader of Syriza, the radical left movement which sprung out of nowhere, assume that they can blackmail Germany into continuing to offer cash without preconditions. The defeat suffered by German Chancellor Angela Merkel in recent local elections is also interpreted as a move away from the policies of austerity which she is alleged to have foisted on the rest of Europe. But while a weaker Merkel government may signify a greater German readiness to relax

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austerity conditions on other European nations such as France or Spain, it does nothing for Greece. German voters are not clamouring to hand over their money to the Greeks and, with Greece accounting for only 2.3 per cent of Europe’s economy, the country is dispensable. Indeed, making an example out of Greece by rejecting any concession is almost guaranteed to be Chancellor Merkel’s way of showing to the rest of Europe that Germany should never be taken for granted. The Greek default may come as soon as this summer, when the country has pledged to cut another €11 billion out of its government expenditure, something which is highly unlikely to happen. If the EU stops offering money then, Greece will default almost immediately. Needless to say, Greek politicians will blame Germany for this outcome, although the blame will be entirely theirs. What follows after that amounts to – as one EU official poetically put it – ‘a jump into the abyss without a parachute’. A Greek default could trigger a Europe-wide panic, leading to the collapse of Europe’s currency and a global economic crash. But there are good grounds for believing that this is too alarmist. Most of the Greek debt is already in the hands of European governments or the European Central Bank, which means that Greece’s default will not spell a European-wide banking meltdown. Greek banks will, of course, collapse. The country will have to issue a new currency, which will promptly crash. It will also have to temporarily close its borders in order to prevent capital from fleeing. And, as unemployment soars, the chances of civil strife inside Greece are high. The technical difficulties which could be created by a Greek default remain mind-boggling. But although they all deny it, European governments have spent months secretly preparing for such an eventuality. Nor would it be surprising if we discover that Greece has already printed an alternative currency: most countries keep alternative bank notes in storage for a national emergency, and it may not have been entirely by accident that the Greek national bank upgraded its British-made printing presses last year. The key for the rest of Europe will be to make sure that a Greek default remains confined to that country. This will mean that other vulnerable nations, such as Portugal or Spain, would immediately be offered additional bailout funds even if they did not need it; the purpose should be to reassure people that countries which observe their obligations retain the benefits of Europe’s single currency. In the process, Europe’s credibility will suffer a permanent blow: it will be impossible for the continent to claim that it is an ‘oasis of stability’ after allowing one of its members to default. So, for decades to come, Europe will have to pay a risk premium on its borrowing. Still, Jens Weidmann, the head of Germany’s central bank, the Bundesbank, was probably right when he recently pointed out that ‘for Greece the

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consequences would be much more grave than for the rest of the euro zone’. Investors will conclude that Greece was a uniquely horrible case, and that the country’s fate need not be replicated elsewhere in Europe. Ironically, however, Greece will not escape its obligations by defaulting. If it wishes to remain part of the EU, the country will still have to repay every cent it owes and may have to do it the hard way, with its own devalued currency. The Greeks will also be unable to borrow, so they will be confronted by the rather unusual experience of having to live within their means. The nation which invented the word ‘tragedy’ should grasp this situation pretty well. And, as most Greeks recall, powerful tragedies are invariably followed by catharsis, the cleansing and purging of the soul. ‘Austerity’ versus ‘Growth’ But, while the Greek drama unfolds, another battle is now coming to the fore over the possibility of offering mutual debt, contracted and sustained by the Eurozone states. The so-called Eurobonds would essentially offer a German guarantee, allowing weaker countries such as Spain or Italy to borrow at lower interest rates. The principle, as President Hollande put it, ‘is one of European solidarity’. International Monetary Fund chief Christine Lagarde added her voice to this chorus: ‘More needs to be done, particularly by way of fiscal liability-sharing’ she told a press conference this week. Yet Germany, together with a dwindling group of small northern European countries, remains adamantly opposed, mainly because it believes that Eurobonds would only make Europe’s current troubles much worse. The first snag with the Eurobond concept is that it is actually illegal: under the Maastricht Treaty (Article 125) governments are precluded from guaranteeing each other’s debts precisely in order to ensure national responsibility for borrowing choices. Given appropriate political will, ways around this ban can be invented. After all, European governments have already circumvented treaty obligations by creating a fund to save nations from bankruptcy, and there is no reason why this fund could not issue Eurobonds as well. However, matters may not be so simple in Germany, where the country’s constitutional court has taken an increasingly jaded view of such operations; should the court decide to strike down the Eurobonds as illegal, this could send shockwaves throughout Europe’s financial markets, potentially even tearing the euro currency apart. Yet for German chancellor Angela Merkel, the political hurdles remain far more compelling than the constitutional ones. Opinion polls in Germany indicate a rapidly-growing disenchantment with the euro; one poll shows that a majority of German voters now consider the euro a mistake. And

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huge majorities oppose the use of any additional German cash to bail other nations. However, even if Dr Merkel was willing to ignore these public opinion trends, the costs involved in creating Eurobonds are mind-boggling for her country. By assuming responsibility for the debt of other countries, Germany will lose its top triple-A credit rating, since its overall debt liability will increase. In effect, therefore, the Germans will pay twice: to cover debt liabilities should others default, and for higher interest rates demanded on Germany’s own borrowing. Mr Otto Frick, the budget expert from the German Free Democrats, the junior partner in the coalition government, estimates that higher interest charges alone will add €15 billion ($24.2 billion) a year to Germany’s government expenses. Eurobonds ‘will drag us all further into the debt swamp’, Mr Frick concludes. Yet by far the biggest objection to the scheme is practical: it does nothing to resolve Europe’s long-term debt problem, and could actually make it worse. Europe has already experienced a de facto Eurobond during much of the last decade, when all the countries operating the same currency were able to borrow at similar and very low rates because investors assumed – wrongly as it turned out – that Greek or Portuguese debt was as safe as Germany’s. The result was a disaster: in Greece the government borrowed and spent as though money was going out of fashion, while in Spain or Ireland, ordinary citizens did the same, and ended up dragging their national banks down. The moral of the story is that having one borrowing rate for the continent was a key factor in the crisis: countries which fail to administer their finances properly should expect to pay more, and inventing Eurobonds in order to keep borrowing costs down is precisely what should not be done. Besides, there is no evidence that the extra borrowing which will be financed through the proposed Eurobonds will encourage economic growth on the continent. Indeed, precisely the reverse may be true: once granted access to fresh lending, European governments will be tempted to postpone politically-difficult reforms, just as they have done since the 1960s. ‘Growth financed by debt? Those are the recipes from the day before yesterday’, says Ms Maria Fekter, the uncharacteristically blunt finance minister of Austria, one country which supports Germany. ‘The arguments that France’s new president François Hollande is putting forward are nonsense, and got us into this whole mess in the first place’, Mrs Fekter adds. True, the German chancellor is increasingly cornered. At the recent G8 summit in Camp David, US President Barack Obama and British premier David Cameron urged her to flood Europe with fresh cash, or ‘inject liquidity into the system’ as the more innocuous, technical term has it. Throughout

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Europe and particularly in France, newspapers dismiss Dr Merkel’s behaviour as that of a housewife who supposedly can do nothing more sophisticated than just count the coins in her piggybank. Worse is still to come – at least from her perspective – in the run-up to a European Union summit scheduled for the end of June. But it is highly unlikely that the Germans will countenance a Eurobond issue, unless the entire Eurozone is breaking up. Dr Merkel is criticised for doing too little and too late, but there is a reason for this: the crisis is not of her making, her taxpayers have no interest in bankrolling others, European solidarity is non-existent, and the institutions which are meant to underpin the system are not fit for the purpose. An Even Grimmer Future The euro may survive, even if – as seems increasingly likely – Greece is evicted from the system; the only way a currency zone like the euro dies is if its biggest member – Germany – loses interest in it, and that is highly unlikely, for a whole host of historic reasons. Still, whatever happens, the original objectives of the enterprise already lie in ruins: • The euro was meant to push Europe towards a political union. Nothing of the kind happened: the institutions created since the Maastricht Treaty are all top-down, and lack democratic legitimacy • A single currency was supposed to buttress a European identity, through a reduction in wealth disparities. In fact, it has done precisely the opposite, by splitting the continent between ‘haves’ and ‘have-nots’ to a degree never encountered before • The euro was intended to remind Europeans that their political creation is synonymous with economic prosperity. But the currency is now associated with decline • A single currency was supposed to reduce transaction costs, consolidate banking services and strengthen Europe’s position as a global financial hub. But it was London – outside the euro – which benefitted from the explosion in financial services. Transaction costs between European banks have not been reduced • The euro was designed to improve intra-European trade. It has done so, but the biggest trade growth for Germany today is not Europe; it is China and other parts of Asia • A single currency unit was touted as Europe’s way or remaining relevant on the world stage. But Europe’s global decline has accelerated, and the euro is far from being regarded as a world reserve currency • Finally, the euro was designed to prevent rivalry between individual countries and, most particularly, to prevent the idea that Germany dictates on political and economic matters in Europe. But that’s precisely what Germany now has to do, out of necessity rather than choice.

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Seldom before has there been such a comprehensive failure. But that is what happens when an abstract idea is pushed forward by a small group of leaders obsessed with exorcising the ghosts of history, rather than handling present realities. Dr Jonathan Eyal is a Senior Research Fellow and Director, International Security Studies, at RUSI.

Future Constellations of Europe: Strategic Reflections
Werner Weidenfeld

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UROPE has a succinct code word: ‘crisis’. These phenomena of crises have become part of everyday life; the routine. There are debt crises, euro crises, decision-making and approval crises. This inflation of apocalyptic doomsday forecasts serves only to spread concern in an environment already abundant with anxious perceptions. You can almost hear the ironic response, ‘which trauma do you fancy today?’ Europe lives with its contradictions – alongside its considerable difficulties stand equally numerous achievements. Concern for the common currency can be countered by a reminder that the euro remains the second most important reserve currency of the world, with a high degree of stability. There are complaints about ‘a normatively disarmed generation of breathlessness’ that allegedly causes ‘Europe to remain in a frightful rigidity’ (Jürgen Habermas). The ‘incapacitation of Europe’ by the ‘gentle monster’ of the Brussels bureaucracy is being criticised. Some exclaim, ‘Europe, where has your magic gone?’, yet advocates of this Europe maintain their entrepreneurial spirit. However, does the continent currently have genuine self-perception? Stages of Evolution What kind of political substance is behind the hysteria of our days? The history of the European project has seen several periods of crisis when the rationale for integration has been questioned. However, until now, an answer has always been found to inject immense vitality into the project. This is what is missing today. This is the defining feature of the new epoch – the absence of an identity forming target. However, all political systems lack the ability to act without the foundations of a solid identity. It is worth reflecting on the previous stages of European integration. Immediately after the Second World War, the continent was interwoven with multiple interconnected groups, all eager to learn the lessons of history and ensure that nationalist wars and catastrophic disasters were not to prove their sole historical legacy. From then on, this continent marked by wide trails of blood was meant to seek and realise the alternative to nationalism: the unification of Europe. Extremely demanding goals were set; political union and a European federal state among them. After all, numerous resistance groups in the Third Reich had already reflected on this and had provided conceptual drafts. At first,

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however, this great ambition took only a humble step, not least due to Great Britain’s reluctance, and it was only in 1949 that the Council of Europe was finally founded. This, however, was not a great success at the supranational level. Another method was applied in order to achieve this goal; modest and specific functions were to be integrated. Subsequently, Robert Schuman and Jean Monnet presented functionalist approaches for the European Coal and Steel Community. In this way, the former war-time enemy, Germany, could be controlled without being discriminated against. The impressive success in establishing the ECSC led to similar attempts in the defence field, but the EDC failed in 1954. Nonetheless, having a precisely defined objective helped in times of crisis. Alternative, functionalist solutions were ordered. In the defence arena, the sovereignty seeking Federal Republic of Germany found other security policy anchors, namely NATO and the WEU. In the so-called ‘Spirit of Messina’, the European Economic Community (EEC) and the European Nuclear Community (EURATOM) were negotiated in 1957. On the other hand, due to the existence of a clear objective, the fundamental conflicts between France and the Federal Republic of Germany became resolvable. Corresponding with Bonn’s wishes, France created a common market space, and, in-line with Paris’s own wishes, the Federal Republic of Germany accepted the nuclear component should be removed from military control. The intent was to achieve the extremely ambitious targets of the Treaty of Rome. The first significant disagreement over these goals led to the first integration crisis. In 1961, the US and Great Britain signalled their readiness to submit to pressure from the Soviet Union concerning the status of Berlin. To Adenauer and De Gaulle, this implied a threat to the existence of a liberal Western Europe. A political union with a security policy component was meant to provide an answer – as suggesting in the so-called Fouchet Plan. However, the remaining EEC countries, which had become distrustful in the meantime, did not want to follow this leadership. Adenauer and de Gaulle thus created a less ambitious alternative solution, the Franco-German Friendship Agreement, which was incomprehensible even in German domestic political circles. The fading purposefulness of the project ‘Europe’ led to several years of stagnation and crisis. The ‘empty chair crisis’ was partially resolved by the socalled Luxembourg Compromise of January 1966; although dissent remained over its interpretation, it constituted a significant symbolic message. Despite the continuing East-West conflict, this vague, perplexing arrangement did not allow for the same type of integration dynamics that had previously existed.

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The crisis-like exacerbation of the decline became known by the biting and widely accepted label of ‘Euro-sclerosis’. At the end of the 1970s and early 1980s European integration entered an era of profound decline. Europe was no longer able to keep pace with the dynamic international markets; it seemed exhausted, a museum exhibit relic. Federal Chancellor Helmut Kohl and French President François Mitterand recognised the urgent need for a strategic departure, but an accordingly gifted political actor was required from within the European institutional system. They found this personality in Jacques Delors. He was a strong French finance minister and most people saw him as the future French President. However, in 1985 he accepted the presidency of the European Commission. As an initial step he informed the heads of state and government that he intended to strategically consider the situation for some time. After several months of reflection he presented his conclusion: Europe needed a grand historical task. This could either be the reorganisation of security or completion of the single market. In his opinion, Europe had the strength to fulfil only one of these big tasks. The single market was adopted as the strategic objective, requiring the implementation of almost 300 bodies of law over a period of several years. The public was persuaded by the statistics and arguments presented by the comprehensive Cecchini Report in 1988. The adopted course was to be followed for several years. The lessons from this example should be considered in relation to the current challenges: Europe needs strong political leaders and strategic thinkers. Politicians must explain the necessary steps, within a strategic framework, in order to sustain momentum and public support. The conclusion is obvious: European politics must eliminate the explanation deficit. Much more time and energy has to be spent on explanation. Whoever wins the battle of perceptions will win the future. Whither Europe? But what alternative futures exist for Europe? There are indications suggesting five different scenarios, demonstrating just how open Europe’s future really is. Scenario 1: ‘The Titanic’ The Titanic scenario describes a substantial threat for European integration, which in the worst case could lead to its dissolution. According to this scenario, the European Union is not able to address the internal and external challenges. The diverging interests and economic performance between new and old member states increase dramatically. The heterogeneity of member states and competition among them appear unbridgeable. National egos are aggravated by the severe global economic crisis. The fear of recession leads to nationalistic, protectionist reflexes, and the exploding budget deficits disperse the financial European solidarity of the member states’ citizens and governing elites alike.

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Scenario 2: Exclusive Core Europe The scenario of an ‘Exclusive Core Europe’ assumes a lack of consensus among the member states concerning the future development of the European Union. At the same time, the EU’s inability to confront the pressing economic and security policy challenges prompts its citizens to lose their identification with the very idea of a unified Europe. However, an exclusive group of states remain committed to intensifying intergovernmental co-operation. Cooperation within the contractual framework of treaties fails, due to the policy of obstructionism by the periphery member states. Frustrated by the EU’s constant paralysis, this core group of states adopts intergovernmental cooperation as the only realistic way to represent common interests worldwide. Scenario 3: Monnet Method In the ‘Monnet Method’ scenario, the future development of the European Union follows the pattern of previous decades. The EU can only partially confront the internal and external challenges. The Treaty of Lisbon merely cures the symptoms of Europe’s political inability to act, without getting to the very heart of the problem. The conflicts of interests and distribution disparities of the member states persist or intensify with every enlargement and every economic crisis. As a whole, the EU system appears lethargic, but still not paralysed. The single market, the Schengen regime, the monetary union as well as the awareness that the process of European integration has brought peace and stability to the old continent hold the Union together. Scenario 4: Open Area of Gravitation According to this scenario, an avant-garde committed to the community method pursues the objective of continuous immersion in integration. The centre of gravity is constituted by the group of countries that participate in most of the integration projects. For these advocates of substantial reform, the Treaty of Lisbon is only an interim stage on the road to a political union. As not all member states are committed to this approach, multiple-speed integration becomes the central defining feature of the enlarged Europe. Member states are enabled to advance their co-operation in specific policy areas, both new and old, within the EU’s contractual framework. The possibilities for ‘enhanced cooperation’, offered by the Treaty of Lisbon, are utilised. Scenario 5: Superpower Europe In the superpower scenario, Europe fulfils its global power potential. The European Union exploits its material and institutional resources to the full extent. Economic efficiency, population numbers, military potential and the European system of values offer the EU a substantial basis for action. Building on the successful implementation of the Treaty of Lisbon, other reform steps are taken to improve the EU’s efficiency, ability to act and transparency. The enhanced comprehensibility of the EU system as well as the ability to

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meet the internal and international challenges positively impacts upon the acceptance of the Union by its citizens. In addition, the increasing crosslinking of societies encourages genuine public debate of ‘European issues’. The construction of intermediary European structures like media and nongovernmental organisations leads to the establishment of a pan-European demos as a foundation for a European civil society. On the basis of a growing sense of unity within the context of a Europe of citizens, the EU continuously develops towards a political union. Those who bear these five scenarios in mind understand that the future of Europe is not predetermined. Each of these five scenarios can become a reality for the next generation; just as a mixture of factors from different scenarios can come true as well. However, one conclusion is unavoidable: the reorganisation of power is on the agenda. The European profile will only be sharpened if the Union increases its ability to act. Though the Treaty of Lisbon established an arsenal of leadership posts, the allocation of their authority is left open. President of the European Council, President of the Council of Ministers, President of the Commission, High Representative for the Common Foreign and Security Policy, Chairman of the European Council – all these posts co-exist in parallel to each other. The heads of state and government of the larger member states, as well as the European Parliament, which has recently acted more self-confidently, interfere in this jungle of leadership responsibilities. An effective, targetoriented decision-making process cannot be organised in this manner. Effective and experienced leadership are somewhat different. Therefore, the reorganisation of power is on the agenda in Europe. The decision-makers, who are traditionally in favour of integration, want to further strengthen the Commission and Parliament. The European Parliament has been the real winner in all new treaties since the foundation of the EEC in 1957. From its point of view, this is how things should go on. It flexes its competencestrengthened muscles. Its new president, Martin Schulz, declared war on ‘summit politics’. However, the actual impetus for the Fiscal Compact emanated from the governments of larger Eurozone member states. Germany and France have formed a leadership tandem. At the onset of the current crisis, they did not have the same opinion; their political and economic cultures are too different to allow for that. However, both recognised that an adequate response to the crisis could only be found if they both jointly took the initiative. And that is exactly what happened. Yet, many immediately questioned whether Germany had taken over the actual leadership and whether this was appropriate. The usual political dialectic was triggered: if there is lack of leadership in Europe, it will be claimed; if leadership is exercised, it will be criticised and deplored. It was not unintelligent for France and Germany to repeatedly integrate Italy, governed

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by Mario Monti, in this leadership circle. Great Britain represented another special case. Entirely in accordance with its traditional policy, it said No to a Community Treaty regarding the fiscal union. However, also in line with its tradition, it participated in the elaboration at the working level. In summary, it becomes clear that it is more than ‘just’ about the fiscal union or ‘just’ the improved governance of the Eurozone. It is about a dramatic power struggle in Europe. On the surface, there are appropriate smiles in front of the cameras, but there is a tough fight for influence behind the scenes. The leadership structure of the European Union needs additional clarification beyond the struggle of the member states for power and influence. However, Europe also has to advance its leadership culture. The continent’s power structure cannot simply uphold what was once valid for a European Economic Community of six member states. The considerably larger Europe has to be organised in a more nuanced way. Therefore, in the medium-term, the fundamental structural problem of international politics remains: a discrepancy between globalised challenges, partly international and partly national decision-making structures, and mostly national legitimating structures. This discrepancy stresses the key deficit of present-day politics. The drama is tangible day by day: Europe is experiencing a historical turning point. The pivot can be compared to the most important turning points in history. The struggle for imperial hegemony of earlier epochs and the experience of big military disasters all gathered similar dimensions of political depth like the first steps of the success story of integration. The large power apparatus of the European Union is confronted with the question of its legitimacy. The answer to this question will determine the scenario of future Europe. Dr Werner Weidenfeld is Professor of political science and Director of the Centre for Applied Policy Research at the Ludwig Maximilian University in Munich.

The Democratic Inadequacies of the Proposed Fiscal Compact
Declan Ganley

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OWARDS the close of the politically tumultuous eighteenth century, Edmund Burke, the Irish intellectual giant of European and North American politics, assessed the modern era’s first attempt at unifying Europe under Napoleon’s Grande Armée. Burke, the vociferous defender of the values inspiring the American struggle for independence and individual liberty, recoiled at what he saw as the product of the French Revolution, the very antithesis of liberty. He was not merely a polemist when he wrote his Reflections on the Revolution in France. He combined philosophy and a feel for the sweep of history into political positions that were pragmatic and practical; they were capable of being adjusted without losing their intellectual consistency. Burke saw Europe, under the spell of Jacobin France, falling under despotism disguised as shallow political promise, the cynical hijacking of liberté, égalité and fraternité wrapped in the mantle of the all-powerful centralised state. Burke could see that the Jacobins were totalitarian. They claimed to know all, and to be the sole arbiters of all that was right and all that was wrong. If you opposed them, you were the enemy. Loyal opposition was an alien concept. Constructive criticism of the Jacobin system was more likely to result in you losing your head to the guillotine than being appreciated for seeking improvements in government. Thus, intolerance for those that challenged it became the hallmark of the all-powerful centralised state. Burke represents the sort of approach we need now, as we consider the current revolution the European continent is about to undergo. His innate conservatism is not the point; his clear-sighted ability to hold onto a centralised idea, and articulate a pragmatic political approach to it, is precisely what European leaders now need. Burke saw those who challenged the consensus and status quo differently, saying: ‘He who wrestles with us strengthens our nerves and sharpens our skill. Our antagonist is our helper.’ In the UK, the argument between so-called ‘Europhiles’ and ‘Eurosceptics’ is frankly childish and misses the bigger picture. Burke would have understood that developing the bigger picture means dealing with the particulars and taking the trouble to look at the historical dynamics, what makes the issue tick; not political point-scoring to bolster a case that politicians feel more in their water than their head. Burke had no time for ‘vulgar and mechanical politicians’, only those who took the trouble to think hard and sweat the detail were qualified to be ‘directors of the great movement of empire’. He would

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have recoiled at the way European politics has once again turned Jacobin. It proactively rejects the idea of a loyal opposition, and its bureaucracy is quick to label as ‘anti-European’ all that dare question it. An environment has been fostered in which political parties and governments across Europe must subscribe to this ‘groupthink’ that is almost always reduced to the lowest common denominator. The achievement of excellence in any field of pursuit is thus stifled by the very design of the European Union. It has resulted in the shrinking of democracy, the silencing of loyal opposition, the devaluation of the individual over the collective, the diminution of competition, of merit and innovation; and now, even the start of an asset-stripping of current and future generations of Europeans in order to subsidise the failure of private corporate interests. Those interests benefit from the symbiotic relationship between some large insolvent financial institutions and many large insolvent member state governments throughout the EU. The fact is that Europe, unluckily saddled with unfit leadership, finds itself suffering from a grey-suited tyranny of the mediocre. This is manifest in the failure of the Union’s leadership to construct those proper institutions and laws so urgently required to save Europe from the economic spiral into which it currently descends. Following the farce that was the Lisbon Treaty – a treaty that even ex-French President Nicolas Sarkozy recently admitted had failed and is not fit for purpose – the latest fiscal compact is another exercise in empty posturing. It simply will not come even remotely close to solving Europe’s economic crisis, designed as it was in the halls of Berlin and Paris with one primary objective in mind – to placate electorates being fed stories of ‘lazy Greeks’ by the tabloid press. Rather than level with their electorates, leaders have continued a charade to feed Europeans the placebo of a treaty with rules that are already in place under Maastricht, but transferring so much sovereignty from individual states to the Union that even euro-devotee Peter Mandelson called it ‘the largest measure of sovereignty that European leaders have so far contemplated collectivising’. That such sovereignty can be transferred in such a cavalier manner without regard to the democratic accountability owed to the citizens of Europe, is, in a word, shameful. And it is bitterly ironic that transferring this power to the centre and its entity, the European Stability Mechanism (ESM) that is literally above the law, will do nothing to solve Europe’s economic crisis. It is instructive to quote the ESM treaty on legal immunity, from Article 32: ‘The ESM, its property, funding and assets, wherever located and by whomsoever held, shall enjoy immunity from every form of judicial process except to the extent that the ESM expressly waives its immunity for the purpose of any proceedings or by the terms of any contract, including the documentation of the funding instruments.’ The fiscal compact is the

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definition of bad law and, in the words of Burke, ‘bad law is the worst sort of tyranny’. Europe is in dire need of courageous leadership. We need to get back to the business of taking risks, of being prepared to embrace ‘the freedom to fail’, both in our banking and private corporate institutions and in our politics. The siren cry of French President François Hollande’s ‘growth’ is just another false promise. Growth does not come from governments protecting failed companies or imposing more taxes or expanding themselves even further. Destroying competition and distorting markets by suffocating innovation and stifling broad-based small enterprise job creation are always the end result of such a policy. Brendan Simms has written perceptively that Europe is in the midst of a fundamental crisis of democracy. The growth of ‘economic governance’, he says, ‘threatens to disenfranchise whole peoples’. Since the economic crisis of 2008 began to impact across the continent, the ‘gradualist fallacy’, says Simms – that somehow a united Europe would be built brick-by-brick in some sort of functionalist way – has been brutally exposed. In fact, ‘the historical record shows that successful unions have resulted not from gradual processes of convergence in relatively benign circumstances, but through sharp ruptures in periods of extreme crisis. They come about not through evolution, but with a “big bang”’. This was how the Federalists in the United States perceived their own situation when they came together in Philadelphia in 1787. They took the trouble to look in detail at various schemes of political union that Europe then offered, and concluded – ironically enough in light of the present debates in the UK – that the union between England and Scotland, the ‘entire and perfect Union’ between those two countries, was the only logical and secure model for the thirteen former colonies. You cannot dabble with political unions without courting disintegration; they are either a serious project of shared sovereignty or they are not; and having a superstructure of political union without the necessarily deep underlying political consensus is bound to be exposed as a sham sooner or later. This is where we now are in Europe. We have reached a point of insolvency, so realistically we must choose either to unite in a true federal democratic union, or see Europe unravel in an unpredictable manner that has the potential to turn dangerously ugly. In scenarios that start with certain member states leaving the euro, we may see a release of uncontrollable centrifugal forces that could ignite underlying tensions and awaken the proverbial ‘sleeping dogs’ that are strewn from the Balkans to the Baltic to the Iberian Peninsula. Even Europe’s founding anchor states would not be immune from turmoil. So the risks of continuing down the present perilous path of unaccountable leadership are more likely higher than the risks of calling a halt to the current charade and actually doing something that at least has some prospect of working.

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The starting point is that the response to these problems is to keep our eyes firmly on the larger objective – to create a peaceful and democratic Europe that is also sustainable in the face of the unprecedented challenges of the twenty-first century. But we also have to maintain a clear-eyed view of the inadequacies of the current political and economic institutions available to Europeans at the moment. We have to be prepared to take a number of worthwhile risks and do several things simultaneously: A liberal Union-wide bankruptcy law should be passed, allowing for an eighteen month (or shorter) beginning-to-end bankruptcy. Every financial institution that cannot repay taxpayer bailout funds recently injected should be put through an insolvency purge, their assets sold to the highest bidder, their non-recoverable liabilities written off. No private company should receive state financial aid, nor should it be afforded any protections, direct or indirect, from the full force of competition. The EU should move immediately to a one-off full federalisation of state debts similar to the broad blueprint used by Alexander Hamilton to federalise the debts of the individual American colonies. A European Union bond should be issued to finance the needs of the Federal Union government and, where necessary, provide financing to supplement individual member states under specific loan criteria. Member states will be free to borrow directly from the markets on the understanding that they will be forced into bankruptcy, with full losses incurred by lenders, if they fail to meet repayment terms. State borrowing would be tied to a requirement that any bond offering will only be made with attachment to the specific means by which the debt will be paid down/extinguished. The position of president of the European Commission and president of the European Council should be merged into one office-holder and should be subject to a popular democratic election to be held no later than December 2013. This office will be a highly sought-after role and will probably attract high-calibre candidates; it will also force competing visions of Europe to be put to voters for their ultimate choice. Votes should be weighted in an electoral college format so that the voters of smaller member states are not made irrelevant. This president would serve for one six-year-term only, and would be chief executive in the same manner as the president of the United States.

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An accommodation could be made to remaining European monarchies in respect of their historic traditions, to allow for some ceremonial roles. The Commission should become the servant of the executive arm, and its members nominated by the democratically elected president, and ratified by a newly created upper house of the European Parliament. An upper house or senate should be created, with four representatives of each member state, with each such state holding equal voting power. That is to say, Ireland will have four senators, as will Germany and other states. This upper house will be given the right to initiate legislation along with the lower house, the current EU Parliament. The European Parliament should be reformed to give greater balance for population (which would favour larger member states) and should be given the power (along with its upper house) to initiate legislation. All lobbying of the executive and legislative branch must be registered and transparent. A full insolvency purge of all European financial institutions should be immediately undertaken. A liquidation and asset sale of all unhealthy institutions should take place forthwith. A write-down of significant size, together with a Hamiltonian scale re-negotiation should take place on all distressed EU member-state debts. The federalising of all remaining state debt should immediately follow, backed by the issuance of union bonds which are in turn backed by the entire tax revenue of the Eurozone. The Union civil service should be kept small and highly efficient; this should be enshrined in Europe’s new constitutional arrangement. A debt ceiling will also be set constitutionally. The Union should have monopoly of external action both in soft and hard power. The ECB should be guaranteed full independence and a low-inflation policy be pursued. The official working language of the Union should be English. We understand the major sensitivities involved, but it is necessary to have one official language among so many, so as to remove any scope for ambiguity in laws and regulations or their interpretations.

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An EU-wide pension plan is needed, placing citizens’ pension assets beyond the reach of future potentially insolvent and irresponsible governments, implemented per the highly successful Chilean model. The automatic right of secession for any member state should be provided for with a two-thirds majority of the polity concerned. Napoleon and then Hitler tried in their own ways to unite Europe after a fashion that was both unstable and objectionable, and we are now in the midst of the third attempt in modern history to create a united continent. This latest attempt, for the first time founded to achieve noble and peaceful aims, should be given the chance to succeed – but only on condition that it now subjects itself to democratic accountability, lest it depart on a road to something far less bearable. One risk that must not be taken is to transfer any more sovereignty to Europe (as would be the case in the fiscal compact) without first constructing the means to hold it democratically accountable, keeping in mind Benjamin Franklin’s words of warning: ‘Those who would give up a little freedom, to gain a little security, deserve neither and will surely lose both.’ Ireland is, for the short term, burdened with the failed debts of certain fake risk takers, some of them large German, French and British financial institutions that we have no moral duty to bear. This is a gross injustice. It is anti-market. It is an abrogation of all of the rules of capitalism and it is the most exploitative exercise in corporate welfare in history. It is beyond unacceptable that anyone would even consider asking Ireland to pass a treaty that does not cut this bank debt burden. Expecting Irish ratification of such a patently bad deal is an insult to the intelligence and common sense of the people of Ireland. We must not entertain saying Yes to this bad law. More importantly, we must do our part to bring Europe to its senses and face the hard choices that it must make. As for the empty threats that we in Ireland will not be able to raise funding, consider that even Iceland, having gone through a massive bank default, is now welcomed back in the markets. Any Irish government claiming that it would be barred from markets for years would clearly be admitting that it is incompetent to hold office. So we would be well advised not to listen to the fear-mongers advocating surrender to such an already outdated, vacuous and abysmal treaty formula. Take the advice of Edmund Burke, who said: ‘No passion so effectually robs the mind of all its powers of acting and reasoning, as fear.’ In this treaty, we have no bank debt relief nor have we the means to repair the crisis of democracy at the heart of Europe. We should not reward mediocrity, and both for the sake of Ireland and for Europe’s current and future generations, I oppose acceptance of the fiscal compact in the Irish referendum on 31 May. The future of Europe is on a precipice. Contagion from

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other failures is a real possibility in present circumstances and the formula set out by the European Central Bank – a body that remains detached and unaccountable – will not prevent it. Declan Ganley is an Irish technology and communications entrepreneur and founder of Libertas, which has campaigned for radical reform of the European Union.

Alexander Hamilton and the Debts that Helped Create the United States
Declan Ganley and Brendan Simms LEXANDER Hamilton never got to lead his country, but he did get to serve George Washington in a position that was to become absolutely pivotal to the survival of the United States of America – as its first secretary of the Treasury. He trained first in the commerce of the West Indies and later served as a remarkably heroic young officer of the American Revolution. Hamilton was a lawyer and leading author of The Federalist Papers and did much to weld America’s political union, founded on firm democratic practice, before his untimely and tragic death before he had reached fifty. On taking office in 1789, shortly after the conclusion of America’s War of Independence, Hamilton found himself facing the challenge of shaping the economic framework upon which the nascent and very bankrupt United States would either perish or prevail. Hamilton’s country had been ravaged by war and saddled by debt. On top of that, he had to find a way of paying off an army that, in many cases, was awaiting years of backpay. In addition to domestic concerns, there were major foreign lenders, including some of the very largest and most powerful players in global finance at the time – French and Dutch bankers. With redcoats on the Canadian border still holding western forts and the Royal Navy ruling the Atlantic, Hamilton quickly understood that the union’s credit rating would play a large part in deciding whether or not America really had a future. As secretary of the Treasury, and under Washington’s protection, Hamilton was given the scope to establish the economic structural basis of America. That simply would not have been possible had Washington and the other Founding Fathers not already put in place the initial mechanisms for government by consent. Without Hamilton – or his patron, Washington

A

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– the superstructure facilitating the fantastic nineteenth-century burst of American economic growth would simply not have been built. Benjamin Franklin’s argument to the British in the 1760s was that a unified America would be an economic powerhouse and that they would be foolish in the extreme to risk losing it for the few seats the colonists wanted in the British Parliament. That hard-headed denial by the British elite, to bow to granting their colonies government by consent of the governed, was to have major consequences. On dealing with the most pressing matter of government debt, Hamilton was faced with the fact that the thirteen founding states of the United States all had separate and disparate debts, built up during their times as separate colonies during the course of the War of Independence. As the war had been waged in some states more than others and as the contributions of the states to the war effort and cost had varied greatly, even that portion of debt that was directly attributable to a form of ‘joint enterprise and expenditure’, was not evenly or proportionately disbursed across all of the states. On top of the states’ debts, there was already a federal debt, which had been used to finance some of the cost of Washington’s triumphant Continental Army, as well as some other federal borrowings. Hamilton knew that he possessed limited short-term financial resources and that these many debts would have to be re-structured, while enhancing America’s reputation as a borrower. One dilemma was that many securities had changed hands at significant discount, raising potential moral dilemmas. Weighing his options, Hamilton decided that security of transfer, and its repercussions for private property, were paramount to establishing credibility, thus assisting a favourable credit rating. He then made the bold decision to federalise all of the state debts in distress, doing so to ensure the survival of the whole, rather than the sacrifice of any member state. Interest on the (already incurred) federal debt was then between 4 and 5 per cent and Hamilton understood that for the sake of American credibility, this debt, all owed to foreign lenders and primarily made to finance America’s war effort, must be paid in full. Nevertheless, the various interest rates on the debts of the thirteen states were higher, at 6 per cent or more. Hamilton knew that his ability to raise revenue was simply not sufficient to allow the servicing of the combined states’ debts. He also knew that bondholders sitting on state debts were exposed to a broad range of growing risks, of which they were well aware.

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Hamilton also saw the opportunity to shift the loyalty of those creditors by giving them a stake in preserving a federal government by having it federalise the state debts and thus make those creditors commit risk onto the new United Sates. However, given the fact that combined state debts and interest were just too high to sustain, Hamilton decided to deliver a federal ‘haircut’ on assumption of the states’ debts. Hamilton took the path of offering ‘voluntary’ haircuts in a variety of options that largely boiled down to a partial payment at 6 per cent interest, a partial ‘equity swap’ (in Hamilton’s case, for Western land that at the time was relatively valueless but had prospects), or payment at a lower interest rate, over a longer term but sweetened by quarterly, rather than yearly payments and paid from taxes specifically earmarked for the purpose of paying those bonds. The creditors did the pragmatic thing and accepted Hamilton’s offers. Hamilton drew those creditors into supporting his new country, while at the same time rescuing many of his thirteen member states. Through his federalisation and re-structuring of unsustainable state debts, Hamilton helped cement the disparate states together to form their ‘more perfect union’. Hamilton’s hands-on experience with a potentially catastrophic sovereign debt crisis caused him to leave some wise advice for posterity that growing debt ‘is perhaps the natural disease of all governments. And it is not easy to conceive anything more likely than this to lead to great and convulsive revolutions of empire’. He also wisely advised that he ‘ardently wishes to see it incorporated as a fundamental maxim in the system of public credit of the United States that the creation of debt should always be accompanied with the means of extinguishment’. As a means to finance debt, Hamilton set up ‘sinking funds’, revenue that was stored up to service debts and which he prudently and quietly used to buy back large amounts of government debt at bargain prices (Hamilton understood the Central Banker’s art of ‘creative ambiguity’). Bailouts were not Hamilton’s modus operandi. At King’s College (later to become Columbia University) one of Hamilton’s friends and an early companion in the Treasury Department was William Duer. But Duer had quickly departed his assistant secretary role at the Treasury to engage in private banking and speculation, becoming a major New York ‘market maker’ in the process. In 1791 and 1792, Hamilton was faced with America’s first banking and government securities crisis. Amid the financial fallout,

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his powerful financial industry friend, Duer, had ended up in the position of needing a government bailout for his banking and financing interests or he would ultimately face debtors’ prison. Hamilton, though empathising with Duer, would not provide the bailout. The end result was that Duer ended his days in a debtors’ prison, sometimes visited by Hamilton but paying the ultimate price for Hamilton’s allowing ‘the freedom to fail’, which in the eighteenth century had steeper personal consequences than in the world of today. Hamilton’s most recent (and excellent) biographer, Ron Chernow, summedup the completion of Hamilton’s time in office:
It is popular today for Europeans to look back at the early formation of the United States of America and to say that it was inevitable, unique and took place in an already cohesive homogenous society. The facts of the matter are more complex. The thirteen colonies that made up the first states were disparate in their composition and had seen their existence in relation to ties with London, more greatly than they did to each other. American cities were filled with immigrants from all of Europe’s cultures, speaking a multitude of languages, with English and German being the most dominant. Great cultural differences existed between the states, perhaps the most acute being in their attitudes to slavery.

The early institutional success of America’s union was more due to the willingness and courage of a principled minority of gifted leaders (formed in a more meritocratic environment that, for its time, was somewhat less constrained by the sclerosis that often afflicts old establishments) who were motivated by a common bond of morals and a pioneering willingness to make sacrifices and take risks for the greater good. Declan Ganley is founder of Libertas. Brendan Simms is Professor in the History of International Relations at Cambridge University. Adapted from Declan Ganley and Brendan Simms, ‘A Europe for the People by the People’, Sunday Business Post, 10 January 2012.

Could America’s Founding Fathers Save Europe?
Joel Faulkner Rogers and Sean Kirwan

I

N early 2012, the university polling centre YouGov-Cambridge worked in collaboration with Professor Brendan Simms of Cambridge University and Declan Ganley, founder of the Irish think tank Libertas, to measure public response to the ‘Ganley-Simms proposals’, as they will be called here. These are eleven proposals advanced by the two Irishmen, adding up to a bold argument that only full democratic federalisation will ultimately resolve Europe’s current crisis. This includes fiscal as well as monetary union, the pooling of greater sovereignty in key policy-areas and the collectivisation of European debt through the issue of Union bonds backed by the entire tax revenue of the Eurozone. Whichever direction it takes, add Ganley and Simms, the next phase of the European project will only succeed if it produces a more direct form of democratic participation in the style of America’s constitution. EU Government for the People by the People? YouGov-Cambridge put several of the Ganley-Simms proposals to nationally representative samples of the population in Britain (1,523 respondents), France (1,518 respondents) and Germany (1,553 respondents). This included asking to what extent respondents would support or oppose the following measures for the European Union (EU) as a whole: • A democratically elected EU president, who is chief executive in the same manner as the President of the United States of America, and directly elected by citizens across Europe • Turning the EU into a fully integrated ‘United States of Europe’, with a central European treasury and common rules on national budgets • The creation of a single European military, with an elected civilian authority that decides when European nations go to war and take military action • A single seat to represent the entire EU at the United Nations, instead of individual seats for each member • An automatic right to leave the EU if a majority of voting people from that country say they want to do so. At one level, answers mirrored broader diplomatic trends, with a divergence in approach between Britain and the Eurozone core. Despite so much trauma for the European project since the onset of the financial crisis, FrancoGerman opinion is notably receptive to certain proposals for new and deeper approaches to integration, albeit with German limits on the potential for economic activism and an overall reluctance in both polities to cede national

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control in a handful of key policy areas. Meanwhile, significant majorities in Britain continue to push in the other direction, with calls for at least some revision of relations with Brussels.

The response to the Ganley-Simms Proposals

When asked to what extent they would support the introduction of a democratically elected EU president as Chief Executive, 41% of Germans and 46% of French supported the idea (versus 28% and 23% who opposed respectively). In comparison, only 25% of Brits supported the idea. Figure 1.
46 23 Total oppose Total support

25 44

41 28

UK

Germany

France

28 Feb - 4 March 2012

Nearly 40% of French and over 1/3 of Germans said they support turning the EU into a fully integrated ‘United States of Europe’, while only 10% of Brits said likewise. Figure 2.
35 32 65 38 31 Total Oppose Total Support

10

UK

Germany

France

28 Feb - 4 March 2012

Where 41% of Germans and 43% of French said they support the creation of a single European military with an elected civilian authority to decide when European nations take military action, just 18% of Brits said the same.

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Figure 3.
41 18 28 54 Disagree 30 Agree 43

UK

Germany

France

28 Feb - 4 March 2012

On the question of representation at the United Nations, German and French respondents were largely split between support and opposition towards the idea of a single UN seat to represent the entire EU, instead of individual seats for each member, with 34% of Germans in support versus 34% in opposition and 34% of French in support versus 32% in opposition. By comparison, just 11% of Brits showed support versus 57% who opposed. This sensibility is further indicated by recent research conducted with YouGov’s Euro-tracker Survey in April, 2012: 57% of German voters said they would vote to remain in the EU versus 25% who said they wanted Germany to leave; 47% of French voters said they wanted to remain compared with 32% who wanted to leave. Significant numbers of both French and German voters also reflected a long-term commitment to European Monetary Union (EMU), with pluralities saying their country should always be a part of the single currency. Figure 4.
SURVEY COUNTRY should withdraw from the Eurozone immediately and return to using our old currency

43

45

SURVEY COUNTRY should stay a member of the Eurozone for now, but DEFINITELY leave the Eurozone eventually and return to our own curency SURVEY COUNTRY should always be a member of the Eurozone

20 8 15

16 13 13

France

Germany

SURVEY COUNTRY should stay a member of the Eurozone for now, but MAYBE consider leaving the Eurozone eventually and returning to our own currency 28 Feb - 4 March 2012

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The German Limits on Economic Activism When considering the political viability of European federalism, however, ostensible commitment to the single currency should be seen in the wider context of German economic, cultural and historic attitudes. Perhaps with little surprise, survey-results (collected between 28 February and 4 March 2012) showed that German voters are currently generally more economically confident than their French counterparts. 47% of Germans said their economy is currently in good condition, versus only 20% who said it is in bad condition, while 5% of French respondents said the economy was doing well, versus 77% who said it was doing badly. German respondents were also notably less concerned about unemployment. Only 40% said unemployment is an urgent issue facing their country, versus 70% of French who said the same. More so than other European polities, German public opinion appeared unforgiving towards problem-ridden weaker members of the Eurozone. 51% of Germans said Greece should leave the Eurozone, versus 29% of French who said the same. Accordingly, while Germans are more economically confident, they show higher concern about inflation and the need to curb it. 51% of Germans said the main priority for the economy should be to curb inflation with less government spending, while 56% of French said that the main priority for the economy should be reducing unemployment with more government spending. If the Ganley-Simms vision advocates a vastly more integrated European polity along the lines of a comprehensive federal model, this would presumably include common taxation, common budgetary control and potentially enormous fiscal transfers from richer to poorer areas. Speaking in the purely practical terms of the reality of public opinion, their largest obstacle in these deeper initiatives for economic integration would be German public opinion. While Germans show noteworthy interest towards proposals for more direct forms of democratic participation or the pooling of sovereignty in areas such as military action, survey results also show a continued German commitment to the concentration of economic pain on debtor states, and less support for the expansion of economic crisis-fighting initiatives such as greater monetary easing, Eurobonds to mutualise the debt-stock or the economic implications of expanded bail-out funds and fiscal transfers. Where 51% of French supported making it easier for EU countries to borrow from the European Central Bank, only 30% of Germans supported this. 60% of French respondents supported lower interest rates for the EU as a whole compared with 40% of Germans. One third of French respondents also supported the idea of Eurobonds compared with only 17% of Germans.

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The Nuances of British Retreat Survey results of British public opinion, meanwhile, reflect a continued desire to renegotiate the terms of EU membership, at least to some extent. In the same breath, however, it must also be noted that there are important distinctions between what these figures do and do not say. On the broad question of European integration, we see a familiar divide between Britain and the Eurozone core, with 47% of French voters and 62% of German voters wanting either continued union as now or more integration, compared with only 27% saying the same in Britain. Figure 5.
SURVEY COUNTRY staying as a full EU member and working for a more integrated Europe than now

40 31 14 13 16 22 40 13 20 22 16 8

SURVEY COUNTRY staying as a full EU member but using the power of veto to block any moves towards a more integrated Europe SURVEY COUNTRY withdrawing from the EU altogether

SURVEY COUNTRY having a looser arrangement with the EU, based on maintaining trade and cooperation on some common policies

UK

France

Germany

28 Feb - 4 March 2012

Hence, a large number of British voters clearly want ‘less Brussels’ in some regard. But survey results also emphasise continued support for co-operation across a range of policy-areas, which challenges popular suggestions of late that British voters might be ready to go ‘Swiss’ or ‘Norwegian’ in a new outer Europe that equals little more than an amplified free-trade area. The difference lies between attitudes to control and cooperation. YouGov-Cambridge posed a similar question to two nationally representative samples of the British population in slightly different ways. In the first instance, respondents were asked whether they thought a list of specific policy-areas should be controlled by the EU as a whole or by national governments each deciding for themselves.

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In this context, a majority of respondents strongly opposed European control in most policy areas, in bold contrast with France and Germany where respondents showed significant support for allowing more of these to be EU-controlled. These areas included financial regulation, military action and recovering from recession. Figure 6.
Laws on TUs and strikes Agriculture Crime & justice Tax rates & national budgets Military action Financial recovery Regulating financial institutions Terrorism & international crime

12 17 8 4 22 16 23 44 47

80 74 85 89 69 74 68

Controlled by EU (%)

Controlled by UK government (%)
28 Feb - 4 March 2012

In the second instance, however, respondents saw the same list of policyareas and had to choose whether European countries should co-operate more closely together, or should loosen their links and handle the issue more at the national level, or if the present balance was about right. In this case, respondents preferred more co-operation in nine out of sixteen policy areas. In seven of these, preference for control and co-operation actually indicated trends in different directions, with a majority preferring national control in the first question while a majority or plurality preferred more co-operation with Europe in the second. Figure 7.
Laws on TUs and strikes Agriculture Crime & justice Tax rates & national budgets Military action Financial recovery Regulating financial institutions Terrorism & international crime

15 23 30 13 39 41 38 67 11 28 34 37

54 47 44 57

EU countries should cooperate more closely (%) EU countries should loosen their links on this issue (%)
15 - 16 February 2012

The Federalist Choice for a Continent in Crisis

33

These results arguably suggest two distinct themes to British public opinion on Europe: first, that a significant section of the public wants a serious debate on – and potential revision to – the balance of control in key policy areas; second, there is little evidence, however, that this points all the way to a drawbridge mentality for reducing British-EU relations to mere terms of trade. The Limits of Federalism It should also be noted that results from both question-frames highlighted key areas of statecraft where overall public desire lent towards both national control and less co-operation with the EU – namely national budgets, crime and justice, and the basic means of national production, such as agriculture, the rights of workers and laws on trade unions and strikes. Here British voters share ground with their French and German counterparts, where survey results reflect a similar desire to maintain sovereign control over these same areas. (Note the top four items in both cases in Figures 8 and 9). Figure 8.
France policy control:
Laws on TUs and strikes Agriculture Crime & justice Tax rates & national budgets Military action Financial recovery Regulating financial institutions Terrorism & international crime

19 28 30 21 51 49 52 72 21 39 41 39

70 63 63 70

Controlled by EU (%)

Controlled by French government (%)
28 Feb - 4 March 2012

Figure 9.
Germany policy control:
Laws on TUs and strikes Agriculture Crime & justice Tax rates & national budgets Military action Financial recovery Regulating financial institutions Terrorism & international crime

22 31 38 25 57 54 61 76 17 34 38 32 56

79 61 68

Controlled by EU (%)

Controlled by German government (%)
28 Feb - 4 March 2012

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Rethinking Europe

The Democratic Deficit Another area in which British trends compare with Franco-German results is the basic sense that Europe’s crisis is democratic as well as economic. Only small numbers in each case think they have a voice that counts in the EU – an opinion that seems to unite European populations and British parties alike. Figure 10: Cross-country consensus.
My voice counts in the EU
11 20 32

66

49

41

Disagree Agree

UK

Germany

France

28 Feb - 4 March 2012

Figure 11: Cross-party consensus in the UK.
My voice counts in the EU
11 7 25

67

51 71

Disagree Agree

Lab

Con

Lib Dem

28 Feb - 4 March 2012

In a list of words and phrases about ‘what the EU means to you personally’, only 15% of French, 21% of German and 10% of British respondents chose ‘democracy’, and only 12% of French, 16% of German and 12% of British respondents chose ‘a way to protect citizens rights’. By comparison, 44% of French, 58% of German and 56% of British respondents chose ‘a lot of bureaucracy’ and 51% of French, 43% of German and 39% of British respondents chose ‘a waste of money’. By a similar token, establishing an ‘automatic right to leave the EU if a majority of voting people from that country say they want to do so’ was the one Ganley-Simms proposal that saw a majority of public opinion pointing in

The Federalist Choice for a Continent in Crisis

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the same direction across Britain, France and Germany: 68% of British, 53% of French and 55% of German respondents said they supported it. In conclusion, more than two years of European economic crisis have so far failed to prevent significant numbers of French and German voters from aspiring to an ever closer union. According to the polls, this might conceivably include the pooling of greater sovereignty, expanded control of certain policy-areas by the EU as a whole, and more direct forms of democratic participation such as presidential elections. But Ganley and Simms take note: we also see clear limits on both sides of the Channel in the public will for pooled sovereignty in certain key policy areas. Lest we forget in this context, the US Founding Fathers never had to meet the challenges of modern, networked public opinion, which is evidently and finally finding its voice as a chief mechanic of the European project. Dr Joel Faulkner Rogers is the Director of YouGov-Cambridge and author of several books and US/UK government studies and academic materials. Sean Kirwan is a Senior Research Fellow at YouGov-Cambridge, educated at Cambridge University and UCL in International Public Policy and Research Methods.

A Sceptical Perspective
Malcolm Rifkind

T

HE economic crisis of the Eurozone has been exacerbated by the acute manifestation of a chronic political problem that has dogged the European project for decades – our old friend, the democratic deficit. European integration has always been a self-consciously elite project, forged by men traumatised by Nazi tyranny and a totalitarian ideology that had claimed legitimacy through elections and referenda. In the early stages of integration, national governments shared sovereignty to find common solutions concerning coal, steel, atomic energy and agriculture, and this was not hugely controversial. However during my political career I have witnessed (and on occasion participated in) the notable acceleration of the integration process, from the Single European Act to the treaties of Maastricht, Amsterdam, Nice, the Constitution fiasco, and most recently the Treaty of Lisbon. Setting aside the relative merits of each step along this process, can one reasonably assert that attempts to either mitigate or deny an increasing crisis of democratic legitimacy in the European Union have been successful? The long-term problem of the lack of democratic accountability in European decision-making will indeed be exacerbated by the further extension in coming years of the use of qualified majority voting in the Council of the European Union, under the auspices of the Treaty of Lisbon. How should a national electorate hold their government to account if it has opposed a measure seen not to be in the national interest, but is outvoted in the Council? We were told that the introduction of the European Parliament, and then successive attempts to legitimise it through granting more and more powers, would ease such problems. But the Parliament’s failings in capturing the imagination of the European electorate have only served to discredit the assumptions of those who argue that rapid integration will be endowed with a retroactive legitimacy by a grateful public. Nor has the introduction of the euro helped to produce a unified Eurozone polity as many had hoped. Instead, its structural flaws have produced not just the current economic crisis, but tensions between creditor and debtor nations and between elites and electorates that prevent an effective response. Europe’s leaders therefore find themselves caught in a vicious circle. On the one hand, Berlin, Brussels and the bond markets demand austerity and integration. On the other hand, citizens are resisting what is perceived as the undemocratic manner in which these solutions are being imposed, as well as the solutions themselves. This risks a wholesale rejection of mainstream parties willing to do what is necessary to resolve the economic crisis, which in

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turn risks exacerbating the crisis, thus giving further impetus to increasingly radical populist political forces around Europe. The fear of this spiral has led to political paralysis across the Eurozone, and in the case of Italy and Greece, the suspension of normal democratic practice, followed in Greece by an incoherent result in their general election. This paralysis has fed disenchantment and the airing of increasingly radical ‘solutions’. These radical populist solutions ‘from below’ in Europe’s political margins on the far left and the far right and the rising popularity of figures such as Jean-Luc Mélenchon and Marine Le Pen in France, and Geert Wilders and the far-left Socialists in the Netherlands, have been well documented in recent times. Their programmes must of course be resisted. Not so well documented are the radical federalist solutions ‘from above’, borne of elite disenchantment with Europe’s present predicament. Impatient with the failure of incremental solutions, some in political and academic circles call instead for Europe’s own federalist Great Leap Forward. Taking inspiration from the founders of the United States of America such as Alexander Hamilton, Europe’s leaders are urged not only to press ahead with bold federal solutions required to resolve the euro crisis, but to take the opportunity to create a democratic superpower with a monopoly over foreign and defence policy, and install English as the superpower’s official language. And they say Tories are on a different planet. It may come as no surprise to the reader that I consider the idea that such a development is more likely to resolve than to exacerbate the popular disenchantment that threatens both resolution of the euro crisis and the European Union to be, frankly, laughable. The misty-eyed invocation of the foundation of the United States of America is also highly inappropriate. The inhabitants of the European Union are not New World settlers, in a state of extreme political and cultural flux and with the promise of a virgin continent stretching ahead of them. It ultimately took a very bloody civil war to hold the Union together – a fact frequently left out by those who cite the American example. Even if one was able to take such suggestions seriously, an attempted leap forward of this kind would be the most appallingly reckless gamble, risking all notions of European unity, and ultimately its security. I plead guilty to caution. But I am quite aware that the status quo is untenable. Those who will continue to resist long-term visions of deeper integration across the EU must nevertheless acknowledge both the severity and the immediacy of the current crisis, and the need for some form of fiscal union in the Eurozone to complement its ill-judged monetary union. The British government has long accepted this. In an interview with the Financial Times last summer, George Osborne conceded:

The Federalist Choice for a Continent in Crisis

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We have to accept that greater Eurozone integration is necessary to make the single currency work and that is very much in our national interest. We should be prepared to let that happen.

I concur with this view. In case anyone needs reminding, British bank exposure to just the Eurozone periphery (Ireland, Spain, Portugal, Italy and Greece) is equivalent to almost 15 per cent of the UK’s GDP. That is a higher exposure as a proportion of GDP than Germany. The Chancellor of the Exchequer did not wake up one morning thinking he was Jean-Claude Juncker. Nor is his acceptance of the need for integration in order to save the euro a British attempt to sabotage European solidarity by driving a wedge between Eurozone and non-Eurozone members. Instead, his position is the result of a sober analysis of both economic and political realities and, I suspect, an acceptance of the least bad of the EU’s available options. In November 2011, Mark Leonard of the European Council of Foreign Relations outlined four possibilities in his paper, ‘Four Scenarios for the Reinvention of Europe’. They were: (1) the current system of incremental solutions led by national leaders and without treaty change; (2) breaking up or reducing the number of members of the Eurozone; (3) folding the necessary integrative moves into the European Treaties; and (4) a legally binding intergovernmental agreement signed by members of the Eurozone outside the scope of the EU treaties. Leonard concludes his summary of these four options as follows:
Thus each of the four routes to fixing Europe’s institutional crisis has advantages and disadvantages. The first is the easiest to achieve but it risks failing to solve the crisis as well as exacerbating the resistance of European citizens. The second solution could be more sustainable and less painful for the citizens of countries such as Greece, but it could unleash a tsunami of panic that results in the unravelling of the euro. The third would be the most complete and durable solution but also has the greatest risk of spectacular failure, as a rejection of the treaty by parliaments or referendums could lead to the rapid disintegration of the EU. The fourth solution could give the Eurozone what it needs while sidestepping the resistance of non-euro members, but it could lead to a new gulf within Europe and the slow marginalisation of the EU itself.

It is within this context that David Cameron’s veto in December 2011 should be understood. Because of the very nature of a veto, David Cameron’s non was widely regarded as an inherently negative move – the final act of a desperate prime minister under pressure from rowdy backbenchers and having suffered a diplomatic checkmate at the hands of his opponents. But there is another interpretation – that Britain’s veto was simply a recognition that the risk of a new gulf slowly opening up within Europe

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was preferable to that of a EU-wide treaty solution which not only placed intolerable demands upon states that had not opted to join the euro, but which also carried the greatest risk of spectacular failure, with disastrous consequences for all. The argument that ‘it can’t be a veto if nothing was stopped’ completely misses the point. Firstly, it was not Britain’s aim to stop an intergovernmental treaty from being signed. Speaking of Britain in his now famous Berlin speech of November 2011, Poland’s Foreign Minister Radoslaw Sikorski said that, ‘we would prefer you in, but if you can’t join, please allow us to forge ahead’. Britain duly obliged – in this context, the veto was more tak than non. Secondly, Britain did stop that intergovernmental treaty from being folded into existing EU treaties, carrying the risk of an effective response to the Eurozone crisis being strangled by another interminable round of EU-wide institutional reorganisation. In doing so, Britain kept alive a positive vision for the EU – that of a more flexible union better suited to a twenty-seven-plus membership. David Cameron had outlined this vision in a speech delivered before Britain’s veto. Although much more attention was given to the fact that he uttered the words ‘we sceptics’, of much greater significance was his case for an EU ‘with the flexibility of a network, not the rigidity of a bloc – whose institutions help by connecting and strengthening its members to thrive in a vibrant world, rather than holding them back’. Instead of a constructive discussion about this vision, the post-veto debate was almost entirely about another old friend, the spectre of a ‘two-speed’ Europe. I have always been sceptical of this imagery. Indeed, I reject the very notion of ‘speeds’ of European integration. It carries the assumption that although countries may be moving at different speeds, they all expect eventually to reach the same destination. I do not believe this to be the case. This does not mean, as some will try to suggest, that I believe that EU members should all pull in totally different directions. It is a matter of distance, rather than speed or direction. The idea that all EU members have hitherto been travelling at the same speed towards the same destination is manifestly false in any case. The EU was not split in two by the introduction of the euro – it has always been divided along numerous axes. Members can be categorised in terms of Eurozone and non-Eurozone, Schengen and non-Schengen, NATO and non-NATO, creditors and debtors, more interested in Mediterranean Union or Eastern Partnership, Social Chapter and non-Social Chapter, pro-Community method or intergovernmentalist, and so on. The sheer complexity of today’s European Union of twenty-seven members must therefore be acknowledged, and a more flexible approach to European governance developed accordingly. As

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Jean-Claude Piris, a former legal adviser to the EU Council, has argued:
Beyond the question of the euro, the fact remains that it is not able to function efficiently within its present legal framework and that it is not able to answer the needs, interests, and wishes of all its Member States at the same time.

The wrong conclusions are easily drawn from such analyses. In November last year, Nicolas Sarkozy called for the formalisation of a split between a federal Eurozone core and a confederal non-Eurozone periphery. This would reverse the achievements of enlargement and the single market – a disastrous regression. It would in fact be the exact opposite of what is needed: a deepening of the single market, which would not only encourage growth, but also provide the common interest and focus for all members of an enlarged, more flexible European Union. This is not an argument to say that Britain should just be allowed access to a European single market and have nothing to do with other forms of co-operation. It is naïve to suggest that Britain can disengage from Europe but still get a deal from the rest that is in the national interest. People who fantasise of Britain as a Switzerland with nuclear weapons underestimate just what a raw deal Switzerland gets when it attempts to negotiate on market access with a united front lined up against it. Those who say that Britain has always been a reluctant partner or outlier in Europe are also mistaken. It played a central role in the establishment of the single market and European enlargement – Europe’s big success stories of the last few decades, and neither of which were responsible for Europe’s current woes. One look at the ECFR’s annual scorecard for achievement in EU foreign policy in 2012 will demonstrate the UK’s current engagement – under a Conservative prime minister and foreign secretary, might I add. True, we were branded a ‘Slacker’ on ‘Formats of the Europe-China dialogue’ and ‘Reciprocity in access to public procurement in Europe and China’. But we earned the mantle of ‘Leader’ in ‘Relations with China on the Arab Awakening’, ‘Relations with China on climate change’, ‘Rule of law and human rights in Russia’, ‘Relations with the US on the Libya operation’, ‘Relations with the US on climate change, ‘Relations with Turkey on regional issues’, ‘Rule of law, democracy and human rights in the eastern neighbourhood’, ‘The Egyptian revolution’, ‘The Libyan uprising’, ‘The Syrian uprising and Lebanon’, ‘Middle East Process and Palestinian statehood’, ‘European policy on the ICC and ad hoc tribunals’, ‘Climate change’, ‘Development aid and global health’, ‘Famine in the Horn of Africa’, ‘Sudan and RDC’, and ‘Afghanistan’. Nothing about the EU’s institutional development is inevitable. After the Cameron veto, some countries tried to raise the temperature of the debate in

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order to encourage a diplomatic rift, in the hope of formalising Europe’s split in two. But in general these moves were resisted, and the Treaty on Stability, Coordination, and Governance in the Economic and Monetary Union of 30 January did nothing to formalise such a rift. The risk of a gulf emerging that prevents all of the EU’s members from co-operating constructively when necessary can be addressed by proactive moves to address relations between the seventeen and ten, for example guaranteeing the ten access to discussions between the seventeen, avoiding the damage of mutual suspicion and pre-arranged bargaining positions. The prize is the fulfilment of Europe’s pledge in 2000 to find ‘unity in diversity’ – a Europe held together by its shared interests and focused on the practical benefits of voluntary co-operation, rather than the myopia and resentment of co-operation by compulsion in an increasingly rigid block. Britain’s different historical experiences to continental Europe may mean that it is less prone to thinking of Europe as a ‘blessed plot’, and less likely to succumb to vague talk of solidarity. But this is as much, if not more, of an asset than a hindrance. Britain has consistently worked for a more open, liberal and outward-looking European Union, and it will continue to do so. The vision of a more flexible Europe à la carte, held together by a shared interest in the health of certain core European institutions, would not mean a radical transformation but a means to preserve Europe’s strengths, while recognising its chronic weaknesses. These are discussions for the medium term, as the biggest threat to Europe, whether of one-speed or two-speeds, is the immediate economic crisis. Europe’s leaders must do the absolute minimum necessary to save the euro, mindful of the risks of going too far. The Eurozone now has the institutional tools to push for the necessary integration, but it will be extremely difficult. Their governments must spell out the potential risks and rewards to their populations of the strategy they are pursuing. They must gain consent at the national level for the substantial sovereignty that will necessarily be forsaken. If the Eurozone is to become smaller, which is increasingly likely, there must be a sensible debate as to whether the risks of the potential shock to Europe’s financial system are tolerable. A more useful figure to bear in mind than Alexander Hamilton is Mikhail Gorbachev. Misunderstanding the complex interplay between the economic and political crises during his time in power, he attempted a radical constitutional reorganisation at the same time as forcing through painful but necessary economic reforms. He thought it would buy him time and political legitimacy. We all know how that went. Sir Malcolm Rifkind is the Conservative Party MP for Kensington and Chair of the House of Commons Security and Intelligence Committee.

Europe’s Halfway House
Michael Stürmer HILE the month of May is traditionally celebrated as one of joy and hope and merry-making, things will have looked different when seen from the office of Angela Merkel on the sixth floor of the Federal Chancellery. It is not only the common currency that is at stake in the present crisis, but also the entire architecture of Europe, the balance of power and the smooth working of democratic institutions. The shockwaves of the global economic crisis continue in all directions and will leave nothing unchanged; globalisation has no pity for the losers. It is time for an agonising reappraisal and policy that recovers trust and confidence lost. The Greek elections brought the long-simmering woes of a failed state to breaking point. France sent François Hollande to the Élysée Palace; while the incumbent, Nicolas Sarkozy, seemed to inspire more trust in his economic competence, it was not to be and his shortcomings cost him the presidency. Moreover, France has decided that austerity is too high a price for fighting inflation and strengthening Europe, and instead is being seen as refuge from German demands and the rigours of globalisation. Perhaps worst of all, elections in North Rhine Westphalia (with 17 million people, the largest of the German Länder and once upon a time  the industrial powerhouse of Germany) returned a Socialist-Green coalition back into office that over the preceding two years had distinguished itself through excessive deficit spending and, on top of everything else, had run afoul of the Constitutional Court – so much for the oft-mentioned German fear of inflation. Come 2013 and the next Bundestag election, the best Dr Merkel can hope for is – should the SPD and Greens fail to win a majority – a grand coalition with the Social Democracts. But, as Harold Wilson famously said, a week is a long time in politics. There could be a double-dip recession in the US; war could break out in the Middle East; the Eurozone crisis might go from bad to worse. For the time being, support for the chancellor’s fiscal compact and its accompanying austerity is waning throughout Europe; while at home, in the motherland of fiscal virtue, things do not look too promising either. No doubt, Dr Merkel, enjoying a well deserved reputation as the greatest of political tacticians, will eventually give way and approve a mixed menu of Germanstyle fiscal rectitude and state-propelled public spending à la francaise – and to hell with the tough bargain at the centre of the fiscal compact: money for virtue. Northern EU states will continue to finance current deficits and the southern states will refuse to shape up. Britain will be an uneasy spectator. Meanwhile,  watch out for the strains  in the Franco-German balance: Germany has to carry most of the burden, and once the Germans find out

W

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the extent of the bill they have to foot, they will resent it and suspect that politicians will make inflationary policies the panacea for all financial woes present and future. Even in Germany, the finance minister – regardless of his conservative credentials – encourages the unions to take a big ladle when serving the soup. France under Mr Hollande, meanwhile, will continue to avoid the tough reforms needed to liberalise many professions, will not allow longer working hours, and will fail to raise the pension age. This is bound to create irritation, friction and ill-concealed bitterness. But separation is impossible; both sides know this, and France can bring enormous pressure to bear as the Mediterranean countries will more or less follow its lead. Germany will be alone, at best together with the Netherlands, Finland and perhaps Austria, in the virtuous camp – but not for long, because it is a lonely place. Moreover, politics kicks in: A Germandominated  Europe would be self-destructive, with France in permanent opposition and humiliation, yet able to throw spanners into the works. That  would destroy what the Germans see as their greatest achievement: European integration. Sonderweg never again – this has been Germany’s raison d’état since Chancellor Konrad Adenauer, almost seventy years ago,  brought Germany back from the realm of the dead. The essence of German interests is still to be captured in three imperatives: to sleep in peace, to eat well, and never to be alone. It is in this context that the chancellor announces that ‘more Europe’ is the way to salvation. Germans, however, are not sure whether, in the present crisis, this is more a threat than a reassurance. Dr Merkel is also on the record saying that ‘if the euro fails, Europe will fail’ – her way of keeping the Germans loyal to the European project although her immediate objective is, first and foremost, to save the fiscal compact, signed after excruciating negotiations. But what lies beyond stabilisation of the common currency is kept deliberately vague. Only one thing is for sure: the common currency alone, without the cultural and political wherewithal, is not enough to transcend the nation-state. The logical consequence of the fiscal compact is a more federal Europe – but this also poses the risk of Britain and others declaring that enough is enough, and anything beyond a free-trade zone de luxe is unacceptable. The Germans, in spite of reunification, still tend to believe that nationstates are a thing of the past. They are, and they aren’t. For sure, they are no longer the proud towers  of power and prestige, but they guarantee – or pretend  to guarantee –  the livelihood of the citizens and protect them against hardship. The social contract that keeps everything in balance is not established between the EU and the European citizens, but inside the nation-state.

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Nation-states are still the guardians of social stability. The common currency, meanwhile, has been set up as a stateless medium, with the European Central Bank the guardian of price stability. But stability and democratic consensus have turned out to be in conflict, and the outcome is forever uncertain. While the fiscal compact – like the now-defunct Maastricht Criteria and Growth and Stability Pact – is meant to extend German fiscal virtue to the wider Eurozone, it is seen in Germany, by elites and the man in the street alike, as the essential guarantee of sound money, growth and prosperity. Unfortunately, most of Germany’s neighbours do not share this view. At present, adherence to the fiscal compact could make or break the common currency. But it is not a mould for the future. The chancellor admitted as much when she  honoured the twentieth anniversary of the Maastricht Treaty in a lecture to students – surrounded, of all things, by Greek statues – in a Berlin museum. She went beyond her usual self and proclaimed a vision of the Europe for an unknown future. ‘Without doubt, we need more and not less Europe’, Dr Merkel said, repeating a familiar phrase. But then she went on to say something extraordinary: ‘That’s why it is necessary to create a political union, something that wasn’t done when the euro was launched’. Helmut Kohl used to mention the political union of the future but never went into detail, knowing full well, as he explained time and again to close advisers, that there was little in terms of instruments and even less in terms of moral support among the Europeans, Germany included, to give political union substance and power. The Maastricht Treaty on Political Union  is, compared with Economic and Monetary Union, no more than a shadow. That the fiscal compact would one day grow into a fully fledged political union, giving the EU state-like appearance and quality, requires, for the time being, an act of faith. Europeans in their vast majority are simply not ready for what they would perceive to be a leap in the dark. The fiscal compact can at best remedy the weaknesses of the original European construct; to expect it to create the union that should have preceded it is fantasy. But  there are lesser steps that can be taken to strengthen the European Union and transform it into a global player. First of all, Europe needs an integrated, multi-dimensional energy policy. But this cannot be built on the German quasi-religious anti-nuclear posture – now massively under attack from industry and the trade unions – while the British and the French swear by nuclear power to secure a sufficient supply of electricity. Second, Europe needs to be serious in terms of military security and defence. The US has other business to attend in the Middle East and around the Pacific, is financially overburdened and, after two wars, is overstretched. Third, culture and education would offer another avenue towards a better

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understanding of Europe’s unity in diversity. Infrastructure, fourth, would offer powerful incentives to work together. In short, instead of a revolutionary bid for federalism which runs against the grain of most Europeans, a step-by-step, trial-and-error concept needs to be developed, and accompanied, paradoxically, by a lot of self-restraint on the part of the Commission. Today, Europe is in crisis and simply not ready for the challenge of political union on federal lines. But, once the various building blocks are in place and working, meaningful political union will come into its own. Michael Stürmer is a German historian, holding several prominent academic appointments, and former advisor to West German Chancellor Helmut Kohl and currently chief correspondent for Die Welt.

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