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20th Birthday of the Maastricht Treaty: towards more European solidarity and stability in times of economic turmoil

ImageIn light of the ECB announcement to start a conditional but unlimited bond-buying program, the state of the union of Barosso in which he announced to work for closer integration, the loss of the extreme Eurosceptic parties in the Netherlands and the ruling of the German constitutional court, one could easily become optimistic in regard to the prevailing European challenges. Alas, the Eurocrisis lingers on and the centripetal economic and nationalistic forces are slowly disintegrating the European Union with little efforts to stall, let alone reverse the process.

                                                       Written by Mathias Maertens, JEF Belgium Political Secretary

The populist narrative that feeds public opinion is the belief that the profligacy of southern countries primarily caused the current crisis. This biased version does not take into account the intricate web of economic forces preceding the crisis but also neglects the historic circumstances surrounding the integration of the European countries and the creation of a common currency. The result is radicalization of public opinion by virtue of easy slogans, zero-sum games and looming nationalism that renders any sustainable and fair solution for the crisis impossible.

20 years ago: Maastricht treaty and birth of the Euro

The introduction of the Euro by the Maastricht treaty was intended to deepen the single market, to offer the EU members financial stability and as a political instrument for further integration. At first glance, it has failed miserably but what matters more is that it was predictable.

ImageDuring the negotiations prior to the treaty, German Chancellor Köhl was often warned about the incompatibility of Italy’s budgetary statistics with the admission requirements. He granted permission anyway because of political reasons: Köhl saw the Euro-construction as part of a bigger picture and referred to it as “a bit of a peace guarantee” to ease the other member states’ fear over the unification of Germany. As co-founder of the union, he argued, Italy could not be sidelined although its budget requirements where clearly not met. The door was opened for other non-compliant countries to join the Euro with hopes that apparent imbalances would be manageable.

It would however be foolish to throw away the baby with the bathwater. Integrated Europe surely needed a single currency, but its introduction was simply not accompanied by proper regulatory and fiscal instruments to counter economic imbalances within the Eurozone. Only the Stability and growth pact was introduced as a measure to secure financial stability albeit few countries, including Spain but not Germany, bothered to obey the criteria. The economic benefits that resulted from the introduction of the common currency are however still positive and ironically, the lack of surrounding measures benefitted the northern countries the most. While mutualizing the benefits of the Euro, the costs of its institutional flaws should have been shared as well.

Euro was a godsend for Germany

Although it had to give up the beloved Deutsche Mark – much against the will of the German people – the Euro was in particular a godsend for Germany. In a study conducted by the Mckinsey Company it is estimated that for the year 2010 alone the overall economic benefits of the euro amounted to € 330 billion. Half of these gains can be attributed solely to Germany although it only represents 25% of overall GDP.  These enormous profits were the resulted from an environment of excellent external conditions created by the Euro. Inflation of the labour costs in the southern countries gave the “sick man of Europe” the chance to restore its competitiveness by means of the Harz reforms which held the German wages constant without an EU-wide violation of the ECB’s 2% target inflation.

Furthermore the Euro enlarged the market which northern countries could export to without leading to an appreciation of their currency. This argument is neglected although it is vital to understand that the presence of importing countries was and is still critical for the northern countries to remain competitive in the global market. The surplus savings of these countries found their way through EU’s banking system to regions where investment yielded very high returns for these funds. The housing booms in Ireland and Spain where born. In an environment of free movement of capital little can be done to counter these transfers. The policy of the ECB to keeping interest rates low to not hamper growth of the largest EU economy further spurred unsustainable housing booms in already overheating economies. Hence, it is established that in the current framework ECB’s mandate can be described as “one size fits none”.

Southern countries went towards debt cliff

The other side of the coin can however not be ignored. Most southern countries did little to deflect the capital inflows to productive capacity and instead wasted them on fuelling wage growth in non-tradable sectors or on stunning but unprofitable public projects. The massive sclerotic government apparatus that was developed in Greece comes to mind and so do the examples of unused public infrastructure in Spain. As nominal growth continued, everybody lacked the political courage to reform their economy towards more differentiation and export. In some countries public debt exploded, in others the private held debt by the population soared due to low real interest rates. A vicious circle arose between national banks that held government debt and governments that needed to bail-out these banks. In lack of a European wide banking union, this has led to the current insurmountable debt cliff.

The dominant solution that was prescribed by the debtor countries to overcome these problems was that of ‘growsterity’: An economic theory based on the idea that deleveraging of both public and private debt and drastic market reforms would lead to credibility and hence lower interest rates in the financial markets. That it would lead to deflation and a vicious circle of depression was readily ignored. Instead, they argued, if market rates didn’t drop it was not a sign of failed EU policy but a sign that the austerity programs needed to be more stringent. This renders the theory, which was never tried before on such a scale, not falsifiable and therefore from a scientific point of view completely disposable. Alas, the programs where insisted upon with the result that Greece now has the same GDP as it had prior to the Eurocrisis and youth unemployment in  southern countries has reached dramatic levels.

Way out of the Eurozone crisis

Just as the benefits of the common currency where dispersed all across Europe, the burden needs to be distributed fairly on all Eurozone members since the complex economic forces at the origin of the crisis were a shared responsibility of all parties involved. As competitiveness is a concept of relativity, one may expect of the debtor countries to commit themselves to the alleviation of the adjustment process of the hardest-hit countries. Moreover, the integration of these countries in the European Union was indeed a measure of solidarity through economic improvements as rebuttal for the harshness under decades of dictatorships that only ended in the mid-70’s. It is for these reasons unacceptable that the capacity of these countries to regain growth is corroded by forcing on them the whole adjustment effort. As a result the basis of any European welfare state, such as a well-funded Education and Health care sector, is rapidly being eroded in these countries.

Whether one adheres to the solution of reshaping the Eurozone’s economies until sufficient similarity is reached; to debt pooling, a common budget and a banking union; or to any solution in between these two extremes, the current institutional framework is not capable of providing the necessary tools from a democratic point of view. In case of aligning the economies, the strongest Eurozone member will force its economic model upon the others, thereby blatantly ignoring the budgetary sovereignty of the nation-state as is happening at present through the programs induced by the Trojka. In the case of debt pooling, a common budget and a banking union, countries will guarantee other states’ liabilities without ever consenting to it as was proclaimed by the petitioners of the German constitutional court in Karlsrühe. Both groups are right to be enraged that their democratic rights were hollowed out which is fuelling the anti-European sentiment across the continent.

Call for more European solidarity

ImageIn essence, to overcome the economic and political crisis, Europe has to embrace solidarity. Not solidarity in the context of current intergovernmentalism that would entail direct transfers or the remission of loans by some countries, since this would continue the division of Europe in the morally superior states and the humiliated sinner states. We need solidarity in the etymological meaning of the word: “making strong, hard, unbreakable”, that can only be attained through federalism. A real federal executive and legislative branch, democratically elected, can end the prisoners’ dilemma in which the countries find themselves today and thus by virtue of majority voting implement the measures most favorable for the common European interest. Furthermore a developed federal budget is one of the necessary conditions for a currency union to work. The current redistributive capacity, 1 % of the EU GDP, of the CAP and cohesion funds is far too small to cushion any asymmetric shocks within the Eurozone. The pooling of European resources should spark the highly essential investments needed for growth the coming decades, namely the reforms towards an integrated sustainable European energy network. The institutional challenges necessary for all these changes are indeed overwhelming.

However, although often considered as an almost spontaneous process of unification of one nation, the events prior to the construction of the American federal constitution bare some remarkable resemblances with the current political crisis in Europe. In fact, the process of revising the articles of confederation in 1787 did not stem from some lofty idea of to unite people on the basis of political resemblance, but was driven mostly by the failure of an intergovernmentalist approach with a bankruptcy and financial meltdown as main consequences. In spite of fierce opposition due to nationalist feelings, the fear of loss of sovereignty and the pooling of financial liabilities, the founding fathers managed to overcome a gridlock situation in a remarkable feat of state-building that led to a brilliant legislative piece.

The challenges of reshaping its institutions are much more ample for the European Union, if only because of the fact that not every EU member is part of the Eurozone. However, the current path of functionalist step-by-step integration has left the Union economically and politically shattered with a technocratic government where no citizen feels itself represented in.

 The Young European Federalists are therefore convinced that the only way to contain the crisis on a sustainable way is a federalist approach that provides democratic legitimacy together with economic stability.

ImageThis article was written by Mathias Maertens (Political Secretary JEF Belgium) and edited by Sarah Dejaegher and Daan Pelckmans (JEF Belgium’ Board) as introduction to the JEF Cross Border Seminar to be held in Maastricht from 21 till 23 September 2012, where youngsters will be invited to actively contribute to finding innovative and sustainable solutions for issues of the Euro crisis.