Rubbing out the red lines

Member states have long resisted handing over more power to the EU, but economic imperatives are forcing them into a major U-turn.

Europe is witnessing yet another demonstration of the power of economic forces to frustrate political preferences and carry governments along untried, untested and unwanted pathways.

The latest chapter of the financial crisis that began in 2007, triggering the near-collapse of national banking systems and plunging Western economies into the most dire recession since the 1930s, was played out in Brussels last week. An important climax is promised for the European Council meeting next week (24-25 March). Then, EU leaders will try to agree lasting responses to the threats to the solvency of some member states, while also tackling structural barriers to boosting the overall competitiveness of EU economies.

Tweeted with modish fanfare by Herman Van Rompuy, the European Council president, in the early hours of Saturday morning, the “pact for the euro” agreed in outline by eurozone heads of government is still only a fuzzy sketch of a possible new beginning in eurozone governance and politics. The devil will be in the detail, and we shall not have much of that before next weekend. Remarkably, however, it gives every impression of going against the grain and the political preferences of most member states. New approaches to economic-policy surveillance and co-ordination have the potential to weaken national authority over political domains hitherto jealously guarded by member-state governments and parliaments. The European Commission, the Council of Ministers and the European Parliament will command the attention of national governments and demand that a range of national fiscal and economic policies are framed with the priorities and needs of the EU in mind.

And this at a time when, politically and emotionally, the Union has rarely been more fragmented and its political processes more strongly influenced by politicians anxious to draw red lines against ‘more Europe’. This is particularly true of the larger member states, but it is also true of smaller ones, from Scandinavia to the Netherlands and Austria. Never in the past 50 years has so much political activity in member states been devoted to the digging of last ditches against further encroachments of European power.

Yet most governments are at the mercy of forces too powerful to contain. If they wish Europe’s single currency to survive – and they need it to – they are having to bow to the exigencies of collective scrutiny and judgment in the eurozone, backed by threats of sanctions imposed by EU institutions. Hitherto sacrosanct national prerogatives, such as retirement ages and pay-bargaining systems, will for the first time be a matter for European co-ordination.

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But will policy co-ordination and peer-group pressure be any more effective than it was after 2003, when the disciplines of the stability and growth pact provoked as much awe as a water pistol in a penitentiary?

Certainly, an agreement next week will not be grounds for abandoning healthy scepticism. But on the positive side of the balance-sheet, the surveillance and co-ordination processes are more thorough and continuous than in the past, and they begin each year before annual budgets are written in national capitals.

Secondly, Germany stands behind the new arrangements, as their very determined inspiration and as the biggest guarantor for the European Financial Stability Facility (EFSF) and its planned successor, the European Stability Mechanism. Germany needs the ‘European semester’ – the putative annual cycle of economic policy co-ordination – and the pact for the euro to work. If they do not, the sustainability of Germany’s commitment to European integration will be severely questioned.

By historical standards, its commitment is already shockingly low. Germans seem to be forgetting how much its political rehabilitation and economic power is a product of 50 years of safe, if unexciting, European political and institutional development. Trust in its European partners has sagged very badly, while financial aid from stronger to weaker member states is attacked within Germany as unacceptable free-riding. Attitudes seem to have been strongly coloured by the failure of the enormous internal transfers from western to eastern Germany since 1990 to produce social transformation and an economic catch-up – and within the timescales expected.

Hence the attempts by coalition allies and extra-parliamentary forces to tie Chancellor Angela Merkel’s hands in the negotiations on European rescue facilities for member states threatened by insolvency. There must be no hint of a ‘transfer union’ that bails out profligate and peripheral member states and spares them the consequences of national policy failures that, in the case of Greece, were successfully hidden for too long behind a mask of lies.

It is still too early to judge. But the first signs are that Merkel has had to make some important concessions of principle on the lending capacity of the EFSF and the use of its funds to purchase sovereign bonds in order to save next week’s European Council from ignominious failure. She has also had to soften the terms of the loans to Greece and she stands ready to do so for Ireland, providing Dublin makes concessions on corporate tax rates. If regional elections in Baden-Wurttemberg on 27 March punish the chancellor and her party, it will be a poor reward for protecting Germany’s vital national interests in a stable euro and a renascent EU economy.

John Wyles is an independent consultant based in Brussels.