The lesson of Brexit
The erosion of trust in the EU has been galvanised by the Bloomsberg Speech on Europe of 23 January 2013, in which Prime-Minister David Cameron announced his intention to organise a referendum about British membership of the EU. In his speech Mr Cameron created a peculiar dichotomy, which the EU has been unable to refute so far. On the one hand, Cameron blamed the EU for its lack of democratic accountability, while he insisted on the other hand that the EU should not aspire to form a democracy. He saw the EU as a ‘family of democratic states’ rather than a political entity, intend on creating an ‘ever closer union’ between its member states. Cameron notably emphasized that ‘it is national parliaments, which are, and will remain, the true source of real democratic legitimacy and accountability in the EU.’ In other words, Cameron criticised the EU for its democratic deficit, while he insisted that it should not function as a democracy!
Notwithstanding this inconsistency, the effect of the Bloomsberg speech has been that it cemented an irreconcilable opposition between the concepts ‘EU’ and ‘democracy’. The one effectively excluded the other. Although Cameron intended to strengthen the case for the continuation of British EU membership, his speech was hailed in The Netherlands as a call to arms by a steadily increasing number of eurosceptics. They demanded a referendum on Dutch membership of the EU too. They also exploited the insurmountable opposition between the terms European Union and democracy. In effect, the anti-Europeans in the various member states wanted the Brexit to be followed by a Nexit, then a Frexit as well as the long-awaited Grexit, until the EU would have no choice but to dissolve itself.
The successes attained by the opponents in the Brexit-referendum and in the Dutch referendum on Ukraine were largely due to the inability of the proponents of European integration to contradict their claim. The lesson to be learned from the Brexit-debacle may well be that the EU will continue to suffer electoral defeats as long as the Union is unable to explain and defend its own model of democracy. Consequently, the EU will only have a future if it starts to accentuate its democratic credentials and tries to develop them further.
The Westphalian paradigm
The greatest achievement of the EU lies in its creation of a new model of democracy. The history of the EU shows the validity of the thesis that, if two or more democratic states agree to share the exercise of sovereignty in a number of fields in order to attain common goals, the organisation they establish for this purpose should also be democratic (Hoeksma 2016). Although this proposition is obvious for laymen and millennials, it contradicts the established beliefs of the academic world. The adherents of the prevailing theory of international relations argue that the concepts of democracy and the rule of law can only come to fruition within the boundaries of a sovereign state (Brinkhorst 2008). According to the so-called Westphalian system of international relations there is no political life beyond the state (Baudet 2012).
The very essence of the EU, however, is that it has been meant from the start as a deviation from the Westphalian paradigm. After two devastating wars in less than half a century, the peoples of Europe insisted on abolishing the theories and mechanisms that could lead to the renewed outbreak of war. Thus, the concept of national sovereignty, which had formed the sacrosanct principle of the Westphalian system, was submitted to the overriding importance of the prevention of war. In practical terms, this aim was realised through the creation of the European Community for Steel and Coal in 1952, which brought the control over the means indispensable for the conduct of war in the hands of a supranational authority. As a result of this bold initiative, war had not only become unthinkable, but also practically impossible. For many contemporaries, the sharing of the exercise of sovereignty seemed a smart way to guarantee the maintenance of peace.
The reverse side of pooling sovereignty was emphasized in 1965 by President de Gaulle, who resorted to his ‘policy of the empty chair’ in order to maintain France’s right to veto proposals, deemed to be harming his country’s national interests. Although the conflict ended in stalemate, the Luxembourg Compromise of 1966 enabled the EEC to proceed (Kapteyn 1970). The principle of sharing the exercise of sovereignty had been retained and was reinvigorated through the Single Act of 1987. From then on, the practice of shared or smart exercise of sovereignty symbolised the European deviation from the Westphalian system of international relations.
After the stagnation caused by the policy of the empty chair had been overcome, the process of European integration rapidly regained momentum. In 1973, the political leaders of the –by then nine- member states adopted the Declaration on European Identity, in which they described the Communities as an organisation of democratic states (Middelaar 2009). In combination with the continuation of the practice of pooling sovereignty, this declaration implied that the EC/EU was to follow its own conceptual path. Obviously, the politicians and scholars of the day were still divided along the lines of the federal and confederal approach. Had the EC/EU a federal vocation and should the process of integration lead to the emergence of a United States of Europe? Or should the organisation be perceived -in line with De Gaulle’s convictions- as a union of states, in which sovereignty remained with the member states? The debate reached a climax during the preparatory discussions about the Treaty of Maastricht in December 1991. While France and Germany wanted to include the term ‘federal vocation’ in the preamble to the new treaty, the British Prime-Minister John Major succeeded in keeping the contested term out the Treaty on European Union. Over the years a consensus was reached to neutralise the theoretical debate by qualifying the EU as an ‘organisation sui generis’. An unintended consequence of this diplomatic compromise is, however, that the EU is unable to present itself to its citizens and the outside world in clear and simple terms. Sixty years after the foundation of the EC this inability threatens to undermine the EU as its proponents are not capable of defending the Union against the allegations of a number of politicians and scholars that it is ineffective, soulless and undemocratic. Neither the innuendo of Boris Johnson that the EU forms the ‘Fourth Reich’ nor the ‘scientific’ suggestion of Joseph Weiler that ‘democracy is not in the legal DNA of the EU’ (Weiler 2012) have been contradicted or exposed. The frivolous propositions of the previous President of the European Commission Barroso to describe the EU as an ‘Unidentified Political Object’ or as a ‘non-imperial empire’ are indicative for the intellectual malaise in this respect. It may be concluded therefore that, unless the EU provides itself with a new, consistent theory beyond the current stalemate, it will remain in political limbo until it falls apart.
The theory of democratic integration
It is a generally accepted academic norm that paradigms, which have lost explanatory value, should be replaced. From the traditional perspective of states and diplomats, the introduction of EU citizenship did not make any sense whatsoever. Even the members of the European Council, which introduced the new status in 1992, were not sure about their intentions and objectives. They followed the suggestion of their Spanish colleague Gonzalez, who hoped to bolster the legal position of compatriots residing in other EU member states (Cloos 1993). Not surprisingly, the new status was dismissed by scholars as a pie in the sky (Oliveira 1995). It did not give the citizens of the member states new rights and it had no bearing on the longstanding debate about the end goal or finalité politique of the EU.
Seen from the civilian perspective of democracy and the rule of law, however, the introduction of EU citizenship was a major event since it constituted a decisive step in the transition of the EC/EU into a Union of states and citizens. It was triggered from within by the desire of citizens to participate in the political life of the emerging entity. As the cooperation between the –by then twelve- member states of the Communities increased and intensified, a growing number of citizens of these member states expressed discontent with the bureaucratic and secretive way in which ‘Brussels’ used to operate. They wanted to prevent the de-democratisation of their countries, which the process of European integration appeared to entail. Lawyers founded international committees with a view to ensure transparency (Boeles 2016) and artists started to look for ways and means to give Europe a soul (www.asoulforeurope.eu).
In defending civil liberties and democratic decision making at the European level, these citizens confirmed the basic assumption of the theory of democratic integration (TDI) that, if two or more democratic states agree to share the exercise of sovereignty in a number of fields in order to attain common goals, the organisation they establish for this purpose should be democratic too. Thus, the TDI contains a new paradigm for explaining the nature and functioning of the EU from a citizens’ perspective. It does not only offer a fresh look on the history of the EU, but is also capable of providing guidance with respect to its future development.
Whatever the intentions of the European Council may have been, once it had been established, EU citizenship assumed a double-edged dynamics of its own. On the one hand, it provided the newly proclaimed citizens with such a solid legal status that they were entitled to say: “Civis Europaeus sum” (Lenaerts 2012); on the other hand, it enabled them to get involved in and to contribute to the political life of the emerging polity. According to the citizens’ definition of the EU, which was launched in 2014, ‘the EU constitutes a Union of states and citizens, in which the citizens are entitled both to participate in the national democracies of their countries and in the common democracy of the Union’ (Hoeksma 2014).
In hindsight, the pace with which the EU evolved towards a democratic international organisation continues to amaze the most seasoned observers. The developments on the ground appear to corroborate the validity of the TDI: five years after the introduction of EU citizenship by virtue of the 1992 Maastricht Treaty, the Treaty of Amsterdam included the notion of ‘democracy’ in the core values of the EU proper. Subsequently, the preamble to the Charter of Fundamental Right of the EU, which was proclaimed at the summit of Nice in 2000, stated in plain and simple terms that the European Union is based on the principles of democracy and the rule of law. Since the Lisbon Treaty gives the Charter the same legal status as the Treaty on European Union and the Treaty on the Functioning of the EU, it enshrines the principles of democracy and the rule of law in the legal foundations of the Union. It may therefore be concluded that it took the EU merely one and a half decade to evolve from an organisation of democratic states towards an increasingly democratic polity of states and citizens.
A currency beyond the State
The cogency of the TDI is underpinned by the fact that it also provides a plausible explanation for the functioning of the euro as the single currency of the EU. According to the Westphalian paradigm, which also dominates the field of international financial relations (Lastra 2006), a currency like the euro cannot exist. In this template, each currency must be backed by a State. Debts, incurred by a State, are referred to as ‘sovereign debts’. States unable to pay back their sovereign debts, will face bankruptcy. With all harsh and unpredictable consequences that process may entail.
At the time of the conclusion of the Maastricht Treaty in 1992, both the establishment of EU citizenship and the introduction of a single currency were regarded as consequences or perfections of the internal market (Szász 2001). In a similar way as the governance of the common market was based on the shared exercise of sovereignty, the governance of the euro required the member states of the EMU to practise a smart interpretation of the concept of sovereignty. In hindsight, the first decade of the euro’s existence appears to have been a prolonged honeymoon. The viability of the single currency was not questioned and the weaker member states were enabled by the markets to lend beyond their capacities. After the collapse of a major American bank in 2008, however, the situation changed overnight. All of a sudden, the markets returned to the traditional belief that each currency must be backed by a State. The perception that the euro was, in effect, a currency without a State ((Padoa-Schioppa 2010), induced them to assume that it was doomed to fall.
In response to this unprecedented challenge, the member states of the EMU did not return to the Westphalian approach, but rather agreed to stick to their own European model of international relations. The decision to create a Banking Union is indicative for their determination to share sufficient exercise of sovereignty for ensuring the survival of the euro (Rompuy 2014). In doing so, the EMU member states and the institutions of the EU established themselves as the joint sovereign behind the euro. Despite all the difficulties they had to overcome, they convinced the markets and the hedge funds that the euro is and will remain a ‘currency beyond the State’ (Hoeksma and Schoenmaker 2011).
The migration crisis
At this stage in its turbulent evolution, the EU has proved on the one hand that it is possible for democratic states to share the exercise of sovereignty without losing statehood and, on the other hand, that such states can enjoy the benefits of a single currency without having to merge into a federal state. Taking into account that the EU also disposes of an autonomous legal order and a directly elected parliament, there is sufficient evidence for the conclusion that the Union has replaced the ageing Westphalian system of international relations with its own and distinct ‘European’ model of inter- and transnational cooperation.
The migration crisis, however, demonstrated that sharing the exercise of sovereignty also requires discipline from all member states. The unilateral decision of the German government to suspend the Dublin Regulation on asylum led to an uncontrolled influx of more than a million migrants in less than a year. Although the decision was taken for humanitarian reasons in connection with the Syrian civil war, it allowed large numbers of ineligible asylum seekers to enter the Schengen-area. From a conceptual point of view, the events of 2015 have shown that it is inconceivable to abolish internal frontiers without establishing external border control. The similarity between the euro crisis and the migration crisis appears to have been that outdated concepts were replaced with bold innovations without the introduction of appropriate mechanisms for defending the new achievements. In both cases, the European Council learned the hard way that it is not feasible to make great leaps forward without taking existing realities into account. While the euro seems to be on its way to become the first ever stable currency beyond the State, the migration crisis will not be solved by the proclamation of the European Council, contained in the Bratislava Declaration of 16 September 2016, ‘never to allow return to uncontrolled flows of last year’. Given its geopolitical situation, the EU should acknowledge that migration will form a challenge and an opportunity for decades to come.
The battle at the ballot box
Despite the fact that EU citizenship has been introduced in 1992, the institutions and the political leaders of the EU still have to come to terms with the notion that the Union not only consists of states, but also of citizens. Anno 2017 the EU presents itself on the Europaserver as ‘a unique economic and political union between 28 European countries that together cover much of the continent’. In the same vein, the President of the European Council Donald Tusk portrayed the EU in his speech at the ceremony of the 60th Anniversary of the Treaties of Rome on 25 March 2017 as a ‘unique alliance of free nations’. Moreover, the White Paper on the Future of the EU, presented by the European Commission on 1 March 2017, does not contain any suggestion for addressing the Crisis of Confidence between the EU and its citizens. The internal contradiction of the White Paper is that it intends to restore the trust of its citizens in the EU by presenting five different models of cooperation between its member states.
At this juncture it may be recalled that President Juncker described his team on entering office as ‘the last chance Commission: either we succeed in bringing the European citizens closer to Europe – or we will fail’. Halfway the mandate of his team it might have been expected that he would not only have submitted diplomatic variations on the cooperation between the member states, but also proposals for the strengthening of the democratic character of the EU. This goes the more as there is ample room for improving the democratic credentials of the Union. The experience with the Brexit shows that the EU is destined to lose the battles at the ballot box as long as it unable to refute the allegation that the concepts of Europe and democracy are incompatible and that the one excludes the other.
From Union of states and peoples to Union of states and citizens
One of the main aims of the White Paper is to prepare the EU, its member states and its citizens for the parliamentary elections of 2019. Against this background, it provides an excellent opportunity for adjusting the EU and its institutions to the transition from a Union of states and peoples to an increasingly democratic Union of states and citizens.
The first step, which the EU should make, is to bring its self-perception in line with existing realities. The Union is no longer a mere ‘economic and political partnership between 2X states’ like the Communities used to be before the conclusion of the 1992 Maastricht Treaty. As the late Walter van Gerven convincingly demonstrated in his Stanford study of 2005, the EU has been established originally as a Union of states and peoples. According to article 1 TEU the task of the Union was to organise the relations between the member states and between their peoples. Secondly, while the Maastricht Treaty introduced EU citizenship as a yet undetermined concept, article 137 of the treaty stipulated that the European Parliament ‘shall consist of representatives of the peoples brought together in the Community’. In view of this repeated emphasis on the peoples of the Union, it was most appropriate at the time to portray the EU as a ‘polity of states and peoples’ (Timmermans 2008).
However, the dynamic development of the concept of EU citizenship, which has been summarised above, forms ample evidence for the conclusion that the EU can no longer be described as a ‘unique economic and political partnership between 2X countries’ nor as a Union of states and peoples, but should rather be characterised as a ‘Union of states and citizens’ (Timmermans 2016). As a token of its intention to reach out to the citizens, the European Commission should substitute this democratic description of the EU on the Europaserver for the outdated technocratic qualification of the former Communities.
Parliament without constituency?
The second move in the process of adjusting the EU to its transition from a Union of states and peoples into a Union of states and citizens should come from the European Parliament. Although article 14 TEU unequivocally stipulates that the EP shall be composed of representatives of the Unions’ citizens and that its member shall be elected by direct universal suffrage, the elections for the EP are still based upon the Act concerning the elections of Members of the European Parliament by direct universal suffrage of 20 September 1976. In line with the construction of the European Communities as an organisation of democratic states, EP members were chosen at the time as representatives of the peoples of the Communities. In a similar vein, article 137 of the Maastricht Treaty prescribed in 1992 that ‘the EP was to consist of representatives of the peoples brought together in the Communities’. Thus, the EP was construed originally as an assembly of representatives from national constituencies rather than as a political body with a constituency of its own. Critics could have argued that the EP was a parliament without constituency.
Forty years onward, the Communities have changed beyond recognition. The citizens have emancipated to the extent that they form at present a constitutive element in the construction of the Union. Moreover, title II TEU sets out the conditions under which the citizens can exercise their democratic rights in the Union. Thus, the Lisbon Treaty allows for the EU to be described as a Union of states and citizens, in which the citizens are entitled to participate both in the national democracies of their member states and in the common democracy of the Union. The conclusion is warranted, therefore, that the treaty presupposes the existence of a constituency at the level of the Union.
The view that the EU forms the constituency of the citizens of the Union, is corroborated by the provision of article 10, para 2, TEU. It states without reservation that the citizens are directly represented at Union level in the European Parliament. As citizens cannot be represented in any parliament without elections, it follows that EU citizens have to enjoy active and passive voting rights at the level of the Union. In drawing up a proposal to lay down the provisions necessary for the elections of its members, as article 223 TFEU suggests, the European Parliament may take these implied voting rights as its point of departure.
So far, the EP has failed in this endeavour, mainly because of differences of opinion with respect to the introduction of transnational voting lists (Donatelli 2015). The new approach, which is required, should start with the realisation that the construction of the EU as a Union of states and citizens signifies that the EP is destined to have a constituency of its own. In its proposal the EP should formalise this presumption. A small, but practical intermediary step would be to reserve the first place on the voting lists of the national constituencies for the ‘Spitzenkandidaten’ at the European level. As the political parties in the EP have already introduced this concept in 2014, the forthcoming elections in 2019 form a unique chance to for the European Parliament to strengthen its credentials as the directly elected parliament of the citizens of the Union and to bring its stature in line with the provision of article 10 TEU.
The Commission and the Citizens of the Union
The third proposal for improving the democratic character of the EU without treaty change before the next EP-elections concerns the relation between the European Commission and the citizens of the European Union. Citizens have never been the highest priority of the Commission. They appeared on the horizon only thirty years after the conclusion of the Treaties of Rome in 1957.
In order to combat the steadily increasing sentiment of eurosclerosis, the European Council invited the Italian EP-member Pietro Adonnino to draft a report on ‘a Peoples Europe’. At the time, however, Adonnino could only table proposals aimed at the citizens of the member states (Adonnino 1985). After all, EU citizenship was only established in 1992. As a result, his suggestions related to the mobility of the national citizens and to the shared remembrance of victims of the Second World War. The organisational consequences, which the Commission drew from the Adonnino-Report, are still reflecting the limitations under which it was written. A Unit ‘Citizens’ has been created as part of the Directorate General Communication, which was given the task to finance and administrate the inter-civilian activities in the fields of education, town twinning and remembrance.
Thirty years onward, the main challenge for the Commission is to account for the transition from an organisation of states, the citizens of which should learn to understand each other, to an increasingly democratic union of states and citizens, in which the citizens of the member states are also citizens of the union. The urgency of the challenge is the greater in view of the fact that the EU citizens form a constitutive element of the Union. According to article 10, para 3, TEU ‘every citizen shall have the right to participate in the democratic life of the EU’. As the Lisbon Treaty has been concluded ten years ago, the measures of the Commission to enable and encourage the citizens of the Union to do so, are long overdue.
Towards a better democracy
Beyond these three measures, which can be implemented without treaty change, lies a wide field with options for further democratisation of the European Union. From the perspective of the TDI, the aim of the process will be for the EU to evolve towards a Union of democratic states based on the rule of law, which also functions as a constitutional democracy of its own. Although the dream may take decades to be realised, in pursuing this goal the EU will ensure on the one hand that the citizens will receive a similar measure of protection from the Union as they enjoy from their member states and, on the other hand, that they will be able to participate with the same conviction in the democratic life of the Union as they do in that of their home countries.
Some measures to be taken in order to strengthen the democratic character of the EU follow from the construction of the EU as a Union of states and citizens. The most obvious one is the introduction of EU-wide referenda on essential issues at Union level. No purpose is served by organising a circus of subsequent national referenda on European subjects as happened in 2005. Other issues will have to be settled on the level of the Union, notably the right of the EP to dismiss individual members of the European Commission. In order to function in a more efficient manner, the Commission should no longer be required to consist of one commissioner per member state. The construction of the ECB forms a fair example of the way in which this concept can be implemented, notably with respect to the rotation of voting rights in the Governing Council. In the financial field, it is imperative that the governance of the EMU should be embedded in the existing democratic structures of the Union. The lesson to be learnt in this respect is that ad hoc-solutions for urgent problems should not be allowed to undermine the democratic functioning of the EU as a Union of states and citizens.
Finally, it should be submitted that the restoration of trust with the citizens also requires the EU to be able to defend its achievements. As the experiences of the past decades in the fields of the protection of democracy and the rule of law, of budgetary discipline and of border control have demonstrated, member states do not always live up to their commitments. At present, article 7 TEU gives other member states and three EU institutions the possibility to suspend certain rights of a member state, in which there is a clear risk of a serious breach of the values of the EU. While it is obvious that the cooperation in the EU is and will remain to be of a voluntary nature, the EU should provide itself with more stringent and efficient means to correct member states’ governments with undemocratic intentions and/or unlawful practices. It should notably be considered to give the EU the authority to advise unwilling states to leave the Union. As the EMU forms part of the EU, this authority should a fortiori apply to the member states of the euro area.
If a good crisis should not be wasted, a multiple crisis like the current one should provide the EU with renewed energy and increased determination. While its potential has not yet been exploited to the full, the Lisbon Treaty has stood the test of a reliable legal instrument for fair decision making. The euro has not collapsed and the ECB has established itself instead as a financial authority in its own right. Moreover, the hopes and expectations of anti-European parties and politicians that the voters would turn their back on the EU have not materialised. Finally, the worst economic crisis since the Great Depression of the previous century has been overcome and the economy is showing strong signs of recovery.
It is now up to the European institutions to take concrete actions in order to restore the trust of the citizens in the EU. On casting their votes, citizens should no longer be restricted in their choice on the basis of their nationality. The first priority for the European Parliament is therefore to draft a proposal for the election of its members, which formalises the existence of a constituency at the level of the Union. For its part, the European Commission should adjust its policies towards citizens to the fact that they are no longer merely citizens of the member states, but are also citizens of the Union. Instead of facilitating citizens of the member states to engage in exchanges and remembrances at the national level, the Commission should encourage EU citizens to participate in the political life of their Union. The fact that these changes can be implemented without treaty change, obliges both the Parliament and the Commission to take immediate action in order to restore the trust of the citizens in the Union and to ensure that, at 60, there is a bright future for the EU as a democratic union of states and citizens.
Essay by Jaap Hoeksma, Philosopher of Law, Director of Euroknow and Creator of the Boardgame Eurocracy. Hoeksma is author of the EU-monograph: From Common Market to Common Democracy, lendable at the library.[number of readers: 891]
 As a result of internal complications in The Netherlands, the Dutch referendum materialised on April 6, 2016 as a referendum about the Association Agreement between the EU and Ukraine.
 Rather surprisingly, K.M. Buitenweg does not pay academic attention to this shortcoming of the EP in her recent thesis on the EP’s Quest for Representative Autonomy (Buitenweg 2016)
Ever since the beginning of European culture and the European way of life began its journey in ancient Greece throughout the Roman times, the medieval ages or in the modern times, it has never been this integrated and peaceful as now. The continent has been one of the most diverse of all continents, if accounted for size. Europe was a strong continent, with countries that have ruled half of the planet at some points, but in the modern age the continent have became divided and weak, especially compared to the continent sized superpowers of the USA and the Soviet Union. This reason have brought forth the idea of a single, united Europe, which is able to held its own in both military and economic terms. After this enlightment, the leaders of the continent have gradually made changes in their policies and facilitated change so a supranational organization can be founded to unite the old continent. Even though the cooperation is much more developed as it was used to, but the fiscal and monetary cooperation is far from perfect. Only the fiscal policy is a common policy, but the monetary policy is at national level. The current debt crisis showed the dangers of this half integration.
Europe and the problems of unity
First of all, the European Union is using a same currency, with same interest rates for very differently developed countries. The needs of Germany are completely different and on a whole different level as of a smaller county such as Malta or even Belgium. The problem is that the common monetary policy is set for the whole Euro zone.
This means that the interest rates are similar for countries with different growth prospects. There is no “one size fits all” in economics what is acceptable for Germany or other countries, with relative high growth rate and developed financial markets, is not acceptable for other countries, which are dealing with recession. This has become clear when the Greek government have launched a campaign to change the mind of the policymakers and the leaders of the main countries of the EU, first and foremost, Germany (Bird, 2015). This continuous battle shows that the one size fits all economic policy is simply not fitted for such a diverse union. The ECB set higher interest rates to favor the German economy and help to boost the European economy through that, but these higher interest rates were not appropriate for some other countries such as Portugal and Italy (Pettinger, 2013).
Europe is really diverse and this makes it harder for workers to deal with unemployment, than it does in a country with less diversity in language and culture. Because of this, if someone got unemployed in Hungary, he would have a much harder time finding a new job in another country. The language and the culture are quite different in Europe, unlike the US.
The US is often thought to be the Optimal Currency Area. The main criteria are the labor and capital mobility. The second one is the price and wage flexibility across regions and the third is the ability to transfer government funds and adjust the taxation across region.
How do the countries of the EU compare to the states of the US in terms of the OCA criteria?
Labor mobility US > EMU
Capital mobility US = EMU
Price flexibility US = EMU
Wage flexibility US > EMU
Union level fiscal transfers US > EMU
(CES, 2009, Optimal Currency Area)
It is evident, that the US outperforms the European Monetary Union in 3 areas out of the 5, and even in the remaining field, the two unions are equals. The EU is not able to beat the US in any relevant fields, which leads to structural level problems, and smaller competitiveness compared to the US and the rest of the world economy.
To balance out these problems and to become similar to the US, the EU needs to remove language and cultural barriers throughout the Union. It also need to make the wages much more responsive to price and inflation fluctuations. This limits the labor movement severely. The last main issue is that the EMU cannot transfer funds or adjust taxes from one region to another. In the US these issues are resolved and it is a one of the main source of their general efficiency.
A similar, federal-local system similar to the US could solve funding issues in EU projects; as regions would be able to use their funding for the smaller issues, while the higher level could concentrate on European cohesion. This of course would also require that the EU would get more funding from the members, and this is unlikely in the foreseeable future (Knipton, 2013).
The fiscal policy is limited. It is important to have similar levels of national debts, because otherwise the counties which have a higher national debt will have a hard time finding buyers for their national debt. This caused a huge problem in the PIIGS (Portugal, Ireland, Italy, Greece and Spain), who have huge national debt, which is getting harder and harder to finance.
One of the main problems is that there is no Europe-wide fiscal authority. Each individual country in the EU controls its own budget and thus fiscal policy. It is a problem because the EMU cannot deal with the economic fluctuations on a regional level and it cannot eliminate the ups and downs. Because of the nationally lead fiscal policy, it is harder for the European Central Bank to cooperate with the national level authorities. Another setback is that these national authorities can and already have acted without regards to the common hazards and they already collected high national deficits (Pettinger, 2013).
The specialists argue that countries which are member of the Euro Zone, tend to fall into a sense of security and they think that they are safe from the currency crisis. This sense that for security can be a quite dangerous one, because countries and the local governments are delaying the structural changes and fiscal responsibility. This is weakening the Euro Zone, because the Economic and Monetary Union cannot affect the local fiscal policies.
Germany has a sense of recovery, as the investors are flocking to the largest and safest economy of the Euro zone. This made the Germans sure that their mix of fiscal and monetary strictness and discipline is the only working way; this perception have blocked the talks between Germany and Greece, as Germany is unwilling to accept alternative solutions or any kind of extra support (Smith and Rankin, 2015).
In the case of Greece, they benefitted from the low bond yields, because the Euro zone was backing up the Greek debt. Because of this, they delayed the structural reforms and this lead to a dangerous situation, where even the complete bankruptcy of Greece was imaginable (El-Elrian, 2012).
There is no lender of last resort yet, because the European Central Bank will not buy bonds from countries which have short term liquidity problems. Because of this, those member states that need the ECB the most – are excluded.
Also, there divergence in bank rates. The Euro zone is supposed to create a common interest rate, however we see something else. We see that the interest rates for the private sector in the peripheral countries are significantly higher than the ones at the central countries. Even though the ECB tried to counter it by cutting the official interest rate, but it was not effective, since the banks did not cut a meaningful amount from the interest rates charged after debt. So this move failed to solve the issues of the companies in the peripheral countries, such as Italy or Spain (Pettinger, 2013)
“Europe is facing its worst humanitarian crisis in six decades,” according to the general secretary of the International Federation of Red Cross (IFCR), Bekele Geleta. Even years after the financial crisis, there are millions of people falling under the poverty and staying there for indefinable time (Machaus, 2013).
The crisis made the poor poorer, and it also started to destroy the middle class as well. The middle class of Serbia for example had already been shirked.
The crisis also affected the hospitals and the social sector, because the countries cut from the funding of these as a reaction to the crisis. So now when the people need it most, there is less help than it used to be. The level of service in these sectors keeps declining, which is completely in contrary with the EU’s objectives.
The unemployment is also one of the largest concerns of European Union. The newcomers to the job market are affected even more severely. This means that the young people are not able to find jobs in their own country and they start migrating to other countries. In Spain the unemployment rate under 25 years is more that 50%. This leads to the overburdening of the receiver’s social sector and it also increases xenophobia and rising social turmoil, such as anti migration protests. The migrated workers are already causing problems, and it would only deteriorate; with a mass of peripheral Europeans migrating to the centre (Pipes, 2014).
These people are not only in the peripheral countries, with weaker economy. The number of people dependent on welfare is growing in the most powerful economies of EU as well. In Germany and France there are more and more people who are unable to afford food and rent at the same time. If it was not for the food aids, these people would either starve or would be homeless. According to the Red Cross, there are around 600 000 German citizens, who are in this situation and the number is still growing (Machaus, 2013)
The problems of the European Union can come from several reasons. The first is the Great Recession, which hit the Euro zone and crippled the economy.
However there are other factors as well, which can be equally if not more dangerous. The countries of the EU are not pushing the structural, fiscal and monetary reforms which are needed to secure the future of the European Union.
The rising problem of unemployment is also linked to both reasons. To stop this, the European Union needs to deal with structural reforms, because this problem cannot be solved by just policy changes, it needs real changes and real solutions for the problems of the European Union.