The euro rescue plan and refugee crisis have plunged the EU into an existential crisis, according to Michael Hüther (director of the Cologne Institute for Economic Research, IW) and Hans-Werner Sinn (outgoing director of the Ifo Institute for Economic Research) in a commentary published in the Süddeutsche Zeitung. Only through a joint initiative could the EU manage to regain its strength.
Why Europe could benefit from a common army
Things are not looking good for Europe. Sixty-five years after the start of European integration, the euphoria that accompanied the move towards a Europe of peace, liberty and prosperity has dwindled. The EU has also surrendered its dream of how it would advance to the benefit of everyone. Never before has European policy seemed as frazzled, disillusioned, discordant and hopelessly bewildered as it does today.
Bailouts during the euro crisis strained Europe’s sense of identity and direction. The low interest rates brought about by the euro drove southern Europe into an inflationary credit bubble. When the bubble burst, it left in its wake national economies that were overpriced and no longer competitive, which were then rescued by the European Central Bank and the international community with collective loans. This gave private creditors the chance to recoup their investment and abscond. The northern countries – with Germany leading the way – stepped in as creditors for the countries of southern Europe, thereby raising the natural clash between creditors and debtors to the intergovernmental level, which is not particularly conducive to peaceful relations.
And now Europe finds itself transfixed by the refugee crisis, which is challenging Europe as a whole. Germany, the de facto leading nation in Europe, acted on its own, without consulting with its partners, and finds itself now rather isolated.
So, it’s no wonder that people are now asking what can carry the European Union into the future. The knee-jerk position formulated in the wake of the euro crisis that a deeper fiscal union must finally be instituted is unconvincing, for two reasons: a fiscal union would lead to a transfer union that would smooth out not only temporary economic disruptions, but become a permanent fixture. This would reinforce the lack of competitiveness of the southern countries, since such transfers keep wages and the standard of living at a level high enough to discourage competitive companies from settling there. Italy’s Mezzogiorno is a prime example of such a development.
The other reason is that the fiscal union amounts to an implicit or explicit mutualisation of debt. This provides an artificial prop to the creditworthiness of the debt-ridden countries, and artificially lowers the interest rate at which they can borrow funds. However, this in turn causes an overwhelming incentive to go even deeper into debt – an incentive that legal barriers can hardly control. We do not consider it unlikely that the fiscal union favoured by France will lead to a massive, ultimately unstoppable avalanche of debt. This would seriously endanger the peaceful cohabitation of the nations of Europe.
In the Five Presidents’ Report of the summer of 2015, however, this was presented quite differently. The report called for a better coordination of the social systems; but in our assessment, this harbours more dynamite than cement for the euro zone. The same applies to the demand for a treasury for the entire euro area – one that would have to make as-yet unspecified decisions in a “genuine economic and monetary union”. This simply isn’t supportable without the European public and a corresponding “sovereignty of the European people”. Even the relatively mild recommendation of European unemployment insurance holds its own share of explosive power. Such insurance would balance out the costs of structural differences and bring about opportunistic behaviour that would exploit the collective.
The demands of the British government were rightfully aimed in a different direction. It would be most unconvincing if Germany, in collaboration with France, were now to get involved in even more collectivisation initiatives. Such a policy would have a destructive impact on the joint European project, especially considering that many countries in the eastern part of Central Europe tend to share the British position. Anyone pursuing fiscal integration with France and southern Europe without the integration of eastern Europe is essentially digging a deep trench straight through Central Europe. The trench would separate Germany from the countries with whose culture it’s always been most closely connected.
Taking these dangers into account, what can ultimately succeed in Europe? The priority is to close the EU’s functional gaps that became evident in the course of the refugee crisis. The external borders of the Schengen Area are not being protected effectively, the contribution of the member nations to coping with the influx of refugees has not been established, and a strategy for combating the root causes for migration does not yet exist, nor does a plan for supporting refugees near the trouble spots.
The internal market and four fundamental freedoms were introduced before Europe was faced with the pressure to resolve these issues. But now it’s obvious that a country needs borders in order to guarantee both welfare coverage in the broader sense and the protection of its citizens’ ownership of the country’s public assets. Free access for everyone is just as incompatible with a liberal and market-oriented system as free access to private property would be. However, the borders must be open for the free and fair exchange of goods and labour. Such an exchange is only possible with clearly defined property rights.
Europe went beyond the creation of the free market by establishing the Schengen Area, within which even border controls were dispensed with. This was done in the expectation that civil and labour law would provide sufficient protection for the free trade of goods and labour, and that it would not result in an abuse of national goods or welfare systems.
The Schengen Agreement has been severely challenged by the refugee crisis, however, since the border countries of the Schengen Area did not register those coming in from outside – which it was their job to do – but simply waved them through, thereby evading their obligation to look after the refugees as stipulated in the Dublin III Regulation. Greece, a Schengen exclave, did not meet its obligations; nor did Italy or Slovenia, countries that currently constitute the main gateways to the Schengen Area in Central Europe. It simply wasn’t possible for them to do so, given the nonexistent quota regulation for redistributing refugees throughout the Schengen Area.
This requires an immediate and urgent change, by setting up reception centres at the borders of Italy and Slovenia, where the Schengen countries of Central Europe can carry out asylum procedures in line with a uniform law and on the basis of a balanced quota system, and where they can also grant entry to economic migrants on the basis of uniform criteria. Persons who clearly are not entitled to asylum as well as those who are otherwise insufficiently qualified can be denied entry on the spot. It is doubtful that such an arrangement will be manageable in Greece, given the country’s jagged coastline with thousands of islands. We also don’t consider it expedient to depend on the goodwill of Turkey. We could imagine that stronger controls and the fixing of quotas on the German border could constitute a temporary solution – one which might make other countries more willing to agree to a quota system.
What’s more important on the medium term is the creation of a Europe-wide defence community. In view of the military trouble spots around Europe, we consider it an unconscionable anachronism that the EU’s 28 countries have over 25 separate armies, each with their own general staff – even if they are interconnected through NATO, albeit feebly. This fragmentation pushes costs and is inefficient, since it requires keeping parallel weapons systems. Furthermore, it’s dangerous, because the lack of compatibility between the countries’ military equipment and the lack of a common chain of command would gravely hinder operational efficiency in case of an emergency.
Before the Eurozone countries become further entangled in a fiscal union, the countries of the Schengen Area or Eurozone should join their forces into a European defence community. Uniform structures and a high command would establish a new, sustainable pillar of European cooperation – one that would provide a solid foundation for the political union and which would make regulatory sense. The Western European Union can serve as a starting point; it was established as a replacement for the European Defence Community that failed in 1954, was integrated into European treaties to reinforce the Common Foreign and Security Policy (CFSP) in 2000, but ultimately ceased to exist in 2011.
Up to now, participation in the “permanent structured cooperation” (Article 42 of the Treaty on European Union) has been voluntary, linked to criteria of defensibility. This participation should be based on an agreement and further intensified to the point of a common army. Such a visible European pledge of solidarity – similar to those made at the formation of the United States and of Switzerland – would have a strong and sustainable impact on European integration. It would finally turn the continent’s integration around, placing it back on its feet.
The defence union would need a common budget, financed through membership contributions, which would finally be utilised for the creation of a genuine public good for Europe as a whole. The joint financing of refugee policies could also be organised in a similar context. Europe needs to regain its strength from a common project that would draw upon the coherent interests of the member states. On the long run, the European Union cannot bear a split into one coalition of the willing and one of the unwilling. Ultimately, the failure of the unwilling will also impact the willing. It doesn’t have to end this way.
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