Automatic Stabilizers for the Monetary Union

A tumbler has automatic stabilizers – the eurozone has not.

It is one of the well known problems of the eurozone that it is hardly possible for the European Central Bank to determine an appropriate base interest rate, given the different economic situations of the various member states. In a time of cyclical recession, inflation rates usually decrease, so that the central bank lowers the interest rates, which makes credits cheaper, stimulates the economy, and raises inflation. In a time of economic boom, by contrast, inflation usually goes up, to what a central bank responds with heigher rates, which make loans more expensive, cool down the economy, and reduce inflation. However, if a central bank has to establish a common interest rate for several countries, some of which are in recession while others are on the upswing, it faces a virtually impossible task.

The European People's Party at the height of its power

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After its electoral successes, the only thing the EPP lacks is a common political agenda.

Five days before the Spanish parliamentary elections last sunday, Alfredo Pérez Rubalcaba, top candidate of the governing party PSOE (PES), delivered a speech on the economic problems of the country, the main issue of the electoral campaign, and proposed his solutions for them. The options were two: either the European Central Bank should intervene massively and buy Spanish government loans – or the European Council had to adopt a public investment programme which Spain itself can't afford. The problem: Both options depend on European institutions, which means that even winning the elections Rubalcaba would not have been able to impose them himself. But, as El País wrote with some mockery: "at least, it should not fail because of lack of ideas". By contrast, the leader of the opposition, Mariano Rajoy from the conservative Partido Popular (EPP), didn't even bother to formulate an economic agenda. Instead, both candidates just went complaining around about "Merkozy" (see El País), until finally this paradoxical campaign came to an end and the PSOE suffered the disastrous defeat everybody expected, which means that over the course of 2011, there has been a government change in all five countries suffering most from the Euro crisis: Ireland, Portugal, Geece, Italy, and Spain.

Brief History of the European Transfer Union (1)

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After the debacle of the FDP in the elections for the regional parliament of Berlin and Peter Gauweiler's defeat in the vote for vice-president of the CSU, the coalition politicians in the German Bundestag have reduced a bit their anti-European populism – it obviously doesn't pay off. However, there is still one word which keeps persistently wandering through the German public debate since it was invented around two years ago by these populists: it's the "transfer union" which, according to them, threatens to result from the measures against the euro crisis and is contrary to the "stability union" which the founding fathers of the EU strove for. This allegation is pointless for two reasons. Firstly, because the EU was already a "transfer union" when it was still called European Economic Community and people only dreamt about a common currency. And secondly, because there is no contradiction at all between transfers and stability – on the contrary, the first could even be the precondition of the second.

What happens if Europe becomes German

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As the German federal government appears to be both decided and capable to impose its models of economic policy to the rest of the eurozone, we should pose the question what purposes it aims at and in which way it is planning to solve the debt crisis. Of course, it is not entirely sure whether the federal government has any plan at all – but supposing it has, its demands from the other member countries allow the following conclusions on the German strategy for Europe:

The guiding concept of the German reform approach appears to be the mercantilist idea that imports are bad and exports are good. If a country buys many goods from abroad in order to consume them, it has to pay for them, becomes poorer and has to incur debts. If, on the contrary, it sells many goods to other countries, it will get foreign exchange, so it will gain wealth; and, moreover, thanks to the foreign demand its production will rise, so that new jobs are created. Thus, in order to escape from an economic crisis, a country has to increase its exports and lower its imports as much as possible.

Strategies of economic policy – and why it matters who decides

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If this is not a case for the European Parliament, then what is?

If a country (or let's say, a continent) is at the same time in an economic depression and a massive sovereign debt crisis, there are only two possible ways out. One of them consists in fighting the debt crisis by raising taxes and cutting expenses – in the hope that this public austerity will bring back market confidence and the economic crisis will resolve itself. The other consits in revitalising the economy by a publicly financed stimulus package – in the hope that the restored economic growth will also increase tax income, solving the sovereign debt crisis.

Which way for recovery: saving or spending money?

Both strategies are based on different economic theories. A neoclassic will doubt the effectiveness of stimulus packages and therefore prefer the austerity option. A Keynesian, by contrast, will argue that business confidence doesn't rise out of nothing just because the state spends less money, and therefore defend an expansionary policy in order to raise aggregate demand. At the same time, both strategies have their own characteristic risks: if austerity fails, the economy will sink even deeper into depression, enteprises will go bankrupt, unemployment will grow and due to lower tax revenue also the public debt itself. On the other hand, if the economic stimulus fails, the government has just increased its debts even further and possibly also fueled inflation by the additional spending.

Why federalism?

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I affect not reserves which I do not feel. I will not amuse you with an appearance of deliberation when I have decided. I frankly acknowledge to you my convictions and I will freely lay before you the reasons on which they are founded.

The Federalist Papers, No. 1

Why should there be supranational integration at all? Unfortunately, the partisans of the "European idea" often answer this question with rather unconvincing arguments. They like to tell us that the European Union, the Common Market, the Monetary Union have economic advantages – or they refer with pathos to the peace in Europe, safeguarded by the EU. Both arguments are true, no doubt, but they fall short of the real importance of the European integration. Sure, every European country, especially Germany, would be poorer without the EU. But in its competences and its functioning, the EU has long grown beyond the old Economic Community, and it doesn't make much sense to evaluate all of its actions only on the basis of its economic benefits. And sure, the European integration was essential for the Franco-German rapprochement during the 1950s and it still makes impossible any intra-European war. But after all we know from conflict research, if it were only about avoiding wars, it would suffice that all European countries are internally democratic. In any case, this argument cannot justify today's EU, and even less a further supranationalisation: where should the apparently never-ending integration process lead to, and why should the European citizens support it, if all the goals  we wanted to achieve with it have long been accomplished?

But the decisive reason for supranational integration is a different one: it is the striking democratic deficit of any system of independent nation states. Because every nation state is democratic only internally: it concedes all of its citizens the same participation rights and therefore has the legitimation to solve social problems which affect the whole if these citizens. However, social relations don't stop at national borders: citizens of different countries do business together, compete with each other, pollute each other's air and water, marry each other, and want to learn from each other at schools and universities. Therefore, there is a need for political regulation which goes beyond countries and for which the sovereign nation states of the past have developed diplomacy and international law. These tools were sufficient as long as the societies of different countries were still rather separated from each other: important political questions were decided democratically in a national framework – and a functional elite in the foreign ministries of the world was entrusted with the few problems which went beyond that and needed an international regulation.

A dilemma and a way out

But the closer the connections between the societies became, the more obvious were the problems of such a diplomatic decision-making between governments which are responsable to their national population only. On the one hand, it is rather unefficient, as the single governments don't have in mind the best possible solution for all citizens, but only for those of their own country, and thus are often disposed to take a free ride and increase their own benefits at the expense of the collectivity. On the other hand, diplomatic decision-making restrains the participation of citizens, as their voting right only gives them influence over their respective own government – not over all the others who also take part in the decisions. These two disadvantages are complementary; minimizing one of them, you increase the other: If you emphasize the right of democratic self-determination by accepting only informal co-operation on the international level and maintaining a veto right for national parliaments for any decision, there will be a growing danger that transnational problems are not solved at all. If, by contrast, you increase diplomatic efficiency by introducing majority voting in international organisations or delegating decisions to special boards and committees, you reduce even more the influence of any single citizen.

The only way to escape this dilemma is to introduce parliamentary decision-making procedures beyond the national level. Only a supranational democracy enables political decisions by majority voting and still maintains the power of the citizens, as decision makers will be elected by them. What concerns the citizens of a single country, should be decided by the inhabitants of this country. But what concerns the citizens of all countries, must be decided by the inhabitants of all countries – or by a Parliament responsible to them. And this is the merit of the European integration and the reason why it has to continue in further treaty reforms, not in any direction, but in the direction of a complete supranational federation, in which a European government will be responsible to the European Parliament and the European Parliament to the European citizens. Because only a federal Europe can be a democratic Europe.

And, by the way, only a federal world can be a democratic world.

La via da percorrere non è facile, né sicura. Ma deve essere percorsa, e lo sarà!

Altiero Spinelli/Ernesto Rossi, Manifesto di Ventotene