How real is the danger of an EU collapse? My verdict: It’s receding

John Bruton *, former Prime Minister of the Republic of Ireland


The International Institute for Middle-East and Balkan Studies (IFIMES) in Ljubljana, Slovenia, regularly analyses events in the Middle East and the Balkans. John Bruton, former Prime Minister of the Republic of Ireland has analyzed the situation in European Union and its future. His article entitled How real is the danger of an EU collapse? My verdict: It’s recedingis published below.

How real is the danger of an EU collapse? My verdict: It’s receding

Popular sentiment and necessity are pulling Europe in opposite directions. The popular sentiment that drove the EU forward over the last 60 years is weakening just as the Union needs to take on new tasks if it is to avoid a collapse in European finance. This is due to a combination of general social trends and two very specific pressures.

The general social trend is historical forgetfulness. Europe at peace for almost 70 years has forgotten why European unity was such a priority. Nationalist sentiment is indulged as if it were free of consequence.

Another social trend is a lack of understanding among the general public in all EU countries of how much their livelihoods depend on economic decisions elsewhere, and of how unrealistic an “ourselves alone” policy now is. This failure in understanding has a structural cause. Electoral politics are still local and national, whereas the issues they have to tackle are often global. Politicians are forced to pretend they can find national solutions to economic difficulties, whereas national actions will never provide more than part of the answer. Public opinion has no adequate democratic vehicle for educating or expressing itself beyond national boundaries. There is no electoral pressure to learn what people in other European countries are worried about, or to think outside national terms.

The two specific pressures now putting stress on the EU are the euro crisis and the growing desire of the UK to have a different type of relationship with the EU. The euro crisis is forcing the EU to deal with all the issues that were postponed when the original design of the euro was agreed. The EU’s powers, budget, own resources and procedures for decision making were left in completely inadequate state relative to the scale of the crisis. So the crisis has had to be tackled outside the traditional community method of EU governance where proposals would have been prepared holistically and adopted by majority.

The crisis is instead being dealt with on an inter-governmental basis, the way Europe dealt with its problems as long ago as the Congress of Vienna of 1815 and even before that. Decisions have to be unanimous between 27 (or in the eurozone’s case 17) heads of government, who each have the “day job” of running their own country. They are able to turn to EU issues over long weekends, but even then their mandates oblige them to look at EU issues primarily through the prism of national interest. The brinkmanship and bargaining, that is an inevitable part of such an approach makes it impossible to present any broad visions to the European public. The euro crisis is being made all the harder to manage by the fact that the UK is not in the euro, but must co-operate if EU institutions are to be used to solve euro area problems. Meanwhile, the UK is pursuing an entirely different agenda of its own. This difficulty is illustrated by the fact that the euro’s Fiscal Compact treaty had to be brought into effect outside EU structures because the UK wasn’t satisfied with concessions regarding its own particular interests. This type of conflict is liable to occur again in the future. The risk is that these pressures will undermine the instinct for compromise, that enabled a smaller EU to overcome the much smaller problems of the past. Existential threats do now face the European Union, so it’s worth beginning with what Europeans might lose if the EU were to founder.

The European Union is an historically unprecedented international institution-building project. It is the first ever voluntary coming together of sovereign states, pooling some of their sovereignty so that they could do more together than separately. It has no comparable historical precedent. Almost every other political unification or state building in history has involved the use of force. The creation of most European states, including the UK, and the maintenance of the unity of U.S. involved force. By contrast, the EU came together peacefully and voluntarily without coercion of any kind. Some argue that the EU was only necessary to cement the post-war reconciliation of Germany and France, and that now that that’s achieved and a free trade area created the Union has done its job and it needs no further development. This is wrong for two reasons. First, the queue of states lining up to join the EU shows that it still provides a political and economic umbrella under which the reconciliation between states and their mutual security can be assured. That’s why the Baltic states, Poland and other central European countries joined, and it is the reason several Balkan states and even Georgia and Ukraine, might like to do so. It is also why Greece, to the surprise of many, has favoured Turkish membership.

The United States of America is remarkably successful in many ways, but there is no queue of other American states lining up to join. Even Puerto Rico has not done so after more than 100 years of Washington rule and non-voting representation in Congress.

Second, the EU is the world’s most advanced effort to provide a measure of democratic supervision of globalisation, with two key differences between the EU and other efforts like those of the United Nations and the World Trade Organisation to supervise globalisation. The EU has a directly-elected Parliament which co-legislates for the EU alongside the 27 member governments, who often decide issues by majority. These are characteristics not generally found in other international organisations. These other organisations operate on a purely inter-governmental basis, which means that there has to be unanimity to get a decision and that democratic involvement only arises after a deal has already been negotiated in private. And that democratic involvement is ratification in national parliaments without the possibility of further negotiation or amendment. The result of these two important differences is that organisations like the WTO and the UN can do much less than can the EU. The EU offers a unique model for democratic rule-making, at supra national level, something which will become more necessary as we advance further into the 21st century.

The world’s failure to deal with climate change is a good example of the weaknesses of inter-governmental global governance. If the different regions of the world were like the EU and could negotiate seriously, because they carry with them large blocs of countries on a basis of genuine political legitimacy, Copenhagen and other failed climate change summits would not have happened. If the EU were to break up, either because of the collapse of the euro or because a major country like the UK feels it has to exercise its right to leave the EU, and either event were to set off a breakdown of the trust that keeps the EU together, we would have lost a unique instrument for building security in Europe and for problem solving in the wider world.

There are two existential threats to the EU, the euro crisis, and the UKs possible desire to leave, and both demand deeper analysis. A break-up the euro is undoubtedly by far the more serious threat to the EU because the scale of the economic losses is potentially so much greater, and the means of controlling those losses much less. As 2013 dawned,the euro crisis appeared slightly less acute than before. The announcement of a new bond buying policy by the European Central Bank calmed the markets, even though there can be no doubt that the markets will test the ECB’s will power at some stage. Meanwhile, the link between the solvency of European banks and the solvency of European states has not been removed. It isn’t clear yet that the European Stability Mechanism (ESM) will invest directly in Spanish banks, or that the Irish state will be relieved of some of the burden it undertook to prevent Europe-wide contagion at the time of the collapse of an Irish bank to which non-Irish banks had lent inordinately. A default by any EU state would wreck the banks of that state, because each state’s banks tend to be big purchasers of its bonds. The collapse of one bank in any eurozone state would force its government to inject capital into other banks to avoid a run on banks generally and the spreading of contagion to other countries. The confidence loss caused by a major bank getting into difficulty could lead to a dramatic collapse in state revenues, leaving it with a much increased budget deficit, just as it was having to recapitalise the bank.

To resolve these problems, four things have to happen more or less at the same time.

  • Greek government debt will have to be forgiven.
  • The ESM has to be seen as big enough to stand on a contingency basis, behind Spain and other countries that may get into difficulty.
  • New mechanisms to supervise and if necessary rationalise Europe’s banks have to be put in place.
  • The reforms agreed to reduce deficits and promote growth by opening up to freer competition jobs and services markets will have to be fully implemented in letter and spirit to show creditors that debt-forgiveness or an enlarged ESM doesn’t mean throwing good money after bad.

Some progress has been made, but it’s far from certain the Greek debt issue has been adequately tackled. There’s still a risk that dealing with the problem is being postponed until after Germany’s September elections. It’s a delay that may add to the overall cost of the solution, although it does allow time for Greek reforms to establish credibility. And that the time must also be used to educate public opinion in creditor countries like Germany of the true consequences of a euro break-up. One of the reasons growth potential has been so low in Greece, Italy and Spain is the lack of competition or flexibility in key sectors. This has also masked deep unfairnesses in society, with some groups able to overcharge for their services but others are driven into marginal, badly paid and precarious jobs. There are also major failures in the educational systems of many southern European countries, where disproportionately large numbers leave school early or fail to complete courses.

The EU has now enacted a raft of legislation, including the Fiscal Compact treaty, to ensure that countries reduce their deficits and liberalise their labour and service markets. But education is outside the EU’s mandate. Looking to the wider picture, Germany is not yet satisfied with progress so far, and wants an EU Commissioner given the power to veto national budgets, and enforce reforms. Yet Germany itself and France, along with other core countries could be doing a lot more to open up digital, financial, energy, retail and professional services markets. Germany set a good example in labour market and pension reform at the beginning of this century, but there are other reforms it could initiate now that would help other EU countries to sell more goods and services into the German market and so trade their way out of their economic problems.

In Germany and elsewhere, political resistance to further debt forgiveness for Greece is understandable but a Greek exit from the euro would be far more dangerous. That needs to be explained to public opinion in Germany and all EU countries. A Redemption Fund such as that proposed by the German government Council of Economic Advisors would be one way of allowing the possible mutualisation of some sovereign debt; and just the possibility of that could stabilise sovereign debt markets even if never activated. But the negotiations that might lead to this are proceeding very slowly and in the meantime things could easily go wrong. Even a disorderly default by a country within the euro would have far less severe consequences than the exit of a country from the euro. Some northern Europeans believe that an orderly exit of Greece from the euro might be contemplated if accompanied by a huge fund that would be much bigger than the existing ESM to stand behind all other troubled eurozone states. The hope is that this would be enough to prevent a Greek exit from leading to a loss of confidence in the financial positions of the rest of the eurozone. It’s a view that is profoundly mistaken.

The whole EU edifice rests on law; the EU has no police force to enforce its will and relies on member states respecting the European Court of Justice’s interpretation of EU law and then implementing its decisions, however unpleasant that may be. The exit of a country from the euro would quite simply be a flagrant breach of treaty obligations which have all the force of law. The euro was established on the basis that it is irreversible, so Greek exit, particularly if condoned or even encouraged by other members, would say loudly that the euro is not irreversible. That would lead to constant speculation in the markets as to who would be next. And as speculation increased, so too would the size of the funds or guarantees needed to check it. That in turn would lead to a heightened risk that some creditor countries that would have to provide funds and guarantees might decide to exit the euro themselves and re-establish their own currencies. It’s a spiral that would quickly end the euro.

Break-ups of currency unions have happened before, in Austria-Hungary after World War I and in Eastern Europe in the 1990s when the rouble zone broke down. As Anders Aslund of the Washington-based Peterson Institute of International Economics put it recently, the consequences were truly disastrous. And if it were to happen to the euro, new currencies would have to be established, with the relative value of these currencies unknowable; some would lose value very quickly, and the worth of others would shoot upwards. Exports would in some cases become dramatically uncompetitive, and in others they would be so cheap there would be accusations of dumping, currency manipulation and calls for the immediate re-introduction within Europe of import duties. That would end the Single Market and be tantamount to the break-up of the European Union itself. The open markets on which a country like Ireland built its whole economy over the last 50 years would be gone.

In some EU countries the banking system would break down, and people would have no access to credit for even the most basic transactions. In others, people would cease to trust the value of their own money. Money is based, after all, on a promise so if people can no longer trust the states that stand behind the promise underlying their money, the basis for money itself is gone. This isn’t fiction; it is what happened when the rouble zone broke up in the 1990s and explains why incomes fell by 50% in former rouble zone countries. And exporter/creditor nations within the rouble zone like the Russian Federation suffered just as much hardship as importer nations like Latvia and Estonia. The political stresses entailed in such a scenario for the 500m people of the EU and their governments would be such that trust between European nations could easily break down.

We have already seen some signs of this, but these are being held in check by hopes that Europe’s problems can still be resolved collectively. But a break-up of the euro would show that it has been impossible to resolve matters on a collective basis, and it would then be a case of every nation for itself. As if Europe doesn’t have enough problems, one important country, the United Kingdom of Great Britain and Northern Ireland, is preparing to renegotiate the terms of its EU membership and hold a referendum on the outcome, which potentially would decide whether the UK stays or leaves.

The first thing to be said is that the UK is entirely free to do this. Unlike other Unions such as the United States or the UK itself, the European Union is a treaty-based Union which states are free to leave so long as they fulfil their normal obligations under international law which arise when any country withdraws from any international treaty. The UK has from the outset been an uneasy member of the EU. Winston Churchill envisaged a United States of Europe, but he didn’t envisage the UK, which at that time still had a global Empire, being part of it. The UK did not attend the 1955 conference in Messina which led to the treaty of Rome, and when it eventually joined the Common Market, a decision endorsed by a referendum, the idea was sold to the electorate as an economic arrangement when even the most cursory reading of the Rome treaty would have shown it to be much more than that. The UK is now threatening as it is legally entitled to do, to veto the EU’s 2014-20 budget unless there is an absolute freeze on the size of the budget. The difficulty with this stance is not legal, it is political. The EU Single market, which guarantees free movement of people, goods and services, was created as a political deal. Europe’s weaker economies opened up their markets to stronger ones and lifted their protection of local businesses in return for the promise of structural funds to modernise their economies. These funds are provided through the EU budget provides, and although some of the budget still also goes on agricultural support that has fallen from almost 80% to only 30%.

The UK’s EU budget stance is unfair to the new EU member states. In the past, when countries like Ireland, Spain, Greece, Portugal, and even the UK itself, joined the EU, they all qualified for very substantial structural funds for agricultural modernisation, general infrastructure, training, communications and so on. Now, with 12 new central European countries that are relatively far poorer, they are to be told, if the UK sets the freeze it wants, that they won’t get even a fraction of the help other accession countries received. An example of the unfairness came recently from an Estonian government minister who said farmers there have to compete with west European farmers who are getting three times the subsidies. Unless there are drastic cuts elsewhere, this sort of anomaly can only be put right by increasing the whole EU budget.

The UK government has made the budget a red line issue without any debate about what the money is actually spent on, or about what sort of budget is needed if the EU Single Market is to be preserved. The UK wants access to the EU marketplace but isn’t prepared to pay any entry fee. And much the same problem arises in the renegotiation of EU membership current UK government wants. In preparation for this, it is doing a comprehensive audit of all EU laws to identify areas of activity that could be taken back from the EU and administered under UK law. Some good ideas for handing back powers to member states may emerge from this that other members could agree on. But there may also be very real problems if the UK comes up with proposals that suit it but not others. Britain may want to take back yet specified powers, but retain full access for goods and service exports because half of its exports go to the eurozone, whereas only 15% of eurozone exports go to the UK.

All markets are political constructs. The EU Single Market is a product of common rules, regulations and conventions without which nobody could rely on what they were buying. That’s why there have to be common quality standards, as otherwise one country could impose standards, designed to exclude competitors. Rulemaking powers that could be abused in this way cannot be handed back for national decision-making without endangering the whole single market. Competition in any market also has to be fair, and someone has to regulate that. If competitors have different environmental, or product liability standards, or if some companies are operating monopolies or cartels, competition will not be fair. These are matters that cannot be handed back to national authorities and it is important that UK public opinion should understand this.

If the UK decides to draw up a list of EU rules it would prefer to make in Westminster rather than Brussels, the other 26 governments could do the same but would probably come up with very different lists. The process could quickly become bogged down in a serial re-opening of ancient compromises on issues that have little relevance to the urgent existential threat the EU now faces. And If the UK makes proposals that require treaty change, that change will have to be approved in all 27 countries. The UK announcement that it is going to have a referendum on the outcome of the renegotiation may well lead to other countries doing the same, especially if treaty change is involved. Referenda are unmanageable events, and the UK’s renegotiation risks giving an opportunity to others to engage in brinkmanship of their own.

Some people in the UK look back at the precedent of 1975, when Labour prime minister Harold Wilson re-negotiated the EU membership terms accepted a few years earlier by his conservative predecessor Edward Heath. On that basis, continued UK membership of the EU was approved in a referendum. Today they argue that as this tactic worked once it will work again. But this time it will be much more difficult; in 1975 the UK had to negotiate with just eight other fairly similar member states. This time, once Croatia joins in mid-2013, it will face 27 others, with the possibility of some sort of serious political accident much greater. The impression being given is that many in the UK are not thinking very deeply about these things, and that the EU is still regarded by many in the UK as a homogeneous foreign country, not a highly diverse Union. Britain’s membership is seen more as a disposable convenience than as a long-term commitment. If the price of satisfying UK voters is to cause more problems for the “foreigners” in “Europe”, that isn’t seen by some politicians in Britain as such a bad thing.

With genuinely urgent things to do like safeguarding the very existence of the EU, other member states may prove disinclined to devote time to a case-by-case analysis of requests for repatriation of powers or of new UK opt outs. And the European Court of Justice would certainly have difficulty reconciling a special EU menu for one country with the basic freedoms for all on which the EU is based. And then there’s the old question of whether UK ministers and MEPs should continue to have voting rights on things they opt out of. If, as seems likely the UK is still dissatisfied with the results of its renegotiation, the Westminster government will have little option but to recommend to the people in a referendum that the UK withdraws from the EU. Britain’s eurosceptic Tory politicians look to be setting themselves up in exactly that position for 2016. How, then, could the UK protect these interests if it is outside the EU? One possibility is to join Norway, Iceland and Liechtenstein in the European Economic Area, which would guarantee full access for UK goods and services to the EU market. But the price for that would be having to implement all EU legislation that was relevant to the single market, and contribute to the EU budget, but without having any say in EU decisions. This would be worse from a eurosceptic point of view than the UK’s present position, even though it would guarantee continued access for the UK to the EU goods and services market.

The other possibility is to follow Switzerland and negotiate a series of bi-lateral trade deals with the EU. The UK would not be entering such negotiations from a position of strength, because it relies more on the EU market than does the EU on the UK market. Switzerland has negotiated full access to the EU market for goods, but not for services. Services are the UK’s key export sector, so a Swiss-style deal would not be attractive, least of all to the City of London. If Britain were to negotiate a Customs Union with the EU, like Turkey, it would find its trade policies with the rest of the world still determined in Brussels, but with less input from London. Again, under a Customs Union it would only have a guarantee of access to the EU market for goods but not for services. Britain might, of course, simply leave the EU without negotiating any special deal. That would leave it paying tariffs on its exports to all EU member states. In the case of Ireland, it would mean the re-introduction of customs posts along the border and would undermine years of peacemaking by successive Irish and UK Governments.

There has never been passport control within the island of Ireland, but if as a non-EU country the UK wanted immigration controls against immigrants from any EU states it would have to introduce passport checks all along the Irish border, reminiscent of conditions during the worst of the Troubles. Prime Ministers like John Major and Tony Blair invested so much in negotiating a settlement of the “Irish Question”, so it’s amazing that the impact in Ireland of any withdrawal from the EU receives no attention at all from the UK’s eurosceptics. The pressures causing fractures within the EU derive from a lack of understanding among the general public of the extent to which their livelihoods depend on economic developments in other countries. Political leaders make little effort to explain this because to do so would undermine the nationalist myths which brought most states into being in the first place. And because it is often convenient to blame the EU for necessary but unpalatable decisions.

For these reasons, little effort is made to forge pride in the EU’s achievements. No venue has been created in which an EU-wide public opinion might be formed, even though the EU needs more democratic cement to hold itself together. European Parliament elections are not truly European because they are 27 different elections with different electoral systems after campaigns in which national issues predominate. The European Parliament has itself refused to contemplate the election of some members from EU-wide party lists, which might have begun a process of creating an EU-wide debate because it would have meant pan-European political campaigns.

Under present procedures, both the President of the European Commission and the President of the European Council are selected in private meetings of heads of government. They don’t have to win the votes of EU citizens, so the citizens know they can’t vote the “government” of the EU in or out of office in the way they can nationally. This lack of democratic legitimacy is increasingly problematic because the policy response to the euro crisis requires decisions on redistributing resources to be taken at EU level. It is vital that the EU is made visibly more democratic and that Europeans come to feel they can have the same direct say in who governs the EU that they have in their own country. Some 10 years ago, as a member of the Convention that drafted what eventually became the Lisbon treaty, I suggested that the President of the European Commission should be chosen directly by the people of the EU in a multi-candidate election in which every EU citizen would vote, rather than be selected by 27 heads of government, meeting in private. This proposal received almost no support although it has recently been adopted as policy by the ruling German centre-right CDU party and by the European People Party, the largest in the European Parliament.

If my proposal had been accepted when originally proposed, the EU would now be in a much stronger democratic position to devise a more coherent response to the euro crisis. The UK press would not be able to argue that EU leaders were “unelected”. A European Commission headed by a President with a full EU-wide democratic mandate would have more authority to propose solutions. And although the Council of 27 heads of government would still play a vital role, the EU would be less constrained by the electoral timetables of individual countries. Another useful proposal is that European political parties should say in advance who their candidate would be for Commission president before the European elections. A difficulty with this is that it would subordinate the Commission to shifting coalition politics within the European Parliament. The direct election of the Commission President by using a transferrable vote system of Proportional Representation would be a better way to involve people in the affairs of the EU.

Some might argue that an EU presidential election wouldn’t work because of different languages, or because candidates would not be well enough known throughout Europe. Others fear the people might choose an unsuitable or unrepresentative candidate, but that could be catered for by allowing candidate, but that could be catered for by allowing candidates to stand only if first been nominated by a minimum number of European MEPs and national MPs drawn from a sufficiently large number of EU countries. A “European Demos” will not just happen of its own accord. Like markets, a Demos is a political construct that has to be created by a political act. Democracy is more than an added ingredient in the construction of European Unity. In the 21st century it must become its motor.

(first published by the EUROPE’s WORLD, Spring 2013, reposted with the author’s permission)

*John Bruton was Taoiseach (prime minister) of the Republic of Ireland, leading the “Rainbow Coalition” of his own Fine Gael party, Labour and the Democratic Left from 1994-97. He was the EU’s Ambassador to the to the U.S. (2003-09) and is a former Vice-President of the EPP