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23 July 2023

Making promises we can't keep

Over the years I have known three grand narratives about the EU: the old federalist version, now presumed dead; another version that reduces the EU to a glorified Common Market; and that of the EU as guarantor of freedom in post-Soviet Europe. The latter version has never been more popular than it is today because of the war in Ukraine. But despite its obvious attractions, that version is full of holes.

The EU's fundamental tragedy is that it needs to be a federal state in order to act as a beacon of freedom. The three narratives appear different. But they cannot be easily separated.

For the last ten years the EU has been trying to increase its powers through the backdoor. It has been using novel legal instruments to make up for the lack of a right to raise taxes and issue debt. My favourite example was a €300 billion investment plan, first proposed in 2014 by Jean-Claude Juncker, the former Commission president. It ended up mostly as a reclassification of existing investments, with an EU label stuck on them.

A more recent example for the gulf between lofty ambitions and financial reality was the recovery fund, agreed in 2020 after the start of the pandemic. This time it was real money - again a little of €300 billion in grants. I can't count the number of commentators who rushed to declare that this was the EU's Hamiltonian moment - the beginnings of an EU fiscal union. But it was not to be.

The EU still relied on its members to guarantee the debt. The financial markets saw right through it. EU debt now trades at a premium interest rate to those of the member states. This was not supposed to happen.

You cannot fudge yourself into geopolitical leadership that way. For that you need real money. It would require a constitutional treaty to establish a fiscal union. The EU as it is constituted today cannot act as global power or even deliver economic stimulus. I can still run a successful single market or customs union. It can regulate markets. But it cannot do what it really wants to do - become a geopolitical actor, a force of freedom, and a leader in green energy.

Or, for that matter, accept Ukraine as a member state. 

The EU may well accept Ukraine as a candidate for accession and then leave it to rot in the ante-chamber, just as happened with Turkey. Right now, the EU is structurally not equipped to deal with Ukraine. 

Despite pro-Ukrainian virtue-signalling at European summits and on social media, I would expect the tone to change once member states are presented with the bill for Ukrainian EU accession. Germany and the other net contributors would have to shoulder the lion share of the cost - at a time when their own economic model is coming under strain. Would Poland and Hungary be happy to give up their current status as net recipients of funds from the EU budget for the sake of Ukraine? Would Italy agree to become an even larger net contributor?

As a country with 43m inhabitants, Ukraine would displace Poland as the fifth largest EU member, after Germany, France, Italy and Spain. Ukraine's accession would dilute existing voting shares in the Council of Ministers, one of the two decision-making bodies of the EU. 

I believe there is a solution. The EU could adopt a two-tier membership structure - a fortified eurozone at the centre and an outer group of members. Ukraine could join that group. The frequently used word "associate member" would be too dismissive for what this would entail. A separation of the EU into an inner and an outer group would still include the customs union, the single market, and structural and regional aid for everybody. If the core group assigns itself an autonomous fiscal union, it could raise funds, on the EU's behalf, to finance Ukraine's reconstruction. Ukraine, along with other countries in the outer group, would have full voting rights on all issues except the monetary and fiscal union of which they are not part. In turn, they would enjoy a higher degree of national sovereignty in economic policy. 

I am not pretending that this would be easy to agree on. For as long as people are under the delusion that the recovery fund could act as a blueprint for a common European fiscal policy, there will be no pressure in favour of a formal treaty change. But it won't be possible to keep up that delusion forever. The cost of the status quo will become apparent. It would be an EU that disappoints; an EU with a diminished global role; and an EU that would not include Ukraine.

EU reform would also constitute a necessary prerequisite for the UK should it ever wish to rejoin. For all their differences, the Ukraine and the UK have a common dilemma in their relationship with the EU. Neither appears to have a viable alternative strategy outside the EU. Yet the EU as it is constituted today is not suited to their interests either. 

Of the three narratives I mentioned at the start, the UK's version has been one of the EU as a Common Market. The Ukrainians see the EU as a safe haven from Russian oppression. It is only that long defunct seeming notion of a formal political union, with a separate fiscal space, and a two-tier membership structure, that can deliver for Ukraine and for the EU itself if it wishes to develop into a global power. And, it would open a pathway for the UK to reconnect if it so wishes.

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