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23 January 2022

When did we lose the fight?

When you fight for a cause that does not materialise, at what point do you recognise, and admit, defeat? There are some causes you may want to keep fighting for no matter what, like human rights or climate change. Is European integration in that category? For me, it is not. My biggest area of disagreement with my fellow European federalists is not in what we think is desirable. What we disagree on is where the dividing line between realpolitik and wishful thinking lies.

A good example occurred this weekend. The fool whose committed the crime of saying what everybody in the SPD is thinking was Kay-Achim Schönbach. He was forced to resign as head of the German Navy for revealing to the world that Germany’s natural ally is Russia.

Germany also plays a non-cooperative game in the EU’s monetary union, through an economic model that is reliant on large savings surpluses. Whether the issue is economic or foreign policy, other member states have been reluctant to challenge Germany.

The euro area’s sovereign debt crisis deprived me of my last great European illusion, the notion that crises make us stronger. That particular crisis made us weaker. So has the pandemic. I see no trajectory whatsoever for Italy to generate the degree of productivity growth needed to render its foreign debt sustainable. The only way to avoid disaster is for the ECB to support Italian debt forever. It might do so. But that would set the ECB on a toxic path, leading to a wide selection of other horrible destinations. Then again, the euro area would probably not survive an Italian debt default intact either. Pick your poison.

I know that many other pro-Europeans have not reached the same conclusions, and may never do. Some are prone to celebrating false dawns, like the creation of the European stability mechanism, which they saw as a prelude towards a European debt agency. Some celebrated the recovery fund as the start of a European fiscal union, without mentioning that it lacks any cyclical component. They also don’t like admitting that its value constitutes only 0.3% of GDP per year. You can get to higher numbers if you add up grants and loans, which you should never do, and then divide the total by a single year’s GDP. If you reduce your ambition to embellishing statistics and headline-grabbing PR stunts, then this is for you.

The objective metric of success and failure for the recovery fund will be the degree of productivity growth it generates. That will be visible in the raw data over the next few years. Even in the unlikely case that it is renewed, it will remain below the level at which it constitutes a macroeconomic thing. It is useful in the way that so many things in life are useful. But it has nothing to do with a fiscal or economic union.

My scepticism is not impatience, but concern that opportunities have been lost forever. Take ECB asset purchases. There was a short window for a genuine eurobond between 2008 and 2015, when the ECB’s programme of quantitative easing started. Afterwards, the ECB bought national sovereign debt in the trillions, and turned them into euros. This is what QE does: it swaps debt for money. Money is a liability similar to bonds, except that the maturity is shorter.

The idea behind a real eurobond could not be more different. It would not have been about the monetisation of national debt. A real eurobond would have been a debt instrument of a federal fiscal union with limited tax raising powers. In that scenario, the ECB would still have been able to buy debt, but only EU-level debt, meaning volumes of a much smaller magnitude. National debt would have become become sub-sovereign. Member states thus could have defaulted without risking the stability of the union.

A federal Europe would not have needed to be a big state. It could have included defence procurement, at around 2% of GDP, and investment programmes in climate change and digitalisation, for example. It would have provided plenty of reinsurance services against cyclical shocks and financial crises. It could have been one of the leanest sovereigns in the world, with a budget of some 5% of GDP. That would have been sufficient to fulfil its core economic functions.

If only. I have come to the conclusion that this ship has sailed. Once you realise this, the consequences are far-reaching. If a proper economic union constitutes the first-best option, it is does not follow logically that a dysfunctional economic union is the second best. Maybe you believe that economic union can still happen. That’s fair enough. But if you don’t, you have to ask yourself some rather troubling questions. This is where I am at. One of the questions is this: even if the European solution is optimal, is it possible that the national alternative is superior to a malfunctioning hybrid?

I am asking the question in the realisation that the biggest threat to European integration derives from the areas it does badly. The single market and the customs are successful. So are trade and competition policy. But macroeconomic policy co-ordination has been a persistent failure. And foreign and security policy are moving in the same direction.

Perhaps the biggest failure of all is the inability or unwillingness of the most argent supporters of European integration to speak truth to power, and to treat integration as a belief system. That is how you lose the battle for a united Europe: when you end up with an economic union that fosters division, and a European army that never fights.

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