GP Response: The EU’s Changing Economic Governance: Continuity or Discontinuity? The Long Shadow of the Worst Eurozone Crisis Ever

In this Global Policy Response Mario Telo dissects the Hertie School of Governance’s Governance Report 2015, with particular attention to its focus on the link between governance change and legitimacy.

Three steps in the right direction

The Governance Report 2015 by the Hertie School of Governance provides high quality insights on very controversial research and policy issues: the Eurozone crisis and its institutional dilemmas. The changing EU governance during the hardest economic crisis since the ‘30s is a difficult topic. In any case, the Report looks for new balances between integration and contestation and for innovative compromises, overcoming traditional and trivial solutions. Even if the amount of fresh research provided by the five analytical chapters is much more attractive than the final outlook, three main conclusions should be stressed:

• The causes of the Euro-zone governance crisis were not only external (the US subprime crisis starting the worst global financial crisis since the ‘30s), but also internal: the Maastricht Treaty asymmetry between monetary unification and economic decentralization, setting different levels of governance – European for the first, while national for the second, only corrected by soft forms of coordination. This discrepancy can only be addressed by strengthening the pillar of economic governance.

• Since the construction of the EMU is a work in progress, the solution cannot be either a coming back to the pre-Maastricht system nor a kind of muddling through, keeping the status quo: it should come about by “correcting the current path”. But how? Some of the Report chapters take serious stock of the practical innovation which is already in its implementation (for example Mark Dawson in chapter III, regarding the very relevant “European semester”), while others are more skeptical about the current ‘Merkel method’. The majority of concrete proposals deserve attention: enhancing structural convergence by completing the single market (notably in the service sector, see the ‘Monti Report’); synchronizing business cycles by reviving the old J. Delors proposal (1988) and the recent four Presidents idea (2012) of introducing some fiscal stabilization mechanism at EU level.

• The Report pays much attention to what Christian Joerges defines as the ‘legitimacy problématique’, and McGrath the negative ‘implications of divergence’ in unemployment rate for internal mutual trust. The thesis that “the effectiveness of new modes of economic governance and intense coordination remains dependent upon conditions and circumstances which cannot be created or imposed by legal fiat” (p.124, referring to Chapter III and Chapter IV ) requires a special concern for regaining legitimacy beyond the simple “normalization”. How? Even if the Report underestimates the potential bridging role of European political parties, unions and other civil society associations, the call for an enhanced role of ‘new actors’, including national parliaments, by increasing the accountability of the EU’s fiscal policy; for inter-parliamentary cooperation; for an enhanced role of national constitutional courts; and for more cooperative problem-solving modes of governance, addressing accountability gaps: all look like the outcome of a wise combination of realism and innovation.

Institutional dilemmas: new modes of governance or a new treaty?

Some of the theses presented by the Report demand further research. In general, when addressing the EU’s problems of efficiency, legitimacy and accountability, the Report seems to sometimes oscillate between, on the one hand, normative claims and recommendations for an institutional reform which – in the current context of the widened EU – are close to wishful thinking (for example: “communitarisation of the fiscal decision-making should be an urgent priority” p. 123, furthermore, with veto power of the European Parliament: recommendation 4), because they cannot ignore the obvious implications in terms of a Treaty revision, unrealistic in the legal context of the unanimous voting procedure (art 48 TEU) (1). On the other hand, the Report advances concrete proposals and new realistic ways of pragmatic governance more able to grasp unprecedented challenges, beyond the traditional Manichean opposition between the community method (good) and the intergovernmental method (wrong).

Some of the recommendations push their federalist inspiration very far: they would see the ECB transformed into a second US federal reserve bank, ensuring “lending of last resort”. This is an astonishing proposal because the authors know perfectly well that such a dramatic Treaty change would meet the opposition of many member states, firstly Germany, while needing a Treaty reform by unanimous vote. These type of proposals risk underestimating both the tremendous political obstacles for such institutional reform within the 28 member-state EU; and the quality of the already ongoing innovations within the Lisbon TEU and TFEU provisions, notably under the impulse of the Commission, and the Eurogroup, as well as the current ECB leadership (‘quantitative easing’ and other unconventional measures). The reader expectations, notably in the case of a Report coming from Berlin, would be for a more persuasive combination of realism and utopia.

Regarding the question of efficiency anti-crisis policy, the report (chapter by Enderlein) wisely suggests “another round of exploratory governance” and advances concrete measures. What remains, however, unclear to the reader is whether what has been done by the EU institutions in the six years between 2009 and 2015 (ESM, Banking Union, European semester, Six pack, Quantitative easing…) are steps in the right direction or not. Do the wished-for innovations in EU economic governance need a radical turning point or only an adjustment? The Report is not clear enough in evaluating the many potential ‘third ways’ merging or bridging community method and intergovernmentalism – which are at the center of what many researchers call the ongoing ‘experimental governance’ and other new ‘open methods of coordination (2): the potential policy input of Dawson’s analysis (pp 50-57 about the ‘third family of decision making: the coordinative methods’) is lost in the final Outlook. Maybe, by the further exercise of ‘exploratory governance’, a deeper dialogue with partially convergent research strategies could be useful to overcome the feeling of serious oscillation and uncertainties which characterize this Report on this crucial point.

The focus on the legitimacy and accountability gaps

Rightly the Report draws attention to the link between governance change and legitimacy. What looks problematic is however the assertiveness of some of the chapters by drawing attention to a kind of structural contradiction between integration and legitimacy, as summarized by the final Outlook: “further integration within the EU might lead to further problems of legitimacy” (p 120). In fact, the Report is not paying attention enough to the fact that all of the progress out of the crisis has been obtained by further integration and several new trade-offs between solidarity and conditionality. Is the EU – as a consequence of its prediction – doomed to a forthcoming final legitimacy break-down?

The first possible misunderstanding is about expectations. Legitimacy and solidarity within the EU will never be as profound as solidarity and legitimacy within a nation-State. The reader sometimes has the feeling of overwhelming expectations as far as EU legitimacy is concerned – while the majority of the international research community agrees that the EU is a regional grouping of neighboring states and not a federal state in the making. The EU’s internal solidarity and legitimacy cannot be and never will be as deep as the national level. That means that the EU should be realistically compared also with what is ongoing within regional groupings of other continents (MERCOSUR, ASEAN and so on), and not only with the US, Germany or other federal states.

The Report is very much influenced by the pessimistic atmosphere of 2014. It underestimates the political nature of the objective of saving the Euro and, as a consequence, the political value of the European Council decision to keep Greece on board. 2015 was much clearer in this respect than 2014: notably, the Euro-summit decision of July 13th 2015 (a clear no to the “Grexit” proposed by the German finance minister Schäuble) was a political decision combining solidarity (87 billion Euro) and conditionality. Contrary to the abuse of the word “hierarchy” as the EU negotiations with weak states are concerned, this decision was taken within multilateral institutions like the Euro-summit, the Eurogroup and the European Council. Is this conditionality structurally against democratic legitimacy? The call for more cooperative ways (beyond the Troika) is right; but the argument about an ontological opposition “further European integration versus democracy”, even if very popular within eurosceptical movements and parties, has no serious scientific background. The debate is open and, as the Report states, the future is unpredictable: however, the arrangement with Greece was ratified both by creditor’s countries (the Netherlands, Germany, and Finland among others) and by parliaments and elections in recipient countries, like Greece. It is very important to note that Prime Minister Tsipras was confirmed by his clear electoral victory in the September 2015 elections, while the extreme right (in spite of the hard anti-immigrants campaign) and the extreme left opposition (outcome of the secession of Syriza’s left wing) obtained poor scores. Do the 2.5% for Varoufakis represent democracy while the electoral majority for Tsipras a new kind of Quisling? Or are democracy and further European integration more compatible than expected?

Whether the 13th July 2015 compromise will work or not is unpredictable. But, at the end of the day, the Greek people voted in favor of the trade-off between solidarity and conditionality offered by the EU institutions. They voted in favor of the mix between austerity policies and investment policies, supported by the ECB quantitative easing policy, and signed by Tsipras on July 13th. Something similar happened in 2014 in Italy (the defeat of both left and right wing euro sceptics), and in Portugal in October 2015 (where the consensus for the Eurozone includes the three main parties, 70% of the voters!). The comments emphasizing German- or European-Diktat, or ‘harsh constraints’ (p 119) should be more critically analyzed, whereas the ongoing multilateral compromises between respect for common rules and social welfare look as deserving further research, maybe through the lens of the concept of ‘diffuse reciprocity’ (Ruggie 1993).

Regarding the legitimacy challenges, the chapters II-V provide many fruitful insights concerning the dramatic process of deepening of the democratic deficit and, notably, social legitimacy during the past 6 years, at least in some crisis-countries. However, the Report seems to neglect some crucial issues: how to revise the practice of a Eurozone where some national parliaments have more weight than others? Within an increasingly two-speed EU, including further integration of the hard core, what about deepening the idea of a distinct Eurozone-Parliament, as a democratic component of a stronger economic governance, including a possible distinct Eurozone budget?

All in all, radically opposing efficiency to legitimacy looks problematic even from a theoretical point of view. Efficiency is also an essential side of legitimacy. J.H.H.Weiler defined as ‘substantial legitimacy’ the positive situation enjoyed by the EC before the first Maastricht referenda of 1993. Fritz W. Scharpf underlined the relevance of ‘output legitimacy’ for all governance, and Robert Keohane, in his call for a ‘less contingent legitimacy of supranational governance’, did not forget to put the capacity of providing ‘benefits for citizens’ at the first place (2004).

According to many, at the end of the day, the EU economy is recovering in 2015 precisely through stronger economic governance. It is not a state and cannot be the target of legitimacy expectations and requirements comparable with an idealized nation-state (some relevant member states are suffering from a national democratic deficit more than the EU) (3). That said, contrary to Andrew Moravcsik’s thesis of a ‘democratic deficit myth’, the Report is right in focusing on the need for the EU and the Eurozone for further levels and ways of expanding its supranational legitimacy (including the accountability gaps of the coordinative methods), complementary to the national legitimacy of every democratic government. Doubts and critics are welcome. Also in this respect the Hertie School’s Report is providing a relevant contribution to an urgent international debate, maybe pessimistic beyond expectations in the case of a German-capital based Report. However, much better a critical Report than an arrogant one.

Mario Telò is holder of the Jean Monnet Chair at Université Libre de Bruxelles, member of the Royal Academy of Sciences, and Professor of EU institutions at LUISS Guido Carli in Rome.

Notes

(1) What is written in the Report conclusions, namely at p. 125,is disappointing: “it is often unclear which proposal would require Treaty change”. The reader could expect a Governance Report published by outstanding scholars under the label of the internationally well-known Hertie school of Governance, to be clearer on what is a matter of improvements in practical governance, and what needs a Treaty reform.

(2) C. Sabel & J. Zeitlin, Experimentalist Governance in the European Union, OUP, 2010; M. Rodrigues & E. Xiarchogiannopoulou (eds) The Eurozone Crisis and the Transformation of EU Governance, Ashgate 2014.

(3) See the Winock/Bartolone Report about democracy in France, of September 2015.