Sarkozy hints at need for change of the political structure of the EU

Geopolitical Diary: A Political Solution To An Economic Problem
October 22, 2008
(Source: Stratfor)

Speaking to the European Parliament on Tuesday, French President Nicolas Sarkozy said that an “economic government” partnering with the European Central Bank (ECB) was necessary for the continuation of the 15-nation eurozone — the collection of nations within the European Union that uses the euro as currency. The suggestion comes as the eurozone and the rest of Europe faces a financial and banking crisis. As a result, deficiencies have been unearthed within the EU economic structure that can only be overcome by greater integration of member states’ financial and economic authorities.

Or, eliminating the statute preventing the ECB to be the lender of last resort to institutions within the Eurozone. At the present time it is precluded from doing that by treaty.

The financial and banking imbroglio consuming Europe has emphasized how the EU and specifically the eurozone — although impressive and supranational — are nonetheless unprepared for, and incapable of handling, wide-ranging economic crises. The European Union is not a superstate, despite the accusations of its detractors or the wishful thinking of its supporters. It does not have a unified decision-making authority on most policy issues except for those concerning the functioning of its common market, and those are primarily non-political.

National governments of member states — across the ideological spectrum — have repeatedly shirked from giving up national sovereignty over vital political, military and economic issues. As the European Union expanded beyond the initial core of Western European states, the idea of policy convergence under a single decision-making authority died — although the Western Europeans themselves never managed to resolve issues of sovereignty either. The European Union essentially became a project of expanding the common market to virgin markets to the east. Until 2008, this endeavor was relatively successful and highly lucrative, opening new markets for European manufacturers and banks.

Yes, until 2008. That's when things started to get turbulent.

The establishment of the eurozone is an impressive feat in its own right. It binds together 15 economies within the 27-member union with a common currency and a common central bank. However, the ECB and the eurozone in general lack a number of competencies that, if ever implemented, would have impinged on national sovereignty but would have also made monetary and economic sense. These include taxation, currency “printing”, decision-making on where to funnel funds in times of crises and European-wide bank regulation.

But the question is, will they EVER allow those things to impinge on national sovereignty? Or will they opt out of the Eurozone instead?

In times of plenty — which the eurozone has experienced for the most part since its inception — it may seem sufficient that the authority of the ECB is strictly limited to keeping inflation under 2 percent (a role inherited from its direct ancestor the German Deutsche Bundesbank). However, the current crisis illustrates the deficiency of this system. Without supranational taxation, the eurozone does not have the ability to make liquidity infusions into the system directly — it simply does not have any real cash of its own. In fact, Europeans have had to depend on the U.S. Federal Reserve for capital through unlimited dollar funds made available Oct. 13. A credit-starved Europe had to draw $250 billion — with hundreds of billions more potentially outstanding — on the first day the Fed announced that swaps would be unlimited.

Even with a taxation system that would supply the ECB with its own pool of funds, someone would still have to make a political decision regarding receivership of those funds. The eurozone is therefore a monetary union with common monetary policy, but has no political oversight. This policy disjuncture becomes extremely relevant during times of economic crisis. And because the ECB does not have authority over the disparate banking systems, banking remains unregulated at the EU level, creating further problems once a crisis does hit.

Taxation not necessary to "provide" those funds. But author clearly doesn't understand this.

Sarkozy’s plan to create an “economic government” would in theory address all of the deficiencies listed above. The idea would be to imbue the current monetary union with political direction and authority. However, the idea would also necessitate surrendering national sovereignty to an extent — an action that Europeans have repeatedly proved unwilling to take.

Will they now be willing? Still questionable.

Sarkozy may have tried to allay these fears by using the word “economic” — highlighting that the authority would not extend beyond the policy realm currently being rocked by the financial crisis. This is a valiant marketing effort for sure, but in reality one cannot separate the political and the economic “government”, especially if the eurozone receives authority over taxation or the ECB becomes responsible for deciding which banks get bailed out or which industries receive loans. Were the Europeans willing to go this far in giving up national sovereignty, they would have done it already.

Agreed. That is absolutely the point and why it is not likely to happen. A dissolution of the EU, at least in part, is more likely.