The failure of mainstream European federalism

Simply stating over and over again that something – in this case a European democratic federation – is possible and desirable does not make it more likely

In a recent paper, Guido Montani – professor of international political economy at the University of Pavia and former secretary general and president of the European Federalist Movement – takes a look at the recent clash between Greece and its creditors, and what this means for the future of European integration and of the monetary union (EMU) in particular. 

Exportnationalismus 

In the first part of the paper Montani analyses the current state of play in Europe. He does so without attempting to downplay the seriousness of the situation or to sugarcoat the facts. On the contrary, he states in no unclear terms that ‘the dramatic Eurosummit of 12-13 July 2015 marked a turning point in the history of European integration’: by threatening to expel Greece from the monetary union, ‘core Europe’ – essentially Germany and its economic satellites, led by German finance minister Wolfgang Schäuble – broke the original pact for the EMU. ‘Monetary union is no longer seen as irreversible, and neither is the EU’, Montani correctly assesses. ‘If Greece, and other overspenders, can be pushed out of the euro area, monetary union becomes similar to a system of fixed exchanged rates: the only difference is that it is more difficult and expensive to get out’. 

Moreover, Montani seems to share Yanis Varoufakis’ view that Grexit was part of a wider strategy, aimed at radically restructuring the EMU into a smaller union of fiscally-tight, export-led core economies – Kerneuropa – by forcibly ejecting those countries deemed structurally unfit (such as Greece), in turn disciplining those governments that might be tempted to challenge the existing/new rules (such as in Italy or France). 

Montani then goes on to explain how this reflects Germany’s rise as the hegemonic (or rather semi-hegemonic) power within the Union, acknowledging (with some reserves) that ‘there is a new German question in Europe’. Montani’s analysis of this issue is mostly based on the one put forward by Hans Kundnani in his book The Paradox of German Power. The crucial concept at the basis of Kundnani’s analysis – which in turn is drawn from the classic work of German historian Ludwig Dehio – is that of semi-hegemony: 

The unified Germany was too big for a balance of power in Europe and too small for hegemony. The German historian Ludwig Dehio would later aptly identify Germany’s problematic position in continental Europe during the Kaiserreich as one of ‘semi-hegemony’: it was not powerful enough to be perceived as a threat by other powers. Thus its size and central location in Europe – the so-called Mittellage – made it inherently destabilising. This, in essence, was what became known as the ‘German question’. 

Kundnani argues that Germany’s economic success in the first decade of the euro, during which it went from a current account deficit to a huge surplus – largely as a result of two factors: the restructuring of German manufacturing by way of outsourcing to the Eastern länder and Eastern European countries, leading to the creation of a German transnational value chain; and Germany’s policy of internal devaluation (wage restraint) – also had the effect of dramatically altering the perception of the German identity, leading to what Kundnani dubs ‘Exportnationalismus’: essentially, a new form of ‘economic nationalism’ based on the supposed superiority of the German hyper-mercantilist economic model (Modell Deutschland). 

Kundnani’s general conclusion – shared by Montani, though with a major caveat, which I will return to later – is that Germany can now be viewed as a geo-economic semi-hegemonic power: 

With the transformation of Europe since the end of the Cold War, Germany returned to the Mittellage in a geographic sense… Germany has not created stability… but instability in Europe. Germany’s rhetoric focuses on stability: it talks about a ‘stability union’ and is proud of its Stabilitätskultur, or ‘stability culture’. But its definition of the concept is extremely narrow: when Germany talks about stability it means price stability and nothing else. In fact, in attempting to export its ‘stability culture’, Germany has in a broader sense created instability.

Ordoliberalism

As a result, Kundnani argues, ‘Germany has returned to the position of semi-hegemony that Ludwig Dehio described – except in geo-economic form’. In the subsequent section of the paper, Montani goes on to discuss the dominant economic doctrine in Germany, deeply rooted in the country’s major political parties and public opinion: ordoliberalism (also known as a social market economy). He writes: 

A crucial aspect of ordoliberalism is its rejection of macroeconomic policies to manage effective demand, as supported by Keynesian economists. If the social market economy is well regulated, with effective competition rules, with a central bank independent from the government and capable of fulfilling the goal of price stability, with a system of social relations complying with the rule that wages increase pari passu with productivity, the social and political goal of full employment can easily be reached. This approach is therefore similar to that of the modern neo-classical school of supply-side economics [my bold]. 

Montani than looks at how the doctrine of ordoliberalism, championed by Germany, deeply influenced both the EMU’s original architecture – the strict limits imposed on government deficits/debts by the Stability and Growth Pact (SGP), further tightened in recent years by the so-called Fiscal Compact; the principle of the independence of the ECB from national governments and European institutions; the no-bailout clause, etc. – as well as the eurozone’s response to the crisis. In general, Montani argues, Germany’s attitude vis-à-vis crisis-stricken countries such as Greece ‘reveals the ordoliberal conception of the EMU’ as ‘nothing but a gold standard… a monetary agreement for the stability of prices and exchange rates, and nothing more’. 

Finally, Montani notes that the ordoliberal views of the German monetary and political establishment (and especially of the Bundesbank, considered to be the temple of ordoliberal orthodoxy) haven’t softened over time. On the contrary, they have gotten more entrenched. On this point, he quotes the President of the Bundesbank, Jens Weidmann: 

It was a long-held belief, above all in Germany, that in the long run monetary union would, out of necessity as it were, culminate in political union. Addressing the Bundestag in November 1991, Helmut Kohl remarked that ‘the idea of sustaining economic and monetary union over time without political union is a fallacy’. I believe, however, that monetary union can also function without political union. The Maastricht framework, which was adjusted in the light of the crisis, offers a sensible foundation for this in principle. 

Montani also notes that ‘this view seems to be fully shared by the finance minister Wolfgang Schäuble’.

To recap, in the first part of the paper Montani concedes the following:

a)     that Germany and the other self-appointed members of Kerneuropa (‘core Europe’) no longer see the monetary union as irreversible, and actually view the expulsion of non-compliant countries as a feasible political choice for the building for a two-speed Europe centred around a ‘core EMU’ restructured along even stricter ordoliberal lines; 

b)    that since the introduction of the euro Germany has emerged once again as a geo-economic semi-hegemonic power with a strong belief in the supposed superiority of its economic model (‘Exportnationalismus’), and that this process has dramatically accelerated since the outbreak of the crisis, leading to the resurgence of ‘a new German question in Europe’; 

c)     that ordoliberalism – an economic doctrine similar to that of the modern neo-classical school of supply-side economics, and based on the radical rejection of Keynesian macroeconomic policies – is deeply engrained in Germany’s major political parties and public opinion; 

d)    that Germany’s current monetary and political establishment (or a significant part of it) – along with that of the other core economies – believes that monetary union can function just fine without political union – all it needs is tighter rules and strict punishment for non-compliance.

In light of this, one would expect the second part of the paper to be dedicated to an equally lucid analysis of the implications of these worrying developments for the prospects of European integration, especially considering Montani’s federalist vocation. Instead, what we get is little more than the same old shopping list of reforms needed to ‘complete the EMU’ and ‘build a supranational federal union’: a federal budget, a central fiscal authority with real spending power, a supranational economic policy aimed at keeping the balance of payments of the euro area in equilibrium, a public bonds market based on federal bonds, a reform of the role of the ECB, a democratic European government, etc. 

King Canute and a very different tide

I found this very disappointing. What I take issue with are not the proposals per se – which I generally agree with – but rather the complete lack of political strategy. Montani offers no insight whatsoever into how we are supposed to achieve these noble objectives, especially in view of the fact that the current European trend – so accurately described by the author in the first part of the paper – appears to be moving in the exact opposite direction. Instead, he seems to rest all his hopes on a pseudo-materialistic faith in the fact that sooner or later – if we simply keep stating our case – the ordoliberals will come to their senses and ‘accept that Europe’s aggregate demand must be managed to ensure growth, full employment and social cohesion in the European economy’ and that ‘all the member states of the euro have a common interest in abandoning a decision-making system that causes national rivalries among them’. What I take issue with are not the proposals… but rather the complete lack of political strategy. 

Unfortunately, seventy years of federalist thinking prove the contrary: in the political realm, simply stating over and over again that something – in this case a European democratic federation – is possible and desirable does not make it more likely. Moreover, underpinning Montani’s entire analysis is the assumption that ‘without the EU and the euro area, Germany would be nothing but an old, declining European power’, which is dubious to say the least.  

The problem is that while an approach that favours idealism over pragmatism may be justified in ‘normal’ times – i.e. times of economic growth and relatively low unemployment –, since progress appears, often deceivingly, to be moving forward (though maybe not at the speed or in the direction we desire), or at the very least not to be moving backwards, it is debatable whether that same approach can be justified in times of economic and political turmoil, such as we one that we find ourselves in today, in which the clocks of history are clearly starting to turn backwards (with nationalism and xenophobia on the rise again). 

The EU is a great case in point: while a generalised pro-European sentiment was common before the crisis – thus providing a fertile terrain in which to sow the seeds of European federalism – the opposite is true today. In today’s Europe, the old ‘enlightened’ approach – making impassioned appeals based on reason and logic, like Montani does in his paper – simply isn’t going to cut it. As mentioned, we face a situation in which the general tide appears to be moving in the exact opposite direction of the federalist cause – and where an exogenous shock, such as a breakup of the EU/EMU, risks relegating the very notion of European federalism to the dustbin of history. Surely such a dramatic situation warrants a change of strategy? 

Take a deep breath and regroup for something worthwhile?

Federalists today have a political obligation to think in strategic terms: is it in the interest of the democratic federalist cause to support the current process of authoritarian, centralised, top-down ‘federalism’ championed by Germany and the European establishment? Is it realistic to assume that ‘it is possible… to strike a compromise between ordoliberal and Keynesian economics’ in the near future, as Montani does? Do we really think that Germany’s deeply engrained ordoliberal political-economic culture can be swayed? If so, how do we go about changing it? Who should we direct our appeals to, the German political elites or its workers and citizens? More in general, can a global superpower like Germany really be tamed through reason and logic? Or should we acknowledge that restraining Germany’s power requires other member states taking a more active role on the European stage? These are questions that federalists cannot avoid asking themselves any more. Should we acknowledge that restraining Germany’s power requires other member states taking a more active role on the European stage?

Changing perspective entirely, maybe the problem isn’t that federalists aren’t pragmatic enough but that they are not utopian enough? Another thing that struck me about Montani’s case was how, well, uninspiring it was. To give ‘the federal government’ more spending power Montani proposes to increase the EU budget from 1 per cent of the EU’s GDP to… 2-2.5 per cent of GDP or little more. Really? 

That’s not much a cause to fight for, to be honest. In a way, Montani’s brand of federalism succeeds in being at once too idealistic to be taken seriously by the European political establishment – as we all know the EU budget has been steadily shrinking since the start of the crisis – and too pragmatic to inspire European citizens. If we are to speak of federalism, we might as well aim high and demand (as argued by Philip Arestis and Malcolm Sawyer) an effective fiscal union with tax-raising powers at the EMU level in the order of at least 10 per cent of the EMU’s GDP; fiscal transfers from richer to poorer countries; a federal authority with the capacity to engage in deficit spending; the support of the ECB in the operation of fiscal policy; etc. 

Personally, I believe that we should simply acknowledge that the political conditions are not ripe – and will not be for quite some time – for a move towards a fully-fledged fiscal and political union, and that it would be in the long-term interest of the federalist cause to take a step back in the integration process by demanding greater flexibility at the national level, as advocated by Philippe Legrain, thus slowly recreating the conditions for moving towards a true solidarity-based and democratic fiscal and political union. 

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