Wednesday, October 29, 2014

On the Credibility of the E.U.: Transfer Payments and State Deficits

In October of 2014, the prime minister of the E.U. state of Britain blatantly (and quite publically) refused to pay a “bill” that the E.U. Commission charged the state on account of upward revisions of its economic growth. “We won’t pay it,” David Cameron said defiantly into a microphone. Meanwhile, Jyrki Katainen, the E.U. commissioner for economic and monetary affairs, accepted the draft budgets of the states of France and Italy even though they violate the limit of 3% of GDP in the European Growth and Stability Pact. Those two states could face fines, however, and the commissioner also noted that the budgets would face strict scrutiny. I contend that these instances of tension between the state and federal levels speak volumes as to the attitude of state officials and likely their constituents toward the E.U. itself. The attitude does not bode well for the European Union as a system of public governance. 

In using the word “bill,” David Cameron implied that the E.U. were akin to a business rather than another level of government. A few years earlier, speaking in the House of Commons, he had referred to the E.U. as “just another network to which Britain is a part.” Whether a network or a company, the E.U. is at arm’s length, easily expendable. No one would guess that the UK had transferred some of its governmental sovereignty to a federal level, as American states had done more than a century earlier. In fact, refusals of state governments to contribute their quotas to the Continental Congress in the 1880s had put an end to the Articles of Confederation—an alliance of sovereignty United States. In treating its state-federal monetary transfer payment as a “bill” and especially by refusing to pay it, Cameron was treating the E.U. as if its states were sovereign rather than semi-sovereign. That is to say, in his mind the E.U. was akin to the Articles of Confederation (i.e., no sovereignty having been transferred). Such a contortion undermines the E.U. itself—especially its federal level.  

Besides the obvious power dynamics from Cameron’s decision that threaten the Commission head-on as the E.U.’s executive branch (i.e., implementing E.U. law), the prime minister’s insistence on treating the E.U. as if it were something it is not (e.g., a network, vendor, or alliance of sovereign states) enervates the E.U. ontologically. It is as though he were treating another adult as a child, thus refusing to validate the adult’s adulthood. The childish behavior is actually in the refusal to treat the other adult as an adult. Unfortunately, such behavior can cause instability in a group and hence subtly undermine it.  

In regard to Jyrki Katainen’s decision not to have two other state governments resubmit their respective 2015 budgets, the New York Times points out that “(r)ejecting the budgets outright could have prompted battles with Paris and Rome that Brussels might not have been able to win.”[1] In other words, just the fact that the states hold so much power in the E.U. relative to the federal level weakens the Commission to the point of compromising the ability of the federal level to enforce the competencies already transferred from the states.  

By analogy, merely having the reputation of being a bully on the school grounds can mean that other kids are less likely to stand up for themselves should the perceived bully take their lunches. The “bully” gets away with being a bully whether he would be one or not. Like a bullied kid, the Commission may have been compromised and thus unwilling to give a “clean” opinion to the Eurogroup (i.e., the finance ministers of states using the euro), which given its officials can be expected to be oriented to the state-level. To the extent that the whole (i.e., the E.U.) is more than the sum of its parts (i.e., the state governments), the E.U. suffers from Commission’s trepidation.  

Germany, a state that had preached austerity to states in fiscal trouble, nevertheless got away year after year with having nominal deficits in excess of 3 percent of the state’s GDP. The Commission could not enforce the Pact against the largest state even when it was being hypocritical. Then in 2014, France and Italy were negotiating with the commissioner who faced pressure not to be undercut by the state-oriented Eurogroup. The main lesson here is that the state governments held too much power at the time for the E.U. to be able to protect its own competencies from being effectively dismissed by state officials of big states. The more subtle lesson has to do with the eroding effects from likening state-federal transfer payments as “bills” and ignoring the deficit limitation in the Stability Pact. Put another way, the state officials do not respect the federal institutions enough for the states to have so much power without threatening the viability of the federal system itself.

[1] James Kanter, “E.U. Budget Clearance for France and Italy Comes With an Asterisk,” The New York Times, October 29, 2014.