The E.U. as Peace-Maker: Bringing in Serbia and Kosovo

Serbia and Kosovo reached an agreement on April 19, 2013 bearing on how much autonomy Kosovo would allow Serb cities in return Serbia’s recognition of Kosovo’s remaining authority in the cities.[1] Kosovo had seceded from Serbia in 2008, and the ensuing conflict kept both states from joining the European Union. As it turned out, the prospect of accession gave both Serbia and Kosovo enough incentive to reach an agreement. Indeed, only a few days after the agreement had been reached, the governments of Serbia and Kosovo approved it. Such swiftness indicates how strong of an incentive accession can be for belligerent republics in Europe. The E.U.’s deployment of this “carrot” is fully in line with the main objective of the European Union: to prevent war in Europe. According to the New York Times, the accord is thus “an important victory” for the E.U.[2] An even further victory in line with the E.U.'s most important purposes would be to internalize both Serbia and Kosovo so any future interstate conflicts could be peacibly resolved. 

In the wake of World War II, the European Coal and Steel Cooperative was formed in order to keep an eye on Germany’s use of iron, should the Germans seek to re-militarize. The EEC was also formed to obviate war in Europe, and the E.U. inherited this central aim. Accordingly, it is fitting and proper that, as Kosovo’s deputy minister of foreign affairs, Petrit Selimi put it, “The incentive of joining the E.U. played a huge role in clinching an agreement.”[3] The E.U. thus played a role in forging greater peace in Europe. In fact, the negotiations took place in Brussels, according to Catherine Ashton, the E.U.’s secretary of state. “It is very important,” she told reporters, “that now what we are seeing is a step away from the past and, for both [Kosovo and Serbia], a step closer to Europe.”[4] Days after the agreement was signed, the European Commission recommended to the European Council  that talks start on Serbia’s accession. Belgrade had “taken very significant steps and sustainable improvement in relations with Kosovo,” the Commission announced. The Commission also noted that as Kosovo had met all its “short-term priorities,” talks toward a Stabilization and Association Agreement, a precursor to Kosovo gaining statehood, should commence.
Bringing both Serbia and Kosovo into the Union would represent a more permanent means of forestalling war in Europe. As this depends too on how much power the E.U. has in reconciling conflicts between the states, giving the federal government sufficient competencies in this regard would also represent a step toward sustained peace in Europe. While the prospect of accession has been shown to be enough of an incentive for a meaningful agreement to be reached, better still is the incorporation of trouble spots into the European Union, where more pressure can be brought to bear on any bellicose states such that any nascent conflicts between them can be peaceably resolved. Indeed, the E.U.’s competency, or enumerated power, to remove state obstacles to a common market is in part geared to forestalling potential conflict between discriminating states. This is also a reason behind the interstate commerce clause in the American system.
Lest a fixation on any of the contemporary crises hitting the E.U. inculcates a pessimism that is destructive to the Union and thus ruinous to its more basic purposes, it should be helpful to keep an eye raised to one of those fundamental aims of the project. Given the two major wars in Europe during the first half of the twentieth century, it is wise to keep perspective regarding the role of the E.U., both directly and indirectly, in obviating war.

1. Dan Bilefsky, “Serbia and Kosovo Reach Agreement on Power-Sharing,” The New York Times, April 20, 2013.
2. Ibid.
3. Vanessa Mock and Gordon Fairclough, “Serbia Ready for EU Accession Talks,” The Wall Street Journal, April 22, 2013.
4. Ibid.

Contagion Beyond the Headlines in the E.U.

The E.U. states of Greece and Italy were grabbing headlines during the first two weeks of November 2011, given the dramatic resignations of Papandreou and Berlusconi. The only other state to get some attention was France. The Wall Street Journal noted on November 12^th that concerns had been quietly building about France. According to the paper,“French bond yields rose to four-month highs, one day after Standard & Poor's Ratings Services erroneously issued a message saying it had cut France's triple-A credit rating. The yield on France's benchmark 10-year bond climbed 0.02 percentage point to 3.46%. That was 1.66 percentage points over yields on comparable German government bonds. France now has the highest government bond yields among its triple-A-rated peers in the region.” However, it seems overly dramatic to say that a .02 percent increase evinces a climb. Moreover, 3.46% is well under 7 percent, which is the level that was presumed at the time to signify the need for a bailout. Relative to the changes in the Italian yield, those of the French bonds could be viewed as relatively moderate, The French yield was still closer to that of Germany. Although not a red herring, the concern over France masked some real sleepers that were poised to take a hit in 2012. 

Eclipsed by the headlines, Portugal’s expected GDP for 2012 was revised downward by the E.U.’s executive branch in November from the May estimates of around -1.8% to -3% with an expected unemployment rate of nearly 14 percent. The 2011 numbers were also revised downward, from about -1.9% to around -2.1 percent. Meanwhile, Portugal’s semi-sovereign 10-year bond yield was at just over 12 percent, well over Italy’s “point of no return” rate of 7.5 percent, which was hit for a day during the second week of November. With an expected contraction of 3% in 2012 and a 12% yield in November of 2011, Portugal could be expected to face stronger head-winds in being able to make its interest payments in 2012. I suspect that the press had become so captivated with the circus of personalities in Greece and Italy that the iceberg lying in front of Portugal was simply not seen.

Besides Portugal, some of the states in Eastern Europe faced icebergs of their own—though not necessarily of their own making. These too were receiving too little press coverage in November of 2011. Specifically, the state leaders of the “euro zone” had decided in October to give the “zone’s” major banks until the following summer to raise their capital reserves. With that amount of time, the banks could avoid issuing new stock (which would dilute the holdings of their existing stockholders) and get the added reserves together by cutting back on lending to Eastern E.U. state governments instead. Morgan Stanley figures that Poland, Romania, and Hungary are most vulnerable to a loss of “euro zone” bank lending. Roughly 1 trillion euros of “euro zone” bank assets were in Eastern Europe at the time of the change in governments in Greece and Italy. Hungary’s exposure was the largest, with loans held by the banks amounting to about 37% of GDP. According to the Wall Street Journal, any hit to the E.U.’s eastern states, whose economic growth had been powered the global recovery, would only worsen the E.U.’s economic outlook and its ability to service its debts. That is to say, enabling the “euro zone” banks to raise additional reserve capital by reducing lending rather than raising equity may have been in the banks’ interest, but choking the eastern states could already in November be expected to make it more difficult for Greece, Italy, and Portugal to service their respective debts from reduced economic output in 2012. 

It would have been wiser on the journalists’ part to put France in perspective and take a look at Portugal and Eastern Europe than to have fixated so much on the plights of Papandreou and Berlusconi as they struggled to maintain power only to ultimately lose it.

For more on this topic, see Essays on the E.U. Political Economy

Sources:

Matthew Dalton, “Europe Slashes Its Growth Forecast,” The Wall Street Journal, November 11, 2011. 

Kelly Evans, “Eastern Europe Vulnerable in Debt Crisis,” The Wall Street Journal, November 11, 2011. 

Neelabh Chaturvedi, Stelios Bouras, and Liam Moloney, “Europe Pulls Back From Brink,” The Wall Street Journal, November 12-13, 2011. 

Budget Austerity in the E.U.: Turning the Russian Invasion of Ukraine into an Advantage

With economic growth in the E.U. flat-lining in mid-2014 after a modest recovery, pressure mounted to relax the federal "austerity" constraints on the state budgets. According to The New York Times at the time, "(p)olitical and financial instability related to Russia's confrontation with Ukraine and the effects of escalating economic sanctions between [the E.U.] and Russia have further clouded the economic outlook."[1] Mired in the austerity vs. fiscal stimulus dichotomy, E.U. leaders may have been missing an opportunity here.

With yet another round of sanctions in the works on the heels of a recent Russian invasion and unemployment at a stubborn 11.5 percent, and the threat of runaway deflation hitting wages in particular, the E.U.'s economy looked poised for an ongoing onslaught of stag-deflation. The E.U. "is menaced by long and possibly interminable stagnation if we don't act," Francois Hollande of the state of France warned.[2]  He had in mind some movement along the ongoing relaxation vs. austerity dichotomy in the direction of larger state deficits--something the governor over in Germany was still fiercely resisting. We "really must question whether we can go on receiving less than we spend, so that our debts keep on growing. Indeed," Angela Merkel pointed out, "a whole crisis of confidence has grown out of that."[3] Such a basic imbalance in state finance undercuts the equilibrium that is so vital to the survival of the macro system in the long run.

So, it would appear that the well-worn dichotomy had reached a dead-end, or the proverbial brick wall. I contend that in such a case thinking beyond the either/or strictures is advisable. To illustrate my point, I present a thought-experiment of sorts (i.e., unrealistic, but it gets the point across).

Let's imagine that the president of Ukraine met with the European Council as Russian troops were crossing the border into Ukraine with the eventual aim of separating the eastern half of the independent state from Kiev.

"I come before you with an admittedly unorthodox suggestion," President Poroshenko might have told the Council. "Without a massive infusion of support from the E.U., my country will split apart and Russia will gain the eastern half."

"What kind of support do you have in mind," the Council's Van Rompuy might has asked.

"Well, the sort that would make your fast-track accession process look like a snail's pace," Ukraine's head of state might have replied with a curious grin that told of something very new coming. "Make Ukraine a state; my government will accept all of your conditions without reservation. Send in your Commission's bureaucrats right away to implement the conditions. To protect them, I recommend that you send along military troops from your state militias as well as the small federal army you have. We could even request that U.N. peace-keepers come along. Putin is already in hot water at the U.N. for continuing his KGB tactics as president."

"What if he keeps sending in Russian troops?" Merkel might have asked.

"This is why speed would be so vital, both in Ukraine's accession, which could be of a limited term if that is easier for you, and the influx of bureaucrats and others doing the E.U.'s business and protecting them. Ukraine would agree to the Schengen Agreement on open borders, and I would request that the E.U. attend immediately to the external border--meaning that which we share with Russia. Securing that border has precedent for the E.U., does it not?" In fact, the need to protect the E.U. bureaucrats pouring into the eastern parts of Ukraine with troops from the state armies would mean that NATO would be relevant. This point, if made explicit, could deter Putin from sending in still more military hardware and troops.

"Please excuse us as we discuss this proposal," Van Rompuy might have politely yet curtly told the Ukrainian head of state. After all, the E.U. leaders do their best work behind closed doors. The point is that their minds need not be closed either. Lemons can indeed be made into lemonade.

Even if this scenario is too outlandish to be taken seriously in a world so wetted to the status quo as its default, thinking in such terms "outside the box" could stimulate more realistic policy prescriptions going beyond the austerity vs. fiscal stimulus dichotomy. For example, the notion of troops and hardware from state militias in the E.U. going along to protect federal bureaucrats might prompt an E.U. leader to suggest that the state armies transfer even more to the small federal army of 60,000 troops. Doing so would enable the state budgets to accommodate both more fiscal stimulus and lower deficits as less military spending would be needed. I am assuming the E.U. would pick up the tab for the operation of the added hardware and the salaries of the additional troops. From the perspective of the E.U., the shift would mean less duplication. How likely is it really that Belgium and Portugal, for example, would need to use their respective armies anyway? In the context of continued stag-deflation, such nationalist luxuries are difficult to justify, especially considering the opportunity cost in terms of stimulating the economy.

In short, the E.U. need not have faced a future of stagnation. Ideas hitherto undiscovered can indeed have great value in practical results. The key is to think beyond the confines of what are presumed to be the only possibilities. The human brain has a tendency to shrink the possible in a way that cuts off many potentially fruitful possibilities without any recognition of doing so. The advisable condition of receptivity is to welcome such ideas into the public discourse rather than going with the knee-jerk reaction of "that's too radical!" or "that would never see the light of day." We might be surprised what could see the dawn and beyond.

1. Liz Alderman and Alison Smale, "Divisions Grow as a Downturn Rocks Europe," August 29, 2014.
2. Ibid.
3. Ibid.

Should Britain Secede from the E.U.?

The real purpose of the E.U. is not economic, but political. It began as the ECSC, which was geared to making sure that Germany would not re-militarize by extracting iron from the Rhine region. The purpose of the E.U. is to obviate the sort of bloodshed that Britain saw in WWI and WWII. If the British people don't want to be in the E.U., then you should leave. I don't believe that even your own government should keep you from deciding such a matter as a people, directly. That said, with great power comes great responsibility, and this applies to popular sovereignty. In other words, the people taking up the mantle of direct democracy in a constitutional referendum should make an informed decision, looking beyond even the people's own immediate interests. The stakes are much, much higher than whether being in the E.U. is an economic net loss or gain to Britain on a yearly basis, or even whether the City is crimped or inconvenienced. Much more is at stake.

After watching Downton Abbey(season 2), War Horse, or Saving Private Ryan, you might want to reflect on the risks involved in secession. You might just be anticipating a future war between you and the continent. You might even be starting a chain reaction that could result in Europe itself being fractured. The Hungarian right, for instance, is urging Hungary to secede. Lest you think there is no long-term benefit in Eastern Europe being in the E.U., you might study Serbia a bit more than a century ago.

Oh, and by the way, the word from Switzerland is that the EEA is just about as restrictive as the E.U. because the EEA had to adopt most of the E.U.'s economic regulations in order to trade with the E.U.'s states. So be careful what you wish for—you might find that you have even less impact on trade regulations that bind you. You might be better off with a “multi-track” E.U. that, unlike the U.S., accommodates different preferences among the states. In other words—and I suspect this will not be lost on any of you—you can be part of something that outdoes the U.S. by improving immensely on modern federalism at the empire-level by showing the world how flexibility can be built in. Or, you can sit on the sidelines as the E.U. continues on to "ever closer union" while accommodating those states that want more room yet are nonetheless part of the union—part of the effort to obviate war in Europe for your generation and your posterity. The choice is yours.