Sunday, December 6, 2020

‘More Europe’ after Brexit

By John O’Sullivan

Thursday, December 03, 2020

 

It was always predicted that if Britain ever left the European Union, one of the principal consequences would be the disruption of all other internal relationships among the EU’s 27 remaining member states. For the previous 40 years, Britain had been a kind of leader of the opposition to the dominant bloc in Europe, namely France and Germany combined. The Franco-German steamroller would propose some new step to greater economic and political integration, usually with the support of Italy, Spain, the Benelux countries, and most of Central Europe; Britain would oppose it; and a shifting group of other countries, usually including Holland, Denmark, Portugal, and whichever powers felt disadvantaged by the Franco-German proposal, would seek the U.K.’s support in amending it. Negotiations would then proceed, the proposal would be amended at the edges, “opt-outs” or delays or bribes would be granted to recalcitrant countries, and “More Europe” would advance a step. That largely satisfied all those in the “opposition” camp except the British, for whom the continual reduction in sovereignty was a serious problem in itself. When they resolved it by Brexit, everyone else had to think hard about who their allies would be in future EU talks.

 

The British still haven’t left except formally, and negotiations on a future U.K.–EU free-trade deal are being fought out through press leaks with a “no deal” outcome still very possible, if unlikely. But the redrawing of the EU budget now has to take account of the withdrawal of its second-largest contributor, the high costs of its planned green and digitalization programs, and the unexpected costs of dealing with COVID. This year’s negotiations over how those costs should be paid for (and by which countries) have already begun to separate, well, not the men from the boys but the debtors from the creditors around the table at the European Council of heads of EU governments. New and sometimes surprising alliances (and betrayals) have been the result. There are now four de facto players in the Council.

 

First, the “frugal four” of creditor countries — Holland, Sweden, Denmark, and Austria — which want credible fiscal control of countries receiving EU grants but oppose any mutualization of EU debt in the meantime.

 

Second, Mediterranean Europe — Greece, Italy, Spain, and Portugal — which has suffered serious economic hardship from joining the euro, in terms of lost growth, high youth-unemployment figures, and emigration. Italy’s economy has been stagnant for 20 years, and Greece today is effectively in a debtor’s prison. What they want is, quite simply, more money as compensation for staying inside the euro.

 

Third, Central Europe, which, though it has been growing more quickly than the EU as a whole in the last few years (Hungary’s rate of growth was just on either side of 5 percent in the years 2018 and 2019), nonetheless consists of relatively poor countries that want more money to modernize industry and agriculture and to keep their young people at home but that also resist the growing transfer of power from national parliaments to Brussels. That’s a contradiction that partly explains the attacks on Poland and Hungary from “Brussels” (i.e., the European Parliament and the EU Commission).

 

Fourth and finally, the Franco-German steamroller is still there, but each of its partners has a special relationship with one of the other groups. France is the unacknowledged champion of big-spending Mediterranean Europe. Germany was the fifth member of the “frugal five” until the EU summit in July. Those commitments had quietly separated Germany from France so that even when they were singing “More Europe” in harmony, they intended different things by it. To President Macron, it was a roundabout path to ambitious programs to build more-centralized European institutions and to mutualize EU debt. Germany’s greatest fear, on the other hand, was that the EU might become a “transfer community” in which the German taxpayer ended up funding the lazy lifestyles of Southern Europe.

 

At the July summit, however, Germany was taking over the EU presidency (its term is due to end December 20, at another EU summit) and did not want its climax to be a failure. Chancellor Merkel follows the post-war German strategy of using the EU to sanitize German power. That compels Germany to rescue an EU program at risk, as Merkel did in the case of Greece in 2015, when she blocked a proposal to help Greece leave the euro with the assistance of EU subsidies. So she effectively abandoned the frugal five, now the frugal four, formed an alliance with Macron (who supposedly drafted the compromise text), and pushed through the expanded budget and a 750-billion-euro post-COVID rescue plan, half of which is grants and half of which is loans, both funded by borrowing by the EU itself and guaranteed by member states.

 

That package of measures crossed an important Rubicon in EU financial affairs — indeed, it crossed several Rubicons, since the EU funds raised by such borrowing are to be distributed in part to finance green recoveries in recipient countries and will be conditional on their adhering to rule-of-law principles in their domestic laws. In political language, the result, as Boris Kalnoky has pointed out in the Hungarian Review, is that Merkel and Germany are attempting an extremely complicated hat trick: the transformation of the EU economy to achieve net carbon neutrality; the simultaneous rescue of that economy from the economic consequences of the pandemic; and the injection of “democratic values” alongside considerations of efficiency and welfare into the EU’s distribution of financial subsidies. In pursuing these three aims, Merkel has an ally, Ursula von der Leyen, formerly defense minister in her cabinet and now president of the European Commission. Even so, getting unanimous agreement by the December 20 summit will be extraordinarily difficult.

 

And her task is complicated by the wider political reality that other players in the euro game will try, as always, to get their favored policy nostrums added to any reform package.

 

They include the EU Commission, the European Parliament, and the socialist or green parties of the Left sometimes acting in concert. The Commission, for instance, having already secured from member states a commitment to reduce 2030 carbon emissions by 40 percent from their 1990 level, later proposed to tighten that to 55 percent. The European Parliament then proposed a cut of 60 percent. Nations supporting these proposals include Spain, which has increased its emissions, but not Poland or Czechia, which depend on their coal reserves to generate energy. And since these proposals logically imply severe cuts in living standards, changes in people’s diets from meat to plants, and reductions in air travel and vacations abroad — none of which have been honestly discussed with the voters — their passage into law unamended is highly uncertain.

 

The European Parliament has responded to the more flexible politics of the post-Brexit EU by developing a more muscular determination to shape them. Its governing coalition leans left but also includes the conservative European People’s Party, which itself includes the Hungarian Fidesz Party, which is also Merkel’s ally. Europe’s Left regards Poland and Hungary as antidemocratic authoritarians all the more reprehensible because they keep winning elections. It was outraged that Merkel had protected both countries by placing the rule-of-law provision in the financial package inside a “locked box” to be opened only in case of dire emergency — and further angered that Hungary in particular had emerged with one of the largest increases in EU funds. (I suppose that since the Danube Institute, where I work, receives government funding, I am myself an indirect beneficiary of the EU funds, but they don’t seem to have made my analysis particularly favorable.)

 

This complex political situation has produced a series of diplomatic exchanges between Budapest, Warsaw, Berlin, and Brussels, as Germany has sought to protect the recovery package from the grumbling political crisis over the rule-of-law provisions. The government of either Poland or Hungary could in principle use its veto to protect the other against penalties, so, to forestall that, some of their European critics have proposed the “nuclear” solution: create new treaties that exclude both countries and bring forward the financial package under that heading. That would create a much larger crisis than the one this tactic purports to solve, however. Besides, there are hints from Germany that Hungary should be able to pass the rule-of-law test readily, since it’s been whittled down from the Left’s original list to excessive government influence over the selection of judges. If so, it’s Poland that might be in trouble. But Viktor Orbán has already told the Poles that Hungary would veto any sanctions against them, so that would seem to foreclose that outcome.

 

All in all, it’s likely that Merkel will succeed in getting either a compromise or a postponement of the dispute in the interest of securing the benefits of the financial package. For that too is at risk from the opposition of the frugal four as well as from the enthusiasm of the European Parliament. Its president, David Sassoli, was instrumental in helping Germany to get the package passed in July, but he seemingly takes the view that debt mutualization will probably not be a one-off event linked to the pandemic but a permanent element of EU budgetary management. And what of the frugal four, who clearly oppose that drift? They’ll come to accept it.

 

President Macron takes a similar view: “We were able to change something fundamental . . . which is to borrow in common and have a real transfer mechanism.” Just don’t tell the Germans that. So a clash is clearly on the way in December.

 

And just how valuable to EU states is the package anyway? It looks generous as a percentage of most national budgets but much less so when measured against the costs of the EU’s green ambitions and the weakness of global financial markets. It’s unlikely to save Italy, for instance, from another banking crisis. And the frugal four are right to fear the precedent it sets. One might say that financing loans by debt mutualization will happen again and again in the EU if Germany and others always yield to the argument that Europe must continue moving forward and that the euro or the drive for a net-zero-carbon economy cannot be sacrificed to narrow parsimony.

 

Unless the frugal four become the frugal five again on December 20.

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