How the EU Went Astray

Brussels is betraying its founding values, creating problems rather than solving them
By Prince Michael of Liechtenstein, Geopolitical Intelligence Services
June 12, 2018 3:48 pm Last Updated: August 9, 2018 6:34 pm

The original objective of the European Economic Community in 1957 was to peacefully integrate Europe through the creation of a continent-wide free market. The process of expanding the common market and eliminating barriers was extremely rewarding for the six founding members: France, Germany, Italy, and the Benelux countries (Belgium, the Netherlands, and Luxembourg).

The French-German friendship, cultivated after centuries of wars, and the renaissance of the European spirit after nearly 200 years of nationalism, were the first great successes of that process. Gradually, more European countries joined the six pioneers.

Nearly four decades later, the community reached another milestone with the 1993 Maastricht Treaty that established the European Union (EU). It also included the launch of a common currency. The euro, however, was created not only to facilitate intra-European trade and give Europeans the backing of a strong currency, there was a political agenda as well. The new currency was supposed to help mold EU members into a supranational political union.

In theory, the European Central Bank (ECB) was designed to be independent of politics. Such setups work for sound currencies. But as the euro was born with a political agenda, the ECB’s independence would have its limits and rules set in place for sustainability were flaunted.

To ensure the stability of the common currency, countries had to adhere to a set of economic parameters, the so-called Maastricht criteria.

The euro area member states had to keep inflation in check, their budget deficits should not exceed 3 percent of GDP, and their overall debt should be capped at 60 percent of the GDP. In reality, even Germany and France soon violated the Maastricht criteria in the early 2000s. And in the 2010s, the ECB has exceeded its monetary policy mandate, designed to protect the currency’s value, to involve itself directly in the EU’s fiscal and economic policies.

Through the negligence of the EU but also at the national government level, many member countries engaged in excessive spending. The Maastricht criteria have been reduced to nice-sounding phrases on paper. As a result, we now have a strong tension between countries with lax fiscal habits, mainly in the south, and more fiscally responsible countries in Northern and Central Europe, especially Germany.

The Tension Matrix

Let’s call this situation the North-South tension. There is another disruptive phenomenon in the EU, which we may call the East-West strain. This is the perceived conflict between a socialist-leaning mind-set, typical to Western Europe, and conservative political tendencies, often found in Central Europe. By conservativism, we understand a political orientation that respects proven traditional values and promotes progress based on these values. This does not mean embracing nationalism, but it surely extends to patriotism. To quote the composer Gustav Mahler (1860-1911), conservatism is not about “preserving the ashes but passing on the flame.”

In the context of this East-West tension, France and Germany wrapped themselves in the flag of liberal democracy and started a “value-driven” crusade for closer political integration of the EU. It is unclear what the word “liberal” is supposed to mean here, but the crusade seems to produce rather socialist measures. What we keep getting are higher taxes, more regulation, fewer property rights, and omnipresent government. Opposing that, some Central European countries are either declaring themselves or being labeled as “illiberal” democracies.

For the sake of simplicity, let us set aside the issue of Brexit. There is no doubt that the internal market provided by the EU is beneficial to all member states. Why, then, all these tensions? One often hears the complaint that the euro area has a single currency but not a single economic policy. But that is not necessarily the problem. The real source of pain comes from economies being squeezed into bureaucratic schemes, “harmonized,” and forced into the straightjacket of one currency.

This “one-size-fits-all” approach ignores the needs and particularities of the member states. In the case of the Greek debt crisis, for instance, the easiest and least painful solution–for everybody–would have been to let Greece default in 2010 and drop the euro, perhaps temporarily. This was not allowed, however, to the detriment of both the Greek population and the cohesion of the Union.

The EU sees itself as equaling Europe, which is simply not the case. This observation is not meant to deny the union’s great merits. Overestimating its importance, however, skews the perspective and often leads to policy mistakes.

Out of Control Spending

The last few weeks have brought warnings that Italy’s proposed new government might be a danger to Europe and the EU. This confuses an underlying problem, which could pose a serious danger, with something that would merely trigger a crisis.

The problem is out-of-control government deficits and debt, not Italy’s cabinet lineup. It seems the EU is far more preoccupied with situations that may upset the status quo than with issues posing an existential threat to the union. Sometimes, as in a Greek tragedy, everything done to avert a disaster only brings it nearer.

After the Brexit vote, the remaining members of the EU displayed two telling reactions. Some were rightly alarmed that something was wrong with the union’s direction. Others, however, responded with knee-jerk calls for an “ever closer union.”

This strategy, together with some misguided British internal politics, was the main reason the Brexit crisis occurred in the first place. Europeans increasingly felt that Brussels ignored the principle of subsidiarity. Functions were unnecessarily centralized or “harmonized.” Besides its famous “four freedoms,” the EU does need, of course, common policies in certain areas such as infrastructure, energy, security, etc. But things have gone too far: the concentration of power in Brussels caused a backlash.

North-South tensions have a real cause. It cannot, however, be fixed by establishing a common ministry of finance and transfer payments. The solution is making the countries truly responsible for their financial decisions. That, more or less, is what the thinking of Wolfgang Schäuble, the former finance minister of Germany, and leaders of the austerity-minded northern European countries boils down to.

Germany’s first reaction to Brexit was mixed, including a certain dose of Schadenfreude–imagining that it would be quite a blow to the UK economy, which is probably correct. Schadenfreude is never a healthy emotion, though. Germany realizes that it has lost an important ally in its quest for responsible fiscal politics in the Union. Today, Berlin is backed only by the Netherlands, the Nordic countries, and, to a certain extent, the Visegrad countries on this matter. Germany is in a clear minority in Brussels. This does not augur well for the cause of responsible fiscal policy in the EU.

Adding to the drama, now Germany’s government is split as well. The economic and fiscal views of the Social Democrats are akin to those of the southern states of Europe, while the Christian Democrats remain in the northern camp.

Bad Incentives

The 2015 migration crisis produced a new set of tensions within the EU. The countries in Central Europe, especially the Visegrad 4 (Poland, Hungary, the Czech Republic, and Slovakia), were described as lacking in solidarity for their refusal to accept a policy of assigning refugee quotas to the member states. A “values” conflict between “liberal“ and “illiberal“ democracies soon followed, with Paris and Berlin the most agitated “liberal” capitals.

Central Europe is no less European than other parts of the EU, and it is also fiscally responsible. These countries put to good use the transfers of EU cohesion and development funds that followed the enlargements of 2004 and 2007, improving their infrastructure and building up their economies.

The European Commission is now bringing up the issue of solidarity. With the support of Germany and France, it proposes to cut the transfers to Central Europe while increasing the allowances for the south. Such a shift in allocations would mix clear-cut economic criteria with ideological judgments. If allowed to pass, the policy would betray the basic idea of the EU.

The mistake here–and it might have started with the euro–is that EU politicians talking about net contributors and net recipients are just looking at cash flows into member countries, not at the whole economic picture. The recipients’ economic contribution to the Union, also in creating value through their industrial bases, is neglected.

Seen in this framework, so-called liberal values are, in fact, political constructs that have little to do with classic liberalism. Such an interpretation of liberalism amounts to a real betrayal of the European spirit and its cornerstone values of diversity and national self-determination.

Prince Michael of Liechtenstein is the chairman of trust company Industrie- und Finanzkontor Ets, and founder and chairman of Geopolitical Intelligence Services. This article was first published by GIS Reports Online.