Curing the EU’s Democracy Deficit

A quiet breakthrough occurred recently in Europe. Political leaders dropped the indecisiveness that has plagued them for the past two years, and took greater strides toward further economic and political union. The "f-word" – federalism – has even been broached, unleashing controversy, and also a badly needed debate.

The most applauded decision was that of European Central Bank chief Mario Draghi to allow the ECB to act as a financial backstop for indebted eurozone states. That was followed by plans for a Europe-wide banking union, a common eurozone budget, limited debt mutualisation (such as Eurobonds) and even a eurozone parliament – separate from the EU’s current one – to bring greater democracy and accountability to eurozone economies.

EU Commission President José Manuel Barroso capped it off with a dramatic speech 12 September calling for a "federation of nation states." His speech may one day be viewed as historic.

But even as these recent changes and reforms resolutely set Europe’s course into forward gear, they have unleashed a new debate across Europe. Many are asking: "Why is more European integration or federalism even necessary?"

There are at least two crucial responses to this question, both of them centred on what Europe will look like, not just in 2015 but also in 2035.

First, it’s important to remember that these decisions are being made in reaction to the on-going economic crisis and the perils of austerity economics. Economists and commentators have tended to view "austerity" on both sides of the Atlantic through the same prism. Yet the situation in Europe is quite different from the United States.

In the U.S., there exists a long-standing federal system that collects large amounts of taxes from Americans in all 50 member states into a national treasury that is spent on various nationwide priorities, as decided by the elected federal representatives in Washington DC. Little protest is made over which states contribute more to the national pot, or whether Californians or New Yorkers transfer some of their wealth to poorer Alaskans or Mississippians – which they do, year after year, budget after budget. In America, the prevailing philosophy is "E pluribus unum," "out of many, one," as it says on every dollar bill.

But in the European "union", the federal institutions – whether the chief executive, parliament, central bank or regulators – are in their infancy. There is a small treasury – the EU collects about 1% of the member state’s GDP, compared to the U.S. federal government absorbing about 24% of America’s GDP – so there are far fewer resources at the European level to deal with a crisis.

Instead, national and even regional interests jealously track which EU member states are the economic drivers and which are the alleged slackers. The Germans, Austrians, Dutch, French and others suddenly find themselves in the foreign situation of having to extend financial assistance not only to the Greeks but also the Portuguese, the Irish, Cypriots and increasingly the Spanish.

In the US, such geographic spreading of the wealth is normal, but in Europe, where nations fought bloody and not-so-distant wars against each other, such transfers are still very controversial. Yet those are an important tool for keeping the continent economically as well as politically stable. If Greece or Portugal were to sink to "failed state" status, it would destabilise other parts of Europe.

But if they can’t keep up, yet have lost the capacity to devalue their currency to regain competitiveness, assistance from wealthier states like Germany and Austria becomes essential to prevent them from sinking further. The only way to avoid this would be to expel them from the eurozone, but that also entails risks, not only of short-term contagion but also longer-term, if they become further destabilised or can’t adequately police their borders.

So unlike the U.S., Europe’s crisis has not been simply a policy debate over "austerity versus stimulus." It has been an existential crisis over union, cross-border solidarity and how to define "self interest."

The second response to "Why more integration" is "Chindia". China and India’s rise as two of the world’s largest economies highlights a new 21st century reality: size matters. In today’s world, population counts as much as productivity toward determining economic power. Even though most Chinese remain poor, China’s rise to the world’s second largest economy makes it one of the largest traders, creditors and markets for commodities. The decisions it makes shape markets globally. As economist Arvind Subramanian has put it: "GDP and size [...] show what resources you can bring to the table."

A Europe composed of dozens of diffuse member states, none of them more than seven percent of China or India, would slowly see its competitive advantages chipped away. Member states would soon be in competition with each other, even more so than today, instead of fostering continental cooperation and development.

But if Europeans can form some kind of federalised Europe, with a population of now over 500 million people, they have a chance to maintain their quality of life and broadly shared prosperity.

European leaders have created a timeline that will allow for lots of public debate leading up to the German elections in the fall of 2013 and the European parliamentary elections in 2014, when voters will have their say. But make no mistake, they are pushing for more integration and federalism as they believe it is the best hope for Europe in the 21st century.

Steven Hill (www.steven-hill.com) is a political writer and author of "Europe’s Promise: Why the European Way is the Best Hope in an Insecure Age" (www.europespromise.org). He has been a frequent contributor to The Vienna Review.