The global financial crisis will have a deep and lasting impact on the real economy. International trade, world production and employment are expected to fall down markedly. In Europe, the dangerous climax of the crisis was stopped in October 2008, thanks to the intervention of the ECB and national governments. In December, the EU approved a European recovery plan. Nevertheless, a quick recovery is unlikely. As usual, national divisions hinder the effectiveness of the actions of European institutions. Every national government deceives itself – and deceives its citizens – about the efficacy of national action. From that crisis, Europe can come out more united or more divided.
In the very middle of the crisis, M. Sarkozy, the rotating President of the EU, declared in the European Parliament: “we have a currency, a central bank, a single monetary policy, but we do not have an economic government worthy of that name” (Oct. 21st). In fact, Europe has a confused governance system, not a government. Unfortunately, the solution proposed by M. Sarkozy – i.e. a directoire formed by the most important countries of the Union – is not only non democratic, it is ineffective. Instead, the real European problem was well highlighted by M. Trichet, the President of the ECB, who declared in an interview (FT, Dec. 15th) that “the Stability and Growth Pact is the legal framework that we have as a quid pro quo for the fact that we do not have a federal budget and a federal government”.
The lack of a federal budget has been crucial in determining the outcome of the crisis. When – at the beginning of October – some government proposed a “European Federal Fund” of 300 bn euros, the German government refused on the ground that the Germans were not ready to pay for somebody’s else mistake. Therefore, instead of having a European Fund, every government provided its own national rescue plan. The final result was a financial engagement of about 2,000 bn euros, seven times more than the European Fund proposed. Later on, on December 12th, the European Council approved the “European Economic Recovery Plan”, drafted by the European Commission, which proposed a mobilization of European resources for an amount equal to 1.5% of EU GDP. Of that amount, only 0.3% of the EU GDP was to be financed by European financial resources. The greater part of the plan, 1.2% of EU GDP, had to be financed by national governments. The result was that some national government, waiting for benefits coming from other budget expenditure (therefore behaving as a free rider), does not contribute at all to the recovery plan. Moreover, the national plans are not coherent: one proposes to increase consumptions, the other one bets on investments. Finally, some government, even if it is willing to contribute, will not be able to draw enough financial resources at a reasonable rate of interest on the financial market, due to the rush of big countries for public indebtedness. In conclusion, the European Plan is not very coherent and is certainly insufficient to bring Europe out of recession. The lesson of the 2008 crisis is that without a federal budget and a European Ministry of the Treasury – responsible before the European Parliament – any attempts of shaping a European policy is destined to fail. The SGP is a bad substitute for a system of fiscal federalism in Europe.
The lack of a European federal government is especially evident if we consider the world challenges Europe has to cope with. The financial crisis was caused not only by the falling prices of toxic assets, but also by the excess of liquidity in the USA and in the world economy at large. The use of the dollar as the key currency for international payments granted the US government the “extravagant privilege” of holding up a huge current account deficit, without bearing the cost of the adjustment, as the IMF asks other countries in the same position. Therefore, a new regulation of the financial market has to go with a new regulation of the international monetary system. A political multipolar system needs a symmetrical monetary system, not an asymmetric mechanism founded on a privileged national currency. Moreover, due to the collapse of the world aggregate demand and production, even the US economy will not be able to recover if the world economy does not recover. A new Bretton Woods is necessary. In a multipolar world, the growth of the international economy is no longer led by only one state or a little group of states (the locomotive doctrine, elaborated by the G7). The European Union, the first experiment of a supranational community of states, has the duty to propose a plan to reform world economic institutions, to promote world-wide sustainable development, to regulate finance, to guarantee a supranational currency – by gradually substituting the dollar with SDR issued by the IMF – and to establish a system of fixed exchange rates among industrialized and developing countries.
To conclude, Europe needs a democratic government. A directoire is an elusive reply. Europe needs a federal budget and a federal government. The fundamental reform, necessary to transform the Commission into a democratic and effective government, responsible before the European Parliament, is the abolition of the veto right in the Council of Ministers. The unanimity rule is incompatible with democracy. The EU cannot avoid the problem. The citizens should be involved in the European decision making system. Every proposal, even a permanent President of the European Council, will be a palliative, if the EU democratic deficit is not removed.