Before the June EU Summit: contract(s) for Europe

Last autumn it seemed that Europe was inevitably heading towards a “great leap” in integration, comparable to such historical milestones as the Rome or Maastricht treaties. German politicians and intellectuals were competing with each other for ideas on a European political union—despite the dislike of the citizens for federalist experiments but also against a Europe-wide criticism of Berlin for its lack of vision and impetus in rescuing the common currency and the whole European project.

The sudden readiness for a great leap—as an answer to the more and more painfully evident deficits in the structure of the economic and monetary union—also overtook Brussels. Head of the European Commission Jose Manuel Barroso delivered a fiery speech in favor of a European federation, while EU President Herman von Rompuy, more restrained in expressing emotions, presented a number of detailed analyses (road maps) for building a “genuine economic and monetary union.”

But the December (2012) EU summit, contrary to high-sounding declarations, did not bring any fundamental resolutions. The mountain brought forth a mouse, although the decision about creating the Single Supervisory Mechanism as the first step towards a European banking union probably does not deserve such a disdainful description. Nevertheless, we suddenly stopped to hear about a political union and deep reforms. In line with an old EU tradition such matters were put aside for later—until June 2013, when European leaders will again meet at a summit which takes place every six months.

The closer we get to this date, the clearer it becomes that the appetite for deep reforms has faded. There are several reasons for that. First, despite the turbulent events surrounding Cyprus, despite alarmist economic predictions for the eurozone (the March OECD report), despite successive countries—Slovenia, Portugal and perhaps even France—forming a queue for another bail-out, the conviction that deep institutional reforms are an indispensable recipe for rescuing the common currency has weakened. Since the European Central Bank started behaving like a genuine central bank (in the opinion of most European countries except for Germany), making interventions on financial markets (since the memorable 6th of September, 2012), the belief that if things go awry Frankfurt will rescue Europe, dulled the sensitivity for the remaining threats. Second, the prospect of parliamentary elections in Germany and the emergence of a new, eurosceptic party “An Alternative for Germany” made the German government look even more cautiously at any projects for further integration. As The Economist aptly wrote recently, Berlin deserves criticism today not so much because of its pressure for structural reforms in the countries in the South of Europe but for its “new reluctance to build a safer structure to underpin [the euro]).”Third, the blackmail used by David Cameron, who would like to exploit the prospect of amendments in the European treaties to achieve some unspecified concessions for Great Britain (in exchange for Britain’s agreement for these amendments) has led to perceiving the reform of European treaties as “putting on fire a powder keg floating in an ocean of oil”, as the Polish Minister for European Affairs, Piotr Serafin, has put it.

So a new great contract for Europe, a dream both of the federalists and those who wish the common currency well, is becoming just that—an elusive dream. True, in today’s Europe no one is able to predict what will happen in a year or even in a few months. Not only Angela Merkel is driving by sight while fighting the crisis. Therefore the June EU summit will not be the great hour for European visionaries but for hair-splitting technocrats. And instead of a fundamental contract for Europe the main focus of their deliberations will be “contracts,” the Brussels slang term for the newest idea for improving economic coordination and the process of reform in the eurozone countries. They will not solve the key EU problems but the discussion around them (so far only held behind the scenes) contains the dilemmas facing Europe in a nutshell.

The idea of contractual arrangements, their general concept presented by the European Commission in the middle of March, is a creative deployment of the carrot and stick strategy. Countries-signatories of these agreements with Brussels are supposed to commit themselves to structural reforms in exchange for access to funds from the “financial capability” specially created for that purpose. From the point of view of Germany, the leading advocate of raising European competitiveness through reforms based on German experiences (the so-called Agenda 2010), the financial injection is to act as an incentive for reforms. For France, which since Francois Hollande’s election is pressing for more intense stimulation of the economy and strengthening the social security dimension of the EU, the other aspect is more important: something like a eurozone budget. While Berlin wants to limit its role to a minimum (€40 billion at the most, preferably from financial transactions tax), Paris is dreaming about another Marshall Plan for Europe. The positions of both key actors in this argument reflect their traditional priorities and notions about the EU.

But the significance of this argument is not constrained to the increasing difficulties in reaching a French-German agreement. The question of who and how would formulate the content of the contracts—which, after all, concern key aspects of the labor market, social security system, etc.—is related to the fundamental issue of democracy. Is it to be yet another instrument which the European Commission or some other Brussels’ body will use to impose on the member countries the reforms they should implement in their own and European interest, weaving the carrot of financial support in front of their noses? It would be tantamount to, as Jean Pisani-Ferry says, bribing the governments of these countries and depriving them of the responsibility for the shape of the reforms—with disastrous consequences for their legitimacy. It is the countries themselves that should formulate the program of reforms and apply for funds necessary to implement them: Such a model would guarantee that Brussels’ policy would not be imposed from the outside and the citizens could make their politicians accountable for the “contracts.”

The discussion on the contracts touches upon yet another key EU problem: institutional cohesion. Which body should be the partner for member countries in these contracts—the European Commission or perhaps the European Stability Mechanism (an institution not mandated for in the European treaties, based on an intergovernmental agreement, responsible for providing financial aid—under strictly defined conditions—to eurozone countries)? If the latter, the EU structure (especially the role of the European Commission) would be significantly weakened.

And finally the question which is particularly important for Poland and other countries outside the eurozone: are the contracts to be signed (and the new EU funds to be spent) only by the “Seventeen” (as the European Commission is suggesting) or by all EU countries? This is one of these seemingly technical but in fact very political debates strongly influencing the future shape of the EU and its division into various circles of integration. It is not accidental that the Polish government supports the option where the contracts would be open to countries not belonging to the eurozone, treating them as an instrument, which could help implement structural reforms necessary to a comfortable future functioning in the eurozone and avoiding the “Spanish scenario.”

In the Spring of 2013 reaching a final agreement in these matters at the June EU summit does not seem very likely. It will probably be yet another stage in the unending series of postponed reforms and adopting successive “road maps”. The so-called contracts undoubtedly are an important element of the discussion on the future of the EU and the eurozone but they will not be a miraculous cure. Today the EU needs above all a contract of a much bigger caliber: A new model of economic strategy, which would allow Europe to enter the path of economic growth and give some air to the countries most suffocated by the austerity policy. In April the Brussels think-tank Breugel presented a list of necessary demands. The list is topped by stabilization of the EU financial sector aimed at increasing the volume of bank loans. Implementation of successive stages of the banking union (a system of bankruptcies and recapitalization of banks) is of fundamental importance. EU countries should not drive inflation down below the 2% level, countries receiving financial aid should have their repayment period prolonged and the countries of the rich North should do more towards boosting domestic demand (through pay increases and public investments).

Before the German elections, we should not expect any decisive moves also in this sphere. In the immediate future, we will be observing a race against time—a volatile economic situation and a dramatic worsening of the public mood (the case of Italy)—and the European Union will be watching it with its hands partly tied. The European Cassandras predict that without a major turn in economic strategy and institutional structure the eurozone will not last long. It is not certain if they are right. But it is almost certain that at the nearest EU summit such a turn will not take place.