European leaders struggle to prevent the break-up of the Eurozone and put the monetary union on a sound footing. The costs of a break-up would be immense in the short, medium, and long-term – immediate losses, financial instability, and contagion, followed by spirals of competitive devaluations and other protectionist measures, capped by a loss of good-will to cooperate on anything substantial in the future. Still, legitimate concerns are being expressed in Germany and elsewhere in Northern Europe about being pressured into a superstate with unlimited liability for other peoples’ current and future debts. But does rescuing the Euro really terminally undermine national sovereignty and transfer authority to supranational institutions or cartels of South European sinner states?
In the current debate, sovereignty is understood less in legal terms, but rather as the effective ability of citizens to look after their own welfare and resolve issues of common concern without recourse to others. Achieving these goals is dependent on having sufficient resources to do so, and this in turn can depend on choices made by others. A state that is unable to re-finance its debt and current spending will not be able to implement any of the policies associated with effective self-government. “Sovereignty ends where solvency ends” as the authors of a recent report rightly point out. Lenders inevitably insist on conditions to make sure that the country will implement new policies to ensure that spending and earning are aligned, thus limiting the state’s de-facto sovereignty. This principle applies inside or outside of a monetary union and most citizens of countries affected by so called “austerity” policies realize that the conditions that would be imposed upon them by the markets would be considerably harsher than those set by the IMF/EU.
But what about the specific provisions under discussion? If we start with the Fiscal Pact, it commits all member states to enshrine new provisions for limiting national debts in their national constitutions, something Germany has already done. It also changes the voting provisions for the so-called excessive deficit procedure. Under the old system qualified majority by member states in the Council was required to impose penalties, whereas under the new system the excessive deficit procedure kicks in automatically when member states’ annual budgets are 3 percent in deficit, and penalties will be applied as recommended by the Commission unless a qualified majority is assembled to stop them. This shift is designed to prevent a cartel of “sinners” to block the application of the process. A qualified majority in this case is 72 percent of the Eurozone members representing at least 65 percent of the population. Hence, Germany could be more easily outvoted but only if it failed to live-up to its own commitments and thus harmed the stability of the Euro as it did in 2002/2003. All recommendations are formulated by the European Commission, taking into account extraordinary circumstances. Penalties are capped at 0.1 percent of GDP. The fiscal pact does therefore not create unlimited liabilities on any country, nor does it increase the likelihood virtuous countries being outvoted by a coalition of “sinner states.”
As for the European Stability Mechanism, it can disperse funds up to a ceiling of currently 500 billion Euros. It does so by unanimous agreement of member states, but in an emergency determined by the Commission and the ECB it can take decisions by a qualified majority of 85 %. Given that voting rights follow the contribution to the budget, and that Germany pays in 21 percent, the largest country of the Euro area could not be outvoted, even in the unlikely scenario that other net-contributor states such Finland, the Netherlands, or Austria were opposed. So spending from the ESM will come with conditions, is capped, and cannot be used as an instrument for redistribution without the consent of net-contributor countries. The ESM does therefore not amount to a significant transfer of sovereignty for a country such as Germany.
But what about the other proposals mooted but not agreed? Unfortunately, the discussion about the Euro survival is narrowed to whether Eurobonds are being created with contributors rarely clear about what they mean. One can put in place various safeguards against “sinner states” free-riding on “virtuous states” by carefully specifying the conditions involved. Note in this context the recommendations by experts assembled by the Think Tank Notre Europe to create a European Debt Agency. They also rightly argue that common debt financing can only be one element in a medium term plan to address the failure to complement monetary union with a working economic union.
The changes required for the Euro to survive in the medium and long-term are not trivial and will require a shift of some competences for regulation of the banking system, a stronger coordination of economic policies, an instrument for dealing with countries facing unsustainable debts, and measures to prevent cyclical divergences. However, these measures do not imply the creation of an economic government in Brussels, nor should one wish for it given the persistence of economic and political diversity in Europe.
While calls for referenda on particular aspects of this package are misguided at this stage, skeptics are right to highlight the need for more democratic participation in the Eurozone’s governance. This could involve more direct accountability of the EU Commission to electorates, more involvement of national parliamentarians in EU politics, and new provisions for direct democracy. Once a new treaty encompassing all of these elements is agreed by heads of state, a Europe-wide referendum should be held to endow it with the legitimacy to function well.