The Junckernaut is no federalist juggernaut

The move to choose the former Luxembourgeois prime minister, Jean-Claude Juncker, as the next president of the European Commission has received an enormous boost from David Cameron’s cack-handed diplomacy but fears that he represents a federalist drive in the EU are entirely misplaced. For most people in the core EU countries, and especially Belgium and Luxembourg, homage to pro-integration rhetoric is almost like that of Christians to the creed or of British Conservatives to resisting the alleged onslaught of legislative red tape emanating from Brussels (even for those who would be hard-pressed to think of a single example which actually affects their lives). That it should be such an article of faith is unsurprising from citizens of countries that have been overrun by invading armies twice in the last century. In practice, however, Mr Juncker is highly pragmatic.

What is federalism?

The word federalism needs to be defined. In a technical sense, it means that there are different powers for different layers of authority. In that sense the EU and its forerunners have been federalist since the setting of the European Coal and Steel Community in 1951, for which the pooling of sovereignty was the fundamental basis of the French initiative to set up the ECSC and was the reason why the UK stayed out, why it attempted the alternative European Free Trade Area and why when the UK did accede to the European Economic Community and ECSC in 1973, it was so controversial as to provoke a referendum in 1975.

In practice, the term federalism has been used both by its proponents and its opponents to mean a much more integrated political body, comparable in some degree to existing federations such as the US and the Federal Republic of Germany. It is hard to imagine a serious move in this direction without a major impact on taxation or expenditure. At present EU expenditure is limited to 1% of GDP which is less than a fortieth of average public expenditure in member states, compared to more like half in the US or Germany. From the point of view of taxation, the only important unifying factors originally were external customs duties and the fact that all member states are required to impose value added tax, though at rates and coverage which they could choose. Some harmonisation of VAT rates was agreed as part of the 1992 Single Market Programme, but with the sole purpose of eliminating the need for varying rates to result in member states keeping border controls on the movement of goods and services. The single market programme did also in other ways result in some more authority moving up to the EU level. Such powers were drawn up by the British internal market commissioner at the time, Lord Cockfield, who had been appointed by Mrs Thatcher, who fully supported the changes.

Juncker resisted tax harmonisation

Apart from VAT, any moves to harmonise taxation across the EU require unanimity. This has remained the case as a result of the opposition to harmonising tax from a number of countries, including Luxembourg. Under the leadership of Juncker, Luxembourg  strenuously resisted moves which would limit its ability to attract investment and otherwise benefit from low corporate and other tax rates. Indeed it was only very reluctantly and after many years of resistance that Luxembourg agreed to comply with measures to limit its provisions for bank secrecy which were obviously designed to enable depositors to evade taxation in the EU countries to which they belonged.

On the EU expenditure side, there is no possibility that it could rise even slightly above 1% of GDP during the term of the next Commission because it is so limited by the Framework Budget for 2014-20 which has been enacted by the Council and Parliament.

UK arguments cut no ice

The main reason why Juncker was being pushed by the European Parliament is as an answer to the EU’s alleged democratic deficit, since he had the backing of the largest party emerging from the May 22-25 EP elections, the European Peoples’ Party. As a way to increase democracy in the EU, the move is deeply flawed (not least because at the time of the Parliament elections at the end of May less than 10% of the electorate had actually heard of Juncker). The case against the justification of Juncker by the argument that it would make the EU more dramatic has been made by almost all UK commentators including highly pro-EU ones, in the British press. The fact remains that, however cogent these arguments may seem to the British, opinion in other EU countries especially Germany is very different. There are a number of reasons for the different German view, but they have been given a decisive push by Cameron’s attempt to veto Juncker. When asked whether they would agree with Cameron that the European Parliament should not impose its own choice as Commission president, 60% of Germans disagree (ie 60% support Juncker). This answer clearly relates to how the question was put, but as a result of Cameron’s public attempt to veto Juncker, the question is now seen in Germany in large part as one of the right of the rest of the EU not to be subjected to a British diktat. In the UK much of public opinion sees the EU debate in terms of whether the UK should be dictated to by “Brussels”. In some EU countries, the UK question is increasingly seen as whether the UK should dictate to the rest of the EU. Most opinion in these countries would like the UK to remain in the EU–but not at the cost of being told what to do by the UK.

A UK right of opt-out from any substantive further powers being given to the EU is acceptable to its partners. But the UK may have to accept a Juncker Commission, particularly following Cameron’s faux-pas. Juncker is probably not the best candidate for the job but whether or not he is chosen will not have much impact on whether other member states want to move further down the path of integration and will have no impact whatever on the UK’s right to opt out of any such moves. In regard to whether a Juncker Commission might be unsympathetic to the UK, the British government has dug itself into a whole. It had better stop digging.

 

 

After five years, is the era of extreme austerity in southern Europe coming to an end?

The  southern countries of the euro zone, Ireland and France have experienced nearly six years of extreme austerity since the economic crash in North America and Europe at the end of 2008 exposed many weaknesses in these countries’ economies and their banks. At last there has been the beginning of an easing of austerity with the possibility of more measures to come. The reasons for austerity have been the high public debts and deficits of the countries concerned, excessive household and business debt in some of the countries, bank losses and inadequate bank capital ratios compounded by lack of transparency, and average inflation across the euro zone had stuck at close to the ECB target of just under 2%, which meant that the ECB could not within its policy mandate to take very substantive measures to loosen monetary policy, although its interest rates have for a long time been very low and it has provided easy short-term financing to banks.

Herculean efforts have meant that some of the affected countries, notably Italy but also even Greece, have managed to bring their deficit ratios (though not their debt ratios) to levels at which they have a little room for manoeuvre which they are exploiting even if without the approval of the troika (European Commission, ECB and IMF) or the ultimate authority, the German government itself dependent on  German voters. Less optimistically, household debt remains high especially in Spain, Portugal and Ireland and the condition of most banks remains weak, while at least until the new round of ECB supervised stress tests to be published later this, they are also lacking in transparency so there are fears that some banks may be still weaker.

The biggest change is that average inflation in the euro zone has fallen to 0.5% which means that the ECB is having to take action to boost the economy to allow inflation to rise towards its target and to avoid actual deflation. It did so on June 5th, with the first negative interest rate of 0.25% on bank deposits with the ECB and €400bn made available as targeted long term refinancing operations (TLTROs) provide banks onlend the sums at reasonable interest rates to non-financial companies. A further move which is being prepared and debated in the ECB is its purchase of asset backed securities (ASBs) of loan packages to small and medium enterprises. The TLTROs and, if they are introduced, ASBs, are the first real effort to tackle a major distortion in the euro zone, namely that it is far more difficult and more expensive for SMEs in southern Europe to borrow than in Germany or other north European countries.

Another significant development is the declared intention of the chair of the euro zone group of finance ministers, the Dutch finance minister, Jeroen Dijsselbloem, that some countries in the euro zone be given a little more flexibility in regard to the harsh imposition of rigour over the public finances. He made a distinction between countries with still relatively high  deficits which require a full focus on “corrective” measures, ie standard austerity measures to cut spending or raise taxes and those which have brought their deficits below the magic 3% threshold and for which “preventative” measures could be accepted in exchange for more flexibility on fiscal targets. These would be unlikely to include raising the 3% threshold but could imply flexibility of the goals for debt reduction and moving towards surplus. It may be helpful that it is Mr Dijsselbloem is suggesting such flexibility given that his provenance, the Netherlands, is seen as a country like Germany committed to fiscal orthodoxy at home. Nevertheless he and the countries, including most notably Italy which hope to be given more flexibility, will have to marshal their arguments cogently to challenge the severe belief in the merits of fiscal orthodoxy amongst the German establishment and German public opinion and not least, the view of the German finance minister, Wolfgang Schauble.