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Future of EU

Europe’s problem is not (just) Germany

By Jörg Haas

Germany has been accused of transforming the EU into a “bad International Monetary Fund” by promoting conditionality and competitiveness. In a response to Hans Kundnani, Jörg Haas argues that insisting on rules and reforms is actually a constructive contribution to the debate about the EU’s future. The real issue with Germany is that it seems unwilling to comply with the laws it has shaped. This is part of a broader problem: the ever-growing influence of national governments in the EU makes it easy for powerful states to circumvent rules. We need an EU that ensures fair treatment for strong and weak members alike.

In a recent article on this website, Hans Kundnani worries that the European Union is “being remade in the image of the International Monetary Fund”. The main culprit, he argues, is Germany. Pretending to strive for ‘more Europe’, its politicians rigidly insist on enforcing rules, replace genuine solidarity with conditional loans and hollow out the welfare state in the name of competitiveness. While I agree that pro-Europeans might be disappointed with the Eurozone reform proposals that are currently being discussed, I do not share his views about the German principles and the country’s role in the EU.

German ideas are useful in principle

German politicians, especially conservative ones, have indeed been known to place quite a lot of emphasis on competitiveness and rules, and on conditionality as a tool to ensure rule compliance. Bundesbank President Jens Weidmann is famous for tirelessly advocating the need for a “balance between liability and control”. In the current negotiations about the EU’s long-term budget, the German government promotes the idea that some EU funds should only be available to countries that introduce economic reforms.

However, it would be too easy to depict the German principles as anti-European or contrary to the spirit of the EU’s founding fathers. Solidarity does not solve all problems. Granted, there is a tendency in the German discourse to overlook the structural flaws of the Eurozone in its current form. But those arguing for a stronger monetary union must also speak up about bad policies at the national level. Many troubles experienced by Greece or Italy were not caused by the common currency, and as long as countries make most of their policies themselves, they also bear most of the responsibility for the results themselves. Lending against conditionality reflects European reality: we live in an uneasy coexistence of strong economic interdependence and weak political integration. The former calls for mutual insurance, the latter undermines trust. Solidarity will not fix the problem unless it is accompanied by more common decision-making. If euro-area members run their economies without considering the effects on neighbours, imbalances and vulnerabilities will build up again, even if the EU redistributes more. Therefore, the German argument that risk-sharing must remain limited as long as there is no willingness to share sovereignty should not be discarded.

Lending against conditionality reflects European reality: we live in an uneasy coexistence of strong economic interdependence and weak political integration.

A focus on competitiveness, the second element of the transformation Kundnani worries about, is neither wrong nor new. To make the EU “the most competitive (…) economy in the world” was the key goal of the Lisbon strategy, dating from March 2000. The dichotomy between the EU’s former role as a model for the world and its current role as a competitor is false. The EU can only be a model if its economies continuously adapt and reform. Of course, one can question the kind of competitiveness that has been promoted in the last years. It cannot mean just liberalising labour markets. It also does not necessarily mean running a large current account surplus. Australia has been running a deficit for decades due to strong domestic investment, and it enjoys famously high and stable growth rates. The most important element of competitiveness must be solid productivity growth, which requires good education and high-quality public institutions as well as functioning markets.

The real issue: rules are only for the weak

There is an issue with German influence on the EU, but it is not the country’s insistence on rules and reforms. Rather, it is its inconsistent behaviour. German politicians habitually criticise the Commission for being too soft on rulebreakers. But when sanctions become a real option, the German government can be surprisingly forgiving. In 2016, the Commission considered fining Spain under the government of Mariano Rajoy, a close ally of chancellor Merkel, for violating the Stability and Growth Pact. To the surprise of many, conservative finance minister Wolfgang Schäuble lobbied against sanctions. Strangely, he proposed only a few months later that the budgetary surveillance of EU members should be entrusted to the European Stability Mechanism because it would be stronger and more neutral than the Commission. Germany’s track record on rule compliance in a broader sense is also unimpressive. No country does worse when it comes to transposing EU directives into national law. The Commission reports 91 open infringement procedures for Germany, compared to 30 in Estonia (and 70 in Italy). Domestic reforms are another weakness. In the European Semester, the policy coordination cycle Germany helped create to improve economic and fiscal surveillance, the country is the second worst performer.

For my friends, everything. For my enemies, the law.

Rules and conditionality must apply to all Member States equally, not just to the weak. Currently, German behaviour comes dangerously close to Oscar Benavides’ famous dictum “For my friends, everything. For my enemies, the law.” This breeds disappointment and hostility in other countries. It is not just unfair behaviour, but also strategically unwise. In order to gain more allies for its European reform plans, Germany needs more courageous politicians who are humble about today’s economic achievements, respect the EU framework, and drop the pretence that lending money to EU countries in crisis was an act of altruism, a gift to the poor.

A Europe that ensures fair treatment

However, while Germany is relatively unique in its combination of rule-making rhetoric and rule-breaking behaviour, preferential treatment is also easy to spot in other large EU countries. One just needs to remember Jean-Clause Juncker’s famous decision not to sanction France “because it’s France”. And it is hard to see how French president Emmanuel Macron’s proposals for reforming the Eurozone, often cited in contrast to the German approach, would improve this situation. Supposing that the EU were to set up a €300 billion Eurozone budget in the discretionary intergovernmental framework the French president seems to prefer. Who would be better able to shape the distribution of the funds in their own interests, France or Portugal? In an environment dominated by national governments, the powerful can easily throw their weight around. This issue needs to receive more attention in the Eurozone reform debate. Intergovernmentalism can be useful as a quick fix, but its long-term consequences are deleterious for cooperation in Europe.

In an environment dominated by national governments, the powerful can easily throw their weight around.

Summing up, it is not a German or French Europe that should worry us, but an unequal one. Will the German insistence on conditionality and competitiveness fix the EU by itself? No. But neither will the French focus on more money and new institutions. Summoning the image of the cold-hearted German (or the wasteful Southerner) is not helpful. Europe needs to work on combining the best elements of the different strategies, and on ensuring a fair treatment of all EU members, regardless of their political power.

 

This article was written in response to Hans Kundnani’s ‘The Troubling Transformation of the EU‘.

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Europe’s problem is not (just) Germany

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