Europe needs a new direction. A restructuring of the eurozone, including a transfer of sovereignty, is essential to end the crisis. The euro crisis reflects the failure of a dead-end policy. The German government lacks the courage to move beyond a status quo that has become untenable. This is why, despite extensive rescue programmes and countless crisis summits, the situation of the eurozone has steadily deteriorated over the last two years. In the wake of its economic crash, Greece faces the prospect of leaving the eurozone, which would have incalculable knock-on effects for the other member countries. Italy, Spain and Portugal are all in the grip of a severe recession, which is driving up unemployment.

The economic downturn in these problem countries is making the fragile situation of the banks even more precarious, and the growing uncertainty about the future of monetary union is undermining the confidence of investors, who are increasingly reluctant to buy bonds issued by the problem countries. Rising interest rates for government bonds, coupled with the steadily deteriorating economic situation, are hampering the processes of consolidation – which were never going to be easy in the first place.

This self-reinforcing destabilisation is largely the product of ad hoc crisis management strategies, which have barely begun to address the challenge of consolidating the European institutions. The fact that the attempts to deal with the crisis over the years have been characterised by a hand-to-mouth incrementalism that has only made things worse serves to highlight the lack of political creativity.

However, the justification for taking a major step forward on European integration does not derive solely from the current eurozone crisis, but also from the need to curb the evil practices of the shadowy parallel universe that the investment banks and hedge funds have built up alongside the real economy of goods and services. This requires our politicians to get a grip and take control again.

The measures needed to bring back proper regulation are obvious enough. But they are not being applied, firstly because an implementation of these measures at a national, state level would have counterproductive consequences, and secondly because the regulatory agenda that emerged from the first London G20 summit in 2008 would require globally coordinated action, which for the present is rendered impossible by the political fragmentation of the international community.

The current crisis is not a crisis of the euro. The euro has shown itself to be a stable currency. Nor is the current crisis a debt crisis specific to Europe.

A major economic power like the EU, or failing that the eurozone, could become a standard-bearer for the way forward here. Only a significant consolidation of European integration can sustain a common currency without the need for a never-ending series of bail-outs, which in the long term would strain the solidarity of the European national populations in the eurozone on both sides – donor countries and recipients – to breaking point. This means, however, that a transfer of sovereignty to European institutions is unavoidable in order to impose effective fiscal discipline and guarantee a stable financial system. At the same time we need closer coordination of financial, economic and social policies in the member countries, with the aim of correcting the structural imbalances within the common currency area.

The current problems

The escalation of the crisis shows that the strategy previously pushed through by the German government in Europe is based on a false diagnosis. The current crisis is not a crisis of the euro. The euro has shown itself to be a stable currency. Nor is the current crisis a debt crisis specific to Europe. Compared with the US and Japan, the EU – and within the EU the eurozone – has the lowest level of debt of all three economic regions. The crisis is a crisis of refinancing affecting individual countries within the eurozone, and is primarily due to an inadequate institutional underpinning of the common currency.

The deepening of the crisis makes it clear that the solutions tried so far have all been found wanting. So the fear is that monetary union in its present form cannot survive much longer without a fundamental change of strategy. The starting point for a change of direction in our thinking is a clear diagnosis of the causes of the crisis.

The German government seems to assume that the problems have basically been caused by a lack of fiscal discipline at the national level, and that the solution is primarily to be sought in a rigorous policy of spending cuts by individual countries. At the institutional level the Germans want this approach to be underpinned by stricter fiscal rules in the first instance, supplemented by bail-out funds that are quantitatively limited and subject to conditions – thereby forcing the countries concerned to adopt policies of extreme austerity, which have weakened their economies and driven up unemployment.

In actual fact the problem countries have so far failed to limit their refinancing costs to a manageable level, despite extensive structural reforms and a policy of spending cuts that are unusually severe by international standards. The events of the last few months point to one conclusion: that the German government’s diagnosis and therapy have been too one-dimensional in conception from the beginning. The crisis has not come about just because individual countries have behaved badly, but is due in large measure to systemic problems. These cannot be solved by greater efforts at the national level; they require a systemic answer.

The current instability of the financial markets is driven by the risk that an individual country might become insolvent, and that risk can only be eliminated, or at least limited, by collective guarantees for government bonds issued within the eurozone. There are concerns that this could create disincentives, and these should be taken very seriously. The only way to allay these concerns is to ensure that collective guarantees are combined with strict collective control over national budgets. This means, however, that the degree of fiscal control necessary to underpin collective guarantees is no longer achievable within the context of national sovereignty via contractually agreed rules.

The alternative options

There are only two coherent strategies for dealing with the current crisis: a return to national currencies across the EU, which would expose each individual country to the unpredictable fluctuations of highly speculative foreign exchange markets, or the institutional underpinning of a collective fiscal, economic and social policy within the eurozone, with the further aim of restoring to policymakers their lost capacity for action in the face of market imperatives at a transnational level. And looking beyond the current crisis, the promise of a “social Europe” also depends upon this.

Only a politically united core Europe offers any hope of reversing the process – already far advanced – of transforming a citizens’ democracy built on the idea of the social state into a sham democracy governed by market principles. For this reason alone – because it leads on to this broader perspective – the second option deserves preference over the first.

If we wish to avoid both a return to monetary nationalism and a permanent euro crisis, then we need to do now what we failed to do at the time of the euro’s launch: we need to begin the process of moving towards political union, beginning with the core Europe of the 17 EMU member countries.

We believe that we should be entirely open about this process. It is simply not possible to retain the common currency without also espousing the idea of collective responsibility and redressing the institutional deficit in the eurozone. The proposal by the Council of Economic Experts to set up a collective debt redemption fund has been rejected by the German government, but its appeal lies precisely in the fact that it puts an end to the illusion of continuing national sovereignty by openly establishing the principle of collective responsibility. It would, however, make more sense to mutualise eurozone debt within the Maastricht criteria – so up to the 60% threshold, rather than above that level.

As long as European governments fail to state clearly what they are really doing, they will continue to undermine the already weak democratic foundations of the European Union. The battle cry of the American war of independence – “No taxation without representation” – has a new and unexpected resonance today: once we create scope in the eurozone for policies that result in redistributive effects across national boundaries, European legislators who represent the people (directly through the European parliament and indirectly through the European Council) must be able to decide and vote on these policies. Otherwise we would be violating the principle that the legislator who decides how public money is to be spent is one and the same as the democratically elected legislator who raises taxes to fund this spending.

No political communitarisation though the back door

Nevertheless the historical memory of a unification of the German Reich that was forced upon many parts of the country for dynastic reasons should serve as a warning to us. The financial markets must not now be pandered to with complicated and untransparent structures, while governments meekly accept the imposition on their peoples of a centralised executive power that takes on a life of its own above their heads. Before it comes to that, the people themselves must have their say. As the representative of the biggest donor country in the European Council, the federal republic should take the initiative and table a resolution for summoning a constitutional convention.

This is the only way to bridge the unavoidable time gap between the immediate economic measures that are due to be put in place, but which can still be revoked in the meantime, and the retrospective legitimation that may be required. If the results of the referenda are positive, the peoples of Europe could regain, at a European level, the sovereignty that was stolen from them by “the markets” a long time ago.

The strategy of treaty change is designed to bring about the establishment of a politically unified core European currency area, which other EU countries – in particular Poland – would be allowed to join. This calls for clear thinking about the political make-up of a supranational democracy that would allow collective government without assuming the form of a federal state.

If we wish to avoid both a return to monetary nationalism and a permanent euro crisis, then we need to do now what we failed to do at the time of the euro’s launch: we need to begin the process of moving towards political union, beginning with the core Europe of the 17 EMU member countries.

The European federal state is the wrong model, demanding more solidarity than the historically autonomous European nations are willing to contemplate. The consolidation of the institutions that is now required could be guided by the principle that a democratic core Europe should represent the totality of citizens from the EMU member states, but each individual citizen in his or her twin capacity as a directly participating citizen of the reformed union on the one hand, and an indirectly participating member of one of the participating European nations on the other.

It is not out of the question that the federal constitutional court will seize the initiative from the political parties and announce a plebiscite to amend the constitution. That would mean that the parties could no longer avoid taking a position on the choice of options that has been kept in the dark until now. A joint initiative backed by the SPD, CDU and Greens to set up a constitutional convention, the results of which could be voted on at the same time as the plebiscite on the constitution (but not before the end of the next parliamentary term), would not then be an unrealistic prospect. This would be the first time that Germany has conducted a public debate of this kind, in which opinions are formed and decisions taken about the different political options for Europe’s future: and we believe there is a good chance that in the course of this debate an alliance of political parties would be able to persuade a majority of the electorate of the advantages of a political union.

A broad public debate is needed

The four-year crisis has brought all kinds of issues to the fore and focused the attention of national publics on European questions as never before. One result has been the awakening of an awareness of the need to regulate the financial markets and correct the structural imbalances within the eurozone. For the first time in the history of capitalism a crisis triggered by the most advanced sector, the banks, could only be resolved by governments getting their citizens, in their capacity as taxpayers, to stump up for the losses incurred. At this point a barrier between systemic processes and real-life processes was broken down. The citizens are rightly outraged.

The widespread feeling of injustice derives from the fact that faceless market processes have assumed a directly political dimension in the popular perception. This feeling is combined with a sense of rage, suppressed or otherwise, at one’s own impotence. To counteract this we need a new politics of self-empowerment.

A discussion about the purpose and aim of the unification process would present an opportunity to broaden the focus of public debate, which has hitherto been confined to economic issues. The awareness that global political power is shifting from the west to the east, and the sense that our relationship with the US is changing, combine to present the synergetic benefits of European unification in a new light. In the postcolonial world the role of Europe has changed, and not just with reference to the dubious reputation of former imperial powers, to say nothing of the Holocaust. Future projections backed by statistical data indicate that Europe is headed for further change, destined to become a continent of shrinking population numbers, declining economic importance and dwindling political significance. The people of Europe must learn that they can only preserve their welfare-state model of society and the diversity of their nation-state cultures by joining forces and working together. They must pool their resources – if they want to exert any kind of influence on the international political agenda and the solution of global problems. To abandon European unification now would be to quit the world stage for good.


This article was originally published in Frankfurter Allgemeine and translated into English by Social Europe Journal

More by Jürgen Habermas

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