Three scenarios for the EU in 2020

Forecasting is a perilous exercise for those involved: we necessarily extrapolate from known facts and not from unknown facts, which normally makes the exercise quickly obsolete.

Who would have predicted in October 2004, for example, that France will buck against the project of constitutional treaty, thinking she was choosing an economic model ; or the ups and downs of the Treaty of Lisbon ; or the banking and economic crisis, its brutality and the equally unexpected return of growth?

However, such exercise is interesting because it allows to highlight trends, pointing to positive or negative developments.

On Sunday 4 and Monday, October 5, the French Institute for International Relations (IFRI) and the Zentrum für Europäische Integrationsforschung (ZEI) held a seminar on “Development prospects of European integration” with a number of distinguished German, French, and Luxembourger professors and researchers.

IFRI and ZEI very kindly invited me to submit scenarios of EU evolution.

I imagined three of them, largely improvised (I had one quarter of an hour) and I decided to write them down with more details.

Beforehand I’d like to point out that the reality probably lies somewhere between these three possible futures, even if my preferred scenario is obviously the third one when the first one will delight the “nonists”, including those who hope that from chaos light will come out.

All scenarios start of the course from the banking and economic crisis of 2008 and 2009, which profoundly changed the Western world.

1 / The worst-case scenario: the disintegration of the European Union

In 2020, Brussels is facing a severe real estate crisis: EU sells off thousands of square feet of offices it has no use and the latest EU officials are leaving the city, putting numerous housing on a market that can’t absorb them.

Even the Berlaymont, symbol of community power, the seat of the Commission, is for sale. The companies, which had come to Brussels attracted by the European institutions, are leaving, which completes the destabilization of the market. The Belgian capital is returning to anonymity : once again the provincial capital of a country

What happened?

How the Union, that seemed so was so strong, how could it disintegrate? One must go back to 2009. The two pillars of the Union, the common market and the common currency, have been seriously manhandled. Facing the crisis, states have had nationalist reactions. Without the voluntarism of Nicolas Sarkozy, the then rotating president of the European Union, there would probably not have had a plan to rescue the European banks: between a Commission totally outdated and refusing to admit that the Anglo – Saxon dominant model had exploded in midair, a Germany persuaded to be safe from turbulences, a chairman of the Eurogroup Jean-Claude Juncker, refusing to move without Berlin’s approval, the head of the French State had the merit to manage in two weeks to make the Twenty-seven agreed on a common toolkit.

But the result of this intergovernmental plan has been a profound change of the European State Aid policy, which has been put in brackets de facto.

The inaction of the Commission and the reluctance of Member States, Germany in the first place, explain why recovery plans have been national, coordination coming after.  Yet again, the head of the French State, aware that isolationism was not an appropriate response, had called for a coordinated European reaction. Even his proposed plan of European aid to the automobile sector has been refused by the Commission: its allergy to any industrial policy wasn’t denied. As a result: a partial re-nationalization of markets, everyone trying to save its national champions and its national jobs …

One year after the crisis began, a sneaky protectionism is at work and solidarity seriously questioned. Mario Monti, who was commissioner from 1995 to 2004, had however warned the States: this trend towards re-nationalization will only get worse, tax competition has become untenable in the context of  unprecedented deterioration of public finances.

However, the continental social system has been proven right during this crisis, dampening the effects of an unprecedented recession ever since 1929, and the continental states intend fewer than ever to abandon it : in other words, the single market without tax coordination is over.

The tension between the single market rules and the need to finance a social safety net can only lead to a questioning of the former. Unless tax coordination is accepted by the countries most committed to the single market, that is to say, the Anglo-Saxon and Nordic countries as essential counterpart.

But by spring 2010, the rise to power of conservatives in Great-Britain buries this idea of “refoundational pact”. Welfare States then increasingly opposed market rules that require them to disarm facing fiscal and social practices they consider unfair. The violations of single market rules are multiplying and the Commission can not do anything, exceeded by the magnitude of the movement: the “four freedoms (free movement of persons, capital, services and goods) are becoming more and more chipped and national industrial policies are implemented.

Meanwhile, the euro has entered a turbulence zone. From 2009, Germany and France fundamentally disagree on the exit crisis scenario: by voting in June 2009 a constitutional amendment, the German Parliament decided to limit the deficit in 2016 at -0.35% of GDP over the economic cycle. As soon as they joined the majority, in September 2009, the FDP announces that he renounces his claims of tax cuts on which he was elected. In contrast, France has postponed to 2015 at the earliest the colouring inside the lines of the Stability Pact, meaning a 3% of GDP deficit limit… Clearly, Berlin chooses rigor while Paris pushes the fires of reflation, making the bet that a come back of the inflation, that will not fail to cause such policy, will more quickly absorb a portion of the French debt which quickly reaches 100% of GDP.

The ECB can only respond, as early as 2010, by increasing short term interest rates, thus increasing the debt burden for countries already heavily indebted. Besides that, markets require more and more important “risk premiums” as public accounts deteriorate, which further increase the debt and prohibits any budgetary leeway.

Tensions rapidly become unbearable: Germany does not see his austerity policy rewarded by low interest rates, which condemns it to a sluggish growth. France is increasingly strangled by too high rates and sees its competitiveness deteriorate compared to its neighbors without having the weapon of devaluation. In 2011-2012, negotiations for EU budgetary period 2013-2018 begin. Between a Great-Britain governed by Eurosceptics, budget-strangled States, a Germany firmly refusing to pay for poor students in the class, they are immediately taken ill. The Common Agricultural Policy is sacrificed in exchange for the ending of the “British rebate”, which halves the EU budget. In any case, France, now a net contributor, does not want to pay for the eastern countries. Each one is then left free to assist its agricultural sector under the nominal control of the Commission. But soon, each country accuses its neighbor of dumping and agricultural trade barriers reinforce the increasing exception to the single market.

The EU institutions are requested to make a significant effort: the disappearing of the CAP no longer justifies such a number of officials. In 2014, retirements are not compensated and recruitment competitions are frozen. Since the Lisbon Treaty finally came into force in 2010, states have abandoned any attempt to deepen the Union. What would be the use, since the States face challenges that push them to play solo.

In 2015, Sarkozy, triumphantly re-elected three years earlier, tries to respond with a proposition for stronger integration, a Europe of variable geometry. Berlin, stuck by the decision of the Constitutional Court of Karlsruhe in June 2009, rejected the last chance proposal: the judges would oppose any further transfer of sovereignty without a referendum, submitted chancellor Merkel. But the German public wants to get rid of the European and especially French millstone. Sarkozy will end his second term in 2017 with this failure.

Just before his departure, he will attend the death of the single currency which has not withstood the pressure. It’s not France that comes out, it’s Germany who decided to end the comedy since the founding pact of the euro has been violated by France (the mark against the culture of stability) and the disadvantages of the euro outweigh the benefits for Germany, Berlin decided to return to the mark. The Benelux countries and Austria follow immediately. The euro is now only the currency of the “club med” and Eastern Europe.

What’s then the point to remain handcuffed ? France wants to be able to devalue, to get a little competitiveness, but she quickly connects with the vicious circle of 70 and 80 years: inflation soaring, forcing another devaluation. The restored franc lose over 50% of its value in a few months against the new mark, forcing Germany to restore all its tariffs in response to this unfair competition …

For obvious reasons, the negotiations on the new financial perspectives in 2017 do not even begin. Why a European budget in such a slump? To finance what? The single market is nothing but a memory, the euro has disappeared, and everyone wants to keep its money, confident he can do better than its neighbors.

In 2020, the EU completes its final dismiss of officials.

Thus the twenty-first century will not be European, but Sino-American after being Soviet-American during the second half of the twentieth century.

2/ The gray scenario : the residual Union

Member States are aware that a breakup of the Union would wipe them off the world map: the single market, despite its imperfections, is a creator of wealth, and the disappearance of the euro would be infinitely more painful than keeping it. As usual, the States will choose not to choose and try to find compromises.

The single market is maintained, but because of the lack of social and tax harmonization, States decide

to revise it downwards. Thus, the de minimis rules are largely liberalized. In other words, the Commission can intervene only if the State aids reach a significant level and are particularly destabilizing. Similarly, the services directive is abolished and the free of movement for workers is subject to strict rules. The free movement of capital, itself, is subject to conditions of reciprocity which opens the door to all interpretations and all litigation. But the facade of the market is preserved.

On the budget side, France witness with delight Germany failing to return, just as she does, to colouring within the lines of the Stability Pact. Berlin had underestimated the effect of aging and its refusal to use the immigration forces Germany to dig his debt. The euro, fortunately, provides an effective shield for those two both poor students. And despite the sluggish growth to which Europe as Japan seem doomed, the markets continue to trust the euro zone. The European Central Bank, chaired by an Italian since the departure of Trichet in 2011, became much more accommodating: anxious to alleviate the debt of the States, it now tolerates inflation of 4% which contributes to trim European competitiveness. For at the same time, the euro remains a strong currency, playing the expendable role against the yuan and the dollar.

British Conservatives finally show up more conciliatory than feared. However, the 2013-2018 financial perspective are severely downgraded: the CAP becomes residual in exchange for the relinquishment of the British rebate. But the main thing is saved: there is a budget, even if it is cut by 30%.

Enlargement continues its pace: Turkey even enters the Union in 2018. Why oppose it? The Union is nothing more than residual: there is no more talks of creating a European power, the will no longer exist, but talks about somehow maintaining the existing. The Lisbon Treaty has indeed been the last major European treaty. Berlin, anyway, is trapped by the decision of the Constitutional Court in Karlsruhe of June 2009 which prohibits any further transfer of sovereignty without a referendum …

During this period, the EU has continued its intergovernmental drift: Jose Manuel Durao Barroso, President of the Commission between 2004 and 2014, has theorized the erasure of his institution which should only be a secretariat to serve the Member States. In 2018, the executives merge: President of the European Council of Heads of State and of Government becomes President of the European Commission, thus endorsing a de facto situation. Henceforth, the Commission can no longer be the integration engine: it is the faithful relay of the Member States.

The problem is that the Commission is no longer able to mediate between the Parliament and the Council of Ministers: we witness the direct collisions of legitimacies, which succeeds in convincing the states it is important not to share more sovereignty in Brussels. The Union and its ongoing battles exhaust them… The Union, in 2020, is a continent of old people which content itself with its slow decline.

3/ the rosy scenario: towards the Federal Union

Aware of the risks of disintegration the EU faces following the crisis of 2008-2009, Member States respond: two new founding treaties are concluded. The first plans the continuation of the single market and, in return, tax coordination in order to avoid fiscal and therefore social dumping. To do this, a new EU treaty is negotiated instituting a qualified majority vote on taxation: it is not about harmonizing, of course, but about avoiding unfair tax competition, whether about corporation tax, income tax or capital gains or income tax. Tax brackets are provided. This coordination is facilitated by the state of public finances: everybody needs money to fill the holes left by the crisis. Even Great Britain, now conservative, accept this new deal, because the single market is its economic oxygen bottle. The race to “lower taxes” is stopped and the States regain the resources to finance their social systems.

A new Stability Pact is negotiated, involving the European Central Bank: rules of good governance are adopted and the Council of Ministers of Finance is given real enforcement powers, including reformation of national budgets that fail to meet the objectives decided in common. Again, the need for a new treaty. The mandate of the ECB is clarified and growth is clearly written next to the objective of price stability. The “economic government” of the Union is born!

The two pillars of the Union having been reaffirmed, Member States intend to serenely pursue their integration. The financial perspectives, far from being another review of national selfishness, result in an increased budget now standing at 2% of GDP with a commitment to reach 4% before 2020, CAP is radically reformed, the British rebate abandoned, the budget clearly shifted towards innovation, growth and employment. In particular, the national research budgets are communitarized and major transeuropean projects are launched, finally allowing interconnections between Member States in the transportation, energy and telecommunications (Internet at very high speed) fields. Better still, the Defense Agency is endowed with real powers and can decide to launch major weapons programs, including procurement policies. The common foreign policy gains momentum: the common diplomatic service becomes in ten years the place where national diplomacies are created. The Union embassies are merged everywhere, which generates huge resources.

Rather than launching large horizontal treaties, States negotiate vertical treaties field by field: energy, justice, home affairs, defense, etc. Each time: budgetary and institutional capacities at the service of a goal. Even in the few countries where referendums are held, the “yes” wins largely, the objectives being clear. Besides, the rule of unanimity is abandoned elsewhere: if a country rejects a treaty, it can not block it. Either he adopts it, or he leaves the Union until they are ready. It places itself in a sort of waiting room, the second European Economic Area.

In 2020, the merger of the executives took place, but to the benefit of the Commission’s president whose president is chairing the European Council and not the other way round. A new treaty is signed providing for the election by direct universal suffrage of the President of the Union on an American model: on the “ticket” is also the Minister of Foreign Affairs of the Union, a vice president with real powers. At the time of this writing, we await the outcome of the European referendum organized on the same day throughout the Union: all governments decided that the issue was so symbolic, since it’s about making the Union a true federation, they must consult the citizens. But the result is little doubt. The Union has only one telephone number and the twenty-first century will also be European. The “old” continent is again confident, so much that it widely opened its doors to immigration, becoming a new, modern far west.

Leave a Reply

Your email address will not be published. Required fields are marked *