IS FEDERALISM THE WAY FORWARD FOR EUROPE ?

 

On Sept. 16th  member states will gather for the first time without British representatives in attendance in Slovakia.

This meeting will be of particular importance as it will be the occasion for the remaining EU members to set the stage for a most needed unified europe that could possibly advocate for Europe to undertake the path toward a federalist model. a more post-Brexit federal type institutional system.

MEETING IN VENTOTENE, ITALY: A PLEDGE FOR A FEDERAL EUROPE.

Ahead of these talks, the leaders of Germany, France and Italy met Aug. 22 to discuss the future of the Continental bloc. The choice of Ventotene, an Italian island near Naples was made on purpose, as they gathered on  where a group of political prisoners in the early 1940s wrote a manifestocalling for the creation of a European federation.

The selection of this symbolic venue sends a message of unity to the rest of the Continent.

In 1941, a group of Italian political prisoners drafted a secret document proposing a solution for Europe’s perpetual state of war and political violence.

buenosairesThe document, called the “Ventotene Manifesto” after the island on which it was written, argued that only the creation of a federal Europe would bring an end to the massacres that kept erupting across the Continent.

During the next decade, the Ventotene Manifesto and the European Federalist Movement that it inspired gave rise to plans for the European Communities, an idea that seemed promising at the time. Professional politicians and clashing nationalist sentiments had led Europe to death and destruction. By contrast, turning power over to technocrats who could administer the Continent free of the dictates of their own national interests would keep those problems from recurring. In other words, if nationalism was a poison, federalism (or supranationalism) was the antidote. This could still be the case today.

THE FEDERAL DEBATE IN EUROPE GOING REVERSE .

Ironically, Europe’s current political crisis follows the same debate that dominated the 1940s and 1950s, only in reverse:

After six decades of Continental integration, federalism has become the problem, and the nation-state its solution.

This does not necessarily mean adopting nationalist policies and their xenophobic variants — though some parties have gained ground doing just that — but restoring the prerogatives that individual states should not have lost in the first place.

One of the pro-Brexit camp’s main arguments during the referendum campaign was that the British Parliament had ceded too much authority to unelected officials in Brussels.

THE DIFFICULTIES IN FINDING A COMMOUN GROUND. 

Actually manifesting this unity, however, will be challenging. After the Brexit, the eurozone’s three largest economies will have a hard time finding commoun ground on how to reactivate the political process in the European Union.

German Chancellor Angela Merkel, French President Francois Hollande and Italian Prime Minister Matteo Renzi understand that they will need to broadcast common EU priorities and goals after the Brexit.

And these shared interests do, in fact, exist: all three nations are aware that a combination of meager economic growth, high unemployment, migration pressure and international terrorism threaten the foundations of the European Union. As a result, these four topics were the focus of the Aug. 22 meeting.

But the ability for each to manage their shared challenges is heavily constrained by a combination of domestic and foreign factors.

France will hold presidential elections in april 2017, and if Hollande was not reelected, his successor may renegotiate whatever agreements his government reaches.

Germany, too, has general elections coming up in late 2017. Merkel is considerably more popular than Hollande, but Euroskeptic pressure from the opposition and within parts of her own party limits her desire to make promises on future European integration.

THE ITALIAN POLITICAL AND INSTITUTIONAL STABILITY AS A PREREQUISITE. 

Renzi comes to the table with the most direct and concrete proposals for EU reform — likely because he has the most urgent political needs of the three.

The Italian prime minister has staked his political future on the result of a referendum on constitutional reforms to be held before the end of 2016.

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It is critical for the Italian’s prime minister to create the best environment for its referendum that the EU governments and institutions let it introduce tax breaks and increase public spending.

A defeat in the referendum would likely cause the current government to resign, but Italy will not necessarily hold early elections.

Instability and political risk will continue to generate financial risk in Italy, especially if the government fails to introduce institutional reforms meant to increase stability.

When Matteo Renzi took over as Italy’s prime minister in February 2014, he had two main goals. The first was to introduce a series of policies — most notably, a new labor law — to fight unemployment and generate economic growth. The second was to remodel Italy’s political system to ensure more stable governments and to reduce the financial risk that political uncertainty posed.

Though Renzi’s economic reforms have been only moderately successful (unemployment is falling slowly, while growth has been timid), it is the political reforms that will define the future of his government and that could open a new phase of uncertainty for the rest of the eurozone.

Renzi’s plan to build a more stable political system has two parts: reform the electoral law and change the Italian Constitution. The changes to the electoral law were approved in 2015, while the constitutional reforms will be the questions set forth by the upcoming referendum.

Opinion polls are now suggesting most voters were against such reforms. To prevent this, Renzi wants the European Union to authorize Italy to cut taxes and increase spending.

He believes that rigid fiscal rules are undermining economic growth in Mediterranean Europe.

This is not a new demand — Italy has traditionally pressured the EU for more flexibility in its debt and deficit targets.

THE GERMAN STAND TOWARDS ITALY’S DEMAND REVEAL THE NEED TO ALSO MANAGE THE EU NORTHERN AND SOUTHERN STATES DEBATE.

250x167_-_halv_st_rrelseGermany has tolerated flexibility for countries in southern europe but is not interested in fully complying with Italy’s requests.

These debates reveal the dilemmas currently facing the European Union.

If the European Commission allows the Italian government to help its banks, politicians in Northern Europe will interpret it as yet another example of southern states bending the rules in their favor.

But if Brussels does not reach some sort of agreement with Rome, the Italian banking crisis that would likely ensue would pose an additional threat to the Continent, which is already struggling to digest the results of the British referendum.

After all, the deterioration of Italy’s banking sector could destabilize other banks in the eurozone, including Germany’s.

imfIn early July, the International Monetary Fund warned that of all the world’s biggest banks, Germany’s Deutsche Bank was the riskiest. Though German banks are not currently in danger, Berlin probably is not keen to create a banking crisis in Italy that could become a contagion to the rest of the currency area.

 

The situation with southern deficits is similarly tricky:

Should the European Union choose not to sanction Spain and Portugal, the credibility of the bloc’s fiscal rules will be undermined, and Northern European governments will likely come under attack from the Euroskeptic opposition or competitors within their own parties.

But the use of strong punitive measures against EU members only weeks after the British referendum would create additional uncertainty in financial markets and do little to renew popular support for the bloc.

The last thing the European Union needs right now is to alienate its remaining members.

And so, the European Union will have one option: to make difficult but necessary compromises.

With regard to Italy’s banks, Rome and Brussels will reach a deal to allow some degree of state intervention and avoid the bail-in mechanism, perhaps in exchange for banking reforms.

Meanwhile, the bloc will probably punish Spain and Portugal with symbolic sanctions, rather than fines of up to 0.2 percent of their GDPs. Madrid and Lisbon, for their part, will likely promise to continue reducing their deficits, even though their domestic needs will prevent them from introducing deep reforms for the foreseeable future.

European Central Bank (ECB) president Mario Draghi and vice president Vitor Constancio leave after a news conference at the ECB headquarters in Frankfurt, Germany, July 21, 2016. REUTERS/Ralph Orlowski

These compromises will by no means solve the European Union’s problems, nor will they heal the growing rift between north and south.

Instead, they will address the bloc’s most immediate threats and temporarily stave off conflict, which may be all the European Union can really hope for at this point.

While Berlin may accept countries bending EU rules, it is not ready to rewrite them — it expended far too much political effort to pressure its EU peers to accept tighter fiscal discipline in the early stages of the financial crisis.

The existing system is imperfect and full of holes, but at least reassures Germany that a structure is in place that can only be altered with significant negotiation.

THE FRENCH AGENDA

France is trapped in the middle. The French government is ideologically close to Renzi, but is also wary of alienating Germany.

hollandeFrance also has priorities of its own. After the repeated terrorist attacks on French soil, Hollande is particularly worried about increasing security and counterterrorism cooperation in Europe.

 

France, the main military force in Europe, is also concerned about Brexit weakening defense in the European Union.

The upcoming presidential elections will take place in a very anxiety producing environement with the threat of renewed terrorist attacks. The concern is not only about security, but about the consequences those attacks will have on the voters bahaviors as we know that any new such threats will favor the extreme right and nationalist candidate. That also explains the strong nationalist stance former President Sarkozy has taken unveiling his political platform on August 22nd.

In recent weeks, Italy and Germany have spoken in favor of additional military cooperation, especially when it comes to joint research and investment in common defense projects.

However, these initiatives are still at a very early stage and all three have dismissed rumors about the creation of a so-called “European army.”

EU LEADERSHIP IN QUESTION

The EU has changed substantially since the days the leaders of Germany, France and Italy could meet and set the political agenda for the Continent.

The EU’s enlargement to the east has made decision-making considerably more complex, and new member states are increasingly willing to make their voices heard.

p8-polandelection-a-20151101-870x605In Poland, or instance, after eight years under a business-friendly and pro-EU government, the Poles, exhausted with the existing establishment, voted for a nationalist administration in the general election of past october.  Some also believed the benefits of EU integration and economic liberalization were not equally distributed among the population.

The newly elected Law and Justice party ran on a promise of lowering the pension age, reducing taxes for small and medium-sized businesses, increasing family benefits, raising taxes on banks and foreign-owned supermarkets, and cutting the country’s reliance on foreign capital. The party also has a skeptical view of the European Union and believes Poland should protect its national sovereignty and remain outside of the eurozone.

The new government’s early actions confirmed that it would not shy away from controversy. The administration in Warsaw appointed contentious figures to key Cabinet positions, accused the media of manipulating the population, criticized the German government for its position on the refugee crisis and Russia, and started a war of words with the president of the European Parliament. These moves prompted opposition parties, EU officials and international media to accuse the Polish government of authoritarianism, warning that the administration’s actions would herald a new era of isolation. However, the reality is more complex.

 

Poland will want to retain its EU membership, but Warsaw will increasingly view the European Union as a club of sovereign nations linked by common and fluctuating interests rather than by the dream of a federal Europe. Thus Warsaw will cooperate with Brussels when it serves its needs but will also look for alternatives while trying to keep its foreign policy as independent as possible. The most interesting of these alternatives is the construction of regional alliances from the Baltic Sea to the Black Sea — a strategy meant to both resist Russia and oppose EU policies that go against Poland’s interests. Warsaw will not be alone; several EU members in the region share many of Poland’s views.

The most important aspect of Poland’s new political phase is that the largest country in the European Union’s eastern flank is no longer in love with the idea of Continental integration. Poland is not alone in this sentiment. But the rise of Euroskepticism in a region that only a decade ago was the most enthusiastic about the political and economic benefits of EU membership speaks volumes about the Continental bloc’s crisis.

pologne nationalistes

The new european institutional direction that could come out of Slovakia,  following up the Franco-German-Italian summit in Ventotene could very well set the tone for a future more federal EU.

 

Going through a more federal EU, apart from managing and ultimately solving the Union’s bugetary deficit concerns could also provide the proper answer to the many non-eurozone nations that are more interested in intergovernmental cooperation than in transferring national prerogatives to Brussels or joining the common currency.

The meeting in solovakia will force Berlin, Paris and Rome not only to find common ground on shared challenges, but also to sculpt proposals amenable to the rest of the bloc. This is certainly what Ventotene was about.

About Frank Farnel

International Public Affairs and Business Development Professional
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