25 July 2015

VoxEU: Monnet’s chain reaction and the future of Europe

Partial integration in the EU might not necessarily lead to more integration. If further integration is to take place, European institutions may need to accept much more flexibility and have provisions not only for entry, but also for exit.

For some time now, critics have viewed Europe’s predicaments as confirmation that forming a currency union was an economic and political error, leading to conflict and breakup (e.g. Feldstein 2012). In contrast, supporters of the euro have claimed that Europe’s woes are due to incomplete institutional arrangements – a ‘half-built house’ (Bergsten 2012) – and the solution should be more integration: banking, fiscal and full political union.

The metaphor of Europe as an incomplete house is echoed in the new “Five Presidents’ Report,” co-authored by the heads of the main EU institutions (Juncker et al. 2015). The report’s central message is that “the euro is a successful and stable currency,” but that Europe’s economic and monetary union is “like a house that was built over decades but only partially finished” and that “it is now high time to reinforce its foundations” by moving towards a financial union (including the completion of the banking union and the creation of a European deposit insurance scheme), a fiscal union, and “finally towards a political union that provides the foundation for all of the above” (Juncker et al. 2015, pp. 4-5).

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Partial integration and Jean Monnet’s ‘chain reaction’

The whole European project is based on the strategy of partially integrating policy functions and institutions in a few areas – such as coal and steel, trade, or, later, a common currency – with the expectation that more integration will follow in other areas. [...]

Frustrated in their attempt to form a full political union directly, Jean Monnet and the other supporters of the European project pursued an alternative path of gradual integration. The process took place mostly in technical and economic areas, with the expectation that deeper integration in more political areas would follow through positive but also negative mechanisms. Surely, Monnet and his collaborators were quite optimistic that the benefits from integration would lead to convergence of preferences among Europeans and demand for more integration. However, they also expected that partial integration might lead to further integration, paradoxically, because of its own shortcomings and limits. That is, they viewed incompleteness not as a bug but as a feature, as it would lead to a closer union down the road. [...]

Later, the euro was also seen by its creators as “a further step—and as a prerequisite for yet other steps—in the political unification of Europe” (Padoa-Schioppa 2004, p. 6). And this stepping-stone role could be played in spite of - or even as a consequence of - its institutional shortcomings. The fact that the Eurozone lacked institutions historically associated with a successful monetary union – such as a formal lender of last resort, a banking union, a fiscal union, and so on – could be rationalised as part of a dynamic path that, in the longer term, would necessarily lead to a political union. [...]

Lessons for the future 

What lessons can we draw from the successes and limits of Monnet’s chain reaction strategy?

The first lesson is positive and relatively optimistic.

• The strategy of partial integration has provided significant benefits to Europeans when appropriately implemented in areas with relatively low heterogeneity costs and high economies of scale and scope, such as trade and capital markets.

In these areas there is still a lot to do, and supporters of European integration – such as the five presidents (Juncker et al. 2015) – are right to push for a large range of initiatives to strengthen the economic and financial integration.

However, the historical record also suggests that it will be very difficult to make significant progress towards integration in fiscal and political areas, unless there is ample democratic consensus. In this respect, the lessons are much more cautionary.

Heterogeneity stemming from different preferences, values, beliefs, and behaviours among Europeans cannot be systematically ignored or sidestepped by stealth, forcing governments and voters to accept further integration in order to reduce the high costs associated with incomplete and flawed institutions. Europe can no longer be built on the idea that a series of gradual steps can lead to an irreversible path towards an ‘ever closer union’ in the absence of extensive democratic support for the whole project. If Europeans really want a political union, they must go for it directly and explicitly. And if they don’t, the solution is not a gradual chain reaction strategy that underestimates heterogeneity costs and overestimates convergence. Going back to the metaphor of the incomplete house, if a political union is truly a necessary ‘foundation’ for a complete and effective economic and monetary union, as stated in the Five Presidents’ Report, it cannot be a ‘roof’ placed on top of a ramshackle construction at a late stage, out of necessity. Instead, it should be built right away, at the base of the building, but only if solidly grounded in democratic consensus.

And here lies the heart of the matter. As already stressed, when different groups and populations democratically form a political union, there are trade-offs between size and costs from heterogeneous preferences over public goods and policies. Hence, the supporters of the European project may have to abandon their historically held view that European integration is irreversible, and that the EU (and within it, the Eurozone) can continue to expand in size while also deepening in terms of institutional integration.

Instead, if further integration is going to take place, Europeans may have to accept a multi-speed Europe, with only a subset of countries within the EU voluntarily moving towards a much closer fiscal and political union, while others keeping looser ties, or even leaving the Eurozone and/or the EU. Rather than resisting this reality, European institutions should be built with much more flexibility, and should include explicit provisions not only for entry but also for exit.

In sum, a more realistic political-economy analysis naturally suggests a different, more effective strategy, whereby, if any further steps are taken towards European integration, they should be taken only when they are economically beneficial and politically stable on their own merits, and openly and democratically supported by the populations involved.

Full article on Vox EU

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