16 October 2012

Steven Hill: Europe's federalist future

After more than two years of vacillation, policymakers have moved decisively towards economic and political union. Some have even used the "f-word" – federalism – igniting controversy and fuelling urgently needed debate, comments Hill in this Project Syndicate article.

European Commission President José Manuel Barroso capped off [recent] developments with a dramatic – even historic – speech, in which he called for a “federation of nation-states".

But Europe’s new course has left many wondering whether more integration is really necessary. Reacting to the global economic crisis and the perils of austerity is a complex issue for Europeans. Although economists and commentators have tended to view austerity in the United States and Europe through the same lens, conditions in the world’s two largest economic areas are very different.

The US has long had a federal system. Americans in all 50 states pay federal taxes into the national treasury, and elected federal representatives then allocate the funds to the states. Little protest is heard over which states contribute more to the national pot, or from Californians and New Yorkers, for example, who transfer some of their wealth to Alaskans and Mississippians year after year. Indeed, in the US, the prevailing philosophy is printed on every dollar bill: E pluribus unum (out of many, one).

But Europe’s supranational institutions – the European Commission, the European Parliament, the ECB, and regulatory authorities – are in their infancy. And, given that the EU collects roughly 1 per cent of Member States’ GDP, compared to 24 per cent in the US, few resources are available to cope with a crisis.

Instead, national and regional interests jealously track which EU member countries drive the economy, and which are the alleged slackers. Suddenly, Germany, the Netherlands, and France have to extend financial assistance to Greece, Portugal, Ireland, Cyprus and, increasingly, Spain. While wealth transfers are usual for Americans, they remain controversial  in Europe, where countries fought bloody wars not long ago.

A fragmented Europe composed of dozens of disconnected states, none with more than 7 per cent of the population of China or India, would slowly lose its competitive advantages. Rather than fostering continental cooperation and development, countries would compete against each other – even more than they already do. A federalised Europe, with a population of 350-500 million people, is more likely to prosper – and thus maintain its citizens’ quality of life.

European leaders have created a timeline for the proposed reforms that will allow for substantial public debate before voters have their say in the German elections next fall, and in the European parliamentary elections in 2014. But they are weary of indecisiveness, so they are already pursuing more federalist policies. They know that it is Europe’s best hope for the future.

Full article

© Project Syndicate