COMMENT & ANALYSIS There used to be a joke that defined a European hell as a combination of British food, German police and French cars. The gag no longer works: all three have come a long way.
Instead, a modern version of hell is a European debate on globalisation with 25 heads of state and government around a table, where the British talk about research and development, the French go on about trade and the Germans expostulate over global capitalism.
Last week’s informal European Union summit at London’s Hampton Court, where this discussion took place, attempted to answer the question of what impact globalisation would have on the European economy. European leaders concluded that we needed more research and development – and more money in general. In other words, they failed to answer the question. From this, I draw two conclusions.
The first is that EU political elites have no idea how to deal with globalisation and the second is that the EU’s institutions are not the place to tackle it.
The consensus in France is that globalisation is a threat against which one needs protection. This is why the French rejected the European constitution, and why Jacques Chirac, their president, has been digging in his heels over agricultural subsidies.
The Germans, supply-siders to the core, treat globalisation as a pure competitiveness problem. Their answer is wage cutting. As a consequence, Germany is prepared to accept a long-term economic depression in order to maintain its industrial base.
For the European Commission, globalisation is a good opportunity to launch wasteful programmes. The latest is the “shock-absorber” fund. Its aim is to help workers retrain and relocate if they lose their job because of globalisation. A better name would be the “moral hazard fund”. You would get money if fired by Hewlett- Packard. If you were a former bus driver, you would have no chance. It is the first “big idea” of José Manuel Barroso, Commission president, since coming to office a year ago.
The EU is the wrong institutional platform to deal with globalisation. It has become too large and divided. The appropriate political levels are national governments and the eurozone.
At national level, governments should implement the right combination of flexibility and security needed to prosper in the age of globalisation. What this means in practice differs from country to country. For Germany, for example, it would require a realisation that the future does not lie in producing mid-sized cars. For France, it means the ability to envision life beyond the Common Agricultural Policy. For most countries, it would involve reforms to render financial, product and labour markets more flexible.
What should the eurozone do? It should improve the flexibility of its macroeconomic policy through co-ordination among member states. It needs a way to co-opt the European Central Bank into this process. The eurozone would also be a better level at which to anchor a shock-absorber fund than the EU – although not necessarily the type of fund Mr Barroso has in mind. The eurozone is a large, relatively closed economy. There is a valid case for a financial mechanism to protect parts of the eurozone against asymmetric shocks.
What I am proposing are deep institutional and constitutional changes. This is no longer the kind of informal co-ordination that can be undertaken by finance ministers over dinner. It ultimately requires the establishment of a new group – the Eurozone Council, a regular meeting among heads of state and government in the eurozone, backed by a civil service. But this would mean the eurozone would take on its own political life alongside the EU.
So what would happen if the eurozone developed its own political identity? In the short run, the EU would still try to monopolise the economic debate in Europe. It would come up with many unhelpful ideas, such as shock-absorber funds or research and development programmes. It would also put the brakes on economic co-ordination, such as tax harmonisation. Finally, as the Hampton Court summit showed, the EU has no useful contribution to make on globalisation.
In the long run, I would expect the eurozone to take full responsibility for macroeconomic policy. It may even try to usurp some of the EU’s current functions, for example in relation to the single market and trade policy.
A recent report of the Federal Trust, a British think-tank*, argued that the eurozone was unlikely to develop a political identity for some time. Its members disagree on how such an arrangement should work. But it concludes that, if the eurozone were eventually to develop in this direction, it would be a “potential recipe not merely for a flexible European Union, but for a fractured one”. This means that a situation whereby some member states, such as Britain, remain permanently outside the eurozone is unstable in the long run.
Which event could propel the eurozone to develop into a political entity? During the tedious hours at Hampton Court last week, it occurred to me that it had to be globalisation. * Flexibility and the Future of the Union, Federal Trust, October 2005. www.fedtrust.co.uk
