Brexit, the European Union and Historical Crossroads

Brexit, the European Union and Historical Crossroads

The United Kingdom voted in favor of revoking its membership in the European Union. The process for implementing that vote is now in shambles. It is anyone’s guess how the process will finally play out. The deal that PM May negotiated with the E.U. admittedly falls short of the goals of Brexiteers. And, the idea of Brexit is equally regrettable in terms of a rational vision for geopolitical trends. Open borders, trade and peaceful coexistence remain, at least in my view, worthy destinations. Yet, if we analyze the way the E.U. has evolved, we can recognize crucial failures. The E.U. has passed numerous crossroads in its rendezvous with history and has fallen short consistently.

What were these crossroads and how do I define the EU’s failures? First, here is a list of what I consider to be the key issues and then following I will provide some analysis of each.
1. The creeping process toward a transition from a customs agreement toward political union.
2. The introduction of the common currency without establishing an institutional framework first.
3. The expansion of the E.U. into Eastern Europe in the wake of the collapse of the Warsaw Pact and Comecon.
4. The response to the debt crisis which hit the peripheral countries of the Eurozone after the 2008 financial meltdown.

Creeping toward Union
Sadly the EU has become increasingly bureaucratic and less responsive to direct democracy. The direction of the EU’s structure and policies has been toward ever closer union and ever greater control over laws, national budgets and taxation. And yet, there has been far too little preparation and open discussion to educate the populace to fully embrace this course. Few referenda were held to endorse the course toward union. When referenda were held the results were mildly in favor (petite oui) or negative. When several nations rejected aspects of the process, they were asked to vote again. What has transpired, as a consequence, is what I have called a creeping transition toward political union with little or no regard to public opinion. This is not the appropriate way to build a consensus in favor of a new emergent super state. The result has been a backlash against the EU and in favor of nationalism. This backlash to a large degree explains the UK vote to leave the EU. But, such backlash is visible in numerous other countries as well.

The structure of EU institutions is indicative. The major bodies that govern the union are three, The European Council, The European Commission and The European Parliament. Major strategic decisions are under the purview of The Council. This is a body which meets quarterly or more frequently to resolve crises. It is composed of the heads of member states plus an appointed President (currently MrTusk) and the President of The Commission. The heads of state are of course democratically elected. However, delegating strategic decisions to this moderate sized gathering removes those decisions one additional level away from participatory democracy. The Commission is where the EU bureaucracy really thrives. All of the members of The Commission are politically appointed and not elected directly. Yet, it is within the Commission that policy questions are researched, debated and formulated for adoption. The third body, that of the European Parliament, is the sole institution within the EU that is elected directly by the people. However, this institution is the least powerful of the three. Something is amiss here and it is common knowledge. As a result participation in elections to the European Parliament is always less than participation in national elections. And this is the case across the board.

The Common Currency
The Euro was introduced after years of planning in 1999 as a virtual currency and in 2002 in the form of notes and coins across the group of nations adopting it. Despite the planning, there have been serious adverse consequences. Economists immediately pointed out two flaws. First, it is inadvisable to implement a common currency without having first established adequate institutions in support. The EU began building those institutions after the fact rather than having them established and fully operational before hand. Second, the use of a common currency would be problematic without having achieved economic conversion and providing backstop safety nets such as a single insurance scheme for unemployment benefits and integrated pension plans.

The Maastricht Treaty was supposed to be the antidote to these shortcomings. The Maastricht agreement required that countries joining the Euro should demonstrate a competitive level of economic development. The countries were also have a debt to GDP ratio of less than 60%, annual deficits below 3% and tamed inflation rates. Again economists pointed out flaws. They noted that individual countries going through recessions would be in a straight jacket, unable to respond to their economic doldrums through a flexible fiscal policy. When the Euro was finally introduced not only had the EU failed to address these limitations, it relaxed the criteria for economic conversion and admitted countries with vastly disparate levels of economic development. In hindsight today it is sadly easy to see that economists criticisms and predictions have proven to be accurate. (More on this issue below.)

EU Expansion
In 1990 the Warsaw Pact disintegrated. Gorbachev’s attempt to implement Glasnost and to reform the Soviet Union and its allied states failed. The Berlin Wall was torn down and governments across Eastern Europe collapsed. This event presented a political opportunity as well as a humanitarian responsibility. There was a clear need to provide economic support to allow the countries of Eastern Europe to stabilize politically and to transition to more efficient modes of production and economic organization. To a degree the EU did respond to the challenge. The European Bank for Reconstruction and Development (EBRD) was set up to support investment and the transfer of expertise. A few of the countries have made relatively successful transitions.

On the geopolitical level, however, the EU failed miserably. When German unification went ahead the US and the Russian Federation agreed to permit reunification with the understanding that NATO would not expand to the east. This was a perfectly sensible agreement. It was time for a peace dividend after decades of Cold War. And yet that agreement was ignored. The US pushed and the EU caved. As the EU began the process of expanding into Eastern Europe it required new applicant nations to join NATO first and then begin the process to join the EU. From the US perspective America was seizing an opportunity to expand its empire. But from the EU perspective this was acquiescence pure and simple. The EU squandered the opportunity to spend the peace dividend.

During this period a significant policy debate ensued within the EU. The idea of political union was already on the table and being discussed. Everyone at the table, however, knew that the transition to political union would be difficult. At precisely the same time the need to respond to the political vacuum in Eastern Europe arose. The result was a debate over whether to expand the marketplace or to deepen the union among existing EU members. Deepening the Union was to include efforts to establish an independent foreign policy. As we reflect on this debate today it is not difficult to discern that the EU decided to do both simultaneously, but both haphazardly. And worst of all, the EU decided to accept the continuation of life under the wing of the American Empire. All discussion of creating an independent foreign policy remained just that, discussion.

Debt Crisis on the Periphery
In 2008 global capitalism was rocked by the subprime mortgage loan crisis in the US. The cause was a complete failure in banking supervision. As ripples ensued across markets and borders, the EU faced its own crisis. The introduction of the Euro had created the expectation that national economies within the Eurozone would converge. (Recall from comments earlier that the Euro was introduced without adequate infrastructure and despite disparate economic development.) As a consequence debt markets in Europe did converge with interest rates across the Eurozone moving toward parity. This decline in interest rates in peripheral economies produced an explosion of debt. Then, when markets crashed over US subprime debt, the ensuing lack of liquidity in European markets led to a second thought on economic conversion. It suddenly became painfully clear that economic conversion had not occurred. Instead peripheral economies had simply become over indebted.

Capital and investment across the Eurozone should have been recycled to establish sustainable economic development across the zone. Instead liquidity had recycled as debt across the zone producing a sovereign debt crisis, Europe’s own subprime problem. Greece, Ireland, Portugal, Spain, Italy and later Cyprus all displayed various symptoms of an over extension of debt within their national economies, whether private or public sector. The response from the EU was misguided and inadequate. The EU did finally set up additional institutions such as had been needed from the start, banking supervision and a European IMF (the EFSF). But the medicine administered to resolve the crisis was austerity programs. This choice was one that stemmed from the German philosophy of political economy and a fear of inflation and / or the weakening of the Euro currency. What was needed as explained above was a recycling of capital and investment to offset the debt explosion that had occurred. Instead, by implementing harsh austerity programs, capital flows shifted towards safety, i.e. back to Germany. In lieu of a Marshall Plan for the periphery, the EU implemented what was in effect a reverse Marshall Plan. The economic disparity within the Eurozone is now greater than it had been prior to introduction of the Euro. And so the crisis within the Eurozone lingers.

Summary
Certainly all of the analysis here is up for debate. My point is precisely that. All of the points above should be on the table for debate. I term the above points failures. Others may reply that they were pragmatic policy choices. Still, the fact remains that there are significant obstacles remaining within the structure of the EU. It is still an open question whether the EU can move successfully toward a stronger, deeper union. In fact it remains entirely uncertain whether the nations within the EU even want a closer union. Without political union and a true movement toward economic convergence, however, the common currency will face continuing crises in future. And unless the EU develops its own political identity and an accompanying foreign policy, it will be held hostage by US interests. It is already evident what this will mean. A hard border will exist between the EU and Russia. In future this may also apply to relations with China. And NATO will call upon the EU to support regime change wars across the Middle East and beyond.

Now, to come back to the question of Brexit, how does the above analysis help to to explain the Brexit gambit and the ensuing shambles? The Brexit vote should not have come as a surprise. Sentiments against the EU had been prevalent throughout all along. The UK had been one of the nations least inclined to political union. It had refrained from entering the common currency and steadfastly cultivated a special relationship with the US. Nonetheless, Cameron took the gamble to call a referendum. Surprise! He lost. The popular vote was marginally in favor of leave. On the other hand, as we have witnessed in voting within the House of Commons, the MPs are marginally in favor of the remain option. Hence, there is a standoff which raises additional risks to the process itself and even the future of the UK. Ideally I would like to see the UK remain within the EU. In doing so I would hope that the UK could be weaned from its special relationship with America. I would also like to see the EU reformed in favor of greater direct democracy, so that we might see progress against the failures I analyzed above. But we all must appreciate that the transition will be a long and bumpy ride.