EU Referendum

Eurocrash: political union, a "dangerous illusion"


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Otmar Issing is a German economist, president of the Centre for Financial Studies (Goethe University Frankfurt) and former member of the board of the Deutsche Bundesbank and of the Executive Board of the ECB.

Having recently published a short book arguing that the Euro is worth saving (but this will require reforms and some countries may be forced to leave), he now writes for the centerist/liberal Die Zeit with the startling claim that the plan for political union to solve the euro-crisis is "a dangerous illusion".

He starts, in a longish essay by addressing the central conundrum facing the "colleagues", that either "Europe" achieves the quantum leap into the political union or the currency union breaks apart, the working motto having become "We need more Europe".

This, of course, is not new. Issing reminds us of Chancellor Helmut Kohl who on 6 November 1991 declared (to applause from all sides of the house) in the Bundestag:
One can not say this often enough. A political union is the indispensable counterpart to the Economic and Monetary Union. The more recent history, and not just the UK, teaches us that the idea that you could get an economic and monetary union without political union in the long run, is absurd.
Thus, the lack of political union is seen as a kind of "original sin," the root of all the euro's problems. Accordingly, it is necessary to supplement the half-finished house of Europe with the political element and to complete it. The logic seems compelling, says Issing, and is still wrong. 

As it stands, political union would present a huge political and legal challenge. A completely new contractual basis would be required, coupled with changes in national constitutions and referendums in individual member states. In short, a difficult, long process would be necessary, the outcome of which appears far from certain.

The essential problem here is forensically identified by Issing. In the short-term, the prospect of closer political integration could not make a decisive contribution to the crisis. No one can seriously believe it would have any effect within a few years.

Thus, the real agenda behind more or less "pro-European" rhetoric, therefore, is effectively a demand for unlimited funding, amounting to the slogan: "money today for the promise of a political union tomorrow".

However, political union involves high financial risks for the more solid member states which not only undermine the longer term efforts towards a political union, but destroy the foundation of such a process, namely the identification of the citizens with the European idea.

But Issing nevertheless maintains there is an alternative, other than the collapse of the euro. EMU, he says, is founded on contracts and obligations that were fatally broken countless times and by all countries. (Just think of the violation of the rules of the Stability and Growth Pact by Germany and France in the years 2003/04.)

This has become a habit, an unpunished series of violations of the law that has resulted in an immeasurable loss of credibility for the single currency. To restore lost confidence, each country much take responsibility for the errors of its own policies.

Community financial aid should be given only occasionally, and then only on the basis of strict conditionality, at rates that do not undermine the commitment to reform in the crisis countries. Under such conditions, a monetary union can survive without political union, at least for the foreseeable future.

But, after so many disillusioning experiences, asks Issing, is it not naive to expect that such a regime can be credible? But to that, Issing's answer is, if restoring faith in treaties and obligations is problematical, how much more credible are the even more ambitious plans and promises for a political union?

To believe that political union is the answer is to raise naivety to new heights. Such assumptions, built on such shaky ground, threaten not just the future of the monetary union, but the historic project "Europe", he concludes.