If the critics and proponents of European integration can agree on one thing, it is that the European Union has seen better days. “Not only has [Europe] not recovered from its post-2008 cold,” says President of the European Parliament Martin Schulz, “beset by multiplying crises, it is now on the verge of developing pneumonia.” The continent’s troubles are not just economic, although a lack of economic growth and chronically high rates of unemployment play an important role in Europe’s overall malaise. The refugee crisis that hit the EU in 2015 has fueled nationalism, has deepened the divisions between member states, and risks tearing the bloc apart altogether. Depending on one’s point of view, the EU is “on the verge of collapse” (George Soros), “stuck in a political trap” (Jürgen Habermas), or “not in a good state” (Jean-Claude Juncker). Even the usually measured World Economic Forum is distinctly pessimistic: “Europe’s leaders are in crisis-fighting mode: reactive, improvising, often uncoordinated.”
If Euroskeptics feel a certain schadenfreude about Europe’s misfortunes, it is because those might herald the EU’s demise. Nigel Farage, leader of the Euroskeptic United Kingdom Independence Party, believes that the upcoming referendum about the UK’s membership in the European Union will be a “tipping point,” marking the end of the EU. Europe’s troubles also appear to vindicate the Euroskeptics’ arguments. From the critics’ perspective, the EU’s woes are almost completely self-inflicted, a result of the hubris of European political elites. The common currency; the rush toward federalization imposed on Europeans against the popular will expressed in referenda in France, the Netherlands, and Ireland; and burdensome European regulations are all threatening to undo the seventy years of movement toward “ever-closer union.”
There is plenty of blame to go around for Europe’s political elites. But, as I argue in my new book, Towards an Imperfect Union, conservatives and advocates of free enterprise are committing a grave error when they wish ill to European integration. The existence of the EU and its precursors has been associated with outcomes that should be particularly dear to those who believe in democratic capitalism. Throughout the history of the EU and its precursors, its member countries have been democratic and at peace—a complete anomaly by historical standards. The prospect of EU membership drove the successful transition of a number of Central and Eastern European countries, with a total population of nearly 100 million, from Communism to democracy and markets. European integration has also put an end to the protectionist barriers that had long divided European nations. And, through a concerted effort to reduce regulatory obstacles to trade and the movement of capital, services, and people, it has created the largest integrated marketplace in the world.
What is the alternative to the gradual crumbling away of the EU that we are seeing today, as the bloc finds itself in the midst of multiple crises? Some argue that the only way out is to turn the Union into a proper federal state. Imagine that its constitution reflected the American federal model with a two-chamber European Parliament, directly elected President of the Union, and cabinet approved by the Parliament. The federation would have taxing powers and the ability to exercise legal coercion in the EU. All existing state debt would be federalized, after the imposition of an appropriate haircut. A single European army, integrated into NATO, would be created. Instead of the fuzzy notion of subsidiarity, which delimits the division of power between today’s EU and member states, a federal constitution would have clear mechanisms of judicial review.
Such is the vision advocated by Brendan Simms, a historian at Peterhouse, Cambridge, among others. His reasoning is simple. Today’s EU is a result of a gradualist approach to integration, driven by the expectation that the various half-measures, such as the introduction of the euro, would sooner or later create incentives for fuller, deeper integration and the creation of a democratic federal state. But that expectation never materialized. As Simms says, “successful unions have resulted not from gradual processes of convergence in relatively benign circumstances, but through sharp ruptures in periods of extreme crisis. They come about not through evolution but with a ‘big bang’.”
It is easy to see the appeal of a genuine federal structure for the EU. Agreeing on a definitive and permanent framework for the union of European states provided through a constitutional convention would put an end to the self-referential, if not completely self-absorbed, nature of European integration. A larger economic role for the European federal government would allow for transfers of resources into economically depressed areas at times of economic downturns, as well as coordination of structural policies across member states. A central government with mechanisms of legal coercion would be in a better position to limit the fiscal profligacy of politicians in member states and to complete the single market by removing the residual regulatory barriers to trade, investment, and labor mobility in the EU, following the example of the interstate commerce clause of the U.S. Constitution, which enables the federal government to restrain the economic policies of states. The EU, fully integrated into NATO, could finally speak with a unified voice on matters of security and foreign policy.
Attractive as it sounds, these are not the reforms I advocated in my book. Conservatives—to whom the book’s arguments are primarily directed—are wary of fantasizing about disruptive social and political changes. Michael Oakeshott, a prominent conservative thinker, argued that a person of a conservative disposition “prefers small and limited innovations to large and indefinite” and “favors a slow rather than a rapid pace, and pauses to observe current consequences and make appropriate adjustments.” This logic lends itself well to policymaking: “a modification of the rules should always reflect, and never impose, a change in the activities and beliefs of those who are subject to them, and should never on any occasion be so great as to destroy the ensemble.” Such a prudent attitude is not driven, as the common critiques of conservatism go, by a dogmatic resistance to change. Instead, it is motivated by the recognition that social affairs cannot be shaped arbitrarily by benevolent, omniscient policymakers.
Conservatism leads to restraint no matter what side of the European debate one is on. Any intellectually sound and appealing reform of the EU could easily lead to unintended consequences—and so could Brexit, or a dissolution of the EU. And once one gets into the business of simply applying constructivist reason to see what the EU or Europe could or should become, imagination becomes the only limit.
There is a more prosaic problem with the ambitious plans for the EU’s overhaul. Whatever we think of their merits, they are unlikely to be translated into reality. The EU’s leaders have little appetite to risk the small amount of political capital they have on major institutional overhauls. Let us not despair, however. There are tonics for Europe’s malaise. For one, the European project has to be turned into a visible engine of economic prosperity. There is much in the EU’s architecture that can be built on, including its success in creating the single market and dismantling barriers to trade and investment. But restoring full economic health in Europe will require a much larger dose of free-enterprise medicine. With their appreciation of government accountability, the rule of law, and the evolutionary nature of social processes (as opposed to the technocratic faith permeating modern progressivism), conservatives are also an obvious source of ideas about how to address, by means of evolutionary reforms, the democratic deficit that is affecting how the general public perceives the EU.
For many, the EU’s biggest flaw is its lack of democratic legitimacy. However, contrary to what Euroskeptics sometimes claim, this deficit can be reduced. Democratic politics is not inextricably linked to the nation-state. It can flourish in other contexts as well, including large multiethnic democracies or at the local level. What has made the emergence of democracy so difficult in the EU is the inadequacy of its institutions. Here are examples of incremental reforms that could bridge the gap between the EU and its citizens.
The first remedy consists of strengthening the transparency of EU summits and meetings of the Council, including those of the EU Finance Ministers (Ecofin) and of the Finance Ministers of the Eurozone (Eurogroup). These two platforms have played a key role in the Eurozone crisis, and their lack of transparency has contributed to the popular backlash against fiscal consolidation programs on the periphery. The Council’s legislative documents could be made publicly available. The meetings and discussions ought to take place in public as well. Moreover, as LSE’s Simon Hix proposed, even without any change to existing treaties, a commission could be created, composed of members of the budget committees of national parliaments of Eurozone countries and of the European Parliament, to scrutinize decisions about fiscal policy, lending, and structural reforms taken by European institutions, including Ecofin and Eurogroup.
Then there is the European Commission, a body that merges the functions of the EU civil service, a strong executive and supervisory role, and a virtual monopoly on new legislation. Its technocratic aura and freedom from direct political scrutiny are warranted only as long as the Commission acts as an executive and regulatory body, overseeing the single market, for example. One doubtless controversial avenue for reform would be to strip the European Commission of its non-executive roles, particularly its prerogatives in the legislative process, and to subject it to political control by the Council.
More realistically, it might be time to recognize that the Commission has become an autonomous political actor and to treat it as such. The Commission’s President is now chosen by the European Council, typically through haggling behind closed doors. The nomination is followed by a largely symbolic election by the European Parliament. The entire process of the selection of the President could be public, with online or televised debates between the candidates. The bids in support of candidates by EU governments could be announced publicly as well. The groups represented in the European Parliament could publicly advertise which candidate they support. Some elements of a more open selection process have already been adopted through the system of Spitzenkandidaten (lead candidates), through which parliamentary groups announced their candidates for president of the Commission ahead of the 2014 European election, thus providing input for the decision taken by the European Council after the election. There would be little downside in extending the same degree of transparency to the entire selection process, making European citizens more directly involved, through European elections, in the choice of the Commission’s President.
As the EU’s only directly elected body, the European Parliament is critical to reducing the existing democratic deficit. Alas, turnouts at European elections are weak, and the chamber is hardly seen as a venue for an actual Europe-wide debate over public policy. This is a result of the fact that the Parliament is not a full-fledged legislative body but only a vehicle through which legislation is passed and amended. It is the European Commission that has a virtual monopoly on proposing new legislation, whereas MEPs only suggest amendments. There is often a greater political payoff in passing nonbinding resolutions, or in purely rhetorical exercises that sometimes attract attention through YouTube and social media. A treaty change that would allow MEPs to propose new laws, as opposed to simply assenting to and amending the proposals submitted by the Commission, would raise the stakes of parliamentary work, increase the importance of the chamber in the eyes of the public, and bring the European political process closer to the traditional form of parliamentarianism seen in individual European countries.
Democracy in the EU is not helped by the lack of a properly functioning system of judicial review that could stop new legislation from coming from Brussels—or Strasbourg. Under the U.S. system of government, the Constitution enumerates the powers that are given to the Federal government, explicitly constraining its activities only to those explicitly listed. Instead, the EU relies on the elusive idea of subsidiarity: “the Union shall act only if and insofar as the objectives of the proposed action cannot be sufficiently achieved by the Member States, either at central level or at regional and local level, but can rather, by reason of the scale or effects of the proposed action, be better achieved at Union level.”
Whether a certain policy objective is better achieved at the national or at the European level is primarily a political, not a legal decision. The lack of an effective judicial review process strengthens the case for political review of the EU’s activities by its member states. The Lisbon Treaty granted national parliaments the power to raise objections to proposed legislation on the grounds of subsidiarity, known as the “yellow” and “orange” cards. In simple terms, a group of national parliaments can raise reasoned objections to a legislative proposal within the first eight weeks of the legislative procedure if they believe that the law infringes on the idea of subsidiarity and unduly encroaches on the sovereignty of member states. This yellow card (the name derives from association football) triggers a review of the proposal by the European Commission. If a majority of parliaments object—an orange card—then the Council and the European Parliament are entitled to strike the proposal down immediately. The idea is laudable because it creates a connection between national politics and the EU. To strengthen the supervisory role of national parliaments, the deal between the UK and the EU includes also a system of “red cards” that enable groups of national parliaments to veto unwanted legislative proposals. This could turn national parliaments into a virtual European senate, providing a check on the EU’s legislative activity.
A cultural change in member states must follow. The Swedish Riksdag, often cited as an example to follow, stays systematically on top of current European legislation and frequently issues opinions under the yellow card procedure. In contrast, the outreach of the UK Parliament to European institutions is weak and unsystematic, which deepens the perception that the EU is a distant and alien entity imposing its will on members. To make the system of cards of any color work as an effective check on the overreach of EU institutions, national parliaments will have to learn to work together in practical ways, going above and beyond the mostly formal ties currently existing among the parliaments.
The EU’s reform cannot be just about process. The bloc has to become a more effective supplier of European public goods: security, including the protection of its borders, immigration, and asylum. The free movement of people within the Schengen space is perhaps the most obvious and tangible achievement of the European project. Yet, the refugee crisis has exposed a deep flaw in the EU’s architecture, which combines an unrestricted freedom of movement with a set of different immigration, border protection, and asylum policies in each member state. That creates ample space for free riding and moral hazard.
First, the EU needs a common system of border protection, funded from European sources. It is not fair to Hungary, Italy, or Greece that the bloc expects them to bear the brunt of the cost of rescuing, accommodating, and processing refugees just because these countries happen to be in their way. National border protection forces should be replaced by—or merged into—Frontex, which needs a mandate, coming from a revision of the existing treaties, and the funding to do the job done in the United States by the Customs and Border Protection agency. The point of funding Frontex generously is not to build a “Fortress Europe” or to give new powers to an unaccountable, EU-run security force. The point is to restore the feeling of safety and security on the continent, eroded by the EU’s inept response to the refugee crisis of 2015 and by the attacks in Paris, which have demonstrated how easy it is for populists to instill fear and leverage it for political gains. If the EU is seen as anathema to the personal safety and security of Europeans, its future is doomed. That outcome can be avoided if European institutions, such as Frontex and Europol, are recognized as reliable providers of security.
Another element of a common European response to the refugee crisis is a coherent and proactive asylum policy. The main reason for the large illegal influx of asylum seekers into the EU has to do with the living conditions of refugees in countries such as Turkey and Lebanon, and also with refugees’ inability to obtain asylum in European countries through the legal route. The first problem could be alleviated by additional funding to refugee programs in countries surrounding Syria. Still, it is unlikely that any amount of financial assistance would reduce the attraction of the EU’s relative prosperity to those fleeing the Middle East. As a result, to curb the chaotic flows of people across the Schengen border, the EU has no choice but to provide the refugees with a legal way in.
Alas, the seemingly irreconcilable difference of opinions between countries that are willing to accommodate large numbers of refugees, such as Germany and Sweden, and member states in Central Europe that reject the idea of accepting any asylum-seekers from Muslim-majority countries is preventing the emergence of a common response. But a different approach is possible. Countries could agree on the total number of refugees that the EU would be willing to accept, determine an initial assignment of quotas between countries, and then allow governments to trade the quotas on a market. Tradable quotas would enable countries that do not want to accommodate refugees—such as Slovakia, Poland, or Hungary—to pay others to step in, without being stigmatized as under the most recently proposed mechanism of “fines,” amounting to €250,000 per asylum seeker.
Before contemplating any system of burden sharing, the EU could implement an even more modest mechanism of a two-sided matching market, as described in a recent working paper by Oxford researchers Will Jones and Alexander Teytelboym. The matching market would enable refugees to apply for protection in several EU countries, ranked by order of preference. It would also enable states to compete for particular groups of refugees. In addition to reflecting countries’ preferences over the characteristics of refugees, the system would enable member states to set the minimum and maximum quotas of refugees they would be willing to accept. Of course, for the matching market to make a meaningful difference in the ongoing crisis, the minimum quotas set by individual countries would have to match the numbers of asylum-seekers coming into the EU. However, in principle, a matching market would allow for a degree of free-riding, which would be politically one of the scheme’s selling points. As long as others were willing to pick up the slack, the matching market would not be jeopardized if a number of EU countries decided to take no refugees whatsoever. Another appealing characteristic of this proposal is that it puts national governments in control of the refugees’ characteristics, potentially including their qualifications, language skills, or country of origin. Once in place, the framework would allow the introduction of explicit elements of burden sharing, such as quotas that may or may not be tradable. As a start, however, the matching mechanism would reduce the size and the chaotic nature of the uncontrolled influx of refugees seen in 2015, because arriving at any particular destination country would become much less important for refugees.
A functioning matching market for EU countries and refugees would create an alternative to the dangerous and illegal journeys that Syrian and other refugees are currently undertaking. That might not seem like a lot, but it might just be enough to relieve the populist pressures that currently risk tearing the EU apart. The civil war in Syria is also a painful reminder that Europe’s long holiday from history is over. Ignoring the brewing security threats in Europe’s neighborhood, whether in Syria or Ukraine, means paying a steep price later. However, just as there is disagreement over the refugee crisis, the EU rarely speaks with a unified voice on foreign policy and security matters. Once again, that is caused by the absence of a European political process that would give the EU a mandate to speak on behalf of member states on such important matters. The sooner Europe creates such a process by reducing the bloc’s democratic deficit, the sooner the EU can become a force for good in its neighborhood.
Of course, Europeans need to address their economic woes. Some of the needed reforms can be done by European institutions, but Europe’s prosperity also requires deep changes in the economic policies of member states.
First, some low-hanging fruit. The European Central Bank (ECB) has to draw the right lessons from the Great Recession. In light of the collapse in nominal spending, there is nothing unconventional about the ECB’s so-called unconventional monetary policies, also known as quantitative easing. It should not have taken four painful years, until Mario Draghi’s famous “whatever it takes” speech, to instill the understanding that, even when interest rates are close to zero, the central bank can control inflation and growth through other means. Even better than quantitative easing would be an explicit target level for nominal spending, such as that advocated by a number of modern followers of Milton Friedman’s monetarism. Under nominal GDP targeting, the central bank would respond aggressively to nominal shocks, thus preventing the debilitating cycles of deleveraging and prolonged unemployment.
Accommodative monetary policy in times of crisis reduces the impact of economic shocks and facilitates economic reforms. However, the survival of the Eurozone and the completion of the single market requires more, particularly a much greater degree of economic flexibility. That means dismantling national barriers to competition in numerous areas, including services, energy, and digital transactions. Europe’s online markets, for example, are still segmented and guided by different rules in different countries. The spirit of the European Commission’s Digital Single Market Strategy deserves applause for aiming to dismantle the barriers to cross-border digital transactions, including different VAT rules, and arbitrary geo-blocking. But the document does not go far enough. It does not, for instance, include a commitment to creating a truly coordinated spectrum policy, which impedes the deployment of the advanced LTE networks. Common EU rules on data protection must be implemented uniformly by member states (so far, they have not been) to remove the legal uncertainty facing companies that rely on cross-border data transfers.
Worse yet, EU competition policies can be counterproductive, especially when they treat digital markets in the same way as old-fashioned utilities, like energy companies. This may be appropriate for the small number of internet service providers that resemble natural monopolies, but even there one must be cautious to avoid discouraging investment in digital infrastructure. In any case, looking at large digital companies as natural monopolies or oligopolies, as the Commission long has, has hindered the growth of Europe’s digital markets. Today’s digital markets are different from textbook examples of imperfect competition. Compared with the era when the EU regulatory landscape was being formed, digital markets present a much greater degree of convergence between different aspects of digital products and services. Companies such as Google or Apple are active in developing digital devices and applications, providing connectivity, and aggregating digital content. Services such as voice communication and text messaging, once charged for by mobile operators, are increasingly provided by Internet-based business models like Skype or WhatsApp that do not charge customers directly. If the past offers any insight here, we can expect even more fluidity between the different facets of digital markets, including internet service provision. The behavior of EU regulators needs to reflect this new reality, instead of relying on static measures of market power and harassing companies just because they appear to dominate an arbitrarily defined market. Treating the digital economy in the same way as utilities has backfired even in the area of internet service provision, which superficially resembles a natural monopoly mainly because of the high costs of entry. In the United States, the prevailing attitude of regulators relies on fostering competition across different networks. ISPs in the United States, including Comcast or Verizon, own the infrastructure that they are using and have incentives to invest in it in order to serve their customers. In the EU, by contrast, the transmission infrastructure remains in the hands of incumbent telecom firms that lease their lines at regulated rates to ISPs. The transmission networks have thus become a form of commons, contributing to Europe’s low degree of penetration of high-speed fiber-optic networks and continued reliance on largely obsolete DSL technology.
Europe’s single digital market requires common technology-neutral rules allowing providers of digital services to compete across the EU. If the EU succeeds, the upside is enormous. A fully fledged, single, digital market could give the EU economy a boost of €415 billion, increasing economic growth by one percentage point.
The Commission should be a leading pro-reform voice across the EU. According to the eponymous survey conducted by the World Bank, Denmark is the third best country in the world to do business. Finland ranks tenth. Greece, a Eurozone member just like Finland, occupies sixtieth place globally, trailing behind Moldova and Russia. Using the judiciary system in Greece to enforce a contract takes 1,580 days on average, almost three times as long as in a typical OECD country. These vast differences in regulatory quality and the costs of compliance clearly interfere with the single market, making it difficult for businesses to compete across borders.
Conservatives are skeptical of the EU’s ability to push for good economic policy in member states. That is why European institutions need to start with themselves. Proponents of new economic regulation adopted at the EU level, for example, ought to be able to demonstrate that the benefits outweigh the burden. For that, the EU needs an independent oversight unit empowered to assess and strike down regulatory proposals. The performance of its European version, the Regulatory Scrutiny Board, is lackluster. It went from conducting 135 assessments in 2008 to only 25 in 2014, covering only a tiny fraction of the new legislation adopted by the EU. In addition to strengthening this control mechanism, the Commission should review existing legal acts that are obsolete or do not pass the cost-benefit test, and prepare an omnibus repeal bill. By default, new pieces of regulation ought to include mandatory sunset clauses, making it necessary for European institutions to defend them in the eyes of the public after a certain time period or to let them expire.
The bulk of the responsibility for reviving Europe’s economy rests with national governments. One reason for the severity of the Great Recession in Europe was the fiscal situation of countries like Greece, with bloated public sectors and overly generous welfare states financed through debt. When the crisis hit, governments struggled to meet the financial commitments that they had made to their populations, and in some cases they had to renege on them, imposing substantial hardship on the most vulnerable. However, defenders of free enterprise should not be waging war against social safety nets. Instead, they should propose making these nets sustainable in light of long-term demographic trends and resilient to economic shocks precisely to avoid the painful episodes of austerity seen in some Eurozone countries during the crisis.
Instead of indulging in fantasies about a world without the EU, conservatives and advocates of free enterprise should strive to be at the forefront of discussions about how European countries can leverage individual initiative, creativity, and the power of incentives to their advantage. Because of a flawed incentive structure, Europe’s universities are increasingly lagging behind the top research institutions in the world. Instead of embracing “creative destruction,” Europeans are often inclined to preserve the economic status quo even at the price of stagnation and backwardness. For Europe to become an economic powerhouse again, that needs to change. It will not change without an active, vocal, and credible movement in favor of free markets that offers practical solutions to Europe’s problems instead of simply pontificating about the supposed evils of European integration.
The EU needs reforms. In the Eurozone, mechanisms of joint economic governance need to be created that will be perceived as legitimate by voters in countries as diverse as Greece, Portugal, and Germany. It is also time to recognize that the EU is a multispeed or “variable-geometry” organization. Not all EU countries are or are planning to become members of the Eurozone, and some of its members have come close to leaving it. The existing rules do not offer the possibility of a legal exit without also leaving the EU. That needs to change. Eurozone membership has to be uncoupled from EU membership, enabling countries to take advantage of EU membership without necessarily rushing into the Eurozone.
Europe’s outdated social contract needs to be updated to the realities of the 21st century. The increasingly fluid labor market, rising economic complexity, and globalization are not compatible with the arrangements that governed Europe’s workplaces and industries in the 1960s. Nor is there any justification to spend a generous portion of the EU budget on an anachronistic system of agricultural subsidies within the Common Agricultural Policy—a program that has withstood many an attempt at reform. To preserve freedom of movement of people within the Schengen area—one of the EU’s most significant achievements—the EU needs to take over from its member states the protection of its common border and put in place a joint system of asylum application processing. It needs to step up its engagement with countries such as Ukraine and Moldova and do more to end the conflicts in the Middle East and North Africa.
In today’s technical discussions of the EU’s future, it is easy to lose sight of the fundamental choice. Europe can go back, as many Euroskeptics advise, to the model of nation-states unconstrained by a central authority, hoping that its absence will not recreate the wars, protectionism, and hatreds that had so long been the norm on the continent. Or it can attempt to make meaningful strides to address the problems of the EU’s democratic deficit, the economic turbulence created by the common currency, and the refugee crisis. The choice for us on the center right is between coming to the rescue of a reasonably well-run, although necessarily flawed, union of liberal democracies that work together to keep the continent safe, democratic, and prosperous, or becoming cheerleaders for the EU’s demise. Given that cheering for European disintegration is perilous, ill-advised, and ultimately self-defeating, it should be an easy choice.
