The Magazine

Tough Times in EUtopia

The continent's politicians think the undemocratic character of the European Union is a virtue. They have miscalculated.

Mar 30, 2009, Vol. 14, No. 27 • By ANDREW STUTTAFORD
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Sometimes truth just has to speak to powerlessness. Addressing the EU's sham parliament in mid-February, the Czech Republic's refreshingly tactless and refreshingly Thatcherite president, Václav Klaus, raised the awkward topic of what the EU euphemistically refers to as its "democratic deficit" and told MEPs that they were part of this problem, not its solution:

Since there is no European demos-and no European nation-this defect cannot be solved by strengthening the role of the European parliament either. This would, on the contrary, make the problem worse and lead to an even greater alienation between the citizens of the European countries and Union institutions.

Klaus's listeners were predictably outraged. They ought to have been terrified. With the EU economies falling apart at an unprecedented pace, there is nothing that these toy-town parliamentarians can do-except get out of the way.

The EU's insultingly undemocratic nature is not news (indeed, it is part of its rationale), but it remains the key to grasping how those who run the EU have, for better and worse, had so much success in ramming their agenda through. Not having to bother too much about national electorates has been a great boon to Brussels. As the continent's economies slide ever deeper into the mire, however, that once handy feature could end up crashing the entire system.

An economic debacle on the current scale is going to shake any political structure, however securely moored, but the EU's persistent recourse to a form of soft authoritarianism has left it peculiarly ill suited to weather the storm to come. After decades of routinely bypassing its voters the union may well no longer have what it takes to secure their approval for the harsh medicine and painful sacrifices necessary to bring the EU through this ordeal in one piece. After all, it can barely even get them to vote: Turnout for the most recent (2004) elections for the EU parliament sank to a record low of 45.5 percent. Admittedly that total was dragged down by massively uninterested Eastern Europeans (only 16.7 percent of Slovaks voted and 20.4 percent of Poles), but it was sparse almost everywhere: Only 39 percent of Brits showed up, about the same percentage as made it to the voting booth in the Netherlands, one of the EU's founding nations.

As the history of the union's occasional, grudgingly granted referenda-a sorry saga of chicanery, rejection and do-overs-reminds us, appeals to the supposed solidarity of that imaginary European demos have never really worked. And that was in the good times. They surely won't do the trick now, nor will arguments based on the logic of a free market ideology widely, if inaccurately, said to have failed. Yet to steer a course through what may become hideously hard times without much in the way of popular consent threatens to push already alienated electorates in the direction of the extremist politics of left or right.

The story of this slump is too familiar to need repeating here, but it is worth pausing to consider how the introduction of the euro has left the EU marooned on a circle of economic hell all of its own making. Imposed on most of the European heartland by a characteristic combination of bullying, bribery, conclave, and legerdemain, the single currency was put in place with as little regard for the real world as for the ballot box. To squeeze a wide range of vastly divergent economies (and to do so with few safety nets) into one monetary system made little sense except when understood as a matter of politics, not economics. But economics has a nasty habit of biting back.

Up until the eruption of the present crisis, the European Central Bank's interest rate policy primarily reflected the needs of France and Germany, Euroland's largest economies. This left rates "too" low for naturally faster growing countries like Ireland and Spain, which in turn inflated unsustainable housing bubbles. These have now burst-in Ireland's case taking much of the banking system down with it. On some forecasts Irish GDP may shrink by 10 percent between 2008 and 2010, a dismal number that could eventually prove too optimistic. Gloomsters joke bleakly that the difference between Ireland and Iceland is six months and one consonant. Spain meanwhile now boasts an official (in other words, understated) unemployment rate of 14 percent. Over 600,000 migrant workers have been laid off. This is not a recipe for social peace.

In other countries, most notably a horribly in-hock Italy (public sector debt over 100 percent of GDP and expanding fast), low interest rates allowed governments to put off long overdue structural reforms. Instead of forcing the introduction of the badly needed discipline that was allegedly one of the principal reasons for its adoption, the euro (a hard currency when compared with shabbier predecessors such as the lira or drachma) was treated as a free pass. It has been anything but. Even before the current mess, Italy's crucial export sector was finding it difficult to cope with the brutal combination of rising cost inflation and a currency far stronger than the accommodating, and periodically devalued, lira. On some estimates, this latest recession is the fourth that Italy has suffered in the last seven years. Back in 2005 Silvio Berlusconi described the euro as a "disaster" for his country. He was not exaggerating.

Devaluations are to GDP what steroids are to sport. In the long-term they may be unhealthy, but in the short-term they frequently work miracles. The problem is that the option is no longer so easily available for the nations that adopted the euro. Italy, Ireland, and a number of other countries are in the grip of a one-sized currency that could never fit all, and the euro is now for them little more than a straitjacket or, more accurately, a noose. They have theoretically retained enough sovereignty to quit the euro, but for one of them to do so, especially if other states stick with the common currency, would be to risk something close to complete economic meltdown.

Money would pour out (so much so that capital controls would probably be required), interest rates would soar, and the reborn national currency would plummet. In the absence of a bailout from the eurozone it had just abandoned, the exiting country itself would probably be driven to renege (either de facto or de jure) on its foreign debt-as would much of its private business. In its consequences, this could be a Lehman-plus trauma with possibly devastating effects on already chaotic international capital markets. No less critically, it could set off a crisis in confidence in the credit of those weaker nations that had kept faith with the single currency, not to speak of feebler economies elsewhere. The cure, therefore, could well be worse than the disease.

In the meantime, in a damned-if-you-do, damned-if-you-don't spasm, the markets are fretting that the disease is turning ever more dangerous-and, in a process that feeds upon itself, ever more infectious. Spreads on sovereign debt yields within the eurozone (between German Bunds, say, and paper issued by Spain, Greece, Portugal, Italy, and Ireland) have widened noticeably. This is a warning that investors are beginning to think a once unthinkable thought: that one or more of the zone's less resilient members might go into default. On this logic these countries can neither afford to keep the euro nor to junk it. Rock, meet hard place.

These worries are made even more pressing by concern over the impact of Eastern Europe's spiraling economic woes on the already shattered finances of the western half of the continent. Contrary to some of the more excitable headlines, not all the countries of formerly Warsaw Pact Europe are, yet, in deep trouble, but the problems of those that are (notably Hungary, Ukraine, Romania, and Latvia) threaten to wreck confidence in those that are not. And those problems will not be confined safely behind the Oder-Neisse line: Two of Sweden's largest banks, for instance, are frighteningly overexposed to the faltering Baltic States, while their counterparts in Austria, seemingly lost in nostalgic Habsburg reverie, have reportedly lent out the equivalent of 70 percent of their country's GDP to once kaiserlich und königlich territories and parts nearby.

Eastern Europe's problems are Western Europe's and, given Eastern Europe's dependence on Western capital flows, vice versa, a state of affairs that neither side appreciates. Infuriated by the impression that they were being sidelined by the upcoming "G-20+" summit in London, nine of the EU's former Soviet bloc members held their own breakaway meeting earlier this month to discuss what to do. Meanwhile, led by Germany's indignant Angela Merkel in full prudent-Hausfrau, Thatcher-handbag mode, the Westerners have tried to damp down the East's increasingly aggressive demands for assistance. Good luck with that. Demonstrating a keenly cynical awareness of which buttons to press, the Hungarian prime minister warned that a severe slowdown in the East could lead to "a flood of unemployed immigrants traveling to Western Europe in search of jobs."

If you suspect that all this leaves the EU looking somewhat stuck, you would be right. But then this is no accident. The lack of democratic responsiveness so thoroughly ingrained into the union's architecture was always intended to stop the bloc's politicians from succumbing to the temptations of protectionism, beggar-thy-neighbor devaluations, and other questionable devices often found in the toolbox of an economically desperate national government. That's all very well, and all very praiseworthy, but it doesn't do anything about the desperation, a desperation that will be felt all the more sharply by electorates looking for their leaders to do something, anything, in response to this crunch-only to discover to their chagrin (to use too gentle a word) that there is little that the EU will, legally or politically, allow those leaders to do.

To take just one example, earlier this year Britain saw a series of wildcat strikes protesting the importation of cheap foreign workers from elsewhere in the union as a means of undercutting the locals. The facts that triggered the dispute are murky, but what is certain is that even if the British government had wanted to intervene under EU law it could not. Equally, while the opposition Tories grumbled, nobody was fooled. If the Conservatives had been in charge, they would have done just the same as Labour: nothing. If you want to drive voters to the political extremes, stories like this are a good place to start.

Except that "start" is the wrong word. Parties of the extreme, whether of left or right, already have more than a foothold in Germany and France. "Populists" of every description can be found in the legislatures in countries from Belgium to Denmark to Latvia to Austria to Poland to Hungary. Take your pick: There are plenty to choose from. Even in never-so-sedate-as-it-seems Britain, a country that has made a fetish (if not always convincingly) of its moderation, the much-reviled far rightists of the hitherto tiny British National party are showing some signs of evolving from being useful bogeymen for the left into a party with demonstrable political clout within elements of a white working class that has been neglected for too long.

The backgrounds and the prospects of these movements vary widely from country to country, as do the pasts and the resentments that have shaped them, but in recent years their appeal has begun to grow in sections of the electorate pummeled by the dislocations brought about by mass immigration and globalization-dislocations made all the more painful by the realization that the ruling elites who never really asked them for their opinion on these changes, let alone their agreement to them, couldn't give a damn about their plight. This is a perception that will only be sharpened when the populations of these countries, more and more of whom are losing their jobs, are told by that very same political class that protection is off the agenda and that austerity is on, that saving local industries is unacceptable, and that helping out foreign countries is a must. And, oh yes, none of this was our fault-it was all the bankers' doing-and, oh yes, they and their bonuses have got to be rescued too.

So what's next? The leaders of the EU countries will do their best to muddle through in rickety, unpopular unity. Here and there they will cheat both on each other and on the key EU principle of a single market. The warning signs are already there. In February, President Sarkozy attacked the way that French auto companies were supplying their home market from manufacturing facilities in the Czech Republic. The previous month, Britain's Gordon Brown had criticized the amount of overseas lending by the UK's beleaguered bailed-out banks. Nevertheless, however awkwardly, however reluctantly, the EU's members will attempt to hang together-for as long as (or indeed longer than) their domestic politics comfortably permit, an effort that will inevitably further boost the appeal of the wild men of the fringes.

That said, as the EU's leaders are all too well aware, the slump has so far brought down two European governments (in Latvia and non-EU Iceland). Nobody wants to be next, let alone run the risk of political and economic breakdown. The few remaining traces of the budgetary discipline that supposedly still underpins the euro will therefore probably be scrapped. The euro may hang on to its reach, but only at the cost of its integrity. To ordinary Germans this will be seen as a betrayal, a dolchstoss even. A people haunted by memories of where a debauched currency can lead, they only agreed to part with their much-cherished deutsche mark on the understanding that the euro would be run with Bundesbank-style discipline. That was then.

So money will be thrown around, the imperiled brethren of both East and West will, after much shoving, screaming, and hesitation, be bailed out. Some protectionist measures (directed against those outside the EU) will be brought in and all fingers will be crossed. It won't be pretty, but with luck, it might be enough to stave off catastrophe. Pushing their luck, some glass-is-half-full Europhiles believe that the fact that no country can easily work its way through these tribulations alone will conclusively make the case for still closer European integration to some of the EU's more reluctant federalists. You can be sure that this is a rationalization that Brussels will look to exploit: Rahm Emanuel is not the only politician unwilling to waste a crisis. The EU's policy response to the slump is likely to have two objectives: the reconstruction of member-states' economies and the destruction of what's left of their autonomy. Going for the latter could well drive even more disaffected voters into the extremist fringe, though Brussels is arrogant enough to persist. There are already indications that the eurocrats may be pushing at an open door. In a startling example of mistaking the Titanic for the lifeboat, Poland has become just one of several nations speeding up plans to sign up for the euro-and the safe haven it is meant to represent.

On the other hand if, as appears disturbingly likely, the economic situation grows far darker, it's easy to draw an alternative picture in which both euro and union come under previously unimaginable stress, stress with unpredictable and potentially ominous consequences, stress that will be echoed and intensified by mounting political and social disorder in a Europe that discovers, too late, that there was something to be said for democracy after all.

Andrew Stuttaford, who writes frequently about cultural and political issues, works in the international financial markets.