‘The European idea has turned rancid’ — John R. Gillingham dissects the EU's failings

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The UK is set to have a referendum on 23 June on whether Britain should leave or remain in the European Union. John Gillingham, author of The EU: An Obituary and a leading historian of Europe, comments on Brexit, the EU’s democratic failures and offers cogent predictions of the European Union’s decline.

The EU: An Obituary is 40% off until May 20th as part of our Brexit reading list.



Weakened by the events of the past year – and for the historical reasons described in this book – Brussels’ fate will most likely be sealed in 2016. The EU may not disappear altogether but survive in vestigial form, yet it will no longer be central to the European conduct of affairs. As is so plainly clear today, it seldom has been during most of its six decade history. The Delors years (1985– 1995) and its aftermath, the Eastern Enlargement, were exceptional in this respect. The EU’s marginality during most of its existence can no longer be denied.

The EU may for many years have been Europe’s great hope but it has turned out to be a disappointment, even to its advocates. It has made notable contributions to the liberalization of the economy, the democratization of Eastern Europe, and the reconciliation of peoples, but these achievements are now threatened. Above all, there is still no European nation, nor will there be in the foreseeable future. To expect that this situation can be changed is tantamount to awaiting the eleventh round in a ten round boxing match.

Indeed, there may be no further need for an EU. Driven by technological change, marketplace competition, and consumer demand, the process of integration in Europe and the world at large will go on with or without it. Globalization continues to erode the powers of supranational entities of which it is the leading example, and in fact has long been doing so. Alternatives to Brussels do exist and are at hand. Whether they can, or will, be grasped is, of course, another matter.

The European Union cannot manage any of the present crises it faces. The current refugee tragedy drives the point home. A million and a half or more unwanted victims of war and civil disruption, mainly from the Middle East, are expected to press at Europe’s gates this year, in addition to the million that came in 2015. Such figures must be quadrupled to include family members in order to estimate the number of arriving persons, present and future, who might eventually have to be assimilated into European society – the final number will probably be no less than 10 million. An increase in terrorism, furthermore, has been the terrible accompaniment to this human influx. These interrelated problems may not be insurmountable, but they are undoubtedly immense, enduring, and far exceed the administrative capacities of the debilitated and all but immobilized institutions acting in the name of Europe.

The refugee crisis is, however, only one of several widening, lengthening, and now crisscrossing fissures – many of them caused by Brussels itself – responsible for the crumbling of the EU. The European Depression is the greatest of them. It cannot be ended unless the single currency project is abandoned. In addition, the present monetary regime must be replaced by partly restored national monies, and fiscal independence returned to the nations of Europe. Until this happens, antagonism between North and South, and (increasingly) East and West, as well as across classes and generations, can only mount. This in the end will fuel public anger with, and resentment of, Brussels. While it may take divergent forms of expression from country to country, the EU will be the final target of this universal ire. The European idea has turned rancid.

The chances are slight that globe girdling mega institutions of commerce and finance like the Transatlantic Trade and Investment Pact (TTIP), now under negotiation, will come to the rescue of the EU. For that to take place Brussels must clean up its act. The Volkswagen diesel emissions scandal demonstrates how diffcult this might be. The implications of this cheating must be borne in mind. VW is the leading manufacturer and recognized pacesetter in the largest and most crucial European industry – as well as an essential provider of jobs, growth, and prestige. The spillover from the company’s misdeeds is immense.

The motor industry is joined at the hip with its purported regulator, the EU. Caught red-handed by US authorities for engaging in activities detrimental to the health and welfare of the European public – the spewing of noxious fumes from more than 11 million automobiles over a period of many years – the Commission (amidst professions of concern and with deeply furrowed brows) punted and did its best to evade responsibility. Unlike the US Environmental Protection Agency, it did next to nothing to curtail the foul and illegal practice making exhaust pollution hazardous – let alone punish the malefactors. Nor, to its shame, did the self-anointed conscience of eco-Europe, the so-called European Parliament based in Strasbourg; it also caved in before the vehicle manufacturers. How in the world should one expect a duplicitous EU to serve as an honest and equitable rule maker in an organization like the one proposed by the ocean spanning trade agreement, whose overarching responsibility would be to set, as well as enforce, international standards for products and processes?

The European Union’s IT policy raises a similar issue on a still larger scale: it concerns the future rather than the present. The revolutionary fifth generation (G5) of telecommunications equipment now in view will require unprecedented resources of capital, technology, entrepreneurship, and managerial savvy. G5 will be an essential determinant, worldwide, of the future industrial cyber economy. Consider, for instance, the self driving automobile, which requires all but instantaneous information transfer in order to operate, a requirement only G5 can satisfy. The example illustrates, one would hope, what the term the ‘Internet of Things’ implies: it will change the face of the modern economy.

With this future in mind, the kind of guerrilla warfare that the Commission, the Courts (ECJ) and, in general, the European Union wage against the American high-tech mega corporations seems futile as well as self-defeating. It can only accelerate the rate of European decline. The expectation that an enfeebled EU can force these giants to lie in a Procrustean bed of regulation is laughable. The real US adversary in the in the struggle for the future of IT is not Europe, of course, but China. In this contest, the EU is a bit player.

The example of Ireland – the one ‘Asian Tiger’ in today’s Depression Europe – demonstrates, furthermore, that growth occurs and jobs materialize not in branches of production where costs have been driven down by the austerity policy of so-called internal devaluation but chiefly from foreign investment channeled into in new high technology fields. This thought should be pondered by the witch-hunting protectionists in the present Commission.

Other equally serious but perhaps less obvious crises loom before the EU. It is too early to assume that the threat of financial meltdown has passed. As the IMF has often protested, over the long run Greece cannot meet the terms of the current bailout, therefore something must eventually give. At the moment, however, the risk of Italy’s collapse is front and centre in European concerns. The citizens and institutions, both public and private, of the country with the fourth largest EU economy, own the bulk of its huge sovereign debt. It comprises no less than half of the EMU total and is currently booked at face value and far above what it could command in the market. Once sold, the true worth (or lack thereof) of this low quality paper would expose the desperate condition of the banking system, the most vulnerable and illiquid in Europe; cause foreclosures across the board; land Italy in the arms of the IMF; and threaten the very survival of the Eurozone. To make matters worse, 18 per cent of the loans held by Italian banks, most of them to local businesses, are non-performing – by far the highest rate in Europe. Not without reason is the precariousness of Italian finance a well-kept secret.

Last December the threatened failure of only a couple of the country’s many minor banks nearly toppled the present pro-EU Matteo Renzi government. Even a partial default would have been political suicide for the Italian prime minister, devastating the middleclass savers who provide his main support and thereby also standing between his fragile coalition and its powerful enemies, the anti-EU duo of the Five Star Movement and the separatist Northern League. By dint of sheer necessity, Renzi therefore devised a national bailout scheme at odds with new EMU rules requiring share and bondholders to take hits prior to any resolution or bankruptcy proceeding. Major fudging on the part of Brussels is called for lest its weakness as a regulator be revealed.

Although Italy’s numerous midget banks have received much recent attention, the country’s three giants constitute a much greater danger. All of them are in far deeper trouble than publicly acknowledged, and at least one (Monte dei Paschi di Siena) is for all practical purposes bankrupt. Their share prices all collapsed in January. Notwithstanding denials by Italian central bankers, the perilous financial state of their country could well degenerate into an Existenzkrise of the EU.

Portugal, like Greece and Ireland, has heretofore been a throwaway of negligible importance to the grand scheme of the EU. Yet even in respect to this fringe nation, Brussels and Frankfurt now have little leverage. In connection with the resolution of the corrupt Banco EspÍrito Santo and its successor, Nova Banco, the recently installed anti-austerity Socialist government of Antonio Costa, backed by the Portuguese central bank, administered a haircut to senior, mainly American, bondholders so brutal that the nation’s credit rating plunged almost at once to junk status. Within earshot of thundering herds moving in the wrong direction, Brussels got the shivers.

The man now at the helm of Lisbon will not relish having his knickers twisted by Frau Merkel. But this may not be necessary. In short order Costa forced her to acquiesce in his government’s anti-austerity budget, which violated EMU restrictions, and she even did so without the prior consultation required by the mandatory provisions of the new European Single Financial Market.

The German chancellor must have feared that where little Portugal has gone, big Spain could follow. The tottering Spanish banking structure is now at the mercy of political instability. Two months have passed since the December elections, which produced a standoff between the two traditional parties of government and anti-EU populists, neither of which can command a majority due to the resurgence of Catalonian secessionism. What began as an anti-EU electoral wave is turning into a crisis of state.

No one can be more closely attuned to the fragility of Europe’s financial system than the MIT trained economist and Goldman Sachs–schooled banker who runs the ECB, Mario Draghi. He dare not, however, broadcast the disheartening news that private finance in Europe has never recovered from 2008. Carrying a trillion euros of bad debt and in serious need of capital infusions, the banks are in a state of chronic crisis. Their shares plunged nearly 20 per cent at the beginning of the year and can be expected to fall further, as rich sovereign wealth funds, their biggest investors, close out large positions.

The underlying problem European banks face, as Draghi well knows, is that the powers that be in both the public and private spheres have drawn the wrong lesson from the economic crisis: instead of introducing the up-to-date market methods of financing familiar to Wall Street and the City, they have propped up outmoded national banking communities that cannot provide the credit the economy needs for recovery. Instead, they are a bottleneck to it. With little fanfare, he is trying to mend the problem. The onerous ‘official’ plan for EU/EMU banking regulation (Mifid II) is effectively on indefinite hold.

Economic stagnation is not the only, or even perhaps the main, source of Europe’s discontent. Disenchantment with the EU also pervades those member states who wisely chose not to accept the trammels of the Eurozone and which, as a result, have enjoyed superior economic performance – Poland, the Czech Republic, Denmark, Sweden, and Britain. The hard truth is that the EU is no less unloved in these comparatively fortunate countries than those trapped in the EMU.

Only a fool would venture to predict how the official institutions of Europe will become unglued, unravel, fall apart, or simply evaporate into thin air. The list of possible scenarios is innumerable. A reasonable guess would be, however, that Brexit will trigger the process of decomposition and reconfiguration. If past events can serve as a guide to the British referendum planned for 23 June, the tide will shift in favour of the anti-EU cause.

This was the case with other recent EU referenda: the Dutch and French rejected the constitution; the Swedish refused to enter the EMU; the Irish initially repudiated the Maastricht Treaty; and in December 2015 the Danish decided not to revise the nation’s opt out agreement. In each of these instances, establishmentarian, pro-EU campaigns heavily outgunned diffuse, under financed, and disorganized populist factions – and, contrary to nearly all predictions, eventually lost out to them. There is little reason to conclude that in Britain, where the sides are more evenly matched, the outcome will be much different.

It is now evident that Prime Minister Cameron has not wrested enough concessions from the EU to placate the country’s wary voters – the majority of whom support his own party, in which, however, a traditional division between Europhiles and Europhobes has been replaced by a more nuanced distinction between Eurosceptics and Brexiteers. Recent polls have swung decisively in favour of the Leave campaign. Behind this shift in sentiment is a reality of awesome significance: Cameron’s promise of a better deal for Britain has little meaning in respect to an EU in disarray, which is untrustworthy, falling behind economically, and unable or unwilling to deliver on its commitments. At the rock-bottom level, moreover, a sovereign national political system, like Britain’s, based on the supremacy of parliament, is incompatible with the existence of a supranational entity, whose leadership remains – in spite of everything – unwavering in its determination to create a European state.

Why, finally, would anyone want to upgrade a second-class to a first-class ticket on a ship that is already slipping below the waterline? The UK need no longer be a supplicant to Europe; the shoe is now on the other foot – it has more to give, economically and politically, than it needs to take. The Stay campaign there fore clamours for Britain to come to the rescue of Europe, if only in its own best interests. Many voices on the Continent are delivering a similar message.

This is no incidental matter. Responsibility for engineering the wind down of the Brussels institutions and their replacement with something different– and, with luck and statesmanship, better – will inevitably devolve upon him as leader of the successful reform party. The task will be daunting. Every EU member state has its own gripe list and each one of them can be counted upon, once Britain pulls out, to demand concessions from the EU and EMU or, if necessary, its successors in receivership. Let it be hoped, in such an eventuality, that an elegy would be more appropriate for the lost case than an obituary.

- Read more: The European Union: A Reading List

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