Crisis bolsters case for a federal Europe

Authors: Ernesto Gallo is a tutor of business, law and social sciences at Kaplan International College, London. Giovanni Biava is an analyst with Group Repowe, an energy company operating in Europe.

For the first time since its adoption, the euro last year risked falling apart, and bringing down the whole EU edifice. Shaken by international financial speculation (mainly on Wall Street), several EU countries (Greece, Ireland, Portugal, Spain, Italy, Belgium, and at times even France and Austria) have been engulfed in a sovereign debt crisis that has proven to be only the tip of an iceberg.

Beneath the surface lie many problems, including ones that are structural. There we find the signs of a longer-term economic crisis, in particular persistent unemployment and low growth rates. Even before the crisis began, the eurozone's economic growth was already modest compared with that of the US, China, the other BRICS countries, and some non-euro countries. That growth has been put at a bare 2.2 percent in the 1990s and 1.1 percent from 2001 to 2009.

Unemployment has been running at 10.7 percent this year, with peaks above 23 percent in Spain, 20 percent in Greece, and about 15 percent in Portugal and Ireland. As was predictable, this has triggered a third, mainly social crisis, with protest and unrest, especially among youth, whose unemployment figures have skyrocketed to 50 percent in Spain. The potential effects of such a crisis have yet to be understood, in particular considering the rise of xenophobic and racist parties and groups in several countries, and the ageing of the European population.

How has Europe managed the crisis? So far, poorly. Most attempts have been ineffective and short-term. Political leadership has been missing, partly because French and German leaders have mainly focused on forthcoming national elections. Italy, the third biggest eurozone economy, has been too busy trying to sort out its own debt problems. Eastern European countries such as Poland and the Czech Republic have pursued euro-skeptic or even contradictory policies. EU-level solutions, such as the European Financial Stability Facility, adopted in May 2010 with the aim of helping countries in financial difficulty, have delivered too little too late. The EFSF endowment, $500 billion (375 billion euros), is roughly the same as Apple Inc's market capitalization.

After temporary relief, financial markets have reacted negatively and the crisis has deepened. Similar considerations apply to the fiscal compact adopted in December. These instruments can provide only limited and temporary relief. Furthermore, none of them has really dealt with the crucial problem of the European economy: terribly slow, anemic growth. Paradoxically, more has been done by the European Central Bank's Long Term Refinancing Operations, started in December and aimed at injecting further liquidity into the system, but once again only for a limited time and with limited resources.

What this all means is that Europeans have not found a way to overcome divergent national interests, short-term technical solutions, and a range of different ideas on economic policies. Is anyone coming to pull Europe out of its troubles? In the past, such a role was played by the US, which used to contribute to European integration mainly with the aim of countering the Soviet Union. Now the Soviet threat is over, and Washington has refocused its attention on the Pacific strategy, could China be Europe's next white knight? If yes, to what extent?

We maintain that the solution to the eurozone's troubles lies in Europe, and things can hardly be otherwise. As many observers hoped, China has intervened in the eurozone's sovereign debt market, but only to some degree. Portuguese and Greek debt are now too risky, and the Greek case has been tragically mishandled by both European and national authorities. Spain and Italy are demographic and economic heavyweights, at least by European standards, and Chinese investments there can be understood only within the framework of a broader economic strategy. What really matters, from Beijing's view, is a more comprehensive and long-term perspective of trade with, and investment in, euro countries with a particular emphasis on energy and infrastructure. Most recent Chinese investments in the EU have illustrated this.

To sum up, China aims to invest in long-term projects in sectors such as industry, energy, telecommunications, infrastructure, all of which are deeply strategic; European nation states thus tend to keep them under control as much as possible. However, there are deeper reasons why it is difficult to see a Chinese white knight materializing.

First of all, China faces significant domestic challenges, and rescuing rich and what some see as lazy Europeans could be seen as unfair in a country whose per capita GDP is $8,394, compared with the EU average of $31,548. Second, an EU that is a mess financially and institutionally, burdened by complex legal procedures and divided into a host of sometimes tiny nation states with their own peculiarities, seems to have little to offer to any well-intentioned white knight.

Only an orderly European house can offer China valuable perspectives of exchange and cooperation; we believe such a house should be organized as a federal state (like India, for instance). In this sense, the European Commission would become a truly European government, accountable to a European parliament with strengthened powers; states, regions and cities would keep their prerogatives in the policy areas where their action would be more effective, according to the principle of subsidiarity.

Such a framework would simplify the EU legal architecture and provide a set of clearer rules for European citizens and Chinese investors alike. Also, a simpler and clearer set of institutions would reduce the risks connected with direct and indirect investment, in particular in those smaller countries that are more exposed to the fluctuations and speculation in globalizing markets. In other words, Chinese investment in the EU (and trade with it) can be a winner for both sides only if the EU becomes a sustainable political actor.

We believe that this would be the case only in a federal EU, which would have clearer and better-defined rules and institutions, and provide more powerful instruments to promote economic growth and innovation, two aspects in which the current, divided EU has been particularly weak.

A European federal state could enhance the quality of relations with China in many other ways, too. It would definitively provide stability to the euro, which is now undermined by the lack of a European fiscal policy. The euro is now the second most used reserve currency, with a share of about 26 percent. China and the other BRICS countries are now looking for alternatives to the dollar's hegemony, but it is unlikely any new reserve currency will emerge in the short term. The euro would be an ideal candidate, provided it had stronger political backing from a more united EU. From a geopolitical perspective, a stronger EU would benefit China in other ways as well.

For the time being there are no significant international disputes between China and Europe, and the EU could represent a strong counterbalance to rising US military power in the Pacific. Together with the US, Russia too is joining the Pacific race, as its talks on a trade treaty with New Zealand demonstrate. Moscow has never made secret of its intention to reach out to the oceanic "warm waters". A federal EU would have the force and authority to mediate and bring balance between such different interests and aspirations.

There will be skeptics who think that a federal EU would tend to behave in the same aggressive way as European nation states in the past. This seems highly unlikely because federalism is premised on a strong idea of peace among states, and a federal Europe would embody something of a gentle force.

We believe that for both beleaguered European countries and rising Chinese investors a federal European state would represent a victory. Obviously, there would be a lengthy process, but the time now seems ripe. Chinese thought and action have constantly illustrated the importance of a long-term view; a federal state could finally be a European contribution to long-term thinking and an achievement in terms of EU-China relations, peace, and international stability.

Source: ChinaDaily