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How to balance sovereignty and integration in a voluntary EU

The principle of voluntary membership is a central value of the EU project, but it is also a source of many of its problems. How can the member states address those problems in order to repair the EU's integration architecture?

By: Date: January 12, 2017 Topic: European Macroeconomics & Governance

The European Union and its institutions are often criticised for their supposed ineffectiveness, slowness in responding to various challenges, lack of transparency in decision making and lack of democratic legitimacy. All those who levy such criticisms should remember, however, that many of the weaknesses of the EU institutional setting arise from its voluntary character and the reluctance of EU countries to transfer more powers to the Union. Nevertheless, it is in the interest of all member states to have an effectively functioning Union, which will be able to deliver European public goods to their citizens. Therefore, the member states should be ready to repair the EU’s architecture even at the cost of sharing more sovereignty.

The voluntary principle

As a voluntary union of sovereign and democratic countries, the EU has few historical precedents and contemporary equivalents. Most other federations and confederations, historical or contemporary, were created, at least partly, as a result of wars, conquests, colonisation or other means of coercion. This includes the United States, which is commonly the object of comparison or benchmarking in analyses of various aspects of European integration. Even some contemporary trade and economic integration blocks, such as the Eurasian Economic Union, have not avoided geopolitical pressures in the process of their formation.

The accession of a member state to the EU must be approved by its democratically-elected parliament or through a referendum after meeting all membership criteria and a lengthy negotiation process. Accession must also be unanimously approved by the parliaments of all incumbent member states. This is also true for the delegation of any new aspect of national sovereignty to the EU institutions through changes to the EU Treaties. All members must agree. Finally, each member state has the right to leave the Union, as the UK decided to do in its June 2016 referendum.

The principle of voluntary membership is a central value of the EU project and the only legitimate way to go forward. But it is also the source of its many problems. Below, we discuss some of the dysfunctionalities that have arisen, and suggest how they might be repaired.

The slow pace of integration and delayed political responses

The need to obtain the unanimous consent of all member states for each new integration step means the integration process has been slow. Until the mid-1980s, progress in building a common market was limited, largely because of the dominant unanimity requirement. The pace of integration accelerated only with adoption of the Single European Act in 1986, the signing of the Maastricht Treaty in 1992, the Amsterdam Treaty in 1997 and the Lisbon Treaty in 2007. All these Treaty changes increased the number of policy areas in which decisions can be taken by qualified majority votes (QMV) in the Council of the EU, rather than by unanimity. The role of the European Parliament has also progressively been strengthened. Since February 2014, QMV has required at least 55 percent of member states, representing at least 65 percent of EU’s population to approve decisions.

Nevertheless, many important policy areas remain in which every member state retains veto power. These include, for example, the Multiannual Financial Framework (MFF – the EU’s multi-year EU budget) and the Common Foreign and Security Policy, even in its economic and trade dimensions (for example, EU economic sanctions against third countries). In practice, the latter undermines EU competence for external trade policy because most contemporary free trade agreements also contain institutional and regulatory provisions that are considered still to be the domain of national sovereignty. The EU trade agreements with Canada and Singapore are recent examples.

Furthermore, even in the areas in which the Treaty allows for QMV, there is a tradition of seeking a consensus between member states and to consider formal voting as the last-resort solution.

As result, the EU’s institutional setup has been constructed gradually as ex-post reactions to various economic and political shocks, which delivered arguments for pooling resources and common decision-making on the EU level. There has not been a comprehensive architectural design aimed at preventing potential crises and preparing, in advance, a sufficient policy toolkit on the EU level.

More economic than political

The need to seek unanimity among member states during the different Treaty changes has led the EU to have a hybrid architecture with many institutional asymmetries, gaps and inconsistencies. Generally, economic integration has outpaced political integration because the former was seen as less sensitive for national sovereignty and offered visible benefits, at least in short term. However, economic and political integration are interrelated, especially in the current era of growing security challenges.

One example is the close interconnection between the European single market and the Schengen travel area. Schengen was considered until very recently a political rather than an economic project. However, the danger of collapse of the Schengen area, as result of the 2015-16 refugee crisis and the increasing terrorist threat is a reminder that the EU open-border regime is important not only for the freedom to travel (one of the most popular elements of European integration) but also for smooth functioning of the single market (see Gros, 2015; and Wolff, 2016).

Increasing geopolitical and security risks in the EU neighbourhood (in both the former Soviet Union and in the Middle East and North Africa) also have negative consequences for trade, investment, financial markets, refugee flows and EU internal security. Importantly, no single member state can address these by itself. A common EU response to these challenges would strengthen the resilience of the entire integration architecture and avoid negative consequences for economic development.

Cherry-picking is not the solution

The consensual and gradual logic of EU integration has also led to institutional asymmetries and gaps within individual integration blocks. Popular moves were accepted while those considered less popular or sensitive for national sovereignty were left for future decisions. This created room for free-riding behaviour and beggar-thy-neighbour policies on national level, which have ultimately undermined the sustainability of the entire construction.

Unfortunately, pushing back the most difficult decisions always backfires, in both national and European policymaking. The two flagship integration projects – the euro and the Schengen area – are good illustrations of this phenomenon.

Introduction of a common currency was not accompanied by a credible fiscal discipline mechanism on a national level, a sufficient degree of financial integration (banking and capital market unions) or a mechanism to prevent idiosyncratic macroeconomic national level policies (leading to asymmetric policy-induced shocks). Some of these gaps (banking and capital market unions) started to be filled in response to the European financial crisis of 2010-13 while others (market-based fiscal discipline) remain unaddressed.

The Schengen system has suffered even more from institutional shortcomings revealed by the 2015-16 refugee crisis, especially in relation to effective protection of common external borders, joint management of political and economic migration into the EU, cooperation with third countries, harmonisation of justice and home affairs and migration-related regulations on national level. Some of those gaps have been addressed recently, for example, by the creation of the European Border and Coast Guard, the successor to Frontex. However, much more must be done if the Schengen area is to survive. Priorities include reforming the common asylum system with the aim of fair burden-sharing between member states, building up EU-wide counter-intelligence and counter-terrorism capacities, and further harmonisation of visa policies.

The lesson for the future is that any new integration project should address up front all of its basic institutional requirements to ensure to the greatest extent its smooth functioning.

Competences, resources, responsibility and rules enforcement

Regardless of the scope of the competences delegated to the Union, there should be sufficient financial and administrative resources, efficient mechanisms for enforcement of the rules, and full responsibility for decisions taken at each level of government. Unfortunately, this is not always the case in the EU, leading to unsatisfactory implementation of common policies and free-riding behaviour on national level.

The limited size of the EU budget (below 1 percent of gross national income allocated mainly to the Common Agricultural Policy, Cohesion and Structural Funds) and the reluctance of member states to transfer more financial resources to the EU level results in the underfunding of many tasks and policies of pan-European importance, such as EU external border protection, migration and asylum policies. As a result, the implementation of common rules and policies relies to a great extent on the administrative and financial resources of individual member states and their political will. This is not always sufficient, especially in times of crises, such as the refugee crisis of 2015-16.

In a well-managed union, each level of government must take full responsibility for its policies and decisions, in particular its fiscal decisions. Responsibility for the debt must be assumed by the borrower. Collective responsibility, ie debt mutualisation or bailouts, undermines fiscal discipline and encourages moral hazard on the side of both the borrower and lender. This is a key lesson from the experience of various federations. In the US, Canada and Switzerland, federal governments do not bail out sub-federal entities, which pushes the latter to establish sound fiscal rules on their own (see Bordo et al, 2011). However, the experience of Argentina and Brazil demonstrates that the repeated bailing out of sub-federal entities leads to fiscal and monetary instability on a federal level.

In the EU and euro area, the no-bailout principle written into Article 125 of the Treaty on the Functioning of European Union (TFEU) was compromised by the series of sovereign bailouts in 2010-11. Restoring this principle will not be an easy task. One of the potential solutions could be the transformation of the European Stability Mechanism (ESM) into a fiscal backstop for the Single Resolution Mechanism and future European Deposit Insurance Scheme. This would mean termination of ESM’s sovereign bailout mandate, at least in terms of financing new rescue programmes for governments in distress. Completing the banking union project and limiting banks’ exposure to sovereign debt are other prerequisites for the restoration of market-based fiscal discipline (Demertzis and Wolff, 2016).

Finally, voluntarily-agreed rules should be backed by the supranational rule-enforcement mechanism. Although the European Commission possesses several instruments with which it can push member countries to comply with the Treaties and EU secondary legislation, these instruments are far from perfect. They work well enough, though often with considerable time lags, in respect of national legislation that contradicts single market rules, but they remain largely ineffective for enforcing fiscal discipline (the Stability and Growth Pact). Their effectiveness is also questionable in terms of preventing member states from breaching fundamental principles of liberal democracy and the rule of law.

The solution would be to grant the Court of Justice of the EU (CJEU) a mandate to invalidate national laws that do not comply with the EU Treaties , including the Charter of Fundamental Rights, and EU secondary legislation.

Variable geometry

The consensual character of the integration process has also led to the phenomenon of ‘variable geometry’ —often referred to as ‘multi-speed Europe’ or ‘flexible’ integration (Warleigh, 2002) — with varying degrees of participation of member countries in common integration projects. Quite often, for the EU to move forward and secure unanimity, concessions have had to be granted to sceptical member states, including exemptions from the common rules or allowing them to opt out of a given project.

There are various legal instruments of ‘variable geometry’ both within the Treaties (permanent opt-outs and temporary derogations as in case of EMU and the Schengen area, enhanced cooperation of at least nine member states) and outside them (separate inter-governmental treaties such as the Treaty on the ESM or Fiscal Compact).

Variable geometry allows integration to move forward despite the objections of some member states. If the particular initiative proves successful, it can have a positive demonstration effect and encourage originally sceptical countries to join later. In the post-Brexit environment, with the euroscepticism on the rise, it might be the best approach to new integration initiatives (Adebahr, 2016; Grabbe and Lehne, 2016).

However, one must be also aware that this method could have negative side effects. For example, it might create durable divisions within the EU, as happened with EMU and Schengen. Such divisions do not help to build solidarity within the EU to address common challenges (as demonstrated by the European financial crisis and refugee crisis), and often lead to self-isolation and the alienation of those that opt-out of common policies (such as with the UK, eventually leading to Brexit). A large number of country-specific exceptions from common rules would make EU governance systems less efficient and transparent, helping eurosceptics and populists to question the rationale of the entire integration project.

In an extreme scenario, variable geometry might also weaken and even cause partial disintegration of the EU governance system because narrower integration circles will require their own management and coordination mechanisms.

How to repair the EU’s integration architecture?

Filling integration gaps and removing architectural inconsistencies will not be easy in a short-term dominated by eurosceptic and populist sentiments. Some of proposals, such as reducing the unanimity requirements for CFSP or MFF decisions, or increase the powers of the CJEU, would require Treaty changes that might not be politically feasible in a near future but perhaps could be possible in the longer term. However, many other suggested measures, such as completing the institutional and policy architecture of the Schengen area, completing banking union, deepening the single market or overhauling the Stability and Growth Pact can be done within the current Treaties by means of secondary legislation.

While there is no alternative to the voluntary membership nature of the EU, all member states should be interested in its effective functioning.

References

Adebahr, C. (2016) A Flexible Europe After the Brexit Vote, Carnegie Europe, Carnegie Europe, Brussels, September 1

Bordo, M.D., Markiewicz, A. & Jonung L. (2011) A Fiscal Union for the Euro: Some Lessons from History, NBER Working Paper, No. 17380, September

Demertzis, M., and Wolff, G.B (2016) What are the prerequisites for a euro-area fiscal capacity?, Bruegel Policy Contribution, Issue 14

Grabbe, H., and Lehne, S. (2016) How to Build a More Flexible EU After Brexit?, Carnegie Europe, Brussels, September 8

Gros, D. (2015) Schengen and European Security, Project Syndicate, December 10

Warleigh, A. (2002) Flexible Integration: Which Model for the European Union?, Sheffield Academic Press: London & New York, NY

Wolff, G.B. (2016) The economic consequences of Schengen, Bruegel blog, February 2,


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