Fixing Europe’s Democratic Deficit

Peter Sutherland is a former European Commissioner and former head of the World Trade Organization.

DUBLIN—The greatest and undeniable economic achievement of the euro is to have saved the European economy from fracturing in the economic and financial crisis unleashed by the collapse of Lehman Brothers. We know from the example of the 1930s how tempted national governments are to believe in times of economic crisis that devaluation and protectionism will serve the interests of their electors; and how devastating it is for all involved when national governments succumb to that temptation. The European single currency has acted and will continue to act as a powerful bulwark against any such tendencies. Those who claim to regard the euro as simply a straitjacket from which national governments would do well to liberate themselves as soon as possible are in essence claiming that currency manipulation and economic nationalism are the royal road to prosperity. I do not believe that for a moment. Nor, ironically, do most of the euro’s fiercest critics when they are talking about any other topic than the single European currency.

But the economic advantages of the euro have not simply been in warding off potential harm. Lower inflation, the elimination of exchange risk, increase in trade within the Eurozone and more integrated European financial markets have all contributed to the underlying culture of monetary stability and economic predictability which the euro has brought to Europe. Well-run European economies, in particular Germany, have taken advantage of this stability to improve their economic performance, responding appropriately to the incentives and disciplines offered by the Eurozone system.

Other member states of the Eurozone have responded less successfully than has Germany to the challenges of the euro system. It is now more widely recognized that increasing debt in order to finance unproductive government operating expenditure is a dead end that undermines sustainable growth. But it is very difficult indeed to believe that these countries would have fared significantly better outside the Eurozone. The case of Italy is a particularly instructive one. Mario Monti, supported by an overwhelming majority in the Italian Parliament, is carrying out those economic and financial reforms in Italy which it is now widely recognized earlier Italian governments culpably failed to implement. Without such reforms, the Italian economy could not possibly prosper, inside or outside the Eurozone. I find it ironic that many of those commentators who are loudest in calling for wholesale reform of the traditional European economic model give such a grudging welcome to this reform when it arises from the workings of the Eurozone.

Germany’s role in confronting the sovereign debt crisis of the Eurozone over the past two years has attracted considerable criticism, much of it unfair. Accusations of German dictatorship and inflexibility are well wide of the mark. If there is a criticism to be made of Mrs. Merkel, it is that she has often seemed to lack a strategic vision for the governance of the Eurozone. But maybe she has one that for political reasons she may be slow to articulate. The German position has greatly evolved over the past eighteen months in regard to the nature, extent and duration of financial assistance to be offered to Eurozone members actually or potentially in difficulty. Nor is there any reason to believe that this evolution has yet come to an end. In common with her predecessors in the German Chancellery, Mrs. Merkel firmly believes that Germany’s economic and political future lies within the European Union, of which the euro is such a central expression. But she does not yet appear to have found a sustainable political balance between the imperative need to stabilize the Eurozone and the understandable reluctance of her electors (and those of other core states) to support financially members of the Eurozone who, to some extent at least, are the authors of their own misfortunes. Mrs. Merkel is not wrong to argue that economic reform in countries such as Greece should be a precondition of financial support from the rest of the Eurozone. But it is an argument which if carried to its logical extreme could easily provoke irreparable short-term damage in the supposed interests of long-term improvement.

When the euro was introduced in 1999, national governments sought to keep for themselves the greatest possible national autonomy for economic decision-making. Looking back, we can see that this was an inadequate approach. Much of the past eighteen months has been devoted to repairing the gaps in the euro’s original structure of governance. The process is not yet complete, but remarkable changes of approach from all member states of the Eurozone are already plain for all to see. Now we must look to growth and how it can be reestablished on a sustainable basis particularly in the periphery

The Fiscal Compact is a necessary part of the future. However the process needs to go further if the future of the euro is to be assured. In the mind of some honest outside observers, there is still a genuine question mark over the long-term future of the Eurozone. But the placing of a question mark is emphatically not the same as the giving of an answer. After all, none of the predictions of destruction frequently expressed in the past have been fulfilled to date. In fact our progress, though faltering, has increasingly brought home to us all that we must unite more rather than less if Europe is to prosper in the future. This must mean that we should combine economic analysis and prescription with political advocacy of a true union of the peoples of Europe. This will entail a degree of cohesion between Eurozone states which reflects a political union rather than a temporary marriage of convenience.

Global markets are not yet convinced about the lengths to which the Eurozone core countries will really go to maintain the currency, recognizing that to achieve this end will require not merely discipline in the periphery but also growth. There has been, for an example, a relative silence about the mechanisms let alone their implementation that might be used to provide aid (perhaps through loans for infrastructural expenditure). Also there is a lack of clarity about the prospects and conditions for any “mutualization” of public debt. In the latter regard there has been what has been described as “conditional” mutualization of sovereign EMU debt but the debt overhang problem has had less attention than is required.

So, much remains to be done in both the political and economic spheres and both of course overlap. To maintain general support for the project firefighting is indispensable but not sufficient. We need a vision of a future which expresses an unambiguous support for ongoing integration.

On the political front it may be difficult at a time when understandably all attention seems to be focussed on the debt crisis and the Euro. In addition, the fate of the so called Constitutional Treaty and the tortured process leading to the ratification of the Lisbon Treaty might well be expected to reduce the appetite of national governments to contemplate any further substantial reform. However, surely reform is indispensable in order to address the undoubted reality of the democratic deficit? The plain fact is that the European Parliament, worthy though its efforts as legislators are, has not provided the legitimacy required. What is needed in addition are two further changes. The first of these is a democratic selection by election of the President of the Commission combined with further steps to legitimize nationally each of the Commissioners to be appointed by him. The election of the Commission President is essential. In turn, he should be empowered to choose his Commissioners from national slates whilst maintaining the requirement that each nationality be represented. He should be required to take account in his selection of each of the Commissioners of the political balance required both in the college and to reflect public opinion in the Member States individually. The selection of those to be included in national slates could be through the national parliaments or through some form of electoral primary system such as exists in the United States.  The second requirement needed to address the democratic deficit is greater engagement by national parliaments in the deliberations of their representatives in the Council of Ministers on proposals for legislation made by the Commission. This is necessary both to improve the quality of legislation and to alert electorates to the full consequences of s uch legislative proposals. The often unseemly backroom technocratic fixing that currently takes place between the Commission and the Member States should give way to greater national engagement and the test of open public transparency.