Ten questions on Europe’s Federation Lite

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Last week Stephan Faris, a journalist with Time Magazine, sent Emma Bonino ten questions on the proposal of a Federation Lite for Europe, following the posting of Europe’s Italian Muse on Project Syndicate and Crusoe.

Below are the questions with their answers. Faris extensively quoted Bonino in his article in Time Magazine on The Future of Europe.

Q. Why do you think that political union and fiscal risk sharing is necessary for the survival of the Euro and the EU (I realize your article cites the IMF on this, but I’d like to hear it in your words)?

A. You need a sovereign and only one behind a currency. There is no historical precedent of a monetary union holding together for long outside its proper context of a political union. A monetary union with 17 sovereigns, and counting, is a fair weather construction: it works only in the absence of economic trouble. When trouble comes is rarely symmetrical: no matter what’s the jurisdiction you look at you’ll always find some constituent parts – states, regions, provinces, what have you – more, or much more, affected than others. At that point, either you leave the laggards to their destiny and that’s the end of the union, or you help them. Help normally comes only if there is a shared feeling of belonging to the same entity, only if you have made e pluribus unum.

Q.What are the flaws in the original EU structure? What should have been done differently?

A. You cannot go on for decades avoiding the truly big issue, which is political union. It comes back to haunt you. Monetary union was done in steps and these were clearly written in the 1992 Treaty of Maastricht. As soon as the euro was launched, six years later, we should have done the same with political union: decide on it in principle and put it in the treaty together with the legally binding steps toward it. There was a half attempt to do just that with the Constitution, but it failed

Q. What are the advantages of “Federation Lite”? Is it political, that is that member states and their citizens won’t accept the creation of a “superstate,” and thus this is the next best thing? Or are there technical advantages to such a limited union?

A. There is an effort everywhere to keep political decision-making as close as possible to the citizens – subsidiarity in EU lingo. Which is right, we believe. Thus one has to move to the center, in Europe and elsewhere, only what is strictly necessary for everybody’s economic well-being and human rights in an increasingly interconnected world. This is a point of principle, not of political expediency.

Q. In contrast, to the creation of a superstate, what role would “Federation Lite” reserve for the member states?

A. They would keep doing most of the things they do now – the big exceptions being foreign and defense policy, and border and immigration control. On other fields, such as big “federal” projects of scientific research or of physical infrastructures, they would simply pool resources on a grander scale than what they do now – without actually losing any function of government, properly speaking.

Q. One thing I fail to understand is how your proposal would have addressed the current situation, in which countries on the periphery essentially used the backing of the EU to guarantee loans they couldn’t afford. How would your proposal prevent this from recurring?

A. Up until mid-2007 there was plenty of credit available everywhere in the world. It was abused not only in the EU periphery but also in the U.S., for example. Our proposal is not meant to prevent irresponsible fiscal and financial behaviour – there are other mechanisms and fora to address this, inside and outside the EU. Our proposal aims, among other things, at completing the range of tools available to the EU to cure financial and economic diseases when they occur, i.e. a European Treasury to accompany the European Central Bank.

Q. On a similar line, why should countries whose governments are unwilling or unable to make the economic reforms necessary for growth be subsidized by the central European government?

A. To the contrary. Subsidies and loans should be made strictly contingent on reforms – but this is a different chapter, economic governance, on which the EU is already working hard. It clearly involves a loss of sovereignty on economic policy on the part of member states that we believe would only be made easier in a context of political union, in the context of a “Federation Lite”.

Q. On a more political note, why do you think Germany would want to offer up any control of its affairs to countries that it considers fiscally irresponsible?

A. Germany would cede as much sovereignty to the federal center as the others would, on a completely equal footing. Being Germany the most powerful country in the EU, we would rather argue that in this way it would finally gain some control on the affairs of countries that it considers fiscally irresponsible.

Q. You mention the creation a centralized European military. What would be the role for NATO were this to take place?

A. Most EU members are NATO members, very little would change. NATO has to sort out its problems regardless of the EU, namely if it still has any role to play. On the other hand, there is a chance that the U.S. would finally have in the EU the reliable and militarily effective partner it never had in its European allies.

Q. As you point out, your proposal addresses future problems. But it has little relevance to the current crisis. What is the way out of the current crisis? Is it devaluation? Or further transfers from countries like Germany to those whose debt threatens to tip them into insolvency?

A. Taken as a whole the sovereign debt of the euro zone is manageable. Thus the solution is for the euro zone to act as a whole and replace a good chunk of the national debts with euro bonds – Jean Claude Juncker and Giulio Tremonti put forward such a proposal a few months ago. There is no direct transfer involved, countries that are now on the verge of insolvency could afford their debts and resume growth – only debt servicing would presumably cost Germany and a few others a little dearer.

Q. And finally, as you mention in your article, a strengthened union is just one of two choices the EU could make. The other is a step towards dissolution. What do you think the impact would be if Europe was to go the other way? What would happen if for instance Italy abolished the common currency and returned to the Lira?

A. Does the world need more political fragmentation or less? We believe less, if only for the sake of keeping pace with a globalized economy. On top of that, Europe’s experiment of peaceful integration is a beacon of civilization for the whole world in our opinion and its failure would not bode well for the future of mankind. Finally, the dissolution you are talking about would be the bitter product of a financial disaster, a disaster that invites another.

Q. Aren’t their advantages too, as countries would be able to craft their own monetary policies, and politicians would find it harder to put off the hard choices of economic reforms and balanced budgets?

A. When our country, Italy, was able to craft its own monetary policy the result was high inflation, recurrent devaluations and the accumulation of a gigantic public debt that is hampering our economic prospects to this day. Our experience tells us that it’s far harder for politicians to put off the hard choices in a EU and euro context than when they are in full control of their monetary and economic levers. A “Federation Lite” would make it even harder, we believe.

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