The European Union and the rule of rules
If the Eurozone is serious about fiscal union, it would appear that it must, in the long-term, rest on laws rather than on rules, and that requires the possibility of force
The euro crisis teaches many economic lessons, each well-rehearsed by now: the dangers of inconsistent monetary and fiscal jurisdictions; the risks of excessive capital leveraging; the imprudence of profligate spending by sovereign governments; and plenty more.
But the crisis also reveals at least one profound political insight, critically relevant both to the way our world works politically, and also to the future of the euro and Europe.
The crisis demonstrates that rules are not very effective.
By rules is meant the obligations that underlie governance - as opposed to government, which is founded not on rules but on laws. Laws are backed up by the possibility of force - the legitimate monopoly over which is retained by states, thereby enabling government to coerce recalcitrant subjects.
Governance, by contrast, has no such capacity, and can only appeal, at best, to some (nebulous) moral authority. Unlike laws, therefore, rules are, ultimately, unenforceable.
Where do we see such governance in the contemporary world? Notoriously at the transnational and international levels, emanating from institutions such as the United Nations and the European Union.
In order to mitigate the anarchy of the international system, these bodies issue rules, intending to restrict state behaviour and thereby render it more reliable. Lacking the option of force, however, they ultimately remain incapable of guaranteeing obedience to their rules.
Nevertheless, governance is the basis of the European project and its monetary incarnation, to which we now turn.
The present euro crisis was not inevitable. Granted, it was very likely, but historical contingency and the failure of pre-emptive agreements, though utterly predictable, were not certain.
One such agreement was the Stability and Growth Pact (SGP), signed back in 1997. An example of governance, it was born of the recognition that in forfeiting monetary policy to a centralised body beyond sovereign control (in this case, the ECB), states would have to show fiscal discipline in order to give that body functional independence. The SGP, upholding the agreements of Maastricht, limited budget deficits to three percent, and total sovereign debt to 60 percent, of GDP.
The rules themselves were dubious, but for our purposes what is noteworthy is that, over the course of the euro’s decade-long childhood, the rules were flouted.
By everyone. (Except Finland and Luxembourg.)
Not just the allegedly spendthrift ‘South’, but also the allegedly thrifty ‘North’ of Europe broke the rules. Why? Because they could.
They could because the European institutions lack the capacity for coercive force. It is no surprise that state behaviour becomes unreliable in times of crisis (although this should also give pause for thought), but the case of the SGP reminds us that even in the absence of crisis, rules are still no guarantee. Without the threat of force, Eurozone countries could flout the SGP without consequence, as nobody could arrest them. And flout they did.
This logic is observable across the board in international affairs: when states do not disarm when they are obliged to do so, when rulers abuse their populations, or when governments harbour and support terrorists, unless a hegemonic ‘world policeman’ steps in, they can do so with impunity.
Unfortunately, many people fail to recognise the difference between rules and laws, even when, as Israeli Prime Minister Binyamin Netanyahu pointed out, the mockery is directly before them: Saddam Hussein’s Iraq headed the UN’s Conference on Disarmament; Muammar Ghaddafi’s Libya chaired the UN’s Human Rights Council; and a Lebanon all but controlled by the terrorist group, Hezbollah, chaired the UN’s Security Council, the body tasked with securing world peace.
The lesson here is that states remain the principal actors in today’s world, and global or transnational governance and its rules can only go so far in regulating their behaviour.
At the end of the day, states can renege on agreements (indeed often there are no consequences to so doing) and so are never wholly reliable. We forget that fact at our peril.
Returning to the euro, the downside of this insight is that the current, long-awaited move towards fiscal union - with or without the UK - may prove to be insufficient.
Even if the rules have genuine bite - for instance, the anticipated automatic and unavoidable sanctions triggered by disobedience - when push comes to shove, nothing but force can compel states to obey. (This is to say nothing of the counter-productive consequences of these penalties.) After all, the SGP also called for warnings and sanctions, to no effect.
If the Eurozone is serious about fiscal union, it would appear that it must, in the long-term, rest on laws rather than on rules, and that requires the possibility of force. If not, there seems little guarantee that fiscal union will produce a different outcome to that which we are presently witnessing, for states will still have little compelling reason to pursue fiscal discipline.
In practice, precisely what institutional shape a pan-European legitimate monopoly of force to back up fiscal laws might take is unclear. Meagre talk since Maastricht about a Common Foreign and Defence Policy notwithstanding, military union is not yet seriously in the offing.
In the longer-term, though, it is not inconceivable - indeed it would hardly disappoint the initiators of the European project who envisioned a United States of Europe born of crisis.
But in the meantime, can one imagine the German military - emasculated though it is - intervening in other European countries to enforce fiscal laws?
No wonder the markets are wary.
Jonathan Neumann is the 'Tikvah Fellow' at Commentary Magazine. He has written for The Jerusalem Post, Standpoint, and the Henry Jackson Society, among others.
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