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Decentralise or disintegrate

21 Dec 2015 By Hugo Dixon

Brussels’ knee-jerk reaction to crises is to ask for more power. Its latest series of problems has fuelled right-wing populism, which feeds off the idea that the European Union already has too much influence. Unless the bloc adopts more decentralised solutions, it could unravel.

As the EU grapples with an influx of refugees, terrorism and the lingering euro crisis, doomsters are outlining apocalyptic visions. Niall Ferguson, a history professor at Harvard University, has compared the EU’s current position to the decline of the Roman Empire, arguing that it has let its defences crumble. Brendan Simms, a history professor at Cambridge University, has drawn parallels with the Austro-Hungarian Empire, the Soviet Union and Yugoslavia, saying these were all unsuccessful attempts to create supranational entities.

Meanwhile, Marine Le Pen, leader of France’s far-right Front National, speaks gleefully about the possibility that Britain could leave the EU, saying this would be like the fall of the Berlin Wall. One senior EU official agreed, though he was morose rather than gleeful about the prospect. If the UK leaves after its referendum on the topic, he said, voters in other countries might ask for plebiscites of their own.

The EU is doing a poor job of managing its multiple crises. One million refugees and economic migrants have entered the bloc illegally this year, most taking advantage of Greece’s lack of effective border controls. A few of the jihadists responsible for last month’s Paris attacks have also exploited the weakness. As if this was not bad enough, the euro zone economy is growing only slowly and flirting with deflation.

All these topics, as well as the threat of a UK exit from the EU, were on the agenda when leaders met on Dec. 17 and 18. They reached few firm conclusions.

The two big crises – over the euro and migration – have common features. The EU was over-ambitious in creating both the single currency and the border-free Schengen Area. It didn’t have the tools to manage either effectively. Nor was the European Commission strong enough to police the rules that had been agreed – such as limiting budget deficits and finger-printing asylum seekers.

The Commission’s response has been to push for more centralisation. Part of its answer to the euro crisis is to establish a euro finance minister, ultimately with some power to control national budgets. Its solution to the migration problem includes creating a coast and border guard which could, in extremis, intervene in a Schengen country against its own government’s wishes.

From a technocratic perspective, these ideas make some sense. But they both would involve significant and symbolically-important losses of national sovereignty.

If the EU was seen as an effective and legitimate institution, it might be able to get away with such a power shift. But, with euroscepticism rife not just in the UK, these proposals are a godsend for the populist right.

The Commission is determined to push the ideas because it sees no other way of keeping the show on the road. This betrays a lack of imagination.

With the euro crisis, there is a decentralised alternative based on using the discipline of markets rather than rules. The key is to make investors pay when either governments or banks borrow too much.

To be fair, the euro zone has already made some strides to ensure that bank investors share the financial burden of rescues via so-called “bail-ins”. But it has done little to stop lenders being infected by over-indebted governments.

One solution is to tell banks they must limit their financial exposure to any particular state. Such a change could cause trouble for countries like Italy, pushing up its borrowing costs. But now is the perfect time to start the transition given that the European Central Bank is buying so many government bonds and so keeping a lid on yields.

Similarly, there is an alternative to a border guard that can swoop into a country against its government’s wishes. This is to suspend from Schengen a country that wasn’t doing an adequate job of policing its frontiers and didn’t call on the proposed European border and coast guard for help.

Until that country cleaned up its act, it would be cut off from the border-free area and the rest of Schengen would be insulated. Although this is not officially what has happened to Greece, the erection of fences in various Balkan countries is having a similar practical effect.

The advantage of such decentralised solutions is that they push back responsibility onto nation states and don’t require transfers of sovereignty that are politically unfeasible.

Something like this is needed because, otherwise, there is a risk that the EU could disintegrate. That would not only cause economic damage; it would make Europe weak at a time when its neighbourhood has become increasingly dangerous.


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