The nationalists bring the drachma back. Literally.

If the Eurozone breaks up, so will the European Union. At least in the form we know it. Everybody talks about it and it’s true. The current crisis is however a reason, why the European union will survive and arguably become stronger.

At the end of May, the Greek Commissioner for fisheries Maria Damanaki told the media that the question of Greece leaving the Eurozone is now on the table. Together with an unsourced sentence from der Spiegel it has brought a wave of political speculations and increased volatility in bond and foreign exchange markets.

Many economists and politicians keep repeating that highly indebted countries would solve all their problems through devaluation and would export themselves out of their debts. Since there is no possibility of devaluation within the Eurozone, they clearly imply that leaving it is the only and the easiest solution.

I firmly believe that some mean it seriously. I am convinced that many of them wish it. However, for a country to leave the Eurozone or its breakup as a whole would be by far the worst solution of all. It’d be as well the worst solution for everybody, including EU countries outside the Eurozone and the remainder of the world.

More problems instead of solutions

There are many reasons why the Eurozone breakup would not solve any crisis but just become another problem. Not because of dangerous side effects to those affected by europhilia (including the present writer) but because of clearly catastrophic economic outcomes. A highly indebted country leaving the Euro would figuratively cut its hurting leg just before climbing a mountain. It wouldn’t feel the blisters any more but it simply wouldn’t be able to walk either.

In the first place, leaving the Eurozone would worsen the debt situation. Let’s take the example of Greece. Greek government bonds are denominated in euros and there is no legal way to change the denomination to any other currency, e.g. to the new drachma. Such legal change in bond denomination would be equal to a declaration of a payment default. Greek creditors would take it as a legally coherent signal to run on issuers of credit default swaps, which would in turn blow a big part of the financial insurance market.

Anyway, Greek government would have to pay its debts in euros, but Greeks would have to pay taxes in drachmas and then convert them under a different exchange rate. Drachma being devalued by tens of per cent, the Greek debt to GDP ratio would rise by the same part. With or without default, this would not relieve or help anybody in the financial and real markets. The huge losses on both sides would be almost exclusively dead weight.

Following assumptions of labour market effects on currency valuations, the new drachma would be devalued by roughly fifty per cent. This would mean doubling of the Greek debt to GDP; enough to wipe out any positive effects of a partial default. Greece and other threatened countries would have to default on the entirety of their sovereign debts to make the devaluation have a tolerable effect on the new aggregated debt.

Let’s admit the new drachma would not go into hyperinflation and that the exchange rate would stabilise on a slightly higher level than two drachmas to one euro. A higher competitiveness of exports would surely “improve” the Greek trade balance, but due to the ridiculously low Greek exports, it would not wipe out the increase in the aggregate debt caused by devaluation. In addition, Greece would have to pay back the debt for punitive interest rates, not for the current arguably preferential rates from the EU and the IMF.

If Greece then did not write off all of its debts, the radically higher costs on serving the remainder would lead to an uncontrolled and uncontrollable default. And if it did write off all of its debt (I would be curious to see how it would manage to do that), the contagion would spread and many fragile European countries would follow the suit in a similarly messed up way.

Something like that would really be a Lehman-like event. The currently discussed rolling over of Greek debts would be just an unnoticeable detail compared to the panic on bond and all financial markets, which would erupt in the case of Greece leaving the Eurozone.

Stamping Greek euros

The situation with ordinary bank deposits and liquidity would also be very painful. Of course, it is theoretically possible to exchange money in pockets of Greek citizens or, firstly, stamp them as it was the case during the Velvet breakup of Czechoslovakia. But only in case you have something to stamp.

If the Greece announced today that it intends to leave the Eurozone, Greek retail banks would run out of liquidity in terms of hours. And nobody would give to the government the precious content of their wallets, pockets and mattresses, because the latter would be significantly depreciated. Withdraw money and hide it from the government in foreign accounts is much simpler than it was in Slovakia in 1993.

The example of the Czechoslovak monetary breakup is not useful in this case for other reasons too. The difference between the potential of the Slovak and Czech crowns as well as financial interconnection of Czechoslovakia with hard-currency countries were ridiculously small compared to financial mobility and differences in real parities that reign over Europe today. According to some, Czechoslovakia was even an optimum currency area. Despite these facts, queues formed in front of Slovak banks and monetary reserves of the Czech central bank decreased in few weeks to a half; a record that has not been reached ever since in absolute or relative terms.

Shock therapy

Alternative to the above mentioned would be to implement a shock therapy. The announcement would coincide with the legal decision of leaving the Eurozone and an obligation to limit withdrawals.

This is somehow a more likely but at the same time even more unrealistic scenario. In an incredible conspiracy – that almost nobody would be allowed to know about – banks would have to prepare for weeks the implementation of limits on withdrawals and stamp the virtual money following a key, which does not exist and could not be rationally invented unless being arbitrary and impoverishing or prone to cause high inflation.

Those who would know what is about to happen might become easily dollar billionaires in terms of hours, while millions of ordinary people short of this very concrete piece of information, would lose tens of thousands. It would be a moment of the biggest one-off redistribution of wealth in the history of Europe and probably of the world. The Argentinian crisis of 2001 or the UK Black Wednesday of 1992 would be ashamed when judged by historians.The only incident that would somehow compare to this event is the Asian monetary crisis of 1997.

The effects on Greek households and banks would be immense. And in these times of crisis, Greece would have to declare bankruptcy or increase radically its debt service, which would paralyse either financing of the whole economy or the government as a whole. Very likely, there would not be enough liquidity in Greece for years and government would have no choice but to increase the monetary supply artificially and massively, bringing thus a realistic risk of credibility loss and hyperinflation. State bankruptcy and contagion to other states would be imminent.

Yet, we have not taken into account legal barriers, which would make from this event the most ugly monetary operation in modern history. Law and justice would have to stand back to feasibility. Unmerited profits of few and huge losses of many would have to be accepted as a price of the final objective.

And what if everybody did it?

This apocalyptic vision concerns only the example of Greece, which is (despite all the contagion it managed to cause) a very small country. Just imagine that everybody left the Eurozone or – if you will – that the Eurozone broke up.

How would it affect financial flows in Europe? What effect would it have on businesses and households? On European real economy and world financial system? What would happen with Euros in non-European central bank reserves?

Panic, massive runs on banks, collapse of financial sector, an end to export superpowers, contagion, abrupt downgrade of countries’ credit ratings, serial government defaults and a global recession… this all might at the end be a very optimistic scenario.

Maybe one day, but certainly not now

The best moment to leave the Eurozone is paradoxically a period of economic growth, settling of trade imbalances and stabilisation of sovereign debts. This moment might never come in our lifetimes. And if it did, in such an ideal atmosphere, everybody would benefit from the existence of a common currency and hardly anybody would think about leaving it.

Even on a flat see of European economy the differences of potential currency parities would be high enough and division of currencies so arbitrary that a similar action would simply not be worth it; nobody would risk it just to solve a future crisis, which could come in decades if ever.

Even the worse scenario, which includes several defaults would not be so catastrophic as the ultimate end of the common currency. The Eurozone countries will pay a high price for the inadequacy of its institutions, but the currency will survive. It has no other choice. The way back to national currencies would be much more costly. Current problems will paradoxically strengthen the willingness for more fiscal coordination or even a fiscal union, more political control and ultimately a democratic one. This will strengthen the European Union.

Originally published in Czech on Aktuálně.cz

"Just sell the islands you banrupt Greeks!" "The Bild writes to the Greek bankrupt PM: You won't get anything from us!" etc.

Greeks were happily spending others’ money and piling up uncovered debts. They were living beyond their means. They should be therefore punished or at least publicly humiliated. Anyway, all southerners are similar idlers and slackers. All you hear is just their mañana, domani, siesta and fiesta. Greeks are especially repulsive. They’re fat, they sit all day long outside their houses, eat lamb and drink ouzo.

Indeed, the Greeks are the fifth most obese developed nation, they eat by far the most lamb in Europe and they have a world monopoly for ouzo. But how do you want to measure laziness? There’s no clear indicator whatsoever, which would capture it in its entirety and hence confirm this dangerous but seemingly obvious popular wisdom. On the contrary, the indicators we have would suggsest the very opposite.

One of the hardest working nations in the world

The productivity of work seems to be a good indicator of diligence and hard work. However, it’s reflecting much more importantly the capital mix rather than hard work. For obvious reasons a Burundian nail-factory worker is much less productive than a Swiss watchmaker, although they may be both equally diligent and hard working.

The hard working should by definition work more than the lazy. The time you spend in work is therefore a decent approximate indicator of hard work. It’s not perfect because you simply can’t quantify the extent of what would an unorthodox economist call a “coefficient of work idleness” and a diligent European “slacking in work hours”.  But it’s good enough because you can slack or remain idle just for a fairly limited part of the time you spend in work and therefore the indicator should be valid for gross comparisons. Besides, many (protestant) work-ethic fans do consider the time worked as a good indicator of laziness/hard work, while comparing the US and Europe.

Hours worked per active worker 1992-2008 (OECD)

If we consider it as a good indicator as well, then we have to admit however that Greeks are the hardest working developed nation after South Korea! A usual 8-hour day being considered as a standard, an average Greek works some 3.9 months more than an average German every year. In practice it obviously does not mean that Greeks work for their thirteenth and fourteenth salaries even the sixteenth months but that they spend every day two hours and twenty minutes more in work than Germans – a nation we have in our conventional popular wisdom associated with diligence and hard work.¹

Where do the loafers take all the money and time?

It’s also commonly understood that most Greeks don’t work at all. Either they depend on state aid – so they can sit the whole day outside and drink – or they retire sometimes in their thirties, so they could stare to by-passers and play with their prayer beads. Obviously, they have to borrow to finance all that repulsive passivity, since they could never find enough money to do that just by sponging on each other.

Well, the reality is, again, completely different. An average Greek retires admittedly 6 months before an average German, but this is due to the gender mismatch. Greek men retire later than German men.² More importantly, if you add up the additional hours worked, the lazy Greeks are winning just incredibly. German men and women would have to work almost 14 years more (!) to catch up the time the Greeks spent in work. Equivalently, if Greeks were to enjoy the same leisure time as the Germans, their worked hours would correspond to a retirement at 75! The wildest dreams of pension reformers couldn’t reach this age in the century to come.

And, just to add some icing on the cake, Greece spends full six percent of its GDP less on social expenditure than Germany.³

Populism

Laziness is not behind the current crisis but rather incapacity of former governments to face a difficult situation, gradually reform the country and increase tax revenues. The strategy of expanding its own electorate through public service jobs has also been revealed to be a dead end.

"Our money for our people"

Similar strategies are nothing but electoral frauds for which the hardworking and honest Greeks should not be held reliable. The impossibility to reform the current state of affairs and the discord of the Greek people expressed on the streets is a result of a despaired nation, which faces decades of austerity and precariousness. It has nothing to do with laziness or with the alleged willingness to be bailed out and fed by other Europeans.

The Greek problems are structural above all: rent seeking, unclear economic institutions, corruption, low tax collection, grey economy… but again, it has nothing to do with Greek laziness or incapacity to face professional challenges. To say otherwise is a European hypocrisy, racism or buck passing.

Originally published in Czech on Aktuálně.cz

The European Central Bank decided yesterday to increase its key interest rates by 25 basis points to 1.25%, starting a cycle very likely to continue further over 1.5% this year. Whatever happens in Southern Europe and however it is going to impact less competitive economies of EMU, the ECB is fighting a wrong enemy.

In times of rising energy and food prices, the ECB tries to tackle a non-existent problem. The 2.6% inflation has no potential to trigger an inflationary spiral in the context of budgetary austerity and salary moderation.

It is only going to inhibit rising commodity prices by impacting more severely than by its marginal change (0.25% to the date) the price of money in real economy, rates of investment and consumption of the Eurozone and of countries of its neighbourhood that have central banks with de facto no or little monetary lever to maintain their sovereign interest rates (including the Bank of England).

Whatever we think about the appropriateness of the 2% target, the current and further future increases of the key interest rate are going to strengthen the common currency (as it was the case after the announcement itself), although it has all interests to remain weak in next quarters, especially considering effects of the American quantitative easing and Chinese systematic exchange-rate manipulation (disregarding rise of its own intervention rate).

So why, for Trichet’s sake, are they doing it?

Firstly, were it Bundesbank, interest rates would have been probably raised earlier this year and might have never plummeted so low. The ECB is not Bundesbank though and has to take into account business cycles all over Europe. Economic growth is far from returning to normal in recent quarters, particularly if shadows of further short-term economic slowdown emerged with rising energy prices (for geopolitical, not demand-driven reasons). One-size-fits-all policy is a bad policy, it is better though than a one-size-fits-Germany policy. By raising interest rates right now, the ECB is opting for the latter interpreting it falsely as the former.

Secondly, money may be too cheap, building up for a new overheating of economy and potential bubbles. With growth at about 0.3% in last two quarters of 2010 and projected 1.7% growth both for 2011 and 2012 (!), overheating is however more a wish than a threat and if defaults and haircuts are inevitable with current debts already too high, 25 bips are not going to change anything, in contrary, it’s going to increase the debt burden through more need for refinancement, not motivate countries to borrow less. Moreover, bursting bubbles just after crisis should be regulators’ job, not central banks’ one, as it would threaten the whole economy, not just the bubbling sectors.

Thirdly, some economists and businessmen are keen to mark the end of the crisis. The yesterday’s decision might thus have been more symbolical than economic or monetary. Sending a good message might be a good strategy. Who knows however, how markets are going to interpret it? It may very well be the very opposite way. A very small sign of weakness in next weeks could feed reasons for a negative rather than positive interpretation of the message.

In overall, none of the three reasons justify the threat that higher interest rates would present to the Eurozone and competitiveness of its weaker members.

A lost decade

Inflation is not a Satan that we have to avoid in all circumstances and the 2%-inflation target is far from being an ultimate de facto goal of the ECB. Tightening money supply too early after a crisis with raising issues of uncompetitiveness is though clearly harmful.

Let us pray to gods of the world economy that ECB’s Governing Council’s yesterday decision does not mark a start of a lost decade for the European economy. It does mark it for Greece already.

——

Used figures come from the Economist Intelligence Unit, ECB’s official-data releases, and FT.

European dissidents fighting for democracy and freedom of nations

‘Europe of Freedom and Democracy’ is the name of the most eurosceptical formation in the European Parliament. Looking at their concrete portfolios, one would see to what extent their perception of the world is xenophobic and nationalist. Their first argument in the European Parliament is however not the preponderance of the white man, the opposition towards immigration, other cultures or religions, as their ideology would suggest. They don’t seem to hate the EU because it undermines their vision of the world. Not at all. Their first and most repetitive argument is that the EU is not democratic enough. I cannot agree more, but…

These fabulous orators forget to bear in mind – among thousands of other facts – two basic assumptions about democracy in the EU and their relationship to it:

1. To democratise the EU is the last thing current eurosceptics really wish. They want to return to the national level pretending that democracy is more secure there. But they would never ever agree to a treaty, which would ultimately democratise the EU, as it would make a clear link between the people and the EU. Simply put, it would undermine the current quasi-monopoly of democratic communication between people and nation-states. And this is what eurosceptics fear the most.
2. Because of national electoral systems, the European Parliament is the only place where major eurosceptic parties (i.a. UKIP, BNP, Front national) get elected to present their opinions and where people actually listen to them. They have all the rights to criticise the EU for the lack of democracy and they do so all the time. It’s just fine. Surprisingly however, I have never heard them criticise their countries for the lack of democracy or for excluding them from the democratic discussion. Nor have I heard them to acknowledge that thanks to the EU’s rules of openness and democracy – at least in the Parliament -, they are helped by public money to express their opinions.

By the way, many alleged pro-Europeans among national leaders are afraid of democracy in the EU as much as eurosceptics. But at least, they don’t denounce its lack on every single occasion.

Countries from the northern tier had not only a clearly better prospect of accession to the European Union but also coped better with the transition from centralised economies and one-party regimes. This led to a broad assumption of the positive effect of the European Union on the transition process. Some neglected inconsistencies between the visible correlation and actual causality must however be drawn.

Establishing a correlation

All the ‘success stories’ of the transition were associated with a prompt and rather unproblematic accession to the EU. Despite natural political and economic complications, these countries have recovered quickly from the transitional recession in early 1990s, succeeded to consolidate their constitutional order and avoided significant populist or even authoritarian derives from democracy.

Countries geographically distant, mostly former Soviet republics – today’s Commonwealth of Independent States (CIS)[1] without any tangible prospect of the EU accession lived through very indecisive transitions. The transformation of their economies and political systems did not lead to Western-style market economy or liberal democracy but to a set of specific types of hegemonic and often authoritarian regimes.[2]

The middle ground between these two distinct groups of clear-cut ‘winners’ and ‘losers’ of the transition, are characterized by sometimes very problematic but not strictly unsuccessful transitions. The extent of successfulness corresponded very conclusively with the prospect of the EU accession, both tending to be bigger in Eastern and smaller in Western Balkans. In short, empirical observations confirm that the prospect of the EU was associated with successful transitions. There seems even to be a certain proportionality: bigger the prospect, more successful the transition.

Doubting the causality

The prospect of membership was however not for everybody and the medal of a potential candidate was awarded after a rather lengthy observation and initially very modest conditionality, technical support and in general relatively small role of the EU as such (probably initially smaller than aggregation of other international actors, such as the World Bank, EBRD or the OSCE).

The EU itself determined very cautiously and rather late, which countries are suitable for EU membership. [3] Only in 1997, the first part of CEE countries was openly admitted as potential candidate countries. This belated first significant message as well as the rather meagre influence of the EU itself in the immediate post-revolution period, undermines the idea of the EU being a crucial determinant in the successfulness of the transition, despite the effect it probably had on the domestic political environment in Slovakia during the electoral campaign of 1998.

Firstly, this assessment took place after substantial successes in transition of the northern tier countries. Czech Republic, Poland, Slovenia and Hungary undertook in early 1990s crucial steps in privatisation as well as reforms concerning decisive fiscal and financial policies. Their political institutions were consolidating rather quickly; the role of civil society was on the rise and all the mentioned countries held free and uncontested elections. Secondly, the EU determined these prospects in a period subsequent to Yugoslav wars, deep financial crisis in Bulgaria in late 1996, problematic political transition in Romania and after deep economic slump and quasi-inexistence of democratic development in the CIS.

In other words, when the EU was realistically establishing the prospect of EU membership, it had already good information on the likelihood of countries to go through the transition promptly and successfully. Moreover, the EU has even used the criteria that determine the successfulness of the transition to accept or reject the potential prospect of membership. In this respect, the causality is opposite: bigger the perspective of successful transition, bigger the prospect of EU membership.

Integration vs. transition

If we observe the concrete processes through which the transition took place, it is also less clear to what extent the possibility of accession helped states to pass necessary reforms and develop their economies in the best way to cope with inner pressures and to achieve the optimal way of transition regarding their historical path. In this context, the prospect and the accession to the EU might have even delayed or complicated the transition.

Transitologists often point out the difference of the post-communist transition in its simultaneity (“Gleichzeitigkeit” in Klaus Offe’s words). It takes place not only in the strictly political and constitutional context, but also in rather different and often contradicting fields of reforms of economy and social structures. However, particular international organisations exercised important pressures on distinct and separate issues, such as the World Bank on social and fiscal reform as well as privatisation or the OSCE and EU on minority rights. Very few of the external actors took the picture of the transition as a whole and neither did the EU. It has for instance favoured particular policies that aimed primarily integration and stabilisation of the region, not transition and its successfulness as such.

The “goodness of fit” of the EU conditionality

To explain the logic of positive or negative influence, we may refer to the so-called “goodness of fit” of European policies to domestic institutions and structures. This theory may be applied also on CEE states and would suggest that the simultaneous pressure from international organisations and from the EU yielded different degrees of success depending on the fit or misfit to the already existing domestic structures and popular willingness of CEE states. In other words, more the political and economic structures were already conform or similar to the Western European structures, more positive the outcome of conditionality was likely to become. It means that the outcome of the EU’s influence depended radically on the receiving state’s structures, and could even harm those states, which were not institutionally prepared, as they would have to proceed to costly adaptive measures.

The EU accession and application of the acquis communautaire was less conducted with respect to the transition itself but rather to the integration. Candidates were imposed in general rather neoliberal rules and frameworks, which were not fully applied in all EU-15 countries due to different varieties of market economies and therefore negotiated opt-outs. This leads essentially to the conclusion that the outcomes of such pressure were rather sub-optimal, because applied rules were not appropriated to CEE environment. In fiscal terms for instance, the double pressure on maintaining the public spending low at once with increased costs of applying the acquis, put the candidate countries to a difficult trade-off between fulfilling concrete domestic challenges – including democratic ones – or satisfying external actors.

Conclusion

The northern tier of the CEE countries would have probably succeeded in their transition anyway, while post-Soviet countries of Central Asia would have suffered transitional problems even with a strong prospect of similar integration. On one hand, it is indubitable that in many policy areas (such as minority rights), the willingness of CEE governments was weaker than the situation asked for and that the EU played a crucial role of stabilisation. It is also clear that the EU candidacy and membership sent important positive signals to the rest of the world about economic preparedness for globalisation and led to clear increase in foreign direct investments. On the other hand, the mere geographical presence of Western Europe was probably sufficient at the beginning to motivate populations to undertake the first round of extensive reforms. Therefore, the correlation of EU membership and success in transition is clearly not a pure causality.

From summer 2007, the Czech economy suffered from appreciation of the Czech crown (CZK) to the euro and dollar. This wasn’t caused only by the positive balance of trade, but – above all – by the foreign exchange market. The crown has reached its historical maximum in summer 2008 after a slight speculative attack, which didn’t have anything to do with the crisis, as it happened before the world  realised there was actually one.

The following depreciation was in 95% a return to normal values reflected by the net exports before and after the unusual rise of 2008 and would have happened even without the crisis. [1] The new appreciation of the crown in 2009 and onwards put the Czech republic rather in a difficult position and resulted in a slower recovery.

Floating exchange rate may help countries to protect their economies, in the case of the Czech Republic and the recent crisis however, it apparently did not. If Messrs Nečas and Klaus aim to verify, whether the crown is going to save the Czech economy during the next global crisis, than I wish them good luck indeed.

[1] Slovakia locked itself in the summer position, because it pegged the Slovak crown to euro during the slight speculative raid on both currencies in summer 2008. This is an unlucky timing, but it wouldn’t have happened to the Czech crown, if it had pegged its rate basically anytime else.

Many factors influenced the outcome of the first Irish referendum on the Lisbon treaty, most of them were very well described and put in journalistic pseudo-causal reflections. One logic has however been systematically neglected both by media and scholars: the existence of numerous hordes of mistakenly defined eurosceptics.

Since the first “NO” in the Danish referendum on the Maastricht Treaty in 1992, the euroscepticism has become a recurrent issue in European politics, sometimes present in formerly eurooptimist or highly “eurotolerant” countries such as Ireland. Nonetheless, with the long-term exception of the UK and recent ones of Hungary and Latvia, the Euroscepticism is still rather a minor issue. According to the recent Eurobarometer survey, despite the crisis and the growing problems of the Eurozone, only a significant minority (15% in autumn 2009) seems to be eurosceptical.

This article argues that the main problem of euroscepticism is not the core part of eurosceptics but the false understanding that EU officials have of euroscepticism. It  may lead to distortions in people’s perception of the European construction due mostly to the perceived illegitimacy and actual lack of democratic accountability. Ultimately, it may lead to much more catastrophic outcomes for the EU than the Irish NO to the Lisbon Treaty.

If you wish a full version of this article with bibliographical notes, contact me here.

The official euroscepticism

The European Commission has already acquired its fix and specific definition of euroscepticism. EU citizens, who answer “bad thing” to the Eurobarometer survey question “Generally speaking, do you think that your country’s membership in the EU is a good thing/bad thing?” are deemed eurosceptical. This defines euroscepticism in a very concrete but arbitrary manner. Mainly, it helps to evaluate very precisely how many so-called eurosceptics are on the European continent, but it does not reflect the perception of the EU’s role in long term nor all nuances of euroscepticism.

The ordinary Briton's daily dose of truth about the EU

The Eurobarometer question may be understood as a question about “remaining or leaving the EU” and as such is not precise in its assumptions. Many eurosceptical parties prefer to stay in the European Union under the “no alternative” clause and their electorate would rather choose the answer “neither good, nor bad”. This definition would neither describe very well those people, who may be very critical to the current EU policies, structures or unaccountability problems. They may think that membership of their country is not beneficiary, albeit they may have a some kind of European identity or share some degree of European cosmopolitan solidarity. To make definition of euroscepticism more concrete and real, it is necessary to use more than one all-embracing term.[1]

EU-scepticism

Let us call the opposition to the EU per se “EU-scepticism” and let us call the scepticism to its current political direction “current-EU-scepticism”. Both of these visions may be translated as euroscepticism according to the Eurobarometers’s methods, but they simply cannot be put to the same basket with eurosceptical nationalists or chauvinists, as they do not necessarily oppose the project of European unification but merely the current instruments chosen to its realisation.

Euroscepticism as such is a more general opposition to the European project; against the shift of democratic powers from nation-states towards the EU. Many eurosceptics, EU-sceptics and current-EU-sceptics may also overlap, but putting them under the same label would mean that the EU project is – in its current form – the only way to achieve European unity, which is simply not true.

According to the current assumed definition (Figure 1), critics of the EU and of its current policies are sub-group of general eurosceptics. According to definition of this article (Figure 2), it is the other way around: euroscepticism is only a particular sub-group encompassing those individuals, who may dislike the EU or its current politics. In other words: the fact that one is against current EU policy does not mean he is also against the EU as organisation. Similarly, the fact that someone is against the EU does not necessarily mean he is sceptical to the idea of united Europe. At the same time, one may be against the EU unification, while being pro-EU in its current, still significantly nationally determined form.

The fact that the European Commission and to some extent also some scholars take into account the first definition (Figure 1) may lead to a very frustrating conclusions for those, who merely criticize the EU, but feel themselves European; in other words those, who would be happy to collaborate on a European level on a policy discussion. To these individuals, it may seem that the current EU is inseparably connected with its current policies and structures and that the only way to oppose them is to oppose the EU in its entirety.

The pro-European “NO” to the Lisbon Treaty?

According to different measures, Ireland is one of the most pro-European countries of the EU. Even before the negative outcome of the Lisbon Treaty referendum, the population was not eurosceptical and was approving the European project. How is it possible?

The Lisbon Treaty may be understood as continuing the shift towards a federalist entity. At the same tame, it may also be assessed as a pragmatic rearrangement and consolidation of power of the highly populated and powerful countries of the EU and reinforcement of national parliaments. As such, some Irish citizens refused the treaty for these reasons (among those, who did it for their pure euroscepticism) and revealed for the second time that a pro-European member-state may react negatively to what was presented as a logical and unquestionable continuation of the European integration.

It has never been more visible in the history of the EU than during the Lisbon treaty ratification process: many Irish citizens would welcome a short constitutional document establishing basic norm for the European Union, but not the Lisbon Treaty nor the failed Treaty establishing the Constitution of Europe (TECE). That was also the moment, when many pro-Europeans have expressed their current-EU-scepticism by voting against these treaties, which was understood as a sign of euroscepticism an sich.

This does not prove that the Constitutional treaty would have passed, were it shorter and more federalist. It is merely to argue that many individuals would have preferred more or different integration than the TECE or the Lisbon Treaty proposed and felt at the end forced to join the eurosceptical camp by voting “NO”.

Who are the real eurosceptics?

As Simon Hix puts it, it is difficult to argue that the European Union is a fully democratic institution. Of course, some legitimate and democratic principles are there, but it does not seem to be enough. There is a clear lack of political and democratic competition and democratic accountability. Not only the European Parliament elections are held following national themes and cleavages, but also referenda about EU treaties are more influenced by the position of the incumbent governments than by the EU itself or its treaties.

The paradox of euroscepticism in this context is following: real eurosceptics are the first to criticize the European Union for its democratic deficit, but they would not do anything to democratise it. A democratisation of the European Union would make it more legitimate and thus more powerful. Eurosceptics do not want the EU to become more democratic as it may weaken their own positions.

At the same time, national representatives of states with big negotiation powers have also their interest in not pushing towards the direct democratic link between citizens and the EU and prefer the status quo, where not only nation-states are the major policy authors, but they may pursue their decision-making with less control than in their national governments. This leads to a conclusion that major eurosceptics, who often designate themselves as strong proponents of the EU, are actually nation-state representatives themselves.

Why should we (not) democratise the EU?

The right of the European Parliament to vote the President of the Commission was proposed during the Committee on Future of Europe (which prepared the draft text of the Treaty establishing Constitution for Europe). This provision could have reinforced remarkably the democratic accountability of the commission, raise its legitimacy and improve the over-all image of the EU, without making it more populist or vulnerable to democratic earthquakes. These provisions were however aborted by Germany and France in the very beginning as unacceptable.

The necessity of a strong EU was also a major argument for the Lisbon Treaty. Even though, few days after its ratification, the European Council behind a close door have chosen two completely unknown personalities, the far least known and with the littlest possible political credit. They have improved their positions ever since, but it does not change much: motivations, with which they were elected, were to limit the EU’s autonomy. It is remarkable to say, that strong personalities (such as Tony Blair, Guy Verhofstadt, Carl Bildt or David Milliband) were vetoed – once more – by France and Germany.

In this context, the Lisbon Treaty provision of passing presidencies from nation-states to permanent representatives was probably not a measure of willing a stronger EU, but rather a better environment for current nation-state control with few accountability and much blame-avoidance mechanisms.

Still getting ever closer?

The democratic deficit benefits to both clear-cut eurosceptics and national states. The latter have strong positions in the current EU and the former would loose their raison d’être. Both of the groups are reluctant to pass powers to a more democratic and independent supranational entity. The definition of euroscepticism is thus blurred as those, who are today called eurosceptics, may in reality be much more pro-European than those, who promote the current politics of the EU.

This is in no way a sane situation. The European Union should seek more of the direct democratic connection to its people to avoid the obscure influence of national interests. This is not to say, that the EU should democratise itself at any price: there is a clear tendency of bias of democracy on the European level. However, there are clear mechanisms to promote a more transparent and democratic EU without making it vulnerable to populism and other negative democratic drifts. Such measures are easy to introduce and virtually free. To be more concrete, Simon Hix proposes simple reforms such as minute-taking during the sessions of the European Council or the direct designation of the President of the Commission by the newly elected European Parliament.

If the EU does not change its internal paradigm, it risks more than failed referenda on its treaties (five up to now and all overruled). It risks also to loose the connection to the idealised ideal of its Founding Fathers as well as the 1983 provision of “ever closer union”.

According to the revived version of the intergovernmentalist theory described by Moravcsik’s, the principle of domestic preference formation would force governments to act on European level only when they pursue common interests or when a given inefficiency may be resolved more easily by coordination. These acts are rational, since without significant reasons for transfer of competencies, any assignment of inefficient competencies would not take place.

For instance the Single European Act (SEA) was implemented mainly for purposes of economies of scale with a very little encroachments to those policies, where these economies would be insignificant or impossible. The SEA limits itself on removing barriers and increasing thus only procedural freedom as described by Amartya Sen and circumvent any redistributive actions. Its impact is completely Pareto-efficient and very few arguments may be raised from national-interest positions to oppose it. Moreover, the theoretical principle of subsidiarity, which was introduced thereafter in the Maastricht Treaty, has transformed this principle into a rule. It is hence explicitly given that the transfer of competences takes place only in situations where necessary and rational.

If you wish a full version of this article with bibliographical notes, contact me here.

Sometimes inefficient but still rational outcomes of intergovernmental bargaining

There are significant differences in bargaining powers between states, which lead to disproportionate results. It seems plausible that some states accept policies under political and diplomatic pressure rather than by rational public choice.

Already during the establishment of the European Coal and Steel Community (ECSC), significantly different bargaining positions led to different outcomes for member states in economic and political terms. Germany sought merely diplomatic and political recognition, while French had important economic interests in the coal region of the Ruhr and wanted to prevent any potential conflict with Germany. The same logic of illiberal intergovernmental bargaining apply in the case of power imbalances, e.g. when the UK attempted to scrap the CAP before actual accession to the EU but had to abandon the agenda swiftly because of its weak negotiating position.

Once in place, inefficiencies may than be maintained by veto players both on the level of the European Council (de iure veto and de facto unanimity decisions in important national questions), national Parliaments (lengthy ratification process) or even by electoral bodies (referendums or social pressure), which lead to perpetuation of these seemingly irrational policies through a simple two-level game.

This presents clear limits to the argument of economic efficiency, but not to rationality. All the states had acted in special circumstances and have made political concessions to defend their economic interests or vice versa. Moreover, some policies were inefficient and to some extent irrational, but the mere assignment to the European level is not irrational as pursuing of some policies by Member States on their own (e.g. agricultural policies) would very probably lead to even bigger inefficiencies and irrationalities (for instance competition towards higher agricultural subsidies). For these two reasons, almost all assignments of policy functions to the EU under the light of intergovernmentalism are rational.

The illusory domino effect of spillovers

This currently less prevalent theory gives more space to irrational assignment of competences. Logic of spillovers is to a big extent inherently automatic, thus uncontrollable and inevitably less rational.

There is, for instance, a clear and logical linkage between the establishment of the CAP, consequent problematic setting of commodity prices, monetary snake and finally the EMU. The loose rules of the Stability and Growth Pact have led to the 2010 Greek crisis and may lead to a further economic and fiscal integration. Asymmetric shocks are likely to become more frequent in the EMU and Europe as such, since Eurozone is not an optimum currency area. One would argue that the European monetary integration might therefore be seen as a set of automatic and irrational steps.

However, the intergovernmentalism has made clear that spillovers’ effect lacks necessary automatism or inevitability. Every step of the European integration is put under a thorough scrutiny of many actors and there is no significant automatism from one step to another. Even if a precedent step may make the next one more likely, it is probable that any further purely irrational step would not be pursued.

Historically coherent political and economic project

If political and economic factors are taken into account, very few or none of the assignments of policy functions are in fact irrational. If we observe the European integration and incremental assignment of competencies to the European institutions, it is a deeply premeditated and controlled process, which may easily produce errors, but is far from irrational.