The EU’s lessons on economic integration

Its current troubles point to the tensions inherent in the current model of globalization

Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint

The European Union (EU) hasn’t been able to catch a breath in a very long time now. But its latest embarrassment may be its most baffling yet—the near-scuppering of the Canada-EU trade deal, the Comprehensive Economic and Trade Agreement (Ceta), by the elected representatives of the five million or so people of Wallonia, a French-speaking region of Belgium. The farcical sight of a tiny sub-region of an EU member state holding up a trade deal its own federal government—and those of the other EU members—wanted is an object lesson in the tensions inherent in the reigning models of economic integration. This has relevance beyond the European project.

The details of the deal are almost besides the point; the Wallonian regional government’s obstructionism had more to do with national politics than economic logic. It’s the larger picture that warrants close examination. While many trade deals have been ratified by Europe’s national parliaments in the past, EU institutions have always taken point on them. This is in accord with the EU charter, which vests responsibility—“exclusive competence”—for trade deals in the EU. Nor does the charter require ratification of such deals by regional legislators. The reason Brussels set an extraordinary precedent in this case is the same reason the Wallonian government calculated that blocking the deal would go down well with the Wallonians: the EU’s lack of credibility.

Given the damage the Euro crisis has done since 2010, this is not surprising. The EU’s structural inadequacies must bear much of the blame for this. Today, more than ever, economics is politics. The compromises this necessitated in the Maastricht Treaty meant that the EU has been stuck at a halfway house. This might have suited it when times were good, but it has proved inadequate in inclement climes. The fact that EU leaders and apparatchiks have often seemed to forget the political dimension of economic decisions hasn’t helped. The centralization of monetary policy and constraints on deficit spending have undercut the ability of national governments to determine fiscal policy. The EU’s supposed principle of subsidiarity that supposedly allows for public policy flexibility at the national level has been left toothless.

With one hand thus tied behind their backs, the governments of the south, from Athens to Madrid, have found that an EU system purported to create net benefits has instead fostered greater economic divergence. Add further stress points linked to the idea of integration—the migrant crisis, the fact that trade treaties like Ceta and the contentious Transatlantic Trade and Investment Partnership go far beyond trade to issues like common standards and arbitration that can further impinge on national sovereignty—and it isn’t surprising that the European project is losing currency among both the left and the right.

These are not new issues. From the time the Treaty of Rome created the European Economic Community in 1957, Europe has been a testing ground for competing theories and approaches to regional and economic integration. The neofunctionalists, led by political scientist Ernst B. Haas, held that the positive spillover effects of integration would propel further integration. Supranational structures and mechanisms would increasingly displace their national counterparts with a concomitant transfer in the allegiances of the common people. Supranational technocracies would lead the way. Stanley Hoffmann’s intergovernmentalism, on the other hand, held that national governments would continue to be the principal agents, with domestic politics dictating their preferences.

Time has proved the latter far more accurate. Common sense and human nature militate against the notion that the European people would, in the course of a generation or two, allow national and regional identities forged over millennia to be subsumed. Or that they would be pleased to allow the power to make policy decisions that affected them intimately to pass into the hands of a European executive and legislature far removed from their specific concerns. Indeed, the greater the integration the EU fostered with a direct impact upon populations and sub-regions unmediated by national governments, the greater the incentive it gave those regions—like Wallonia—to make sure their preferences were taken on board. In the process of concentrating decision making, the EU has fostered its opposite, paradiplomacy.

The European laboratory informs the broader debate today on globalization and its discontents. The specific circumstances of various trade deals and regional blocs might differ, but the basic lessons remain the same. The economic wisdom of aggregate benefit, dispensed from on high, is insufficient when it is not backed by due consideration for political sensitivities and the impact on those who haven’t gotten a slice of the pie. Indeed, even in a country like India, the Narendra Modi government would do well to bear in mind that the more state governments are empowered in matters of investment and trade, the greater the say they will have and demand.

Sooner or later, the EU must make a choice: tighter integration with the institutions to support it or a carefully calibrated loosening of the bonds. Whichever way it goes, the rest of the world would do well to watch and learn.

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