Photo: Reuters
Photo: Reuters

Opinion | What does the next 25 years hold for the EU

The European Union is a third leg (the other two are the US and China) that the world's near-term future depends on. Its evolution is important for the future of both world trade and politics

Twenty-five years ago this month, the European Union was born.

The conception and birth were anything but immaculate. The gestation period was long, arguably dating back to the end of World War II and put into full motion by the Treaty of Rome in 1957. The final steps began with the Treaty on European Union first signed in Maastricht and adopted by members of the European Community 18 months later on 1 November 1993.

The EU is a one-of-a-kind partnership with pooled sovereignty in certain policy areas and uniform laws on a range of political and economic matters. The EU is currently made up of 28 member states (EU-28) bound together to promote security, peace and development. The currency union was put to referendum in only three countries—France, Denmark and Ireland. The UK did not hold a referendum, on the principle of parliamentary sovereignty—even though an earlier one was held in 1975 to confirm continued participation in the European common market. Writing at the time, Vernon Bogdanor, a constitutional scholar, argued that parliament did not have the power to further delegate sovereign power to outside entities and must hence hold a referendum. Famously, the UK referendum that led to “Brexit" took place in 2016.

The common currency—the euro— arrived first as a virtual currency in 1999 and then as bank notes and coins in 2002. Today, 19 of the EU-28 use the euro as their home currency. With 20-25% of the world’s reserves being held in euros, it is the second most important reserve currency in the world after the dollar. Modelled after the Bundesbank, the European Central Bank administers monetary policy with the primary mandate of price stability.

The US, China and EU represent the largest international trading groups in the world. In 2017, they had an almost identical amount of international trade (imports+exports) of approximately 3.7 trillion euros, not counting intra-EU trade. Intra-EU trade is larger than extra-EU trade. Overall, the EU-28 maintains a near balance in trade. Over the last 10 years, EU trade with China has tripled and with South Korea has doubled. On imports of about 375 billion euros from China, the EU runs an annual trade differential of about 175 billion euros. The EU is India’s largest destination for trade in goods.

The EU has now become a well established supra-national entity. A critical assessment of the EU’s first 25 years must indicate a decidedly mixed grade. On the one hand, it has been successful in increasing intra-EU trade, maintaining price stability and keeping ultra-nationalism in check. On the other, it looks more and more like a clunky federal state with a byzantine bureaucracy in Brussels. As many countries around the world drift toward politics that favour populism and nationalism, the idea of Europe as an economically conservative federation appears to be an anachronism. The vote for Brexit is a manifestation of this reaction to centralization and delegation of sovereignty. As is often the case the idea has frayed at the periphery, literally and metaphorically separated by a channel from the rest of Europe.

Many would go further and classify the EU as a failed experiment. They will point to the fact that while intra-EU trade has grown, it has not grown as fast as extra-EU trade. The Brussels bureaucracy will, in particular, come in for strong criticism. It has become an institution unto itself, politically unaccountable with its own flag, anthem, currency and president (not one but five). Recent failures, related to processing immigrants at first point of European Union entry and the bailout of countries despite treaty provisions that indicate that each member state is responsible for its debts, have only aggravated the critics. Inadvertently, the rigidity and protocols of Brussels may have accelerated the rise of populism.

With all that said, is there a future for the European Union?

The European Union represents an important idea in the world—that countries can voluntarily trade a piece of their sovereignty for the greater good. While it appears to be out of step with current reality, it may well become imperative for peace in a future world where nationalism once again runs amok.

In practical terms, one path is of reform—where centralization and bureaucracy in Brussels is reduced—and operating freedom is restored to the EU-27 (ex UK) member-countries. This does not change the Hobbesian nature of the contract that each member state has made with the Union, but it reduces the daily frictions that 500 million people are currently being subjected to. An integral part of this reform must be to promote decentralization and flexibility in decision making.

The other path is to go back to a nation state member linked flexibly and cooperatively with its neighbours—a return to the earlier economic community idea. This has, of course, major implications because it will be the end of the European Union as we know it. A third path of “more Europe", including full fiscal union, appears impractical.

The European Union is a third leg (the other two are the US and China) that the world’s near-term future depends on. Its evolution is important for the future of both world trade and politics.

P.S: “Where there is no common power, there is no law," said Thomas Hobbes.

Narayan Ramachandran is chairman, InKlude Labs. Read his earlier columns at www.livemint.com/avisiblehand

Comments are welcome at views@livemint.com

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