Saturday, 19 March 2016

What is the point of a European Union?

What is the point of a European Union, or indeed any other Union of states, or of citizens?

The basic philosophy

The obvious answer is solidarity.

By uniting around a common set of principles and practices, especially when underpinned by a common philosophy and a demonstrably provable set of truths, members can strengthen their position within negotiations with outside parties, in turn meaning that they need to compromise less often during negotiations.  The result is that participants form a union.

However, no participant in any union is identical with any other participant.  Each participant - be it a government, an individual or a pressure group - represents a unique blend of vested interests and/or misguided emotions.  So the process of joining a union always requires compromise with existing members.

The compromise might be based fully on factually provable truths, or might be contaminated by falsehoods, ideology or other arbitrary beliefs.  Even in based in truth, vested interests of each member is likely to conflict with other members.  Whatever, the participants must see themselves - and be seen by others - as agreeing to the union line (a.k.a. the "party line").  Participants re-enforce their views by corroboration with each other (a false verification), typically excluding observations to the contrary, especially those from the outside world and those that would rightly undermine the basis of the union in the first place.  The union becomes a vested interest in its own right, diverging from the interests of one or more of its own members, and failing to become a true sum of its members' interests.  This develops into groupthink.

So there's a trap.  If any one member of the group spots the underlying truth, it becomes profitable for that one member to take advantage of that truth, to break ranks (often on the quiet, in a hope to get away with breaking ranks).  Worse is when one member of the group starts looking for observations from the outside world that would require the union to change the basis of itself, or to change the focus of the union's managers.  So from day one of the union, a union needs some sort of disciplinary system within it, to ensure both detection of and deterrent against a member breaking ranks.

And it gets worse than that.  Contaminant falsehoods that bind a union are actually a ticking time-bomb.  If any one party outside the union spots the underlying truth - for example, a policy choice by the union that amounts to trying to nail jelly to the ceiling - then the credibility of the union and its participants becomes questionable, jointly and severally.  As a result, outside parties would seek to by-pass the union.  The solidarity that looked like the union's strength now becomes now becomes the union's own threat to itself.

Thus, the economics, politics and philosophy of a union are flexible and occasionally unstable.  This behaviour is known as game theory, prisoners' dilemma or (in management training courses) the red-blue game.

Unions always break down when any one participant loses substantial trust in any one other participant.  Sometimes, the residual union can paper over the cracks caused by the distrust, but the crack remains there, slowly gnawing away at the minds of the remaining participants.  Slowly, but surely, the union would need to re-base its objectives, or collapse in an attempt to apply more paper over the crack.

Distrust is always contagious.

To what extent does this philosophy apply to the European Union?

A quick glance at the objectives of the European Union suggests that it has all the ingredients in place for such a union.

The objectives are, for the most part, aspirational rather than specific, measurable, achievable, timely and realistic.

The objectives presume a particular moral outlook that needs to be common to all members.  The morality inherent within the objectives is social democratic market socialism.  A quick glance at the composition of the elected element of each of the then member governments at any history in time proves that the presumption is false (and was false even in the heyday for market socialism in the early 2000s).

In addition, the European Union looks ill-equipped to detect compliance (or non-compliance) with the objectives by any of its members, and to deter against breaks from the ranks.  A huge body of self-referring law - the acquis communautaire - is required to convert the aspirational objectives into something usefully measurable and enforceable.  As a consequence of such detailed and complicated rules, breaking ranks is increasingly profitable, because under such a mountain of obtuse detail, any amount of corruption/rule-breaking can safely hide.

Case-in-point: on 21 October 2015, the European Competition Commissioner held that tax breaks smuggled by Luxembourg and Netherlands into their 'transfer pricing rules' (related to corporation tax) amounted to illegal state aid.  This took the European Commission a lot of work - years' worth of work - to detect and to measure.

Case-in-point: before the formalisation of the common foreign policy in 2009, member nations of the European Union chose different policy choices when faced with both Gulf Wars of 1990/91 and 2003.  In the former, the contributions of the European members of the coalition varied significantly, reflecting each member's vested interests, combined with an element of free-riding on others' contributions.  In the latter, contributions were much muted because America itself was divided as to whether the war was just.  With the benefit of hindsight, it looks likely that the second Gulf War was as much to do with manufacturing trade for the American arms providers as to topple Saddam Hussein.  Yet, incredibly, in 2000, during the run-up to the conflict, France chose to break ranks with the United Nations to promote its own idea of humanitarian aid.

Similar misbehaviour by European nations applied in the cases of:

  • Russia's invasion of Crimea in 2014, where whatever action the EU could have done was eliminated by Germany's reliance on Russian oil (a reliance increased because of Germany's earlier random choice to abolish nuclear power stations);
  • the various incoherent European responses to the war in Yugoslavia, exacerbated by cluelessness by the United Nations, leading to the ethnic cleaning of Bosniaks in 1995.

Case-in-point: the European Social Charter is an old document that demands a fair, reasonable and sustainable work-life balance with a welfare state to bail out citizens who fall on bad times.  By all accounts, its objectives are noble and worthy.   The most contentious element of the Charter is labour law.  Where labour law interrupts or manipulates the operation of a labour market, the result is normally long-term unemployment, because employers simply cannot afford the risk of investment based on hiring new employees.  Of particular concern is how member nations chose to implement the minimum standards defined by Article 153 of the Treaty of the Functioning of the European Union.  Member nations are free to develop "higher" standards (i.e. more restrictive) than the Treaty directs, and in so doing, countries that choose to do so (France, Netherlands and Belgium in particular) march right into the "prisoners' dilemma".  Each "higher standard" state has a choice:

  • change its law to enable the labour market to work fluidly (the "lower playing field").
  • demand that others make the same unemployment-creating mistakes as it does (the "higher playing field").
  • implement protectionist measures (restraint of trade, import tariffs, block imports, block exports (!), etc all of which are de facto illegal under the European Union's basic rules).
For a flavour of the depth to which France seeks to micro-manage the labour market, refer to a summary of a change to French labour law in 2015 (read between the lines!).

Outside of Europe, the European experience is noticed.  Lessons are learnt.  A key observer is arguably the Chinese Communist Party.  Whilst it is apparently sensitive to labour disputes, the reaction of the Party to corporate collapses since 2008 has been to root out the perceived corruption - poor decision making? - that resulted in the collapse, and to better implement the rule of law to employees (by requiring written employment contracts in 2007; evaluation in 2013).  There appears to be no underlying demand for the European social model of employment.

Case-in-point:  membership of the European Union required a commitment to a single currency, for which preparation was participation of each member in the European Exchange Rate Mechanism ("ERM").  Britain's departure from the ERM in 1992 showed that when a government rigged foreign exchange markets away from market fundamentals, foreign exchange traders - who were more economically- and financially-literate than the government - bet against the government about its own poor policy choice.  On 16 September 1992, when the British government hiked base rates to 15% - knowingly inflicting huge financial pain on a population already fairly heavily in debt - a posse of pro-European British government ministers belatedly realised the folly of trying to rig the market, and abandoned the ERM.

Britain was not the sole casualty.  Other members of the ERM - Italy in particular - also struggled to rig the market and returned to the ERM only when the rules of the ERM were so wide as to be meaningless symbolism.  In this case-in-point, note that outsiders blew the whistle of one government's attempt to nail jelly to the ceiling, which in turn shone the markets' spotlights onto other participants of the union.  The union itself took no action to assess the risk to the credibility of either participants or itself as a result of the ERM.  Subsequently, Italy joined the single currency (the Eurozone) and Britain stayed away the single currency, breaching a term of the union's membership (continued political integration via a single currency).  Both Italy and Britain continue to enjoy the consequences of their respective choices today.

Case-in-point: in 2015, the final stage of the Syrian state's war against its own people resulted in masses of migrants leaving Syria, intending to land in Europe.  Along with this flow of people, opportunistic people-smugglers recognised a viable market for shipping other economic migrants into Europe via North Africa.  The European Union helplessly stood by and watched its members suspend the principle of freedom of movement within the union (the Schengen Agreement), erecting fences and customs controls as if the Cold War was still happening.  Trust by member nations in the treaties that they had all signed disappeared in a flash.

Case-in-point: in 2009, Greece revealed that it could not afford to underwrite its sovereign debt, and that it had lied to ensure membership of the Eurozone (on false pretences).  With banks of other European countries having exposed themselves too heavily to the Greek lending market - in the propagated false belief that Greek was doing better than it actually was - the crisis in confidence in Europe's banks became suddenly contagious.  The European Central Bank felt it had no choice but to issue its own version of the Greenspan Put of 1989.  As at 2016, European banks had still not systematically routed through their investments to find the entrails of toxic Greek sovereign debt.

In all of the cases-in-point above, at least one member of the European Union was unable, or unwilling, to abide by the political solidarity that the European Union demanded, with terrible consequences.  It was as if the European Union simply didn't exist.

And yet, the European Union clearly does exist, because it costs European taxpayers a fortune every year... and still the Union cannot account for taxpayers' money that it spreads around Europe!

Armed with these objectives, what is the strategy of the European Union?

With the high and mighty objectives of the European Union substantially trashed by the free-riding and "red-blue" game between European member nations, it's probably a bit optimistic to ask whether Europe has a strategy for anything.

It turns out that the European Union has no strategy.

The first presentation of such strategy (executive summary forecast; third party opinion) is expected to be in June 2016.

Ominously, in a sign that the Europeans have yet to learn the basics of how to run a country for the benefit of its citizens, the EU's High Representative writes:

"We need to forge a new social contract with European citizens also through foreign policy."

In other words, let's repeat the same mistakes in a different way, ignore the problems that we can fix, but have no political will to do so, and hope for a different set of outcomes.

An ordinary person might call that insanity.

So what is the point of the European Union?

Without a viable future strategy, and such disarray between the 28 members of the European Union, it is impossible to see what problem the current European Union is trying to solve.

Moreover, given the development and decisions of the current European Union, it is impossible to see specific, measurable, achievable, realistic and timely objectives any sort of European Union could have.

The root issue for the European Union seems to be its members' idealist internal policy choices - labour and welfare laws in particular - that render European economies substantially uncompetitive in a wider world.  Monetary policy - zero percent interest, resulting in a panic-stricken hunt for short-term yield - magnify the net negative effects of these policy choices.

Reform from within the European Union looks implausible - the core members of Europe seem hell-bent on nailing their jelly to the ceiling - so the salient strategy for any individual member nation (especially one at the periphery) would be to abandon the ship before it sinks.

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