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Mark Hallerberg: Getting the Young Engaged In Europe

Written by Mark Hallerberg | October 30, 2011 | 0 Comments | Theme: European identity, Mark Hallerberg

Something struck me about this blog. The opening picture shows what looks like students walking next to a street carrying small European Union 
flags. If this were a picture from my native United States with the stars
 and stripes in hand, I would assume that the students were on the way to a
4th of July parade. If the students had German flags in my adopted city of
 Berlin, I would presume that there was a football World Cup match on (and
 it could be either the men or the women playing). Looking at this picture, I cannot help but think that it is posed. When, and why, would young
 people willingly walk through the streets with EU flags? After more than a
 decade of living in five EU countries and in visiting many more, I
certainly have not witnessed such an event.

Of course, on one level the general lack of commitment I observe in
 practice to yet another flag is a good thing. Devotion to flags and the
countries they represent can lead to discrimination against people from 
other countries. Nationalism led to wars in the European past; it would be a bit strange to have people carry around a symbol that represents supranationalism with the same pride they attach to their union jacks.

But there is another reason why this photo seems out of place – note that I
 wrote above “young people.” While I have not witnessed parades of EU
 flags, I can imagine that people of a certain age might be comfortable
 displaying one. Those with memories of World War II or the reconciliation
 of European states that followed, or others that link economic prosperity 
with the Common Market, may indeed be willing at least to be seen with an 
EU flag. But even those marginally younger may not have these
 associations. While it is disputed whether former Chancellor Helmut Kohl
 really said it, the comment that “she [Angela Merkel] is ruining my
 Europe” fits the narrative that Europe¹s most passionate backers are the 
elderly and (almost) retired.

But this is not just an issue of “education,” of explaining to the
 “ignorant” why they should support Europe. While there are enough
 differences across countries to make generalization difficult, there seem
 to be three broad political trends among the young. First, it does seem to
 be the case that young voters have fewer attachments to other
 institutions, such as political parties. Second, the young are more likely
 than their parents to be “single issue” voters, be they on
 post-materialist matters like climate change or more traditional 
bread-and-butter issues.  Finally, there is a drift to candidates over
 parties that one observes among all age groups.

Put these trends together which, on their own, have nothing directly to do
 with the EU, and the EU has a real challenge on its hands how to make
 itself relevant to the young. Note that this challenge is not just about how the EU markets itself–any democratic institution that fails to have
an appeal to a significant part of the population has an issue with legitimacy.

So what is the EU to do?

The EU political system is set up so that the personalities on the
 Brussels stage do not outshine the personalities back home. When a
 politician like Tony Blair with a potentially broad constituency is 
mentioned for a prominent EU post, the national leaders generally refuse 
to support him or her. One could argue that more visible – and 
charismatic-politicians would help raise the EU’s profile among all age
 groups, but it is not going to happen unless there is a radical change in
 the way the EU works.

One sometimes hears rumblings of a more bottom-up approach. A truly 
EU-level, and EU-wide, party that mobilized voters to support the EU and
to enact EU-level reforms could be one way to do this. At present, there are European political party groups, of course, but national parties
compose them. Such a party in any case has not been created, and it
probably won’t be in the near future. Even if it did, the young seem less enamored with political parties as ways of organizing them in any case.

That leaves issues. How can the EU appeal to the young through particular 
issues? This is not easy given the EU’s current institutional framework. If you are young in southern Europe, your biggest worry may be getting a
 job. The arguments that freer trade and good anti-trust enforcement that
 the EU provides lead in aggregate to more jobs are certainly correct, but
 the points are too abstract for most to care. Others may care more about
 climate change or the environment. Here the EU is coordinating goals for
2050 that impact the every day lives of the young, and will continue to do
 so as they age, more than most know.

In any case, an important theme for the EU is how to engage the young. It 
is not necessary for young people anywhere in Europe to be so excited
 about the EU that they spontaneously walk through the streets with flags. But as Europe competes with other parts of the world with young, increasing populations, it does need to harness the energy and creativity
of its diminishing youth.

 

Mark Hallerberg: Choices on European Fiscal Federalism

One of the initial goals, and great achievements, of the European endeavor was to create stability. In the early post-war years, the hope was to lead to a general reconciliation between France and Germany, countries that had fought three wars over seventy-five years. Added to this security dimension was an intention to rebuild the economy. The Member States reached both of these goals quite early in fact, and even now one should not lose sight of the extent to which European integration has brought, and maintained, stability in the security realm.

In terms of monetary integration, the road has been less smooth. There have been plenty of monetary crises, be they the collapse of the snake or the partial collapse of the Exchange Rate Mechanism. As Randell Henning (1998) among others observed more than a decade ago, such crises were good for monetary integration–crisis begat more integration, not less.  Hence monetary integration moved on from the “green currencies” of the 1960s to the “snake” of the 1970s to the European Monetary System of 1979 finally to Economic and Monetary Union as agreed in Maastricht in December 1991.

On the fiscal side of macro-economic policy, in contrast, there has been much less integration. Member States have agreed to set floors to the value-added tax rates, but there is no common European tax. Moreover, the amount of revenue that the European Union as a body receives is less than 2% of GDP, and the European Union is not allowed to run deficits (and in practice runs slight surpluses). This means that fiscal policy remains decidedly at the Member State level. The Treaty of Maastricht and the Stability and Growth Pact (including its reform in 2005) set guidelines for how Member States should run their financial accounts, but that framework was not able to prevent Greece from running large, excessive deficits year after year or to prevent the huge run-up in debt in Ireland after the collapse of two of its major banks.

Today’s crisis in fact arises from debt crises in several Member States; it, in turn threatens to become both a financial crisis and perhaps even a currency crisis. What can be done to end the current crisis and to prevent future ones?

One school of thought argues for a true “fiscal federation” at the European Union level. There are many proposals out there that observers group under this umbrella–the EU should float “euro bonds” that would be used to finance Member State debt burdens; a “European Monetary Fund” should provide liquidity when Member States face a liquidity crisis. Some versions of these plans are thoughtful and worthy of consideration.

When considering which road to take, however, it is useful to consider what others have done. What forms of fiscal federalism already exist, and what has worked and what not?

As I wrote in more detail elsewhere (see European Union Politics 2011), there are two models from the Americas worth evaluating. The first is from the United States. The American states faced a situation in the 1840s similar to the one that the Europeans face today. Several states had borrowed money during “good times” that they used to finance the construction of railroads, and a subset of them faced bankruptcy. They appealed to Washington for a bailout. As Wibbels (2003) notes in his excellent article on the American case, Congress refused to pass a state bailout. Some states indeed defaulted. The reaction of voters was to insist on balance budget articles in state constitutions, and today 49 of 50 states have some version of this article in place. This does not prevent fiscal troubles at the state level, of course. But when California gets in trouble, no one expects that Washington will bail it out, or (even more outlandish) that New York and Florida would come to California’s aid. Market discipline is generally considered to play a beneficial role in this system. States have different credit agency ratings. And as bad as the current impasse is in Washington on the ballooning federal debt, at least that debt is truly federal.

The second model is from Brazil. The analogy here is even closer to the one facing the EU today. In 1999, Brazil faced a crisis because of a combination of alarming debt levels at the state level and the collapse of state-level banks. The Brazilian national government took decisive action. It bailed out troubled banks, but only if those banks were to be closed. States also received a reprieve. But they all had a face a new institutional regime under the country’s Fiscal Responsibility Laws.  The 27 state governments of Brazil must negotiate annual budget balance targets with the Centre. Moreover, they must include expenditure caps to reach those targets. Independent watchdogs at the state level (Tribunal de Contas) check whether governments are doing what they promised.  Those that are not are put on a public list that the central government updates monthly. If the bad behavior continues, states lose federal transfers. Moreover, politicians themselves can be banned or even jailed if they do not comply with the fiscal rule. According to correspondence with Carlos Perreira, a Brazilian professor and expert on the topic, several hundred politicians have indeed been banned under the law and some jailed.

Both models are possible for Europe, but the politics behind them are very different. The American model is more minimalist; it is up to a given state to take care of itself. Yes, there is funding available when a nasty shock hits a state, such as a hurricane or earthquake. There are  problems with the American system; for instance, all sorts of accounting games are played to get to “balanced” budgets. But in general the US system is not a transfer union. When Michigan has higher unemployment, Michigan employers and workers have to pay higher unemployment insurance contributions. It does not include really any regular monitoring from Washington. And markets and a state’s voters are the ones who provide the punishment mechanism.

The Brazilian model is more interventionist. It has also led to regular budget surpluses and to a flood of money wanting to invest in the country.  Why has it worked? The targets are clear, there is someone to monitor whether they are achieved, and there is a credible punishment mechanism.  Yes, there were initially transfers to some states. But the system put in place means that those transfers ended.

The European Union has taken tentative steps towards the Brazilian model. The reporting requirements under the new “European Semester” are stricter than before. There are promises that sanctions–which have not been applied before–will be more likely under new voting rules that make it harder for intransigent states to block them. There are also statements from different European leaders that bailouts under the EFSF and under the ESM that will replace it in 2013 will only happen if Member State governments introduce significant domestic reforms.

But there is a real danger that Europe has found itself stuck in the worst of all worlds. The transfer union is under way. But the institutional structure to guarantee that the transfers will be either only at the beginning or only if there are truly exogenous shocks are not there. The second bailout of Greece in under 14 months is a terrible precedent. Markets already speculate that further bailouts of troubled economies will be needed. And-as the current panic suggests–there is simply not enough money nor enough political support among German, Dutch, and Finnish publics for further transfers in any case.

Europe is in a bind. A Brazilian solution requires much more money–and more support from anxious northern European populations–than exists or is likely to exist. Over the longer term, American-style fiscal federalism is more feasible politically. Importantly, it means less integration, not more. It represents a break from the logic that crisis begets further integration. There is an increasing risk that the more market-friendly approach found in the US, however, could tear apart the common currency. At the same time, the current situation breeds instability, and it undermines the very justification for the European Union in the first place. It is critical that Europe jump to one of the better “equilibria” that the American and Brazilian cases represent.

One thing is certain, however–appeals to “European unity” to justify fiscal transfers alone are not enough. No appeal to “American unity” would convince a New Yorker to pay for the mess in California; how can such appeals ever work in an increasingly divided Europe?