This article belongs to the debate » The End of the Eurocrats' Dream
22 November 2016

Governing at a distance:  democratic responsibility and social solidarity in the Eurozone

As stated in its preface, this impressive collection of essays has the ambitious aim of launching a “fundamental debate” about European integration in the wake of the crisis and, in particular, the institutional reforms and policy choices made since 2008.  The volume’s title already contains the basic diagnosis. European integration has fallen prey to a technocratic project – a dystopian dream which has corroded the EU’s constitutional integrity, its legitimation basis, its very point and purpose.  This dream has to end, or better yet be brought to an end through an effective, if laborious, intellectual and political work. This is the basic message of the volume, shared by all its contributors.

The Eurocrats’ goal is to achieve monetary and fiscal stability through a mode of integration controlled by non-majoritarian institutions, operating through strict economic surveillance, discipline and sanctions and aiming at an ever closer top-down harmonization of the standards and practices of Member States. This project rests on deep-seated (and mostly implicit) cultural predispositions of both descriptive and normative nature.  In essence, Eurocrats believe that budgetary stability and market efficiency are supreme goods, that there is a “right way” of guaranteeing them (and more generally of solving all collective problems), that economics (as a discipline and as a sphere of activity) must prevail over politics, especially agonistic politics. In so thinking, Eurocrats ignore both Hayek’s reminder that economic science is not (and cannot pretend to be) “omnicompetent about the problems of society” and Weber’s warnings about the risks of “organized irresponsibility,” a combination of economic dogmatism and bureaucratic rule.

The various chapters substantiate the general diagnosis with a wealth of original arguments, adopting different analytical perspectives: from political economy to normative theory, from neo-institutional to legal analysis.  The reader learns a lot about the nature and origins of the Eurocratic failings, which can be summarized in a series of disastrous deficits: of justice, compliance,prosperity, democracy and legitimacy  Instead of prompting a virtuous circle of upward convergence cum stability and greater closeness among the Member States, the institutional setting put in place by the Eurocrats promotes and amplifies divergence as well as a moral economy which juxtaposes “good” versus “bad” pupils,  encourages beggar-thy-neighbor policies, nurtures the (internally contradictory) illusion that  domestic political economies can be coerced into adopting  a single template for growth and competitiveness. This approach has not only proved ineffective in terms of outcomes, but has also been eroding the necessary conditions for polity maintenance (the EU polity), let alone its further “building”. Obsessed with taming the beast of interest group pluralism, the Eurocratic regime has unleashed the demons of anti-politics and populism and has pushed them into attacking the EU as such. Historically, European integration has always been guided by a mix of logics, reflecting, on the one hand, the heterogeneity of its constitutive components but aimed, on the other hand, at encouraging joint action in order to achieve common goods.  Eurocracy has disrupted this delicate mix, with the result that, as aptly put by the editors, “existing trajectories and structures of European integration have become badly misaligned” (p.18).

Starting from a shared (in its core themes) diagnosis, the volume puts forward a number of ideas about how to repair damages and on how the Union should develop in the future. Avoiding the sterile disputes about more versus less Europe, federalism versus intergovernmentalism and discarding the illusions about a return to Westphalian sovereignties, the contributors outline a number of scenarios and proposals underpinned by a common ethos, but diverse in their substantive emphases and details.  The reforms which are put forward range from the unpacking of EMU and the return to flexible monetary regime to more or less incisive re-designs of the institutional/constitutional setup, aimed at redressing the democratic, justice, stability and prosperity deficits of the EU in its present form. In their Introduction, Chalmers, Jachtenfuchs and Joerges make an excellent job in bringing out the main axes of the various proposals and in characterizing their underlying rationales. There is thus no need (and certainly not enough space) for me to repeat the exercise.

I do share the common ethos of the volume. What I can offer is a discussion of some specific building blocks of the diagnosis.  My general worry is that the critique of the Eurocratic dream may inadvertently overshoot, incurring into the risk of throwing away some “babies” together with the bathwater (admittedly very abundant and very dirty). In the remainder of this note, I will first focus on issues of democracy and citizenship and then address a thorny question, which is key for Southern Europe: in light of the Eurocratic failings, should EMU be maintained or scrapped?  I will then close with a brief discussion of solidarity and how to reconcile it with European integration.

The EU, democratic responsibility and social citizenship

Contemporary democracies share a political culture which assumes that the government does “what citizens want”, responding to their preferences. Sovereignty belongs to the people, legitimacy hinges on the latter’s consent, free elections hold representatives closely accountable to the voters.  This view offers comforting reassurances that we live in an ethically defensible system. But it reflects only part of the story. Elected officials are not mere translators of demands from below into public policies. However important, responsiveness and accountability do not exhaust the representation nexus. The third dimension is responsibility – often neglected or collapsed into accountability. By responsibility I mean the duty of leaders to face up to collective challenges – often difficult to interpret, with no easy solutions – in the best interest of their own political community, considering the web of interrelationships with other relevant communities.  As famously recommended by Weber, democratic responsibility requires some distance from electoral contingencies, a farsighted capacity to balance principled and consequentialist considerations in coping with a constant flow of substantive problems that can never be fully anticipated and yet demand relentless attention and tending.  In grappling with problem flows, democratic leaders are still constrained by their electoral mandate and must be ready to justify their decisions. In other words, responsibility remains ultimately coupled with responsiveness and accountability. But it involves different logics and capacities, which require some degree of institutional nurturing.

In the present European context, democratic responsibility is faced by two big challenges. The first has to do with increased integration and the incessant creation of cross-national externalities.  Very often, domestic leaders have to solve problems for their own demos which are the direct and recognizable consequence of other EU demoi (how they behave, what they decide); in turn, the solutions which domestic leaders adopt are very likely to generate cross-border effects. This challenge is widely discussed in the volume, especially by Nikolaidis and Watson. There is however a second challenge, which has to do with the growing difficulty for domestic leaders to address policy problems in a long-term perspective.  Most of the reforms which are today needed to recalibrate national socio-economic models imply explicit and extended inter-temporal tradeoffs. These reforms require upfront costs, in return for incremental and delayed benefits: let us think of the expansion of education and training today in order to enhance the human capital of tomorrow. Such “policy investments” are difficult to undertake: the logic of partisan competition places a high premium on the short term. Imposing losses to current voters with a promise of distant benefits is not the most effective strategy to win elections.

In theory, the EU should facilitate the search for responses to both challenges. Precisely because they operate “at a distance”, EU arenas and institutions can provide political leaders with the appropriate occasions, incentives and resources for exercising responsibility both vis-à-vis cross-national interdependences and the imperatives of the long-term. The Eurocratic project has, however, failed to even recognize these problems. In fact, as already mentioned, it has aggravated it by putting in place a system of “organized irresponsibility” led by a small circle of authorities taking one-size-fit-all unidimensional decisions inspired by a narrow and short-sighted economic orthodoxy.  This system is characterized by an utter neglect for the cross-national, cross-sectoral or cross-domain consequences of policy decisions.  Despite its rhetoric on long term “sustainability,” the rigid and rule-based austerity paradigm established during the crisis has created additional obstacles for policy investments.  In debtor countries, it has eroded all margins of fiscal maneuver, while in creditor countries it has amplified the fetish of schwarze Null, i.e. the categorical imperative of zero-deficit, even in the presence of visible gaps in policy investments.

This is the bathwater that needs to be thrown away, the sooner the better.  On this I cannot but fully concur with the volume’s contributors. There are however various elements in the “governing from a distance” mode which may be wise and reasonable to retain and even enhance.  It is important to openly stress this point in the debate. Let us think of the European Semester. Freed from the excessive rigidity of the Fiscal Compact and adequately re-balanced towards growth and social objectives, this governance framework could  serve as a key anchor for the long-term perspective (broadly understood) and the institutional encouragement of policy investments,  as a precious instrument for the joint elaboration of  functionally effective and normatively desirable objectives and  – most importantly – as a transparent arena for identifying those externalities and risks which may require common management.  Surely there are ways for bringing the Semester closer to the circuits of electoral representation, for enhancing its throughput legitimacy via inclusion and accountability constraints – as currently advocated by many critical commentators.  For that matter, the chapter by Bovens and Curtin shows promising signs of growing accountability (at least a readiness to be accountable) on the side of some top supranational leaders.  But the unique contribution (the “baby”) which a rebalanced Semester would produce has to do with responsibility. The relative insulation from domestic electoral contingencies and from the logic of partisan responsiveness would activate a choice logic sensitive to fine-grained instrumental and normative considerations and open to reflexive learning – a logic that tends to be stifled in domestic contexts.  Effective democracy requires an appropriate balance between popular demands and elite expertise, supported by the best available knowledge.  Governing from a distance remains indeed exposed to the risk of “technocratization”. But it can also be made to work at the service of political responsibility, without necessarily violating  the democratic standard.

Let me now briefly turn to citizenship. Throughout the volume it is repeatedly argued that the advent of Eurocracy has markedly exacerbated the de-stabilizing effects of integration on national “social contracts” and social citizenship regimes. The Fiscal Compact and especially the conditionality regime of the Memoranda of Understanding have definitely contributed to pushing through painful social reforms, to the detriment of long established redistributive arrangements and their supporting coalitions, laboriously built through domestic political channels and resting on territorially bounded balances of power. In general terms, the worry about such developments is justified and well grounded. But again we must distinguish between babies and bathwaters.

Historically, the institutionalization of solidarity through social rights has effectively contrasted the dis-integrative tendency of the XIX century’s greatest social utopia: that of a market entirely capable of self-regulation. Societies mobilized in search of protection; states responded with the production of rights. But not all the buffers against market expansionism have served their declared “emancipatory” objectives and some buffers have gone too far. In some moments and in some contexts, the noble instrument of democratic citizenship has been hijacked by petty interests, sectional lobbies, circumscribed groups defending their privileges. Measures of social closure have been used to serve “usurpative” rather than emancipatory objectives. The extensive literature on the insider/outsider cleavage has highlighted the distributive distortions resulting from many forms of employment regulation and social protection inherited from the Golden Age. The awareness and the preoccupation with such dynamics were already clearly present in the early and classical debates about social citizenship. Commenting on the rise of unofficial strikes at the time when he was writing his famous essay, Marshall lamented that an attempt had been made “to claim the rights of both status and contract while repudiating the duties under both these heads” (p. 42). In his turn, Bendix warned that a fundamental civil right and pre-condition of democratic participation, the freedom of association or “right to combine”, can be used “to enforce claims to a share of income and benefits at the expenses of the unorganized and the consumers” (p. 105).

Economically inefficient and normatively unjustifiable forms of right-based closure must be singled out with care and precision, context by context. But to the extent that EU pressures are (or can be) targeted at such forms of closure, then “de-stabilization” might serve functionally useful and normatively desirable purposes.  Among non-economists there is sometimes the tendency to collapse the principled justification of the welfare state and of market-correcting policies into an acritical defense of  the social status quo, whatever its characteristics and distributive implications.  I believe instead that it is important to combine the loyalty to abstract normative standards with a factually grounded acknowledgement and critique of real-world deviations from such standards. The challenge on the “de-stabilization” front is of course how to single out dysfunctional and inequitable forms of regulation and protection and how to target them correctly.

Heaven or Hell? The euro and its possible breakup

The Southern European countries (in particular Italy and Greece) offer a good illustration of the dynamics just described.  During the last couple of decades, EU membership and the so-called external constraint has provided these countries with precious spurs for stabilizing public finances, modernizing the state apparatus, recalibrating the welfare state and the labour market, and rebalancing traditional distributive distortions. In other words, EU-induced “de-stabilization” has brought about several positive effects, not only painful sacrifices.

In my own work on the Italian case, I have often used the metaphor of a rescue by Europe:during the 1990s, the Maastricht process prompted a real quantum leap in terms of institutional capabilities and risanamento (the restoring to health) of public finances.  A rather impressive sequence of reforms was implemented, with a view to correcting  the “original sins” of Italy’s economic and social model.  Admission into the Euro-zone was lived as a hard-won achievement by the vast majority of Italians.  The prize was a significant decline in the cost of debt service, from 9% in 1996 to 4% in 2006. Unfortunately, this bonanza was mostly squandered: savings mainly went into pensions.  The reform process stalled, much needed public investments were not made. The weakening of the external constraint  (EMU’s dysfunctionalities were not so evident then) removed one of the most effective spurs to introduce reforms. Since the early 2000s, the country’s economic performance has been less than satisfactory and the crisis – in combination with fiscal austerity – has pushed Italy into a very deep recession. It is no surprise that popular support for the euro has been markedly declining in recent years.  With the demise of Berlusconi, the center-right has become increasingly critical of the common currency, while the new Five Star Movement and (much more vocally) the Lega Nord are now openly asking for a referendum on the common currency.

At the end of his lucid chapter of EMU’s dysfunctionalities, Fritz Scharpf briefly discusses the potential advantages of an orderly, negotiated and consensual breakup of the Euro-zone with a view to establishing an improved version of the pre-euro monetary regime, based on flexible exchange rates within bands.  This would give back to peripheral countries – so the argument goes – the option of external devaluations, allowing them to recuperate competiveness and relaunch growth, without incurring in the painful social costs that the achievement of those objectives entails within the monetary union.

While I agree that a frank debate on such prospect would be useful, I also believe that there are important aspects to be considered, which might possibly tilt the balance in the opposite direction. Let me briefly mention these aspects, focusing again on the Italian case. Italy is by far the largest peripheral economy and the breakup scenario always assumes, at least implicitly, that this country would be the ideal beneficiary of a return to flexible exchange rates (and, conversely, that without Italy’s request or consent the breakup option would not reach the EU agenda).

The first aspect has to do with the diagnosis of Italian problems and prospects. Italy’s economic decline is linked to a wide range of factors, including a (still) defective state, a massive public debt, badly regulated and highly protected private services and product markets, an old-fashioned system of industrial relations.  The constraints of the euro have aggravated these problems, but have not caused them, therefore leaving the euro would not solve them. The key question however is: does Italy have an internal springboard to remain competitive among the big export-oriented economic powers, hopefully within the euro?  What is often overlooked or inadequately appreciated by foreign observers is that beneath Italy’s malaise there is a resilient pounding heart.  The country still has a wide and robust industrial base and is the seat of Europe’s second largest manufacturing sector.  Despite the dramatic drop of 2008-2009, this sector grew by 15,6% between 2004 and 2015. In medium sized firms, during the crisis productivity grew more than in Germany. The recession led to the loss of many (small) firms, but overall it enhanced allocative efficiencies which were able to sustained export levels (for data and discussion, see the Bank of Italy.) Italy’s “growth model” rests on a big export-oriented industrial engine (the “baby”).  To (re)gain momentum, such an engine needs incisive internal maintenance and re-adaptation.  But above all it needs to be complemented by a much more efficient service sector (which should itself become a second engine for growth and employment) and to be supported by a more favorable institutional environment – including a modernized welfare state.  A lot of dirty bathwater must be thrown away, especially in terms of bad regulations, rent-subsidizing protections, clientelistic distributions. It is misleading to disparage such an agenda as “internal devaluation”. Instead of cutting wages, Italy’s growth engine would (and hopefully will) benefit much more from liberalizing professions and local public services, stirring up the civil service, rationalizing and recalibrating inequitable and inefficient tax/transfers schemes.  A (reasonable) vincolo esterno remains key for moving in this direction.  Net of the perverse consequences of the Eurocratic regime, developments during the crisis do lend support this view. After Berlusconi’s egression (2011), important policy changes have been adopted, including much needed reforms in the field of pensions, labor market, public administration, education and industrial relations. And since 2014, growth and jobs have started to pick up again. It does not seem too late or impossible to revive the springboard.

I am not arguing that Italy is out of trouble: far from it. But let us sketch a counterfactual based on the breakup hypothesis. A currency devaluation during the crisis would have initially boosted industrial competitiveness, but it would also have neutralized “modernization” incentives for all relevant actors, granting new respite to many of the undesirable, efficiency thwarting dynamics of the past. There is a shared agreement among Italian economists that the pre-euro competitive devaluations bear a large responsibility for the adjustment delays of Italy’s productive structure to the new trends of the European and global economy. A weaker lira gave to exporting producers temporary relief for their losses in competitiveness. But it also discouraged investments and innovations on the side of firms, crippled incentives for reforming the state apparatus and for opening protected sectors, caused a number of perverse distributional consequences, not to speak of the activation of several vicious circles such as inflationary spirals.

There is a second, wider aspect to consider. From a symbolic and political point of view, an exit from the monetary union would seal the failure of one of the few broadly shared “projects” of post-war Italy as a nation (entrare in Europa).  It would thus delegitimize entire generations of pro-integration leaders, including the younger ones who have gained office during the crisis. Prompted as it would be by mainstream political forces, such a move would not unarm anti-European radicalism, but would rather inflame  social and political arenas, providing additional fuel to all the populist, protectionist, parochialist and nativist actors and interests which have emerged in the last decade. It must also be noted that the mere starting of the breakup process (e.g. negotiating the birth of a new currency and its bands of oscillation) may trigger off unintended and hard to predict consequences. Italy is not Greece; a European bailout would be impossible.  Should financial markets come to believe that Italy might exit from the euro as it is, they would have enough weapons to force this outcome on their own, very unorderly terms.

Some Italian analysts (Bianchi, Bordogna) have recently offered rough estimates about the consequences of such a scenario.  I report some of them here just to give an idea of the numbers which are being seriously discussed in the domestic debate. Under fierce market pressures, a new lira would have to devalue by 50/60%, almost double compared to the current 30% loss of Italy’s competitiveness vis-à-vis Germany.  The immediate consequence would be a rise of inflation to around 15%. This would trigger off a price-wage-exchange rate spiral resulting in even higher inflation and huge losses for workers in terms of purchasing power, increased inequalities in the distribution of income and wealth between employees and self-employed, and between domestic creditors and debtors.  A devaluation of 50% would raise extremely delicate problems around the value of the public debt in the hands of foreign investors (more than 35% of the total), with capital flight and a likely def