Stress Test Underway For Brussels

When the EU was founded 22 years ago, cooperation on economic, social issues, and on forming joint migration and asylum policies were the grounds on which it was based. But the present reality of the EU, with crisis after crisis unfolding, shows that the EU’s ambition for high-level integration is far from reality. The dream of a “United States of Europe” seems to be slowly fading. Faced with many pressures, EU countries are now discussing different approaches and strategies to solving persistent problems. Until recently, the solution to all challenges in the EU was increased centralization. However, we are witnessing the rise of fragmenting forces across Europe due to an increased divergence in the interests of the different member states.

The fragmentation of the EU

The main challenge the EU currently faces has to be the ongoing refugee crisis. With thousands of refugees stranded on the Greek-Macedonian border, the pressures are mounting, literally, at Europe’s borders. Despite strict border control measures employed by the Balkan countries, refugees still flood in, seeking a better life away from their war-torn countries. The refugee crisis has become the most pressing issue lately after reaching a tipping point, with over one million crossing the borders into Europe in 2015.

But the EU’s response has been frail and disjointed to say the least, with Germany and Sweden taking in the largest number of refugees among all EU nations, while the numbers received by other countries have been miniscule in comparison. Germany has therefore pushed for a policy that promotes burdensharing with other European nations and for quotas on the distribution of refugees as a part of a permanent and binding scheme, with the power of the EU commission behind it. But 15 out of 28 EU members oppose the plan for a variety of reasons.

The refugee crisis is a multi-faceted issue with far reaching foreign and domestic implications. An open-door policy usually clashes with public opinion in addition to many security concerns. The attacks in the heart of Paris and Brussels only highlighted those concerns. Furthermore, this modern refugee crisis has led to increased ‘Islamophobia’ in Europe. Besides security concerns, there are the financial burdens of receiving and accommodating the unprecedented numbers of refugees.

And last but not least, the suggestion that a European authority, namely Frontex, should monitor the refugees’ influx and admission into Europe through its external borders threatens the sovereignty of many nations. Imagine Canada deciding to protect the US border to Mexico due to a (theoretical) massive influx of Mexican immigrants into Canada! The countries refusing to accommodate large numbers of refugees justify it with their lack of capacity. However, for most member states, it is not the lack of capacity but rather a lack of willingness to take on refugees due to security concerns as well as concerns regarding the compatibility between the European culture and the cultural background of the refugees.

The other older and more permanent challenge is found in fiscal, monetary and political imbalances across Europe. While the Greek crisis is currently no longer in the headlines, it is likely to resume again soon and the topic of a fiscal union will once again be on the table. On many occasions, Germany has acted as the glue holding the EU together. As an economic powerhouse, they have been able to play a key role in resolving some of the region’s key issues. However, Germany definitely often over-reaches when it comes to suggestions in its attempt to keep Europe together. For example, in 2012, it suggested the appointment of an EU commissioner to oversee Greek government spending. This is a step that would undermine Greece’s sovereignty. However, the logic behind the idea was to control government spending and tax collection in a country where tax evasion is rampant.

Germany has also been the largest contributor to the Greek bailout package, with $56 billion in contributions, to enable the country to mend, or rather to delay, its day of fiscal reckoning. This is a key point of contention within the Union: each of the member states of the EU have different GDP outputs and provide their citizens with entitlement programs that are incompatible with the Eurozone scale but are nonetheless more democratic than any decision made in Brussels. And that is the root of the problem: democratically agreed upon systems are coming into conflict with detached, undemocratic EU policies and debt negotiations. Binding these different fiscal policies under an umbrella currency truly cripples the democratic decisions made within the EU system.

Last but not least, a third force causing the seams of the Union to fetter is the recent prospect of a Brexit. Britons are to vote in a referendum on June 23rd on whether Britain should leave from or stay in the EU. The UK is the second largest economy of the EU and a potential exit would therefore definitely have far reaching implications on the future structure of the EU, in addition to economic consequences. So how are the British likely to vote? Currently, polls indicate that the British are leaning towards staying in the EU, but that could change in the months to come. A disincentive for this decision is that a large share of Britain’s exports flow into the EU, and, in general, there are strong relations to the EU. On the other hand, Britain will likely gain sovereignty outside of the EU and will be able to take their own fate into their own hands. Listening to the arguments of those in favor of a Brexit makes one thing clear: they are not, per se, in favor of the exit itself, but they are rather against the EU’s current dysfunctional form.
In essence, the key issue behind all of these “forces” (not to mention the ones we left out) is the issue of sovereignty. The EU, in its current form, aims to govern all aspects of European life centrally from Brussels and practically trespasses on the sovereignty of the individual member states. The member states are increasingly getting weary of this notion and want to take matters into their own hands by reducing the power that Brussels has over them.

The failed framework

In a region which contains many different speeds of economic growth, different tax systems, different indebtedness levels, as well as different languages, identities, cultures and so forth, this quasi-centralization seems to be doing more harm than good. So far, the “solutions” to problems faced by the EU have been intermittent and reactionary, at best. German efforts to keep the EU together, driven by its historic guilt are both costly for Germany and do not address the root cause of the problems facing the EU. The EU is currently up against a real test for its ability to withstand the current geopolitical and economic winds. Without a strategy to adapt and reach better forms of cooperation on key issues, it is vulnerable and will eventually – if not fully, at least partially – fail.

At this stage, a reexamination of the theoretical framework that the EU operates under, and how it holds up in the face of such challenges, is necessary. The centralist approach to EU governance is not efficient and, under these pressures, is showing systemic weaknesses. A one-size-fits-all approach simply cannot work.

The EU is a blend of many countries with different backgrounds and historical contexts, and not all favor a bureaucratic EU that overrides their national interests. And, as the countries within the EU are both ‘western’ and ‘eastern’, they also show different preferences for free market economics and heavy regulation. Furthermore, there are the different tendencies for being overly politically correct (Germany, for example) as opposed to being openly xenophobic (Eastern Europe). All of these forces combined are causing a schism in the body of the EU, exposing its structure to not being as coherent as was thought.

The speed of the expansion of the EU and the Eurozone was also too fast. Only the economic strength of Germany could temporarily manage the effects of the troubled members. But this strength cannot go on forever and German taxpayers will not agree to continue to pay for other countries’ sluggishness. The current state of affairs is not helping Germany, nor is it helping Europe.

There is an urgent need for a redistribution of burdens and responsibilities. The best strategy would be a shift toward a system where responsibilities are decentralized rather than centralized. This way, any member country can carry the responsibility according to its own capacity, without over-stretching countries like Germany or under-stretching countries like Greece. Only a balanced form of distributing responsibilities could lead to the healthy integration that EU members want and need. Single-member countries, as past events show, cannot be expected to carry the whole burden or weight of the EU. The nationalist identity will always prevail over the European identity. An Italian will always be an Italian, not a “European”.

What the EU can learn from Switzerland

We are confident that the only way for the EU to survive in the long-term would be to review their current organizational structure. At the EU level, they need to ensure that people and national governments are involved and have a voice in key decisions, which they hold stakes in. A good example of this would be Switzerland, which has a longstanding history of a confederate democracy. In Switzerland, individual rights are balanced against community and national interests, and people are involved in decisions at national and sub-national levels.

Switzerland consists of over 3000 municipalities, situated in 26 cantons, working in harmony for centuries. The lessons that the EU can learn from Switzerland are plenty, such as the application of true, direct democracy.

The process of decision-making in the EU needs to be based on open communication and ongoing hard discussions due to regular votes on crucial decisions, as is the case in Switzerland. One of the most important aspects of Switzerland is its decentralized government; similarly, the EU needs to rethink its own structure. For a peaceful and prosperous Europe, it is unnecessary that the whole of Europe is uniform. Like Switzerland with its cultural differences, the EU needs to understand that the only unity that is sustainable is one that allows for diversity and is not based on uniformity.

In looking at Switzerland, the tax benefits are well known but exist due to competition within. Furthermore, the decentralized political and financial authority has led to increased accountability within the Swiss system. The direct democracy approach has bolstered the Swiss and prevented the level of estrangement and detachment from the political elite that other democratic systems suffer from. Beyond that, the emphasis on the constitution – similar to the US – sets the framework for individual liberty and respect for property that serves as a beacon of protection in a sea of European socialism mired in debt. The best bet for the EU would be to model itself after Swiss federalism. Oskar Freysinger, a Swiss MP, has similar thoughts. He points out that the EU has deviated from the cradle of constitutional democracy we knew in the past. He advises against following dogmas, which do not allow opposing opinions to rise and to be heard within the society.

The challenges facing Europe are not trivial; the solution for the systemic problems it is facing should be nothing short of a complete reboot of the entire system. Perhaps, after all, a crisis is what Europe needs to do just that!

Published in BFI Insights Q2 2016 (more about BFI’s safe investment plans for high net worth individuals)

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