Fabian Zuleeg: The Multi-Speed Europe Scenario Is the Most Realistic One

There are political risks attached to further integration of the eurozone within the model of “multi-speed Europe,” but far greater risk would be to allow the eurozone to fail—says Fabian Zuleeg in an interview with Konrad Niklewicz.

In March, the European Commission has tabled the long-awaited “White Paper” on the future of the EU. It contains five possible scenarios, among them: deeper integration, multispeed Europe, and limiting the EU only to the Single Market. Which one is going to happen?

It is not going to be one, clear scenario. What we are talking about is the mixture of all the alternative options that the Commission presented. There will be differentiated integration—which we always had, so it’s only a continuation. In some areas we will see more competences and more sovereignty being transferred to the European Union. In other areas we might see some steps backwards.

It seems that the European Commission itself prefers the scenario it calls “the multi-speed Europe.”

think that what the Commission is implying is that the “multi-speed Europe” scenario is the most realistic one. And it’s not a question of Commission’s preferences, but the political reality. I’m not sure whether the Commission, if it had free choice, wouldn’t opt for a scenario
of deeper European integration, across the board, more uniform. But in current environment such scenario is simply improbable, hence—the multi-speed.

The scenario of multi-speed Europe provides that willing countries of the EU can go further and deepen their cooperation in certain areas, without waiting for the rest of the pack. The natural candidates are the countries of eurozone. Aren’t we risking that
the eurozone will integrate so deeply that the European Union will become an empty, meaningless shell, with a few countries left behind?

The big question mark is: what the differentiated integration really means? It is still very unclear. We do not know, for example, what legal tools will be used by the willing countries to change the speed of integration. However, it is fair to assume that at some point in time, the cohesiveness of the European Union might be challenged by the very fact of existence of different groups of differently integrated countries.
Indeed, the eurozone is the natural candidate for such differentiated integration. And it’s not because there are countries who want to distance themselves from the others. The eurozone must start this process because there is a lot of unfinished business in its construction. It’s not by a political desire, it is by necessity. Will this process of reform exclude other countries, non-euro member states? To some extent: yes. But that has always been the case! The choice in the end is for the non-eurozone countries to join the currency. And if they do not want to do that—there’s nothing in the system that could force them. But they cannot expect that the necessary changes in the euro construction will not be tackled. Further integration of the eurozone, which is necessary in order to tackle the structural flaws, does not necessarily mean that the European Union will break up in two parts, the core (eurozone) and the periphery. That risk would only start to materialize if the eurozone countries decided to deepen the integration in other than economic areas, such as defense, security, foreign affairs, etc. Only then we would be in a situation of the eurozone versus the periphery. The mere addressing of the structural flaws in the European Monetary Union is not dangerous. Members of the eurozone do not have a choice, it is something that has to be done. In concrete terms, they have to finish the construction of the Banking Union, introduce some form of common deposit guarantees. Finally, some countries of the eurozone will have to accept that there needs to be some sort of fiscal transfer within the area. Whether this fiscal transfer is achieved by fiscal means or by carving out of the European Union budget—that is secondary. Much depends on the ability of France and Germany to come together on these crucial issues. So, to conclude: there are political risks attached to further integration of the eurozone within the model of “multi-speed Europe.” But far greater risk would be to allow the eurozone to fail. The consequences of that would be incalculable. European Union could afford it.

The question is whether Germany and France can find a common ground. Both countries so far have been presenting rather opposite views on economic governance. France preferred debt expansion, Germany called for austerity. Moreover, there will be elections in both countries this year.

My expectation is that both sets of elections are not going to produce a disaster, we are going to have centrist governments in both countries. Slightly different, perhaps, but Europe-oriented nonetheless. Which means that we will have, for the first time since long, a window of political opportunity to strike a deal.

Would the EU budget lose importance if a new eurozone’s own budget were created?

It all depends on how one would design such a budget. Besides, the creation of a totally separate EU budget would require a Treaty change—which is not very probable. So, I’d rather expect a hybrid solution: either a part of the overall EU budget would be ring-fenced for the eurozone or new mechanisms, similar to the existing European Stability Mechanism [a guarantee mechanism for eurozone members—editor’s note], would be created. Having said that, some consequences for the non-eurozone countries are to be expected. Some countries might not be willing to keep the EU budget intact, make up for the financial loss caused by the Brexit, and create additional financial envelope for the eurozone—all at the same time. This is simply not politically possible. So, to address the new challenges, the funding of the Cohesion Policy and Agriculture Policy will be under pressure. Which, in turn, will have important implications for non-eurozone countries. There might be some negative consequences for them…

…which forces us to repeat the question: aren’t we risking a creation of permanent divisions within the European Union? Aren’t we facing a situation where the eurozone countries, debating on their own, would be making political decisions that affect the whole EU and not only their zone? Let’s imagine that one day eurozone members decide to establish common fiscal policy. It would affect the whole EU economy, not only the eurozone.

Of course! But in this scenario, it was the sovereign choice of the affected not to join the eurozone. It is inevitable that decisions taken within the eurozone will have impact on those who are not involved. The reality is that the eurozone itself is a form of permanent separation—as long there are countries that remain outside. As long as any given country opts for staying out of the area of common currency, there will be limits to the benefits and to the obligations as well. It is hard to argue that eurozone membership is easy. It is not. Countries that wish to get in have to sacrifice a lot. Among other things, they have to sacrifice parts of their sovereignty. It’s a question of do mestic political decision: in or out? Nobody could rationally expect to reap benefits without being the member of the eurozone. Every choice has its consequences. It is similar to the case of Norway: it opted not to be a member of the European Union. Instead, it is part of our Single Market—but without voting rights. And it has to pay a substantial amount of money to the EU budget. As things stands now, Poland, Hungary, and the Czech Republic are members of the European Union, but without voting rights in the eurozone. The rights of the non-euro member states that are provided by the Single Market legislation will not be challenged. The freedoms that constitute the backbone of the Single Market are written in the Treaties. European Commission will guard them, there’s always a possibility to recourse to the European Court of Justice. The fact that eurozone decisions affect non-eurozone countries does not mean that the latter are stripped of their rights. There are legal safeguards, even in areas of differentiated (multi-speed) integration. One should also remember: the eurozone member states have majority in the EU, also in terms of population, as 70% of EU citizens live in the eurozone. So, theoretically, the eurozone countries will be able to decide something in their internal discussion and then to formally vote for it in the European Union Council. Countries who complain about being excluded are in fact excluding themselves by not being willing to join the eurozone. Besides, when they were joining the EU, they legally committed themselves to join.

Some of those countries claim that their commitment from 2003 is no longer binding, because the eurozone itself has changed so much. It is a different eurozone now than it was 14 years ago when they were committing to it.

I’ve heard this argument before, but I do not find it credible. First, no country is being forced into eurozone, it still is a choice. Second, it is either unrealistic or deliberately unrealistic to think that something like the economic union or even the Single Market couldn’t change overtime. And in the end countries such as Poland have the choice to decide whether they want to stay within the European Union or not. There’s no force obliging a country to stay in the EU. If the framework of the European Union has changed so much in the intervening years—changed so much that it is no longer in their interest to stay—then there is a choice they will have to make.

So, what should be the advice to non-euro member states from the Central Europe: Bulgaria, the Czech Republic, Hungary, Poland, and Romania? Should they accelerate
their efforts to join the euro?

Yes. Especially after the Brexit vote, we are moving towards the European Union, where by far the biggest economic and political weight will be within the eurozone. So, for countries that are currently outside, it limits them both in terms of economic integration but also in terms of influence. Still, there is a price to pay: and this price for many countries at the moment is a very difficult one to pay. It is the price of sovereignty.

Is the transfer of sovereignty the only price to pay? Many economists say that being outside the eurozone allows for a high degree of flexibility in times of crises. Poland is a good example. In 2008, when the crisis hit the hardest, this country was the only one to avoid recession, partly because its currency could devaluate due to the exchange rate fluctuations.

It is inherently in the interest of those countries to join the euro. We’re living now in a much more volatile world. The risk of currency fluctuations and the instability that this might bring is not to be underestimated. Look at what is happening to the British pound now. Imagine the same happening in Hungary or Poland. With the trade ties, with high level of import penetration, consumer goods, etc.—the effects would be more dramatic than the ones we are seeing in the UK. On inflation, consumer process, wages, living standards. I’m not denying that in certain situation, the flexibility of currency fluctuation is helpful. What I’m saying is that you cannot offset structural weaknesses of any given economy by a constant policy of devaluation.

Greece’s example shows that it might be better not to join the euro as long the domestic economy is not fully ready.

One should not speculate what would be the situation in Greece if it was not in the eurozone. It is not the common currency that plunged the country into crisis. Structural flaws in the economy did, the ones that existed there for many years. The only thing the common currency did was to show these flaws.

Without the euro, Greece would be able to devaluate its currency in order to regain competitiveness.

I doubt it. Does anybody seriously believe that Greece would be able to print drachmas in order to pay pensions, health service, etc.? By now, this currency would be worthless. Besides, this is a discussion how to make the eggs out of omelet. It is impossible, we are where we are, and we can only think how to improve the situation in Greece, member of the eurozone. Countries need to reform their economies
regardless of their willingness or not to join the euro. It is in their best interest, as simple as that.

Some of the citizens might see it differently. Across the whole continent, populists are on the rise. Marine Le Pen might be the next president of France. She openly calls for exiting the eurozone, if not the EU altogether.

Yes, we have a populist challenge in many countries. But let’s see what happens this year. I do not think populists will do as well as they hope to. Partially because of what’s currently happening: there is a backlash against populism after Brexit referendum and after Donald Trump. People all over the Europe are starting to rediscover the value of the EU, talking about their belonging, about the security that the EU gives. The success of Martin Schultz in Germany is a stunning example of German population looking for something different than a negative, nationalistic populism. You have the same effect in France with the candidacy of Emmanuel Macron. Macron is not considered to
be part of the old establishment but at the same time he represents the progressive, forward-looking agenda. The defining line of the political battle we all face is between people who believe in openness and liberal democracy, and those who don’t. That of course would require deep changes in the established political forces, political parties. It will also affect many other institutions like media or trade unions. We have to show our citizens that openness of our societies is something that helps us dealing with the challenges we face, not something that threatens us. Of course, the EU will need to be better at protecting its citizens—because they feel threatened, although they have not been
harmed objectively. What we are dealing with in many cases is the fear and perception of danger, not a real damage. People ask questions about their future: will they still have jobs, will they be able to compete, what will happen to their kids, the next generation, will the society still be cohesive? And dealing with fears and perceptions is often more tricky than dealing with real problems. For example, if we had a situation where we could identify the true losers of globalization, then the classical response would be “distribution.” We would materially compensate those who lost because of the globalization. But it won’t help fighting the fear—because the ones we would have to tax in order to collect additional resources are the ones who are actually afraid of the future.

Governments seem to bow to populist calls. Are Germany and France right, when they are pushing for changes in the posted workers’ directive, which basically boils down to limiting the freedom of movement of the workers? By doing so, French and Germany governments bow to the populist calls, demanding that the “Polish plumber” (or lorry driver) is no longer allowed to undermine the local pay and working conditions.

If there are abuses of freedom of moment, like unjustified claims for social benefits, then we need to address them. But I am not saying that this is the case with posted workers. It has to be proven. In the end, the European Court of Justice will always weigh the decisions taken by governments against the letter of the Treaties. Freedom of movement is in the Treaties. Unjustified limitations, with an aim to limit the competition, will by stricken down by the court.

European Commission often says that a new Europe, the Europe of results, is needed to overcome the current mood and regain public support.

Yes, but these need to be real results: just saying that we are doing something—and not delivering—is far worse than doing nothing. In the past, the EU has often created expectations it could not meet for lack of competences and mechanisms. Just to give the example: the idea that Europe will address youth unemployment was deeply wrong. Even at the national level we don’t have the tools to tackle this problem efficiently. Expectation management is crucial: we have to tell the people that there are things that Europe can do, and that there are things
it can’t do. The title “Europe of results” in itself is not the answer to populism.

Fabian Zuleeg

is the chief executive and chief economist of the European Policy Centre, a Brussels-based not-for-profit think tank on European Union affairs. He is also an honorary fellow at the Europa Institute of the University of Edinburgh and an honorary professor at Heriot Watt University. His research focuses on the economic and euro crises, including the reform of the new economic governance at eurozone level. He also works on the Single Market, Digitalisation, European labour markets and the EU budget. He has a long-standing interest in the political economy of European integration, with a particular focus on the UK-EU relationship, analysing the impact of Brexit on the UK and
the rest of the EU, as well as the process of separation. He was appointed to the Standing Council on Europe, established by Scotland’s first minister after the Brexit vote in June 2016. He regularly comments on current political and economic issues in the EU in the media.

Konrad Niklewicz

Konrad Niklewicz is currently the Wilfried Martens Centre for European Studies Visiting Research Fellow and managing director of the Civic Institute and a guest lecturer at the University of Warsaw. He previously served as Spokesperson for the Polish Presidency of the Council of the EU and Undersecretary of State at the Ministry of Regional Development. Previously he was a journalist and editor of the Gazeta Wyborcza.

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