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Tuesday, October 07, 2008

EU integration under the stress test

The FT's Brussels blog notes that officials in Brussels are resorting to the predictable thinking that the events of the past week can be used to catalyse a fresh integrationist dynamic in Europe:

the 1992 crisis in the European exchange mechanism appeared to deal a serious blow to the goal of creating a single European currency. But the reaction was spirited. Only seven years later, the euro was up and running.

Similarly, it took the 9/11 terrorist attacks on New York and Washington in September 2001 to prompt EU leaders into agreeing, at a summit just three months later, on the principle of a European arrest warrant. This allows the swift transfer of criminal suspects for trial and detention from one EU member-state to another...

On the face of things, the financial crisis offers a perfect opportunity to push forward closer European integration.

This could be right, or could be wrong. There is a clear narrative developing that Europe faces a very stark choice between closer integration or a reversal of the current contradictory model of full monetary union and only partial political union. There are three key faultlines that have profound implications for the EU as we know it: 1) EU competition policy, and the tensions raised by unilateral declarations of deposit guarantee with state aid rules/ bank nationalisations; 2) The Stability Pact, and the implications for budget deficits of dealing with the crisis; 3) the longer term debate over a single monetary policy, and the lack of institutional capacity of the ECB or central institutions in dealing with a true banking emergency.

Larry Elliot notes succinctly:

In the long term, monetary unions do not survive without political union, and so the…conclusion is that there are pressures both for closer integration and for disintegration. The crisis could strengthen those who argue that the halfway house is inherently unstable and will remain so until there is fiscal as well as monetary union. On the other hand, the growing threat of recession may make some countries question the value of remaining in a monetary union.

It is important to note that this year has seen the process of EU integration questioned not only in terms of its economic legitimacy, but also in terms of its democratic legitimacy - through the Irish No vote, following on the heels of the rejection of the EU Constitution by voters in France and Holland.

Two of the key pillars underpinning consent for the EU as a process of irreversible centralisation are now facing a severe stress test.

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