Effective sovereignty must have normative qualities 9 January 2018 There is this view, mostly among economists, which holds that Europe’s real problem is the lack of financial integration. Private capital remains intimately linked to its domestic economy and, by extension, to the nation state. The two become inter-dependent. The resulting feedback loop was evident at the height of the eurocrisis and remains a major concern to this day due to its pernicious side effects. As such, the thinking goes, financial integration at the European level will sever the link between domestic public finances and private capital. Nation states within the EU will no longer find themselves tied to the fate of
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Effective sovereignty must have normative qualities
There is this view, mostly among economists, which holds that Europe’s real problem is the lack of financial integration. Private capital remains intimately linked to its domestic economy and, by extension, to the nation state. The two become inter-dependent. The resulting feedback loop was evident at the height of the eurocrisis and remains a major concern to this day due to its pernicious side effects. As such, the thinking goes, financial integration at the European level will sever the link between domestic public finances and private capital. Nation states within the EU will no longer find themselves tied to the fate of their local banks and vice versa. Combined with credible, universally enforceable mechanisms for placing loses on private entities themselves (bail-in instead of bail-out), this decoupling will prove sufficient to address the design flaws of the euro area. There is no need for a fiscal union to carry out stabilising transfers, as any corrective forces will emerge within the newly established financial union.
There is a kernel of truth in this. Public and private finances need to be decoupled. Europe’s single market can be integrated further, certainly for capital as well as for consumer goods (e.g. online transactions and the circulation of intellectual property). There can be closer oversight of financial activity to address systemic risks at an early stage. Much can be improved. And, of course, bankers should never again be rescued with taxpayer money. Still, the argument rests on at least a couple of questionable assumptions:
- Quasi apolitical means to equilibrium. As with many economy-centric views, where state involvement typically is a driver for inefficiency and where equitable outcomes are most likely in a more-or-less minarchist system (minimum state), this view treats financial integration without political integration as a necessary good. Proponents of such beliefs tend to argue for depoliticising processes, in order to let the market forces do their magic. What they fail to realise is that their exhortations for not involving the state are only targeted at policies that tend to ameliorate the failures of the market. They are quite content with having the state forward their agenda. A financial union in Europe would require considerable political involvement to be established. It would be the outcome of intelligent design, underpinned by a series of legal-institutional arrangements. So the appeal to keep politicians at bay is subject to a double standard. Have them involved to promote the interests of capital, but prevent them from doing anything for the rest of us. On a side note, this criticism also applies to the original design of the Economic and Monetary Union, with its pretenses for market-driven correctives to any excesses.
- Ostensible moral neutrality of capital. Following the reasoning of pro-finance solutions to politics, the cause of the Great Recession can be attributed to “too much state”. Which would be correct if by that we mean that there was too much political support for the abuses of frivolous finance. Financial integration can never be a sufficient condition for achieving optimal social outcomes, as is clear by the global movement of capital. One need only look at how multi-national mega-corporations employ intricate tax avoidance schemes through a series of favourable tax jurisdictions. Big capital has no problem moving across borders. It already lives in an ‘integrated’ economy above/across the nation states in which it operates. Rather than that being a catalyst for benign equilibrium, it is the single most important reason for mischief. Assiduous capitalists employ an army of lawyers and accountants in order to erode their tax base and to siphon profits to their coffers without paying their fair share back to society. Rising inequality is partly attributed to this asymmetry. Capital adapts to the circumstances with far greater ease than the rest of the factors of production (in this case by less encumbered movement across borders). To think that big money is morally neutral is naïveté, given the ample evidence for the ruthlessness with which it exploits any loophole or sign of weakness with impunity, in pursuit of its own interests, even to the detriment of the rest of society.
The EU enjoys effective sovereignty
Commenting on Martin Sandbu, who is a proponent of financial union as a substitute for fiscal union, Dani Rodrik argues that the EU cannot have full financial integration because sovereignty remains with the Member States. In Mr. Rodrik’s own words (emphasis my own):1
Advocates of cutting the Gordian knot between private and public finance recognize that governments’ approach to banks must change radically if this separation is to work. But it is not clear that their proposed remedies would work. As long as economic policy remains the province of national governments, sovereign risk will likely continue to distort the operation of cross-border finance. Sovereign states can always change the rules ex post, which means full financial integration is impossible. And the costs of local financial shocks cannot be diversified away as easily. […] But EU member states are in a very different position vis-à-vis the EU institutions in Brussels. Because they retain sovereignty, they cannot make similarly credible commitments not to interfere with financial markets. So the risk remains that a severe enough financial shock in the EU will affect all other borrowers in the same country in a self-fulfilling manner. Pretending that we can separate private from public finance may exacerbate, rather than moderate, financial boom-and-bust cycles.
Mr. Rodrik is comparing EU Member States to states in the USA, arguing that the former retain their sovereignty and, therefore, can change the rules ex post provided the circumstances. A genuine and credible financial union is impossible because of national sovereignty over economic policy.
Unless Mr. Rodrik has worded this statement very poorly, the claim is flatly incorrect. EU Member States do not have sovereignty on economic policy, certainly not in the Westphalian sense of it being absolute. To summarise what I have explained at length in my last seminar about sovereignty in the EU federal system:2
- There exist two forms of sovereignty. Headline sovereignty and effective sovereignty. The former pertains to the normative claims a state has on its supreme political authority. It does not imply whether the polity can in fact exercise its rightful powers under the circumstances. In the EU, only nation states have headline sovereignty. The EU itself is set up as an organisation that enables the pursuit of common objectives by its Member States (the nation states that have signed and ratified the EU Treaties). Whereas effective sovereignty is about the actual capacity to initiate and implement a policy programme. It is the real power of wielding supreme political authority, of having the first and final say over what gets to be done. The EU does have effective sovereignty, which it exercises over a range of areas of policy, in accordance with rules defined in the Treaties (the Union’s de facto constitution).
- The use of effective sovereignty in the EU is governed by the constitutional principles of conferral, subsidiarity, and proportionality. These define the limits and the use of Union competences. In other words, they frame the distribution of powers in the EU, from the supranational to the national level, providing a guide as to who does what over a given area of policy. Another way of describing the distribution of competences, is to call it the “vertical separation of powers”, which is a quality of all political systems with multiple levels of administration.
- The principle of conferral is directly linked to the raison d’être of the EU, which as stipulated in Article 1 of the Treaty on European Union, is that the Member States “establish among themselves the European Union on which they confer competences in order to attain objectives they have in common”. It is the legal principle that outlines the areas of policy where there is an EU involvement.
- There are three degrees of conferred authority: exclusive competence for the EU, shared competence between the EU and the Member States, and supportive competence for the EU in Member State actions. The first covers policies that are to the general interests of the EU as a whole, such as competition policy for the single market. Shared sovereignty concerns issues that are at the intersection of the national and supranational spheres, or which unfold across borders. The economic governance of the EMU is a prime example. As for supportive competence, it relates to policies such as culture, education, and tourism, granting the weakest form of power to EU institutions.
- These three degrees reflect the reasoning of the principle of subsidiarity, which states that power should be commensurate with the specifics of the case and should be exercised at the level of administration of the affected citizen. As such, issues with an EU-wide scope are matters of exclusive competence. Phenomena that have a national as well as supranational dimension fall under shared competence, and so on.
- Complementary to these are a whole range of laws. For economic governance, we have the two-pack and the six-pack as well as the Stability and Growth Pact and the fiscal compact. All limit the discretion of national governments and force them to work together and with EU institutions in formulating macroeconomic policy.
In short, the EU is sovereign in the practical sense of effective sovereignty and, for all intents and purposes, its functioning is isomorphic to that of formal federations. It still has ways to go, but that is a matter of how good the system is in a normative, democratic sense.
The gist is that sovereignty in the EU is not monolithic. It is policy-dependent and has multiple scopes. For the purposes of this article, suffice to note that “national sovereignty”, understood as absolute, does not exist in the European Union, certainly not for economic policy (obviously the case also for monetary policy for countries whose currency is the euro).
Whatever normative claims nations may have on the origins of sovereignty are practically irrelevant. What matters is how quotidian politics are conducted. Power is not located at the national level.
And here is a subtlety that some observers of EU politics often neglect: even inter-governmental decisions are a form of supranational effective sovereignty, because (a) they are exogenous to any one nation state treated in isolation, and (b) they flow from the European Treaties or EU legal framework in general.
Financial union is no substitute for politics
As such, Mr. Rodrik’s argument concerning the unfeasibility of financial integration in the EU is quite off the mark. The contrary is true. It is possible in the same way most aspects of economic policy are already defined at the supranational level.
The real concern here is whether financial union is a sufficient substitute for a genuine fiscal union and, by extension, a fully fledged political union. I think it would be largely insufficient and would indeed exacerbate the problems with the design of the EU/EMU by granting even more power to the financial elite.
The correct line of reasoning against views such as those of Martin Sandbu, is that they have not learned from Europe’s recent history. They do not deviate from the neoliberalism that was at the core of the original EMU. They will thus repeat the same mistakes of being quasi apolitical and of naively treating capital as morally neutral.
My understanding is that if there is one thing to be drawn from the systemic crisis of the euro is that minarchist theories, regardless of their motives, tend to grant more power and leverage to a select few at the expense of all the rest, all while depriving the polity from the means of both preventing and ameliorating the failures of capital.