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    Royal United Services Instute

    OCCASIONAL PAPER

    Edited by Jonathan Eyal

    RETHINKING EUROPEThe Federalist Choice for a Continent in Crisis

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    Rethinking EuropeThe Federalist Choice for a Connent in Crisis

    Edited by Jonathan Eyal

    Occasional Paper, May 2012

    www.rusi.org

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    The views expressed in this paper are the authors own, and do notnecessarily reect those of RUSI or any other instuons with which theauthors are associated.

    Comments pertaining to this report are invited and should be forwarded to:

    Dr Jonathan Eyal, Director, Internaonal Security Studies, Royal UnitedServices Instute, Whitehall, London, SW1A 2ET, United Kingdom, or viaemail to [email protected]

    Published in 2012 by the Royal United Services Instute for Defence and

    Security Studies. Reproducon without the express permission of RUSI isprohibited.

    About RUSI Publicaons

    Director of Publicaons: Adrian JohnsonPublicaons Manager: Ashlee Godwin

    Paper or electronic copies of this and other reports are available bycontacng [email protected].

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    Contents

    Foreword vLord Mandelson

    Introducon: When Democrac and Fiscal Decits Combine 1Jonathan Eyal

    Future Constellaons of Europe: Strategic Reecons 11Werner Weidenfeld

    The Democrac Inadequacies of the Proposed Fiscal Compact 17Declan Ganley

    Alexander Hamilton and the Debts that Helped Create the United States 23Declan Ganley and Brendan Simms

    Could Americas Founding Fathers Save Europe? 27Joel Faulkner Rogers and Sean Kirwan

    A Scepcal Perspecve 37Malcolm Riind

    Europes Halfway House 43Michael Strmer

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    Foreword

    HELMUT Kohl once said that the queson of European Union was thequeson of war and peace in the twenty-rst century. This sounds

    exaggerated in part because it has turned out to be true. European integraonhas transformed Europe in the course of half a century. It has made militaryconict between the states of Europe all but inconceivable. And because it isinconceivable, we take its absence for granted.

    The European Union poses much more troubling and ambiguous quesonstoday. Kohls Europe enters the second decade of the twenty-rst century inbad shape. At the heart of its problems is an inadequately designed currency

    union, the weaknesses of which have been terribly exposed by the 2008banking crisis and the subsequent crisis of sovereign debt. As I write, Greecewobbles on the edge of this currency union, eecvely a ward of the EU andthe IMF.

    Most observers now accept that the Eurozones aw was the aempt tocreate a single currency without the polical and scal union to supportit. Many argue that the only way to resolve the Eurozone crisis now is totake that step into scal union. Yet we also know that the reason this unionwas never seriously aempted in the 1990s is because Europeans remainambivalent about polical federalism in Europe, no maer how successfulEuropean economic integraon has been up to this point. Europe has solvedthe war and peace queson in the tweneth century, but Europeans are lesssure what queson the Union is there to answer in the twenty-rst.

    In reality the European sovereign debt crisis and the prescripon of a bignew leap into scal union has exposed the other crisis in Europe policallegimacy. The challenge for the EU now is to overcome the Eurozonedebt crisis in a way that helps resolve this ambiguity, rather than makingthe crisis of legimacy worse. This collecon of essays deals with preciselythis challenge and these quesons. How powerful is our sense of European

    polical identy? Can polical federalism work in Europe? Can Europe learnfrom Americas experience of connental federalism? Is Europes problema democrac or delivery decit at the level of European instuons, or isit a more profound issue of identy and solidarity? If we take the task ofsecuring some form of European Union for the twenty-rst century seriously,these quesons will have to be answered before we are done.

    Lord Mandelson

    Former UK Cabinet Minister and European Commissioner

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    Introducon: When Democrac and Fiscal

    Decits Combine

    Jonathan Eyal

    Europe is rapidly approaching one of the most crical decisions in its post-war history: it can either oer an unlimited amount of cash to failed statessuch as Greece thereby unleashing high inaon, or it can start ejecngsome countries from the euro, and risk the collapse of the connents singlecurrency. In both cases, the amount of social and polical dislocaon whichEurope will experience is bound to be unprecedented; quite literally, the

    connent will be reinvented, almost regardless of which one of the two mainopons is ulmately adopted.

    European leaders sll like to pretend that the crisis is temporary andcontainable; plenty of weasel words are being uered about the crisis beingimported from the US and being exacerbated by those nasty Anglo-Saxonspeculators who have taken it upon themselves to destroy Europe for noother reason than, well, they are Anglo-Saxon. Franois Hollande managedto get himself elected as Frances president with the simple message thathandling the crisis was just a maer of the triumph of the will: one can simplystare back at those nasty speculators and they will just go away. In fact, thereal problem lies with a euro project which was always misconceived. And,as secret German diplomac documents recently made public indicate, thewarning signs were there from the start, known to all the policians at thatme, but sll ignored. The history of the euro is a copybook case on how notto construct a connent-wide policy.

    Told You So

    It is by now largely forgoen that, when the idea of creang one currencyfor Europe was rst mooted over two decades ago, leading economistsreacted with astonishment. In a memorable arcle published in 1992 in The

    Economist, Professor Marn Feldstein from Harvard University predictedwith astonishing accuracy Europes current crisis, largely based on his analysisthat a euro currency unit without a single government or a single naonalbudget was bound to fail.

    But as Feldstein and all his colleagues soon found out, Europes leaderswere simply not interested in their views. For the impetus that led to theconnents monetary union was polics at its most basic: raw emoons. Inessence, the euro was the result of a deal under which a newly reuniedGermany gave up its own currency in order to reassure the rest of Europethat it had no intenon to become the dominant power. It was a deal hatched

    between French president Franois Mierrand, born during the First World

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    Rethinking Europe2

    War and obsessed with the tragedies of the Second World War, and German

    Chancellor Helmut Kohl who believed that his own Germans are part-naonand part incurable disease, people who must have their hands ed behindtheir backs, for otherwise they would unleash another war.

    Both leaders knew that the euro amounted to the riskiest project the EU hadever undertaken, as well as being the most audacious currency innovaonsince the establishment of the US dollar in 1792. But so were the ancipatedpolical rewards: a common currency resulng in a true European union. Andthe parallels with the US greenbacks made the eort even more worthwhile:European policians felt giddy at the idea that the euro might supplant theUS dollar as a global reserve currency. Compared to such a grand vision, the

    queson of whether the euro could actually work seemed trivial.

    The historical context of the me when the euro was hatched is the onlyexplanaon why otherwise intelligent and educated people fell for suchschemes. For these were the heady days immediately aer the end of theCold War, the me when the Wests polical model appeared triumphant.European leaders genuinely believed that they walked on water, that theycould shape their desny in any way they wished. Ironically, therefore, justwhen communism died in Eastern Europe, just when Karl Marx appeareddiscredited, Western Europe embarked on its biggest Marxist exercise: thatof creang a currency which deed all sound economic or polical logic, onthe assumpon that policians dictate markets, not the other way around.Karl Marx must be smiling from his grave.

    The Maastricht Treaty which eventually led to the creaon of the euro didcontain some safeguards: the currency is run by a ercely independentEuropean Central Bank (ECB), countries which behave irresponsibly cannotexpect to be bailed out and penales are to be applied on naons whichexceed specic budget decit criteria. However, as John Maynard Keynesonce warned in the context of the post-First World War selement, treaesoen solve one problem, but cause the next.

    And so it proved. The ECBs narrow mandate to ensure just price stabilitywithout any reference to problems such as unemployment or economicgrowth became part of the euros problem. So did many of the targets whichEurozone governments were expected to meet.

    The problem here is not so much that the safeguards were not adhered to although they were not but, rather, that the targets were oen pluckedout of thin air, with no basis in either sound analysis or classic economictheory. The denion of price stability in the Eurozone as an increase of nomore than 2 per cent yearly is one example of such supposedly scienc

    economic targets gone mad. No modern Western economy ever achieved

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    The Federalist Choice for a Continent in Crisis 3

    this consistently, over a long period of me. In the decade preceding the

    introducon of the euro, price inaon in the US averaged 3.3 per cent, andin Germany it was 2.8 per cent. So, a totally unaccountable instuon likethe ECB was tasked with the job of achieving what, at least according tostandard historical performance, was ulmately unachievable. The sameapplied to the famed limit on budget decits, which was set by treaty at 3per cent of gross domesc product. Few now remember that this gure wasactually simply invented by President Mierrand in France during the 1980s,and nobody ever explained then or ever since why it was signicant.In what way would, say, a decit of 4 per cent of GDP be destabilising tothe euro system? No answer was ever provided; the gure became one ofEuropes feshes, and remains so to this day. Paradoxically, therefore, while

    the polical leadership of the euro remained non-existent, the stascalstraightjacket proved too ght.

    Sll, the euro could have worked, had it been limited to a core number ofnaons whose economies and government standards were roughly similar.But, as hitherto secret German diplomac documents released for the rstme in early May indicate, the decision was taken early on to admit almosteveryone into the euro, regardless of their economic condion or recordof nancial performance. When Germanys nance ministry warned thecountrys leader in 1998 that the admission of Italy into the Eurozone carriedenormous risks, the response from Chancellor Kohl was dismissive: we allshare a certain love for Italy, wrote his top adviser at that me, in an eortto explain why his boss was not prepared to look at the economic facts.

    The German magazine Der Spiegel, which obtained these secret documents,calls the decision to admit everyone as Operaon Self-Deceit. And for goodreasons: it rebounded on the Germans, and may yet doom the euro altogether.Southern European economies have suered from deep structural problemswell before the introducon of the euro: Italys governance was always faulty,Spains unemployment rates were always higher, and Greece had been indefault of its debts for nearly half of its history as an independent state. Yet

    all were admied into the euro in the hope that the new currency wouldpersuade them to change centuries-old bad habits.

    Nothing of the kind happened. The abundance of credit allowed everyoneto avoid making structural reforms. And, because interest rates were roughlythe same across the connent, nobody noced that some countries weresinking. The result was that, by the me the crisis struck, Greece was alreadybeyond salvaon, while Italy was too big to bail out.

    Greece Slides Out

    Although few dare say so publicly, most European leaders now privately

    accept that the unthinkable is about to happen: Greece will have to leave

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    Rethinking Europe4

    the euro currency. Financial markets are already making preparaons for

    an event they nickname Grexit. Sll, the manner by which Greece departsfrom the Eurozone and the way the aermath of crisis is handled will shapeEuropes desny for years. The connents biggest polical tests are justbeginning.

    In theory, Greece can sll pull back from the brink. Fresh elecons in Junecould produce a government pledged to respect the naons obligaons.Furthermore, there is no provision in the exisng European treaes for acountry to abandon the currency. But the reality is that the bale for the soulof Greece is already lost. Two-thirds of the countrys voters seem to supportpares determined to stop repaying the countrys debts, while claiming that

    they also wish to keep the euro. In eect, a majority of the Greek naonwants to have its cake and eat it.

    The culprits for this curious outcome are Greeces own policians, whogenerated and sustained a collecve mood of self-denial. A large number ofordinary Greeks genuinely believe that their country is merely a vicm of aplot by bankers, who rst encouraged Greece to borrow excessively, and arenow lending further money at huge interest rates in order to recover theirdebts. The fact that Greece itself is responsible for its excessive borrowing,or that the country has beneed from the largest single bailout in historyimpresses very few. Nor do many Greeks seem to understand that the 200billion in addional help given to them over the past two years is the hard-earned money of other European taxpayers; the view from Athens is thatthese are funds plucked out of thin air by fat bankers. Germany, whichprovided the bulk of the bailout money, gets no gratude either; some Greeksbelieve that the Germans should oer the cash for free, as compensaonfor the Second World War.

    It is now impossible to reverse this poisonous Greek narrave. And it is equallyimpossible to see how any Greek leader can persuade his own naon to sckwith austerity policies which have already slashed the naons wealth by a

    h and promise to do exactly the same again by the end of this decade. Theconclusion is, therefore, inescapable: default is looming. More ominously,the default will not come in an orderly fashion, as the result of negoaons,but will be a messy aair.

    Greek policians such as Mr Alexis Tsipras, the youthful leader of Syriza,the radical le movement which sprung out of nowhere, assume that theycan blackmail Germany into connuing to oer cash without precondions.The defeat suered by German Chancellor Angela Merkel in recent localelecons is also interpreted as a move away from the policies of austeritywhich she is alleged to have foisted on the rest of Europe. But while a

    weaker Merkel government may signify a greater German readiness to relax

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    The Federalist Choice for a Continent in Crisis 5

    austerity condions on other European naons such as France or Spain, it

    does nothing for Greece. German voters are not clamouring to hand overtheir money to the Greeks and, with Greece accounng for only 2.3 percent of Europes economy, the country is dispensable. Indeed, making anexample out of Greece by rejecng any concession is almost guaranteed tobe Chancellor Merkels way of showing to the rest of Europe that Germanyshould never be taken for granted.

    The Greek default may come as soon as this summer, when the countryhas pledged to cut another 11 billion out of its government expenditure,something which is highly unlikely to happen. If the EU stops oeringmoney then, Greece will default almost immediately. Needless to say, Greek

    policians will blame Germany for this outcome, although the blame willbe enrely theirs. What follows aer that amounts to as one EU ocialpoecally put it a jump into the abyss without a parachute. A Greekdefault could trigger a Europe-wide panic, leading to the collapse of Europescurrency and a global economic crash.

    But there are good grounds for believing that this is too alarmist. Most ofthe Greek debt is already in the hands of European governments or theEuropean Central Bank, which means that Greeces default will not spell aEuropean-wide banking meltdown. Greek banks will, of course, collapse.The country will have to issue a new currency, which will promptly crash.It will also have to temporarily close its borders in order to prevent capitalfrom eeing. And, as unemployment soars, the chances of civil strifeinside Greece are high. The technical dicules which could be createdby a Greek default remain mind-boggling. But although they all deny it,European governments have spent months secretly preparing for suchan eventuality. Nor would it be surprising if we discover that Greece hasalready printed an alternave currency: most countries keep alternavebank notes in storage for a naonal emergency, and it may not have beenenrely by accident that the Greek naonal bank upgraded its Brish-madeprinng presses last year.

    The key for the rest of Europe will be to make sure that a Greek defaultremains conned to that country. This will mean that other vulnerablenaons, such as Portugal or Spain, would immediately be oered addionalbailout funds even if they did not need it; the purpose should be to reassurepeople that countries which observe their obligaons retain the benetsof Europes single currency. In the process, Europes credibility will suer apermanent blow: it will be impossible for the connent to claim that it isan oasis of stability aer allowing one of its members to default. So, fordecades to come, Europe will have to pay a risk premium on its borrowing.Sll, Jens Weidmann, the head of Germanys central bank, the Bundesbank,

    was probably right when he recently pointed out that for Greece the

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    Rethinking Europe6

    consequences would be much more grave than for the rest of the euro zone.

    Investors will conclude that Greece was a uniquely horrible case, and thatthe countrys fate need not be replicated elsewhere in Europe.

    Ironically, however, Greece will not escape its obligaons by defaulng. If itwishes to remain part of the EU, the country will sll have to repay every centit owes and may have to do it the hard way, with its own devalued currency.The Greeks will also be unable to borrow, so they will be confronted by therather unusual experience of having to live within their means. The naonwhich invented the word tragedy should grasp this situaon prey well.And, as most Greeks recall, powerful tragedies are invariably followed bycatharsis, the cleansing and purging of the soul.

    Austerity versus Growth

    But, while the Greek drama unfolds, another bale is now coming to the foreover the possibility of oering mutual debt, contracted and sustained by theEurozone states. The so-called Eurobonds would essenally oer a Germanguarantee, allowing weaker countries such as Spain or Italy to borrow atlower interest rates. The principle, as President Hollande put it, is one ofEuropean solidarity. Internaonal Monetary Fund chief Chrisne Lagardeadded her voice to this chorus: More needs to be done, parcularly by wayof scal liability-sharing she told a press conference this week. Yet Germany,together with a dwindling group of small northern European countries,remains adamantly opposed, mainly because it believes that Eurobondswould only make Europes current troubles much worse.

    The rst snag with the Eurobond concept is that it is actually illegal: underthe Maastricht Treaty (Arcle 125) governments are precluded fromguaranteeing each others debts precisely in order to ensure naonalresponsibility for borrowing choices. Given appropriate polical will, waysaround this ban can be invented. Aer all, European governments havealready circumvented treaty obligaons by creang a fund to save naonsfrom bankruptcy, and there is no reason why this fund could not issue

    Eurobonds as well.

    However, maers may not be so simple in Germany, where the countrysconstuonal court has taken an increasingly jaded view of such operaons;should the court decide to strike down the Eurobonds as illegal, this couldsend shockwaves throughout Europes nancial markets, potenally eventearing the euro currency apart.

    Yet for German chancellor Angela Merkel, the polical hurdles remain farmore compelling than the constuonal ones. Opinion polls in Germanyindicate a rapidly-growing disenchantment with the euro; one poll shows

    that a majority of German voters now consider the euro a mistake. And

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    The Federalist Choice for a Continent in Crisis 7

    huge majories oppose the use of any addional German cash to bail other

    naons.

    However, even if Dr Merkel was willing to ignore these public opinion trends,the costs involved in creang Eurobonds are mind-boggling for her country.By assuming responsibility for the debt of other countries, Germany willlose its top triple-A credit rang, since its overall debt liability will increase.In eect, therefore, the Germans will pay twice: to cover debt liabiliesshould others default, and for higher interest rates demanded on Germanysown borrowing. Mr Oo Frick, the budget expert from the German FreeDemocrats, the junior partner in the coalion government, esmates thathigher interest charges alone will add 15 billion ($24.2 billion) a year to

    Germanys government expenses. Eurobonds will drag us all further into thedebt swamp, Mr Frick concludes.

    Yet by far the biggest objecon to the scheme is praccal: it does nothingto resolve Europes long-term debt problem, and could actually make itworse. Europe has already experienced a de facto Eurobond during much ofthe last decade, when all the countries operang the same currency wereable to borrow at similar and very low rates because investors assumed wrongly as it turned out that Greek or Portuguese debt was as safe asGermanys. The result was a disaster: in Greece the government borrowedand spent as though money was going out of fashion, while in Spainor Ireland, ordinary cizens did the same, and ended up dragging theirnaonal banks down. The moral of the story is that having one borrowingrate for the connent was a key factor in the crisis: countries which failto administer their nances properly should expect to pay more, andinvenng Eurobonds in order to keep borrowing costs down is preciselywhat should not be done.

    Besides, there is no evidence that the extra borrowing which will be nancedthrough the proposed Eurobonds will encourage economic growth on theconnent. Indeed, precisely the reverse may be true: once granted access

    to fresh lending, European governments will be tempted to postponepolically-dicult reforms, just as they have done since the 1960s. Growthnanced by debt? Those are the recipes from the day before yesterday, saysMs Maria Fekter, the uncharacteriscally blunt nance minister of Austria,one country which supports Germany. The arguments that Frances newpresident Franois Hollande is pung forward are nonsense, and got us intothis whole mess in the rst place, Mrs Fekter adds.

    True, the German chancellor is increasingly cornered. At the recent G8summit in Camp David, US President Barack Obama and Brish premierDavid Cameron urged her to ood Europe with fresh cash, or inject liquidity

    into the system as the more innocuous, technical term has it. Throughout

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    Rethinking Europe8

    Europe and parcularly in France, newspapers dismiss Dr Merkels behaviour

    as that of a housewife who supposedly can do nothing more sophiscatedthan just count the coins in her piggybank. Worse is sll to come at leastfrom her perspecve in the run-up to a European Union summit scheduledfor the end of June. But it is highly unlikely that the Germans will countenancea Eurobond issue, unless the enre Eurozone is breaking up. Dr Merkel iscricised for doing too lile and too late, but there is a reason for this: thecrisis is not of her making, her taxpayers have no interest in bankrollingothers, European solidarity is non-existent, and the instuons which aremeant to underpin the system are not t for the purpose.

    An Even Grimmer Future

    The euro may survive, even if as seems increasingly likely Greece isevicted from the system; the only way a currency zone like the euro diesis if its biggest member Germany loses interest in it, and that is highlyunlikely, for a whole host of historic reasons. Sll, whatever happens, theoriginal objecves of the enterprise already lie in ruins:

    The euro was meant to push Europe towards a polical union.Nothing of the kind happened: the instuons created since theMaastricht Treaty are all top-down, and lack democrac legimacy

    A single currency was supposed to buress a European identy,through a reducon in wealth disparies. In fact, it has doneprecisely the opposite, by spling the connent between havesand have-nots to a degree never encountered before

    The euro was intended to remind Europeans that their policalcreaon is synonymous with economic prosperity. But the currencyis now associated with decline

    A single currency was supposed to reduce transacon costs,consolidate banking services and strengthen Europes posion as aglobal nancial hub. But it was London outside the euro whichbeneed from the explosion in nancial services. Transacon costsbetween European banks have not been reduced

    The euro was designed to improve intra-European trade. It has doneso, but the biggest trade growth for Germany today is not Europe; itis China and other parts of Asia

    A single currency unit was touted as Europes way or remainingrelevant on the world stage. But Europes global decline hasaccelerated, and the euro is far from being regarded as a worldreserve currency

    Finally, the euro was designed to prevent rivalry between individualcountries and, most parcularly, to prevent the idea that Germanydictates on polical and economic maers in Europe. But thatsprecisely what Germany now has to do, out of necessity rather than

    choice.

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    The Federalist Choice for a Continent in Crisis 9

    Seldom before has there been such a comprehensive failure. But that is what

    happens when an abstract idea is pushed forward by a small group of leadersobsessed with exorcising the ghosts of history, rather than handling presentrealies.

    Dr Jonathan Eyal is a Senior Research Fellow and Director, Internaonal

    Security Studies, at RUSI.

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    Future Constellaons of Europe: Strategic

    Reecons

    Werner Weidenfeld

    EUROPE has a succinct code word: crisis. These phenomena of crises havebecome part of everyday life; the roune. There are debt crises, euro

    crises, decision-making and approval crises. This inaon of apocalypcdoomsday forecasts serves only to spread concern in an environment alreadyabundant with anxious percepons. You can almost hear the ironic response,which trauma do you fancy today?

    Europe lives with its contradicons alongside its considerable diculesstand equally numerous achievements. Concern for the common currencycan be countered by a reminder that the euro remains the second mostimportant reserve currency of the world, with a high degree of stability.

    There are complaints about a normavely disarmed generaon ofbreathlessness that allegedly causes Europe to remain in a frighul rigidity(Jrgen Habermas). The incapacitaon of Europe by the gentle monster ofthe Brussels bureaucracy is being cricised. Some exclaim, Europe, where hasyour magic gone?, yet advocates of this Europe maintain their entrepreneurialspirit. However, does the connent currently have genuine self-percepon?

    Stages of Evoluon

    What kind of polical substance is behind the hysteria of our days? Thehistory of the European project has seen several periods of crisis when theraonale for integraon has been quesoned. However, unl now, an answerhas always been found to inject immense vitality into the project. This iswhat is missing today. This is the dening feature of the new epoch theabsence of an identy forming target. However, all polical systems lack theability to act without the foundaons of a solid identy. It is worth reecng

    on the previous stages of European integraon.

    Immediately aer the Second World War, the connent was interwoven withmulple interconnected groups, all eager to learn the lessons of history andensure that naonalist wars and catastrophic disasters were not to provetheir sole historical legacy. From then on, this connent marked by widetrails of blood was meant to seek and realise the alternave to naonalism:the unicaon of Europe.

    Extremely demanding goals were set; polical union and a European federalstate among them. Aer all, numerous resistance groups in the Third Reich

    had already reected on this and had provided conceptual dras. At rst,

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    Rethinking Europe12

    however, this great ambion took only a humble step, not least due to Great

    Britains reluctance, and it was only in 1949 that the Council of Europe wasnally founded. This, however, was not a great success at the supranaonallevel.

    Another method was applied in order to achieve this goal; modest andspecic funcons were to be integrated. Subsequently, Robert Schuman andJean Monnet presented funconalist approaches for the European Coal andSteel Community. In this way, the former war-me enemy, Germany, couldbe controlled without being discriminated against.

    The impressive success in establishing the ECSC led to similar aempts in

    the defence eld, but the EDC failed in 1954. Nonetheless, having a preciselydened objecve helped in mes of crisis.

    Alternave, funconalist soluons were ordered. In the defence arena, thesovereignty seeking Federal Republic of Germany found other security policyanchors, namely NATO and the WEU. In the so-called Spirit of Messina, theEuropean Economic Community (EEC) and the European Nuclear Community(EURATOM) were negoated in 1957. On the other hand, due to the existenceof a clear objecve, the fundamental conicts between France and theFederal Republic of Germany became resolvable. Corresponding with Bonnswishes, France created a common market space, and, in-line with Pariss ownwishes, the Federal Republic of Germany accepted the nuclear componentshould be removed from military control. The intent was to achieve theextremely ambious targets of the Treaty of Rome.

    The rst signicant disagreement over these goals led to the rst integraoncrisis. In 1961, the US and Great Britain signalled their readiness to submit topressure from the Soviet Union concerning the status of Berlin. To Adenauerand De Gaulle, this implied a threat to the existence of a liberal Western Europe.A polical union with a security policy component was meant to provide ananswer as suggesng in the so-called Fouchet Plan. However, the remaining

    EEC countries, which had become distrusul in the meanme, did not want tofollow this leadership. Adenauer and de Gaulle thus created a less ambiousalternave soluon, the Franco-German Friendship Agreement, which wasincomprehensible even in German domesc polical circles.

    The fading purposefulness of the project Europe led to several years ofstagnaon and crisis. The empty chair crisis was parally resolved by the so-called Luxembourg Compromise of January 1966; although dissent remainedover its interpretaon, it constuted a signicant symbolic message. Despitethe connuing East-West conict, this vague, perplexing arrangement did notallow for the same type of integraon dynamics that had previously existed.

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    The Federalist Choice for a Continent in Crisis 13

    The crisis-like exacerbaon of the decline became known by the bing and

    widely accepted label of Euro-sclerosis. At the end of the 1970s and early1980s European integraon entered an era of profound decline. Europe wasno longer able to keep pace with the dynamic internaonal markets; it seemedexhausted, a museum exhibit relic. Federal Chancellor Helmut Kohl and FrenchPresident Franois Mierand recognised the urgent need for a strategicdeparture, but an accordingly gied polical actor was required from withinthe European instuonal system. They found this personality in JacquesDelors. He was a strong French nance minister and most people saw him asthe future French President. However, in 1985 he accepted the presidency ofthe European Commission. As an inial step he informed the heads of stateand government that he intended to strategically consider the situaon for

    some me. Aer several months of reecon he presented his conclusion:Europe needed a grand historical task. This could either be the reorganisaonof security or compleon of the single market. In his opinion, Europe had thestrength to full only one of these big tasks. The single market was adopted asthe strategic objecve, requiring the implementaon of almost 300 bodies oflaw over a period of several years. The public was persuaded by the stascsand arguments presented by the comprehensive Cecchini Report in 1988. Theadopted course was to be followed for several years.

    The lessons from this example should be considered in relaon to the currentchallenges: Europe needs strong polical leaders and strategic thinkers.Policians must explain the necessary steps, within a strategic framework, inorder to sustain momentum and public support. The conclusion is obvious:European polics must eliminate the explanaon decit. Much more meand energy has to be spent on explanaon. Whoever wins the bale ofpercepons will win the future.

    Whither Europe?

    But what alternave futures exist for Europe? There are indicaonssuggesng ve dierent scenarios, demonstrang just how open Europesfuture really is.

    Scenario 1: The Titanic

    The Titanic scenario describes a substanal threat for European integraon,which in the worst case could lead to its dissoluon. According to thisscenario, the European Union is not able to address the internal and externalchallenges. The diverging interests and economic performance between newand old member states increase dramacally. The heterogeneity of memberstates and compeon among them appear unbridgeable. Naonal egos areaggravated by the severe global economic crisis. The fear of recession leadsto naonalisc, proteconist reexes, and the exploding budget decitsdisperse the nancial European solidarity of the member states cizens and

    governing elites alike.

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    Rethinking Europe14

    Scenario 2: Exclusive Core Europe

    The scenario of an Exclusive Core Europe assumes a lack of consensus amongthe member states concerning the future development of the EuropeanUnion. At the same me, the EUs inability to confront the pressing economicand security policy challenges prompts its cizens to lose their idencaonwith the very idea of a unied Europe. However, an exclusive group of statesremain commied to intensifying intergovernmental co-operaon. Co-operaon within the contractual framework of treaes fails, due to the policyof obstruconism by the periphery member states. Frustrated by the EUsconstant paralysis, this core group of states adopts intergovernmental co-operaon as the only realisc way to represent common interests worldwide.

    Scenario 3: Monnet MethodIn the Monnet Method scenario, the future development of the EuropeanUnion follows the paern of previous decades. The EU can only parallyconfront the internal and external challenges. The Treaty of Lisbon merelycures the symptoms of Europes polical inability to act, without geng tothe very heart of the problem. The conicts of interests and distribuondisparies of the member states persist or intensify with every enlargementand every economic crisis. As a whole, the EU system appears lethargic, butsll not paralysed. The single market, the Schengen regime, the monetaryunion as well as the awareness that the process of European integraon hasbrought peace and stability to the old connent hold the Union together.

    Scenario 4: Open Area of Gravitaon

    According to this scenario, an avant-garde commied to the communitymethod pursues the objecve of connuous immersion in integraon. Thecentre of gravity is constuted by the group of countries that parcipate inmost of the integraon projects. For these advocates of substanal reform,the Treaty of Lisbon is only an interim stage on the road to a polical union.As not all member states are commied to this approach, mulple-speedintegraon becomes the central dening feature of the enlarged Europe.Member states are enabled to advance their co-operaon in specic policy

    areas, both new and old, within the EUs contractual framework. Thepossibilies for enhanced cooperaon, oered by the Treaty of Lisbon, areulised.

    Scenario 5: Superpower Europe

    In the superpower scenario, Europe fulls its global power potenal. TheEuropean Union exploits its material and instuonal resources to the fullextent. Economic eciency, populaon numbers, military potenal and theEuropean system of values oer the EU a substanal basis for acon. Buildingon the successful implementaon of the Treaty of Lisbon, other reform stepsare taken to improve the EUs eciency, ability to act and transparency.

    The enhanced comprehensibility of the EU system as well as the ability to

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    The Federalist Choice for a Continent in Crisis 15

    meet the internal and internaonal challenges posively impacts upon the

    acceptance of the Union by its cizens. In addion, the increasing cross-linking of sociees encourages genuine public debate of European issues.The construcon of intermediary European structures like media and non-governmental organisaons leads to the establishment of a pan-Europeandemos as a foundaon for a European civil society. On the basis of a growingsense of unity within the context of a Europe of cizens, the EU connuouslydevelops towards a polical union.

    Those who bear these ve scenarios in mind understand that the futureof Europe is not predetermined. Each of these ve scenarios can becomea reality for the next generaon; just as a mixture of factors from dierent

    scenarios can come true as well. However, one conclusion is unavoidable:the reorganisaon of power is on the agenda.

    The European prole will only be sharpened if the Union increases its abilityto act. Though the Treaty of Lisbon established an arsenal of leadershipposts, the allocaon of their authority is le open. President of the EuropeanCouncil, President of the Council of Ministers, President of the Commission,High Representave for the Common Foreign and Security Policy, Chairmanof the European Council all these posts co-exist in parallel to each other.The heads of state and government of the larger member states, as well asthe European Parliament, which has recently acted more self-condently,interfere in this jungle of leadership responsibilies. An eecve, target-oriented decision-making process cannot be organised in this manner.Eecve and experienced leadership are somewhat dierent. Therefore, thereorganisaon of power is on the agenda in Europe. The decision-makers,who are tradionally in favour of integraon, want to further strengthen theCommission and Parliament. The European Parliament has been the realwinner in all new treaes since the foundaon of the EEC in 1957. Fromits point of view, this is how things should go on. It exes its competence-strengthened muscles. Its new president, Marn Schulz, declared waron summit polics. However, the actual impetus for the Fiscal Compact

    emanated from the governments of larger Eurozone member states. Germanyand France have formed a leadership tandem. At the onset of the currentcrisis, they did not have the same opinion; their polical and economiccultures are too dierent to allow for that. However, both recognised that anadequate response to the crisis could only be found if they both jointly tookthe iniave. And that is exactly what happened.

    Yet, many immediately quesoned whether Germany had taken over theactual leadership and whether this was appropriate. The usual policaldialecc was triggered: if there is lack of leadership in Europe, it will beclaimed; if leadership is exercised, it will be cricised and deplored. It was not

    unintelligent for France and Germany to repeatedly integrate Italy, governed

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    Rethinking Europe16

    by Mario Mon, in this leadership circle. Great Britain represented another

    special case. Enrely in accordance with its tradional policy, it said No to aCommunity Treaty regarding the scal union. However, also in line with itstradion, it parcipated in the elaboraon at the working level.

    In summary, it becomes clear that it is more than just about the scal unionor just the improved governance of the Eurozone. It is about a dramacpower struggle in Europe. On the surface, there are appropriate smiles infront of the cameras, but there is a tough ght for inuence behind thescenes. The leadership structure of the European Union needs addionalclaricaon beyond the struggle of the member states for power andinuence. However, Europe also has to advance its leadership culture. The

    connents power structure cannot simply uphold what was once valid fora European Economic Community of six member states. The considerablylarger Europe has to be organised in a more nuanced way.

    Therefore, in the medium-term, the fundamental structural problem ofinternaonal polics remains: a discrepancy between globalised challenges,partly internaonal and partly naonal decision-making structures, andmostly naonal legimang structures. This discrepancy stresses the keydecit of present-day polics. The drama is tangible day by day: Europe isexperiencing a historical turning point. The pivot can be compared to themost important turning points in history. The struggle for imperial hegemonyof earlier epochs and the experience of big military disasters all gatheredsimilar dimensions of polical depth like the rst steps of the success story ofintegraon. The large power apparatus of the European Union is confrontedwith the queson of its legimacy. The answer to this queson will determinethe scenario of future Europe.

    Dr Werner Weidenfeld is Professor of polical science and Director of the

    Centre for Applied Policy Research at the Ludwig Maximilian University in

    Munich.

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    The Democrac Inadequacies of the Proposed

    Fiscal Compact

    Declan Ganley

    TOWARDS the close of the polically tumultuous eighteenth century,Edmund Burke, the Irish intellectual giant of European and North

    American polics, assessed the modern eras rst aempt at unifyingEurope under Napoleons Grande Arme. Burke, the vociferous defender ofthe values inspiring the American struggle for independence and individualliberty, recoiled at what he saw as the product of the French Revoluon, the

    very anthesis of liberty.

    He was not merely a polemist when he wrote his Reecons on the Revoluonin France. He combined philosophy and a feel for the sweep of history intopolical posions that were pragmac and praccal; they were capableof being adjusted without losing their intellectual consistency. Burke sawEurope, under the spell of Jacobin France, falling under desposm disguisedas shallow polical promise, the cynical hijacking of libert, galit and

    fraternit wrapped in the mantle of the all-powerful centralised state. Burkecould see that the Jacobins were totalitarian. They claimed to know all, andto be the sole arbiters of all that was right and all that was wrong. If youopposed them, you were the enemy. Loyal opposion was an alien concept.Construcve cricism of the Jacobin system was more likely to result inyou losing your head to the guillone than being appreciated for seekingimprovements in government. Thus, intolerance for those that challenged itbecame the hallmark of the all-powerful centralised state.

    Burke represents the sort of approach we need now, as we considerthe current revoluon the European connent is about to undergo. Hisinnate conservasm is not the point; his clear-sighted ability to hold ontoa centralised idea, and arculate a pragmac polical approach to it, is

    precisely what European leaders now need. Burke saw those who challengedthe consensus and status quo dierently, saying: He who wrestles with usstrengthens our nerves and sharpens our skill. Our antagonist is our helper.

    In the UK, the argument between so-called Europhiles and Euroscepcs isfrankly childish and misses the bigger picture. Burke would have understoodthat developing the bigger picture means dealing with the parculars andtaking the trouble to look at the historical dynamics, what makes the issueck; not polical point-scoring to bolster a case that policians feel more intheir water than their head. Burke had no me for vulgar and mechanicalpolicians, only those who took the trouble to think hard and sweat the detail

    were qualied to be directors of the great movement of empire. He would

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    Rethinking Europe18

    have recoiled at the way European polics has once again turned Jacobin. It

    proacvely rejects the idea of a loyal opposion, and its bureaucracy is quickto label as an-European all that dare queson it. An environment has beenfostered in which polical pares and governments across Europe mustsubscribe to this groupthink that is almost always reduced to the lowestcommon denominator. The achievement of excellence in any eld of pursuitis thus sed by the very design of the European Union.

    It has resulted in the shrinking of democracy, the silencing of loyalopposion, the devaluaon of the individual over the collecve, thediminuon of compeon, of merit and innovaon; and now, even thestart of an asset-stripping of current and future generaons of Europeans in

    order to subsidise the failure of private corporate interests. Those interestsbenet from the symbioc relaonship between some large insolventnancial instuons and many large insolvent member state governmentsthroughout the EU.

    The fact is that Europe, unluckily saddled with unt leadership, nds itselfsuering from a grey-suited tyranny of the mediocre. This is manifest inthe failure of the Unions leadership to construct those proper instuonsand laws so urgently required to save Europe from the economic spiral intowhich it currently descends. Following the farce that was the Lisbon Treaty a treaty that even ex-French President Nicolas Sarkozy recently admied hadfailed and is not t for purpose the latest scal compact is another exercisein empty posturing.It simply will not come even remotely close to solvingEuropes economic crisis, designed as it was in the halls of Berlin and Pariswith one primary objecve in mind to placate electorates being fed storiesof lazy Greeks by the tabloid press. Rather than level with their electorates,leaders have connued a charade to feed Europeans the placebo of a treatywith rules that are already in place under Maastricht, but transferring somuch sovereignty from individual states to the Union that even euro-devoteePeter Mandelson called it the largest measure of sovereignty that Europeanleaders have so far contemplated collecvising.

    That such sovereignty can be transferred in such a cavalier manner withoutregard to the democrac accountability owed to the cizens of Europe, is,in a word, shameful. And it is bierly ironic that transferring this power tothe centre and its enty, the European Stability Mechanism (ESM) that isliterally above the law, will do nothing to solve Europes economic crisis.It is instrucve to quote the ESM treaty on legal immunity, from Arcle32: The ESM, its property, funding and assets, wherever located and bywhomsoever held, shall enjoy immunity from every form of judicial processexcept to the extent that the ESM expressly waives its immunity for thepurpose of any proceedings or by the terms of any contract, including

    the documentaon of the funding instruments. The scal compact is the

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    The Federalist Choice for a Continent in Crisis 19

    denion of bad law and, in the words of Burke, bad law is the worst sort

    of tyranny.

    Europe is in dire need of courageous leadership. We need to get back to thebusiness of taking risks, of being prepared to embrace the freedom to fail,both in our banking and private corporate instuons and in our polics.The siren cry of French President Franois Hollandes growth is just anotherfalse promise. Growth does not come from governments protecng failedcompanies or imposing more taxes or expanding themselves even further.Destroying compeon and distorng markets by suocang innovaon andsing broad-based small enterprise job creaon are always the end resultof such a policy.

    Brendan Simms has wrien percepvely that Europe is in the midst of afundamental crisis of democracy. The growth of economic governance,he says, threatens to disenfranchise whole peoples. Since the economiccrisis of 2008 began to impact across the connent, the gradualist fallacy,says Simms that somehow a united Europe would be built brick-by-brickin some sort of funconalist way has been brutally exposed. In fact, thehistorical record shows that successful unions have resulted not from gradualprocesses of convergence in relavely benign circumstances, but throughsharp ruptures in periods of extreme crisis. They come about not throughevoluon, but with a big bang. This was how the Federalists in the UnitedStates perceived their own situaon when they came together in Philadelphiain 1787. They took the trouble to look in detail at various schemes of policalunion that Europe then oered, and concluded ironically enough in lightof the present debates in the UK that the union between England andScotland, the enre and perfect Union between those two countries, wasthe only logical and secure model for the thirteen former colonies. Youcannot dabble with polical unions without courng disintegraon; they areeither a serious project of shared sovereignty or they are not; and havinga superstructure of polical union without the necessarily deep underlyingpolical consensus is bound to be exposed as a sham sooner or later.

    This is where we now are in Europe. We have reached a point of insolvency, sorealiscally we must choose either to unite in a true federal democrac union,or see Europe unravel in an unpredictable manner that has the potenal to turndangerously ugly. In scenarios that start with certain member states leavingthe euro, we may see a release of uncontrollable centrifugal forces that couldignite underlying tensions and awaken the proverbial sleeping dogs that arestrewn from the Balkans to the Balc to the Iberian Peninsula. Even Europesfounding anchor states would not be immune from turmoil. So the risks ofconnuing down the present perilous path of unaccountable leadership aremore likely higher than the risks of calling a halt to the current charade and

    actually doing something that at least has some prospect of working.

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    Rethinking Europe20

    The starng point is that the response to these problems is to keep our eyes

    rmly on the larger objecve to create a peaceful and democrac Europethat is also sustainable in the face of the unprecedented challenges of thetwenty-rst century. But we also have to maintain a clear-eyed view of theinadequacies of the current polical and economic instuons available toEuropeans at the moment. We have to be prepared to take a number ofworthwhile risks and do several things simultaneously:

    A liberal Union-wide bankruptcy law should be passed, allowing for aneighteen month (or shorter) beginning-to-end bankruptcy.

    Every nancial instuon that cannot repay taxpayer bailout funds recently

    injected should be put through an insolvency purge, their assets sold to thehighest bidder, their non-recoverable liabilies wrien o.

    No private company should receive state nancial aid, nor should it beaorded any protecons, direct or indirect, from the full force of compeon.

    The EU should move immediately to a one-o full federalisaon of state

    debts similar to the broad blueprint used by Alexander Hamilton to federalisethe debts of the individual American colonies.

    A European Union bond should be issued to nance the needs of theFederal Union government and, where necessary, provide nancing tosupplement individual member states under specic loan criteria.

    Member states will be free to borrow directly from the markets on theunderstanding that they will be forced into bankruptcy, with full lossesincurred by lenders, if they fail to meet repayment terms.

    State borrowing would be ed to a requirement that any bond oering willonly be made with aachment to the specic means by which the debt willbe paid down/exnguished.

    The posion of president of the European Commission and president of the

    European Council should be merged into one oce-holder and should besubject to a popular democrac elecon to be held no later than December2013. This oce will be a highly sought-aer role and will probably aracthigh-calibre candidates; it will also force compeng visions of Europe to beput to voters for their ulmate choice.

    Votes should be weighted in an electoral college format so that the voters ofsmaller member states are not made irrelevant. This president would servefor one six-year-term only, and would be chief execuve in the same manner

    as the president of the United States.

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    The Federalist Choice for a Continent in Crisis 21

    An accommodaon could be made to remaining European monarchies in

    respect of their historic tradions, to allow for some ceremonial roles.

    The Commission should become the servant of the execuve arm, and itsmembers nominated by the democracally elected president, and raed bya newly created upper house of the European Parliament.

    An upper house or senate should be created, with four representaves ofeach member state, with each such state holding equal vong power. That isto say, Ireland will have four senators, as will Germany and other states. Thisupper house will be given the right to iniate legislaon along with the lowerhouse, the current EU Parliament.

    The European Parliament should be reformed to give greater balance forpopulaon (which would favour larger member states) and should be giventhe power (along with its upper house) to iniate legislaon.

    All lobbying of the execuve and legislave branch must be registered and

    transparent.

    A full insolvency purge of all European nancial instuons should beimmediately undertaken. A liquidaon and asset sale of all unhealthyinstuons should take place forthwith. A write-down of signicant size,together with a Hamiltonian scale re-negoaon should take place on alldistressed EU member-state debts.

    The federalising of all remaining state debt should immediately follow,backed by the issuance of union bonds which are in turn backed by the enretax revenue of the Eurozone.

    The Union civil service should be kept small and highly ecient; this shouldbe enshrined in Europes new constuonal arrangement. A debt ceiling willalso be set constuonally.

    The Union should have monopoly of external acon both in so and hardpower.

    The ECB should be guaranteed full independence and a low-inaon policybe pursued.

    The ocial working language of the Union should be English. Weunderstand the major sensivies involved, but it is necessary to have oneocial language among so many, so as to remove any scope for ambiguity inlaws and regulaons or their interpretaons.

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    Rethinking Europe22

    An EU-wide pension plan is needed, placing cizens pension assets beyond

    the reach of future potenally insolvent and irresponsible governments,implemented per the highly successful Chilean model.

    The automac right of secession for any member state should be providedfor with a two-thirds majority of the polity concerned.

    Napoleon and then Hitler tried in their own ways to unite Europe aer afashion that was both unstable and objeconable, and we are now in themidst of the third aempt in modern history to create a united connent.This latest aempt, for the rst me founded to achieve noble and peacefulaims, should be given the chance to succeed but only on condion that it

    now subjects itself to democrac accountability, lest it depart on a road tosomething far less bearable. One risk that must not be taken is to transferany more sovereignty to Europe (as would be the case in the scal compact)without rst construcng the means to hold it democracally accountable,keeping in mind Benjamin Franklins words of warning: Those who wouldgive up a lile freedom, to gain a lile security, deserve neither and willsurely lose both.

    Ireland is, for the short term, burdened with the failed debts of certainfake risk takers, some of them large German, French and Brish nancialinstuons that we have no moral duty to bear. This is a gross injusce. Itis an-market. It is an abrogaon of all of the rules of capitalism and it isthe most exploitave exercise in corporate welfare in history. It is beyondunacceptable that anyone would even consider asking Ireland to pass atreaty that does not cut this bank debt burden. Expecng Irish racaon ofsuch a patently bad deal is an insult to the intelligence and common sense ofthe people of Ireland. We must not entertain saying Yes to this bad law. Moreimportantly, we must do our part to bring Europe to its senses and face thehard choices that it must make. As for the empty threats that we in Irelandwill not be able to raise funding, consider that even Iceland, having gonethrough a massive bank default, is now welcomed back in the markets. Any

    Irish government claiming that it would be barred from markets for yearswould clearly be adming that it is incompetent to hold oce. So we wouldbe well advised not to listen to the fear-mongers advocang surrender tosuch an already outdated, vacuous and abysmal treaty formula. Take theadvice of Edmund Burke, who said: No passion so eectually robs the mindof all its powers of acng and reasoning, as fear.

    In this treaty, we have no bank debt relief nor have we the means to repairthe crisis of democracy at the heart of Europe. We should not rewardmediocrity, and both for the sake of Ireland and for Europes current andfuture generaons, I oppose acceptance of the scal compact in the Irish

    referendum on 31 May. The future of Europe is on a precipice. Contagion from

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    The Federalist Choice for a Continent in Crisis 23

    other failures is a real possibility in present circumstances and the formula

    set out by the European Central Bank a body that remains detached andunaccountable will not prevent it.

    Declan Ganley is an Irish technology and communicaons entrepreneur and

    founder of Libertas, which has campaigned for radical reform of the European

    Union.

    Alexander Hamilton and the Debts that Helped Create theUnited States

    Declan Ganley and Brendan Simms

    ALEXANDER Hamilton never got to lead his country, but he did get

    to serve George Washington in a posion that was to become

    absolutely pivotal to the survival of the United States of America as its

    rst secretary of the Treasury. He trained rst in the commerce of the

    West Indies and later served as a remarkably heroic young ocer of the

    American Revoluon. Hamilton was a lawyer and leading author of The

    Federalist Papers and did much to weld Americas polical union, founded

    on rm democrac pracce, before his unmely and tragic death before

    he had reached y.

    On taking oce in 1789, shortly aer the conclusion of Americas War of

    Independence, Hamilton found himself facing the challenge of shaping

    the economic framework upon which the nascent and very bankrupt

    United States would either perish or prevail. Hamiltons country had been

    ravaged by war and saddled by debt. On top of that, he had to nd a way

    of paying o an army that, in many cases, was awaing years of back-

    pay. In addion to domesc concerns, there were major foreign lenders,

    including some of the very largest and most powerful players in global

    nance at the me French and Dutch bankers. With redcoats on theCanadian border sll holding western forts and the Royal Navy ruling the

    Atlanc, Hamilton quickly understood that the unions credit rang would

    play a large part in deciding whether or not America really had a future.

    As secretary of the Treasury, and under Washingtons protecon, Hamilton

    was given the scope to establish the economic structural basis of America.

    That simply would not have been possible had Washington and the other

    Founding Fathers not already put in place the inial mechanisms for

    government by consent. Without Hamilton or his patron, Washington

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    Rethinking Europe24

    the superstructure facilitang the fantasc nineteenth-century burst ofAmerican economic growth would simply not have been built.

    Benjamin Franklins argument to the Brish in the 1760s was that a unied

    America would be an economic powerhouse and that they would be foolish

    in the extreme to risk losing it for the few seats the colonists wanted in the

    Brish Parliament. That hard-headed denial by the Brish elite, to bow to

    granng their colonies government by consent of the governed, was to

    have major consequences.

    On dealing with the most pressing maer of government debt, Hamilton

    was faced with the fact that the thirteen founding states of the UnitedStates all had separate and disparate debts, built up during their mes as

    separate colonies during the course of the War of Independence. As the war

    had been waged in some states more than others and as the contribuons

    of the states to the war eort and cost had varied greatly, even that poron

    of debt that was directly aributable to a form of joint enterprise and

    expenditure, was not evenly or proporonately disbursed across all of the

    states. On top of the states debts, there was already a federal debt, which

    had been used to nance some of the cost of Washingtons triumphant

    Connental Army, as well as some other federal borrowings.

    Hamilton knew that he possessed limited short-term nancial resources

    and that these many debts would have to be re-structured, while

    enhancing Americas reputaon as a borrower. One dilemma was that

    many securies had changed hands at signicant discount, raising potenal

    moral dilemmas. Weighing his opons, Hamilton decided that security of

    transfer, and its repercussions for private property, were paramount to

    establishing credibility, thus assisng a favourable credit rang.

    He then made the bold decision to federalise all of the state debts in

    distress, doing so to ensure the survival of the whole, rather than the

    sacrice of any member state. Interest on the (already incurred) federaldebt was then between 4 and 5 per cent and Hamilton understood that

    for the sake of American credibility, this debt, all owed to foreign lenders

    and primarily made to nance Americas war eort, must be paid in full.

    Nevertheless, the various interest rates on the debts of the thirteen

    states were higher, at 6 per cent or more. Hamilton knew that his ability

    to raise revenue was simply not sucient to allow the servicing of the

    combined states debts. He also knew that bondholders sing on state

    debts were exposed to a broad range of growing risks, of which they

    were well aware.

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    Hamilton also saw the opportunity to shi the loyalty of those creditorsby giving them a stake in preserving a federal government by having it

    federalise the state debts and thus make those creditors commit risk onto

    the new United Sates.

    However, given the fact that combined state debts and interest were

    just too high to sustain, Hamilton decided to deliver a federal haircut

    on assumpon of the states debts. Hamilton took the path of oering

    voluntary haircuts in a variety of opons that largely boiled down to a

    paral payment at 6 per cent interest, a paral equity swap (in Hamiltons

    case, for Western land that at the me was relavely valueless but had

    prospects), or payment at a lower interest rate, over a longer term butsweetened by quarterly, rather than yearly payments and paid from taxes

    specically earmarked for the purpose of paying those bonds.

    The creditors did the pragmac thing and accepted Hamiltons oers.

    Hamilton drew those creditors into supporng his new country, while at

    the same me rescuing many of his thirteen member states. Through his

    federalisaon and re-structuring of unsustainable state debts, Hamilton

    helped cement the disparate states together to form their more perfect

    union.

    Hamiltons hands-on experience with a potenally catastrophic sovereign

    debt crisis caused him to leave some wise advice for posterity that growing

    debt is perhaps the natural disease of all governments. And it is not easy

    to conceive anything more likely than this to lead to great and convulsive

    revoluons of empire. He also wisely advised that he ardently wishes to

    see it incorporated as a fundamental maxim in the system of public credit of

    the United States that the creaon of debt should always be accompanied

    with the means of exnguishment.

    As a means to nance debt, Hamilton set up sinking funds, revenue that

    was stored up to service debts and which he prudently and quietly used tobuy back large amounts of government debt at bargain prices (Hamilton

    understood the Central Bankers art of creave ambiguity).

    Bailouts were not Hamiltons modus operandi. At Kings College (later

    to become Columbia University) one of Hamiltons friends and an early

    companion in the Treasury Department was William Duer. But Duer had

    quickly departed his assistant secretary role at the Treasury to engage

    in private banking and speculaon, becoming a major New York market

    maker in the process. In 1791 and 1792, Hamilton was faced with Americas

    rst banking and government securies crisis. Amid the nancial fallout,

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    Rethinking Europe26

    his powerful nancial industry friend, Duer, had ended up in the posionof needing a government bailout for his banking and nancing interests or

    he would ulmately face debtors prison.

    Hamilton, though empathising with Duer, would not provide the bailout.

    The end result was that Duer ended his days in a debtors prison, somemes

    visited by Hamilton but paying the ulmate price for Hamiltons allowing

    the freedom to fail, which in the eighteenth century had steeper personal

    consequences than in the world of today.

    Hamiltons most recent (and excellent) biographer, Ron Chernow, summed-

    up the compleon of Hamiltons me in oce:

    It is popular today for Europeans to look back at the early formaon of

    the United States of America and to say that it was inevitable, unique

    and took place in an already cohesive homogenous society. The facts

    of the maer are more complex. The thirteen colonies that made up

    the rst states were disparate in their composion and had seen their

    existence in relaon to es with London, more greatly than they did

    to each other. American cies were lled with immigrants from all of

    Europes cultures, speaking a multude of languages, with English and

    German being the most dominant. Great cultural dierences existed

    between the states, perhaps the most acute being in their atudes to

    slavery.

    The early instuonal success of Americas union was more due to the

    willingness and courage of a principled minority of gied leaders (formed

    in a more meritocrac environment that, for its me, was somewhat less

    constrained by the sclerosis that oen aicts old establishments) who

    were movated by a common bond of morals and a pioneering willingness

    to make sacrices and take risks for the greater good.

    Declan Ganley is founder of Libertas.

    Brendan Simms is Professor in the History of Internaonal Relaons at

    Cambridge University.

    Adapted from Declan Ganley and Brendan Simms, A Europe for the People

    by the People, Sunday Business Post, 10 January 2012.

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    Could Americas Founding Fathers Save Europe?

    Joel Faulkner Rogers and Sean Kirwan

    IN early 2012, the university polling centre YouGov-Cambridge worked incollaboraon with Professor Brendan Simms of Cambridge University and

    Declan Ganley, founder of the Irish think tank Libertas, to measure publicresponse to the Ganley-Simms proposals, as they will be called here.

    These are eleven proposals advanced by the two Irishmen, adding up to abold argument that only full democrac federalisaon will ulmately resolveEuropes current crisis. This includes scal as well as monetary union, the

    pooling of greater sovereignty in key policy-areas and the collecvisaonof European debt through the issue of Union bonds backed by the enretax revenue of the Eurozone. Whichever direcon it takes, add Ganleyand Simms, the next phase of the European project will only succeed ifit produces a more direct form of democrac parcipaon in the style ofAmericas constuon.

    EU Government for the People by the People?

    YouGov-Cambridge put several of the Ganley-Simms proposals to naonallyrepresentave samples of the populaon in Britain (1,523 respondents),France (1,518 respondents) and Germany (1,553 respondents). This includedasking to what extent respondents would support or oppose the followingmeasures for the European Union (EU) as a whole:

    A democracally elected EU president, who is chief execuve in thesame manner as the President of the United States of America, anddirectly elected by cizens across Europe

    Turning the EU into a fully integrated United States of Europe, witha central European treasury and common rules on naonal budgets

    The creaon of a single European military, with an elected civilianauthority that decides when European naons go to war and take

    military acon A single seat to represent the enre EU at the United Naons, insteadof individual seats for each member

    An automac right to leave the EU if a majority of vong people fromthat country say they want to do so.

    At one level, answers mirrored broader diplomac trends, with a divergencein approach between Britain and the Eurozone core. Despite so much traumafor the European project since the onset of the nancial crisis, Franco-German opinion is notably recepve to certain proposals for new and deeperapproaches to integraon, albeit with German limits on the potenal for

    economic acvism and an overall reluctance in both polies to cede naonal

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    Rethinking Europe28

    control in a handful of key policy areas. Meanwhile, signicant majories in

    Britain connue to push in the other direcon, with calls for at least somerevision of relaons with Brussels.

    The response to the Ganley-Simms ProposalsWhen asked to what extent they would support the introducon of ademocracally elected EU president as Chief Execuve, 41% of Germansand 46% of French supported the idea (versus 28% and 23% who opposedrespecvely). In comparison, only 25% of Brits supported the idea.

    Figure 1.

    2541 46

    4428 23

    UK Germany France

    Total oppose

    Total support

    28 Feb - 4 March 2012

    Nearly 40% of French and over 1/3 of Germans said they support turning theEU into a fully integrated United States of Europe, while only 10% of Britssaid likewise.

    Figure 2.

    10

    35 38

    65

    32 31

    UK Germany France

    Total Oppose

    Total Support

    28 Feb - 4 March 2012

    Where 41% of Germans and 43% of French said they support the creaon ofa single European military with an elected civilian authority to decide whenEuropean naons take military acon, just 18% of Brits said the same.

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    The Federalist Choice for a Continent in Crisis 29

    Figure 3.

    18

    41 43

    54

    28 30

    UK Germany France

    Disagree

    Agree

    28 Feb - 4 March 2012

    On the queson of representaon at the United Naons, German and Frenchrespondents were largely split between support and opposion towards theidea of a single UN seat to represent the enre EU, instead of individual seatsfor each member, with 34% of Germans in support versus 34% in opposionand 34% of French in support versus 32% in opposion. By comparison, just11% of Brits showed support versus 57% who opposed.

    This sensibility is further indicated by recent research conducted withYouGovs Euro-tracker Survey in April, 2012: 57% of German voters said theywould vote to remain in the EU versus 25% who said they wanted Germanyto leave; 47% of French voters said they wanted to remain compared with32% who wanted to leave. Signicant numbers of both French and Germanvoters also reected a long-term commitment to European Monetary Union(EMU), with pluralies saying their country should always be a part of thesingle currency.

    Figure 4.

    20 16

    4345

    8 13

    1513

    France Germany

    SURVEY COUNTRY should withdraw from the

    Eurozone immediately and return to using our

    old currency

    SURVEY COUNTRY should stay a member of

    the Eurozone for now, but DEFINITELY leave

    the Eurozone eventually and return to our

    own curency

    SURVEY COUNTRY should always be a

    member of the Eurozone

    SURVEY COUNTRY should stay a member of

    the Eurozone for now, but MAYBE consider

    leaving the Eurozone eventually and returning

    to our own currency

    28 Feb - 4 March 2012

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    Rethinking Europe30

    The German Limits on Economic Acvism

    When considering the polical viability of European federalism, however,ostensible commitment to the single currency should be seen in the widercontext of German economic, cultural and historic atudes.

    Perhaps with lile surprise, survey-results (collected between 28 Februaryand 4 March 2012) showed that German voters are currently generally moreeconomically condent than their French counterparts. 47% of Germanssaid their economy is currently in good condion, versus only 20% who saidit is in bad condion, while 5% of French respondents said the economy wasdoing well, versus 77% who said it was doing badly. German respondentswere also notably less concerned about unemployment. Only 40% said

    unemployment is an urgent issue facing their country, versus 70% of Frenchwho said the same. More so than other European polies, German publicopinion appeared unforgiving towards problem-ridden weaker membersof the Eurozone. 51% of Germans said Greece should leave the Eurozone,versus 29% of French who said the same.

    Accordingly, while Germans are more economically condent, they showhigher concern about inaon and the need to curb it. 51% of Germanssaid the main priority for the economy should be to curb inaon with lessgovernment spending, while 56% of French said that the main priority forthe economy should be reducing unemployment with more governmentspending.

    If the Ganley-Simms vision advocates a vastly more integrated Europeanpolity along the lines of a comprehensive federal model, this wouldpresumably include common taxaon, common budgetary control andpotenally enormous scal transfers from richer to poorer areas. Speakingin the purely praccal terms of the reality of public opinion, their largestobstacle in these deeper iniaves for economic integraon would beGerman public opinion. While Germans show noteworthy interest towardsproposals for more direct forms of democrac parcipaon or the pooling

    of sovereignty in areas such as military acon, survey results also show aconnued German commitment to the concentraon of economic pain ondebtor states, and less support for the expansion of economic crisis-ghnginiaves such as greater monetary easing, Eurobonds to mutualise thedebt-stock or the economic implicaons of expanded bail-out funds andscal transfers. Where 51% of French supported making it easier for EUcountries to borrow from the European Central Bank, only 30% of Germanssupported this. 60% of French respondents supported lower interest ratesfor the EU as a whole compared with 40% of Germans. One third of Frenchrespondents also supported the idea of Eurobonds compared with only17% of Germans.

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    The Federalist Choice for a Continent in Crisis 31

    The Nuances of Brish Retreat

    Survey results of Brish public opinion, meanwhile, reect a connueddesire to renegoate the terms of EU membership, at least to some extent.In the same breath, however, it must also be noted that there are importantdisncons between what these gures do and do not say.

    On the broad queson of European integraon, we see a familiar dividebetween Britain and the Eurozone core, with 47% of French voters and 62% ofGerman voters wanng either connued union as now or more integraon,compared with only 27% saying the same in Britain.

    Figure 5.

    40

    2216

    20

    13

    8

    13 1622

    14

    31

    40

    UK France Germany

    SURVEY COUNTRY staying as a

    full EU member and working for

    a more integrated Europe than

    now

    SURVEY COUNTRY staying as a

    full EU member but using the

    power of veto to block any

    moves towards a more

    integrated Europe

    SURVEY COUNTRY withdrawing

    from the EU altogether

    SURVEY COUNTRY having a

    looser arrangement with the

    EU, based on maintaining trade

    and cooperaton on some

    common policies

    28 Feb - 4 March 2012

    Hence, a large number of Brish voters clearly want less Brussels insome regard. But survey results also emphasise connued support for

    co-operaon across a range of policy-areas, which challenges popularsuggesons of late that Brish voters might be ready to go Swiss orNorwegian in a new outer Europe that equals lile more than an ampliedfree-trade area. The dierence lies between atudes to control and co-operaon.

    YouGov-Cambridge posed a similar queson to two naonally representavesamples of the Brish populaon in slightly dierent ways. In the rst instance,respondents were asked whether they thought a list of specic policy-areasshould be controlled by the EU as a whole or by naonal governments eachdeciding for themselves.

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    Rethinking Europe32

    In this context, a majority of respondents strongly opposed European control

    in most policy areas, in bold contrast with France and Germany whererespondents showed signicant support for allowing more of these to beEU-controlled. These areas included nancial regulaon, military acon andrecovering from recession.

    Figure 6.

    44

    23

    16

    22

    4

    8

    17

    12

    47

    68

    74

    69

    89

    85

    74

    80

    Terrorism & internatonal crime

    Regulatng financial insttutons

    Financial recovery

    Military acton

    Tax rates & natonal budgets

    Crime & justce

    Agriculture

    Laws on TUs and strikes

    Controlled by EU (%) Controlled by UK government (%)

    28 Feb - 4 March 2012

    In the second instance, however, respondents saw the same list of policy-areas and had to choose whether European countries should co-operatemore closely together, or should loosen their links and handle the issue moreat the naonal level, or if the present balance was about right. In this case,respondents preferred more co-operaon in nine out of sixteen policy areas.In seven of these, preference for control and co-operaon actually indicatedtrends in dierent direcons, with a majority preferring naonal control inthe rst queson while a majority or plurality preferred more co-operaonwith Europe in the second.

    Figure 7.

    67

    38

    41

    39

    13

    30

    23

    15

    11

    37

    34

    28

    57

    44

    47

    54

    Terrorism & internatonal crime

    Regulatng financial insttutons

    Financial recovery

    Military acton

    Tax rates & natonal budgets

    Crime & justce

    Agriculture

    Laws on TUs and strikes

    EU countries should cooperate more closely (%)

    EU countries should loosen their links on this issue (%)

    15 - 16 February 2012

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    The Federalist Choice for a Continent in Crisis 33

    These results arguably suggest two disnct themes to Brish public opinion

    on Europe: rst, that a signicant secon of the public wants a seriousdebate on and potenal revision to the balance of control in key policyareas; second, there is lile evidence, however, that this points all the wayto a drawbridge mentality for reducing Brish-EU relaons to mere termsof trade.

    The Limits of Federalism

    It should also be noted that results from both queson-frames highlightedkey areas of statecra where overall public desire lent towards both naonalcontrol and less co-operaon with the EU namely naonal budgets, crimeand jusce, and the basic means of naonal producon, such as agriculture,

    the rights of workers and laws on trade unions and strikes.

    Here Brish voters share ground with their French and German counterparts,where survey results reect a similar desire to maintain sovereign controlover these same areas. (Note the top four items in both cases in Figures 8and 9).

    Figure 8.

    72

    52

    49

    51

    21

    30

    28

    19

    21

    39

    41

    39

    70

    63

    63

    70

    Terrorism & internatonal crime

    Regulatng financial insttutons

    Financial recovery

    Military acton

    Tax rates & natonal budgets

    Crime & justce

    Agriculture

    Laws on TUs and strikes

    France policy control:

    Controlled by EU (%) Controlled by French government (%)

    28 Feb - 4 March 2012

    Figure 9.

    76

    61

    54

    57

    25

    38

    31

    22

    17

    32

    38

    34

    68

    56

    61

    79

    Terrorism & internat

    onal crime

    Regulatng financial insttutons

    Financial recovery

    Military acton

    Tax rates & natonal budgets

    Crime & justce

    Agriculture

    Laws on TUs and strikes

    Germany policy control:

    Controlled by EU (%) Controlled by German government (%)

    28 Feb - 4 March 2012

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    Rethinking Europe34

    The Democrac Decit

    Another area in which Brish trends compare with Franco-German results isthe basic sense that Europes crisis is democrac as well as economic. Onlysmall numbers in each case think they have a voice that counts in the EU anopinion that seems to unite European populaons and Brish pares alike.

    Figure 10: Cross-country consensus.

    1120

    32

    6649

    41

    UK Germany France

    My voice counts in the EU

    Disagree

    Agree

    28 Feb - 4 March 2012

    Figure 11: Cross-party consensus in the UK.

    11 7

    25

    67 71

    51

    Lab Con Lib Dem

    My voice counts in the EU

    Disagree

    Agree

    28 Feb - 4 March 2012

    In a list of words and phrases about what the EU means to you personally,only 15% of French, 21% of German and 10% of Brish respondents chosedemocracy, and only 12% of French, 16% of German and 12% of Brishrespondents chose a way to protect cizens rights. By comparison, 44%of French, 58% of German and 56% of Brish respondents chose a lotof bureaucracy and 51% of French, 43% of


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