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Europe and democracy

Gavin Hewitt | 09:21 UK time, Monday, 17 January 2011

Last week in Portugal I was discussing the plight of the euro with the head of equities at an international bank. In her view the only answer lay in progressing towards fiscal union. I questioned whether such an important step would need the active backing of the voters. She looked at me and said "you're British aren't you?"

Her response reminded me of a dinner in Brussels a few months ago. I was sitting next to a smart economist and the same subject came up. She felt that monetary union without fiscal union didn't make any sense. I wondered out loud whether Europe's voters would support such a change. Her immediate response, like that in Portugal, was to seek confirmation that I was British.

It is true that in the salons of Europe Britain is sometimes regarded as having a rather quaint view of democracy and sovereignty. It is almost an article of faith in Brussels that a shrinking world, with its common problems, requires supra-national solutions that the nation state cannot deliver.

But this question of what democracy in Europe means may soon migrate from casual conversation to centre stage.

For increasingly influential voices are advocating deeper integration as the only way to save the euro. It was spelt out last week, in great clarity, by the French Prime Minister Francois Fillon on a visit to London.

European Central Bank HQ in Frankfurt - file pic

In an interview he said that "in order to consolidate the euro we will need gradually to harmonise our economic, fiscal and social policies, hence we are going towards greater integration. We are going to need to put in place an economic system of governance for the eurozone." Europe, he said, was at "a historic turning point".

Recently David Marsh, one of the authors of the euro, was quoted as saying that "in the euro area, no government is completely in control of its economy. They have progressively handed it over. The euro is at a cross-roads - it either has to go down the road of more solidarity or more chaos."

Even though the eurozone countries can have good weeks it is widely believed that the current medicine is not working, that forcing countries to cut wages will neither reduce their overall debts nor make them more competitive. Greece and Ireland have been given a line of credit, but the markets see them and other vulnerable countries as risky investments. So their cost of borrowing is close to unsustainable.

One answer - increasingly being touted - is eurobonds. The interest rates would reflect the health of the European economy as a whole and would be guaranteed by the EU. The strong would see their borrowing costs go up and the weak would pay less. But eurobonds would be a stepping stone towards fiscal union. Already there exists what they call an EU semester, which is an attempt to co-ordinate economic policies before national governments set their budgets.

If these policies extend towards forming a common treasury that co-ordinates tax and spending then, as the French prime minister says, Europe it will be at a "historic turning point".

For it would raise very fundamental questions. If key decisions - and as far as most voters are concerned you can't get much more important than tax and spending - are being taken outside state borders, who would be accountable? In the film Network, Howard Beale famously shouts "I'm mad as hell and I'm not going to take this anymore". In a world of monetary and fiscal union where would the enraged citizen direct his or her frustration?

If the eurozone group of countries heads towards fiscal union then a further question will surely follow. Can you have fiscal union without political union?

Slowly the public is being softened up for historic change. President Sarkozy was not a lone voice when he said recently "the end of the euro would be the end of Europe". Whether that is true, of course, is open to question. But it prepares the ground for explaining that after the Lisbon Treaty, which was intended to settle the dividing line between what belonged at national and EU level, another shift in where power lies is being contemplated. It is worth recalling that Jean Monnet, one of Europe's founding fathers, once said that Europe would be "forged in crisis".

We have not yet reached that point of another giant leap towards further integration. Much of this belongs in policy papers and in the ferment of ideas that a crisis produces. What is unclear is whether, if there were a lurch towards fiscal union, voters would get a say.

When at the end of last year a permanent bail-out mechanism was being discussed, Chancellor Merkel insisted that the new structure had to be supported by treaty changes. Huge effort went into ensuring they could be called "limited" to avoid referendums; vox populi is seriously mistrusted in Brussels.

But what if the elites get it wrong? Some believe that the rise of populist parties across Europe is a direct result of leaders and officials ignoring the public mood towards immigration.

The economist Paul Krugman, who is a great admirer of what Europe has achieved, also notes that some of the mistakes made over the euro were because the architects of the single currency were engaged in "magical thinking".

On the streets of Europe young people are frustrated and bitter, particularly over unemployment. Many see a lost generation without any certainty of work and facing the prospect of a future less prosperous than their parents experienced. Their protests are currently directed at their governments, although I have heard voices raised against the EU and the IMF. It is an interesting question what democracy would mean to them in a Europe of "ever closer union".

Now, as I said, we may be getting ahead of ourselves. Only a couple of months ago Mrs Merkel's office said "there are no plans and there is no desire for a joint fiscal policy".

But the story of this crisis is how quickly lines in the sand are ignored. As Europe's paymaster, Germany will have the decisive voice. They have, at the last moment, accepted the bail-outs of Greece and Ireland, but they don't like it. It breaches a promise made that a single currency would not lead to bail-outs.

But say the current policy of enforcing discipline and austerity on Europe's weaker economies fails. At that point Germany could face a historic choice. To allow a possible break-up of the single currency or back closer integration, which almost certainly would involve more German treasure being used to keep the euro intact and Europe afloat.

The German people, I suspect, will want their say.

The argument over how to save the euro may become a question about the quality of democracy in Europe. Is this a peculiar British concern? I doubt it, but we shall see.


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