Guy Verhofstadt and 'The United States of Europe'

THEFEDERAL TRUSTfor education & researchenlightening the debate on good governanceEuropeanPolicyBriefJan 2006 • Issue 22 • The Federal Trust, 7 Graphite Square, Vauxhall Walk, London SE11 5EE • www.fedtrust.co.ukGuy Verhofstadt and the ‘United States of Europe’:The Eurozone as a new core Europe?Europe is in crisis. The sighs of relief after the rescue of the European budget at the Council meeting in December 2005 could not beliethe fact that much political energy was needed to strike a comparatively small bargain, which eventually did not lead to much change.Europe seems to be gripped by a lack of political determination where key issues such as agricultural reform, a common security policyor the fate of the constitution that will be crucial for the European Union's future, are being dropped from the agenda. In parallel tothis stalemate in European decision-making, the Union is experiencing a crisis of confidence, expressed in the French and Dutch novotes,which sent the Constitutional Treaty into a moribund 'reflection period'. Difficult times for people who would like to see moreEuropean integration, one might think.The current crisis of decision-making incapacity and lack of public support is the starting point of Guy Verhofstadt’s manifesto 'TheUnited States of Europe' that has been circulated recently among high-level policy-makers and commentators 1 . How can the EuropeanUnion be made more attractive especially to the younger population? Where should it go from here if it is not to unravel or atrophyinto a mere free-trade area? How can Europe become a more decisive global player? To the Belgian Prime Minister, the answer to allthis lies in a politically strengthened Eurozone – equipped with a comprehensive socio-economic strategy – which lies at the core ofa 'new Europe'.The 'United States of Europe': a club within the clubThe essence of Mr Verhofstadt's suggestions is that some EU Member States should take the next step towards further integrationtogether and co-operate more closely on a range of issues. This vision is based on the conviction that there is within the EuropeanUnion an unfulfilled public demand for closer co-operation, exemplified in recent Eurobarometer polls. These suggest that citizens inthe majority of the EU’s countries (except Denmark, Greece, Sweden, Malta and the United Kingdom) would like to see more Europeanco-ordination in a variety of policy areas, notably foreign affairs, security and defence.For Mr Verhofstadt, the negative votes on the European Constitutional Treaty reflected and partly arose from a diminishing publicsense of European identity, in which the apparently endless enlargement of the European Union plays a central role. Hand in handwith the weakened sense of European identity goes, in Mr Verhofstadt’s view, on the part of European voters an increased fear ofeconomic insecurity and social pressure arising from globalisation. In recent years, the European Union has been unable to addressthese fears, because its policies are too uncoordinated, ineffective and marginal to be able to present any meaningful response. TheBelgian Prime Minister’s conclusion from his analysis of the French and Dutch referendums is that the European Constitutional Treatywas not rejected because it was too ambitious, but because it was not ambitious enough.Mr Verhofstadt’s answer to these identified problems is that the concerns of the European voters can be best alleviated by a unifiedEuropean approach to problems: one must give the European Union the means and measures it needs to render its policies moreCONTINUED OVERLEAFEDITOR’s NOTEThis is the twenty-second in a series of regular European Policy Briefs produced by the Federal Trust. The aim ofthe series is to describe and analyse major controversies in the current British debate about the European Union.This Policy Brief forms part of the Trust’s ongoing project on the governance of the euro.Brendan Donnelly (Director, Federal Trust)

efficient and to make the Union moreattractive by being capable to respond toits citizens' demands. Like many before him,Mr Verhofstadt draws inspiration from theexperience of the United States of America.The birth of a federal structure with acommon budget and a constitution proveddifficult and slow at the beginning, butgained pace as problems mounted thatcould only be dealt with properly at thefederal level.However, the Prime Minister realises at thesame time that a substantially moreintegrated European Union might not beaccepted by all and that it would make littlesense to wait until each and every MemberState was ready to join this more ambitiousproject. The difficulty in achievingconsensus is even greater now in a Unionof 25, 27 or even more Member States. MrVerhofstadt’s prescription therefore is for adouble future structure in the EuropeanUnion, consisting of a 'United States ofEurope' and an 'Organisation of EuropeanStates'. The first would be a highlyintegratedfederal entity based on thepresent Eurozone. The second would be amore intergovernmental confederation,essentially a sophisticated free trade area,for which in particular geographicallyperipheral countries of the present Unionwould be obvious candidates.A Socio-Economic Strategyfor the EurozoneMr Verhofstadt's vision of a recreatedEuropean Union breaks new ground, in thatit is based on a club that already exists. Forhim, the Eurozone is by a long way the mostplausible template for a more integrated'core Europe', based on already-existing andindeed deepening forms of co-operationbetween a sub-group of EU Member States.The Eurozone’s members have alreadyshown a high level of shared politicalcommitment and, by pooling their monetarysovereignty, they have taken a large steptowards the 'common destiny' of which theEuropean Treaties speak. The Verhofstadtanalysis stresses that the Eurozone shouldnot be a closed club, and that transparentcriteria should be laid down for accessionby all Member States of the Union who wishto join. But in the short term it is on thetwelve members of the current Eurozonethat Mr Verhofstadt pins his hopes for a'United States of Europe'.While his pamphlet touches on otherpolicies for driving integration further (suchas R&D, security and defence), MrVerhofstadt sees the most important taskfor a core Europe as being the socioeconomicpolicies to lift the Union out ofits current crisis. The Member Statesagreeing to take the next step of integrationmust show the willingness to develop acommon economic policy in support of theeuro 'that is capable of rising to thechallenges'. Like the British Prime Minister,Mr Verhofstadt believes that one of the mainreasons for current public disenchantmentwith the European Union is the pooreconomic performance of many MemberStates. His suggested cure, however, isdifferent to Mr Blair’s. The Belgian PrimeMinister criticises the disparity andnarrowness of existing European economicpolicy. The Lisbon strategy, in his view, hasnot led to genuine progress because theopen method of co-ordination used fordecision-making is too casual and does notbind the parties. Mr Verhofstadt contraststhis with the Stability and Growth Pact, amore formal approach to economic coordination.He praises the underlyingphilosophy of the Pact, although he finds ittoo limited in scope and insufficientlyembedded into corresponding andsupporting European economic policies. Therecurrent theme of his pamphlet is that onlyby taking a unified stance can the Europeaneconomy become a global player and fightcommon problems such as slack economicgrowth and high unemployment.A defining element of Mr Verhofstadt’scomprehensive strategy consists of a strongand concerted social policy to alleviate thefears and insecurities of European citizens.He is eager to avoid any impression thatsocial protection should be sacrificed on thealtar of globalisation and economicimperatives. One of the goals he sees for amore integrated Eurozone is the preventionof what he regards as intra-EU socialdumping, a phenomenon that has becomeeven more pressing through the recentround of EU enlargement to cheaper andsocially less protected Eastern Europeaneconomies. Mr Verhofstadt therefore callsfor an agreement within the Eurozone onminimal social and tax standards (withbands to allow fluctuations among MemberStates) for factors of labour marketflexibility such as levels of workers'protection, pension and other companyrelatedlegislation.New Europe: new financingand institutionsA new financing scheme and newinstitutions accompany the Verhofstadtstrategy. Interestingly, he accepts that inmany European countries unemployment isexacerbated by the excessive financing ofsocial policy through taxes levied on labour.This has the effect both of making Europeanlabour internationally uncompetitive and ofdiscouraging employers from taking on newstaff. The Prime Minister would thereforelike to see public revenue, for social andother policies, derived more and more fromindirect taxes, of which a European VATwould be one. This latter tax would in itsturn form the basis of an autonomousEuropean budget, not at the mercy of directnational contributions and avoiding theneed for the cumbersome budgetarynegotiations which regularly disfigure theproceedings of the European Council. Lastly,Mr Verhofstadt proposes new and strongerEuropean institutions that by virtue of theirtransparency and recognisability wouldacquire greater democratic legitimacy.These new institutions would include aEuropean economic cabinet – similar to agovernment with executive powers. For thePrime Minister, his suggestions or somethinglike them are 'the only option' Europe hasin the present state of crisis if it wants toplay a role at the global level and tomodernise its economy.The Eurozone as template?The idea of a core Europe is not new: it hasregularly surfaced over the past decade asan expression of the frustration of thosewho wish to move European integrationfurther or faster than could be done byconsensus in the Union. Mr Verhofstadt’sideas stand in the tradition of the Schäuble-Lamers paper in 1994, Joschka Fischer’sspeech at Berlin’s Humboldt University in2000, and the provisions on 'enhanced cooperation'contained in the Amsterdam andNice Treaties and in the unratifiedConstitutional Treaty. It cannot besurprising that the concept has re-emergedin a European Union now enlarged to 25Member States. Mr Verhofstadt’s proposalsrepresent, at least theoretically, a numberof hitherto separate elements in the debateabout Europe’s economic and politicalfuture. Many commentators, especially inBritain, have concluded from the failure ofthe European Constitutional Treaty that along, perhaps indefinite period now needsto pass before any further substantial stepstowards greater European integration canbe envisaged. Mr Verhofstadt drawsprecisely the opposite conclusion. He seesthe limited and uninspiring nature of theConstitutional Treaty as being the reasonwhy it was so unattractive to the French

and Dutch electorates. The integrativedevelopment of the Eurozone is in his viewthe only now plausible route for fostering asense of shared political identity within 'coreEurope', an identity which in MrVerhofstadt’s view many Europeans crave,but did not see reflected in the cautious andambiguous formulae of the ConstitutionalTreaty. Nor do they see this identityreflected in the present workings of thesingle European currency, which is regardedby many Europeans as simply magnifyingthe problems of globalisation rather thanproviding a coherent response to them.Particularly noteworthy in Mr Verhofstadt’spamphlet is the outspokenness with whichhe combines the traditional federalistagenda of closer European integration andthe recourse to economic imperatives. Thisis a new strategic turn for those who wouldlike to see the European Union develop intomuch more than a simple free-trade area,however structured. Mr Verhofstadt fullyaccepts that the European Union will bemore attractive and indeed more legitimatein the eyes of its citizens if it candemonstrate its contribution to solving theireconomic problems. For him, economicsuccess and European integration are twosides of the same coin, and it is a majorpart of his argument that a more integratedEurozone would be a more prosperousEurozone. He seeks to create a virtuouscircle in which the economic successes ofEuropean integration act as a politicallylegitimising factor for that integration. Thepresent, embryonic governance structuresof the Eurozone are the foundations onwhich progress towards this goal can bemade, progress facilitated in the immediatefuture by the relatively restrictedmembership of the Eurozone group. Likemany political visionaries before, MrVerhofstadt sees in contemporary problemsthe opportunity for long-term solutionsconsonant with his own underlying politicalgoals.The macro-economic andsocial mix of Mr VerhofstadtMr Verhofstadt’s analysis will undoubtedlybe politically controversial. The very conceptof a 'United States of Europe' is oneprofoundly disquieting to many politicians,commentators and electors throughoutEurope. Mr Verhofstadt may recall that inthe 1990s the German Chancellor, HelmutKohl, demonstratively abandoned any useof the term, explaining that he saw it asprovocative and misleading. It is boldindeed for the Belgian Prime Minister totread ten years later a path prudentlyabandoned by the German Chancellor. Butit may be that the most disputed aspect ofhis proposals is their economic element.Both elements of his economic blueprint willarouse contradiction.The first pillar of the Verhofstadt socioeconomicstrategy is the thorough-goingco-ordination of national economies,underpinned by an economic cabinet of allthe Commissioners dealing with economicissues and a central budget more substantialthan that at present. Whether the EU’sMember States would be willing to acceptthe sovereignty-pooling implicit in such aradical suggestion must be at leastquestionable. It is not at all clear that theEuropean Commission has the technicalcapacity, let alone the political legitimacy,to take on such a co-ordinating (directing)role in even the long term. There areundoubtedly problems of economicmanagement associated with the presentunsatisfactory governance structure of theEurozone. Opinions differ, however, as towhether centralised co-ordinationrepresents a move in the right direction. Inparticular, it is a matter of controversywhether an enhanced role for the EuropeanCommission in this context would bebeneficial. Some economists at least wouldfear that the political and economic cultureof the European Commission is likely to bean excessively interventionist one,overoptimistic as to the appropriate role ofcentral political institutions in the workingsof the economy, whether at the national orEuropean level. It may be that the EuropeanCommission can steer a more balancedcourse in these difficult matters ofjudgement and theory than can the German,the Finnish or the Irish government. Thecase is not one which is self-evident.The second component of Mr Verhofstadt'scomprehensive strategy is the safeguardingof the European Social Model. He argues(rightly) that the rejection of the EuropeanConstitutional Treaty, particularly in France,was substantially attributable to a fear onthe part of voters that the European Unionis today only concerned with the continuousopening up of markets. From this fear, hedraws the conclusion that the 'core Europe'based on the Eurozone must be one thatprevents either its members or its Europeanpartners in the 'Confederation of EuropeanStates' from engaging in the social dumpingwhich comes from low levels of socialprotection and tax. These low levels ofsocial protection and tax, particularly in thenew Member States of the Union, representto Mr Verhofstadt a distortion of theEuropean single market, which the 'UnitedStates of Europe' would need to counteractby setting agreed minimum social and taxlevels among its members.The second leg of Mr Verhofstadt’s economicmodel for the Eurozone will arouse at leastas much political and economic controversyas the first. Analytically, many economistsregard the very conception of socialdumping as simply disguised protectionism,and this view is well entrenched in a numberof governments within the European Union,not just in the new Member States. It ismoreover difficult to see how the 'UnitedStates of Europe' could legally protect itselfagainst social dumping without renouncingthe current European single market of 25states. Agreements along these lines by themembers of the Eurozone would certainlybe possible between themselves, but couldnot in the current state of European law beused as a weapon to exclude goods orservices from other EU Member States notparty to such agreements. In constructinghis model of Eurozone governance on thebasis of Commission-run economic coordinationand the protection of theEuropean Social Model (anyway a moreelusive concept than he seems to allow) MrVerhofstadt has ensured that hisprescriptions will be the subject of muchpolemical debate.National positionsThe intention of a manifesto is to sparkdebate and to publicise a vision. MrVerhofstadt clearly hopes that his ideas willgain currency precisely as a result of theuncertainty and soul-searching in which theEuropean Union is now engaged. His radicalproposals constitute his contribution to the'period of reflection' which has succeededthe French and Dutch referendums. Theyare a call to arms, rather than a fully workedout blueprint for every aspect of the 'UnitedStates of Europe' which he espouses.Nevertheless, the outlines of the Verhofstadtanalysis are clear and have already provokedsome reactions. It would be surprising if atleast some of his fellow members of theEuropean Council did not attempt a seriouscritique of his proposals. Their consideredreactions will dictate whether the BelgianPrime Minister’s ideas shape the Europeandebate over the coming months.First reactions to the manifesto have beenmixed. It has sold well in Belgium, but thepresent Austrian Presidency of the Unionhas said that it wants to 'bring MemberStates together' rather than to separatethem. Although the British government has

not commented formally on the manifesto,British rejection of its proposals can beconfidently expected. The combination ofenhanced sovereignty-sharing and thepursuit of a particular European SocialModel in the integrated Eurozone areawould not be acceptable to any foreseeableBritish government. While Ireland mightwell be initially less hostile to MrVerhofstadt’s ideas than the UnitedKingdom, it has been as resolute as theUnited Kingdom in rejecting any taxharmonisation within the European Unionthat might undermine its competitiveness.The Republic would be one country fromthe existing Eurozone which would be onthe face of it a very uncertain candidate forthe 'United States of Europe'. TheVerhofstadt model for these 'United Statesof Europe' demands acceptance both ofeconomic co-ordination and a particularmodel of Social Europe. Ireland might wellfind it difficult to accept the entirety of thispackage.In other Member States, there is morepotential sympathy for Mr Verhofstadt'sanalysis. While there is as yet no officialbacking for the suggestions presented in hismanifesto, this does not necessarily implythat there is no possibility of such plans tobe supported in the medium to long term.In France, for instance, on both the left andright of the political spectrum, there are thebeginnings of a debate on the governanceof the euro, and what France’s role (perhapslinked to that of Germany) should be in anenlarged European Union. Mr Verhofstadt’svision of a 'core Europe' geared around theeuro and the European Social Modeldovetails neatly with a number of recentFrench concerns about French loss ofinfluence in a larger Union and thesupposedly liberalising tendencies of thisenlarged Union. The Italian view of 'coreEurope' clearly depends in the medium termon the outcome of the Italian GeneralElections in April, where a government ofMr Prodi could be confidently expected totake an altogether more favourable view ofMr Verhofstadt’s ideas than anotheradministration of Mr Berlusconi would.Given its enthusiasm at the time of itselection to be seen (in contrast to itspredecessor) as ardently pro-European, MrZapatero’s Socialist government in Spaincould well be a potential ally for theVerhofstadt theses if they came to generatesupport elsewhere within the Eurozone.The long-term key, however, to the politicalsalience of Mr Verhofstadt's proposals willbe the new German Chancellor, Mrs Merkel.She has been widely described as havingonly limited knowledge of or interest in theaffairs of the European Union. Shesurprised, however, many observers by thecentral and constructive role she played inthe resolution of the European budgetarynegotiations in December 2005. If sheconcludes that there is merit in MrVerhofstadt’s argument that bettereconomic co-ordination within theEurozone will make the euro work better,then her lack of any long-standingcommitment to the overall goal of Europeanintegration, which is so powerful in MrVerhofstadt’s thinking, need not be a barrierto her taking up the European mantle ofher political patron, Helmut Kohl. Ironically,a central reason why the euro was set upunder the Maastricht Treaty with such alimited infrastructure of governance was thedesire to reassure the Bundesbank that themonetary discipline provided by theEuropean Central Bank would not beundermined by irresponsible politicalinterference. It will be a very interestingsubject for political commentary over thecoming months whether Mrs Merkel reflectsthe intellectual legacy of the Bundesbankor tends more towards the model of MrVerhofstadt. The difficulty of predicting herfinal reaction to the Belgian Prime Minister’sproposals is symbolic of the uncertainterrain over which Mr Verhofstadt haschosen to fight his new campaign.Public political acceptanceand the politics of reforms:concluding remarksMr Verhofstadt is convinced that an'overwhelming majority' of citizens wouldaccept his proposals in a Europeanreferendum. This conviction is largely basedon his belief that a more sophisticatedgovernance structure for the euro wouldlead to more efficient and effectiveeconomic policies in the Eurozone, whichwould in turn make the Union moreattractive to the wider public. In thisconnection, an obvious problem of timingpresents itself. A referendum to endorseMr Verhofstadt’s proposed new structuresfor the Eurozone would not, by definition,have been able already to benefit from thesestructures. The European electorate wouldneed to be convinced by arguments ratherthan facts that a more tightly integrated'core Europe' could deliver the economicadvantages promised by its proponents.It may seem strange to some of MrVerhofstadt’s critics that he should beputting forward his ambitious proposals sosoon after the rejection in the French andDutch referendums of the EuropeanConstitutional Treaty, of which he was anenthusiastic advocate. One line of analysisexplicitly calls now for a period not merelyof reflection, but rejection of any Europeanintegrative initiatives for many years tocome. This in essence is the view of theBritish government, although this approachis by no means confined to the UnitedKingdom. Nevertheless, it would be wrongfor the British government and those whoshare its relief that the EuropeanConstitutional Treaty has apparently diedby French and Dutch hands to assume thatthe discussion about the European Union’sconstitutional future has disappearedentirely. Mr Verhofstadt’s ideas may findno echo in the current Eurozone, or theymay act as the catalyst for a major newdebate on the Union’s future. He is entirelyright to sense the paradox which led to theTreaty’s being rejected in France because ofits supposed excessive economic liberalismand might well have led to its rejection inBritain because of its supposed excessivecorporatism. Paradoxes are always capableof two resolutions and Mr Verhofstadt hasput forward his own resolution, in a waythat tries to make the future developmentof the Union more attractive to most Frenchvoters. Freed of the need to accept thecompromises of the EuropeanConstitutional Treaty, Mr Verhofstadt hasset out a vision which is at the same timemore compelling and more controversialthan what has been rejected. He will beawaiting the results of the hand grenadehe has thrown into the debate with greatinterest.NotesKatharina Gnath1Guy Verhofstadt, The United States ofEurope. Manifesto for a new Europe,December 2005. To be published in Englishby The Federal Trust in February 2006.