by Tony Judt
The eastward extension of agricultural subsidies and other benefits was also placed within strict limits. In part, as the Commission’s Transition Report 2003 put it, this was because of ‘questions about the accession countries’ capacities to absorb and use efficiently the post-accession grants from the EU’s cohesion and structural funds’. But the main reason was simply to hold down the cost of enlargement and minimize competition for Western producers. Not until 2013 would East European farmers get the same subsidies as those already being paid out in the West—by which time, it was hoped, most of them would have retired or gone out of business.
By the time the negotiations were complete, the terms agreed and the 97,000 pages of the Union’s acquis communautaire duly incorporated into the governing codes of the applicant states, the actual enlargement itself came as something of an anti-climax. Having waited fifteen years to join, most of the new states could be forgiven for lacking the enthusiasm they might have exhibited a decade earlier. In any case, many of the practical benefits of Western engagement had already been discounted—notably in car manufacturing, where former Communist states had a ready supply of cheap, skilled labour and in which companies like Volkswagen, Renault and Peugeot-Citroën invested heavily during the Nineties. Between 1989 and 2003 the cumulative total of foreign direct investment for Eastern Europe as a whole had reached $117 billion.
By the early twenty-first century, foreign investment in former Communist Europe was actually tailing off. Ironically, this was largely a result of the coming EU enlargement. Once they were inside the Union it would certainly be easier to do business in and with countries like Poland or Estonia. And they in turn would be able to sell more to the West: Poland expected to double its food exports to the EU within three years of joining. But these were the fruits of relative backwardness. Once they were inside the EU, wages and other costs in the countries of Eastern Europe would begin to rise to Western levels. The region’s cost advantage over factories in India, or Mexico, would be lost. Profit margins—at least in the manufacturing sector—would start to fall.
Meanwhile, thanks to the heavy cost of unraveling the Communist economies, East Europe on the eve of accession remained far behind the countries of the EU. Per capita GDP even in the most prosperous new member states was far below their Western neighbours: in Slovenia it stood at 69 percent of the EU average, in the Czech Republic at 59 percent, in Hungary 54 percent. In Poland it was just 41 percent, in Latvia, the poorest new member, 33 percent. Even if the economies of the new EU states kept growing on average 2 percent faster than those of the existing members353, it would take Slovenia twenty-one years to catch up with France. For Lithuania the time lag would be fifty-seven years. The citizens of former-Communist states had no access to such data, of course. But most had few illusions about the difficulties ahead. When Czechs were asked, in a series of opinion polls in 2000, how long they thought it would be before their situation ‘improved’, 30 percent of respondents answered ‘within five years’; 30 percent answered ‘in ten years’; 30 percent answered ‘fifteen years or more’; and 10 percent said ‘never’.
Nonetheless, for all the justified skepticism of the beneficiaries, the formal implications of the EU’s ‘big-bang’ enlargement were real enough. When the accession treaty, signed in Athens in April 2003, came into force on May 1st 2004, the European Union grew at a single stroke from fifteen to twenty-five members (Bulgaria and Romania were held back, their accession anticipated for 2007). Its population increased by one-fifth (though its economy was expanded by less than 5 percent); its land mass by almost as much. And the frontiers of ‘Europe’, which as recently as 1989 had reached no further east than Trieste, now extended into what had once been the USSR.
At the dawn of the twenty-first century the European Union faced a daunting range of problems: some old, some new and some of its own making. Its economic troubles were perhaps the most familiar and in the end the least serious of its concerns. With or without the new member states the EU continued to spend—as it had done from the outset—hugely disproportionate sums of money on its farmers. Forty percent of the Union’s budget—or $52 billion in 2004—went on politically motivated ‘farm support payments’, many of them to large mechanized agri-businesses in France or Spain that hardly needed the help.
Even after agreement had been reached to reduce these subsidies and cut the Common Agricultural Program it was anticipated that farm price supports would still constitute over a third of the EU’s total expenditure well into the second decade of the new century, placing an intolerable burden upon the budget. The problem was not that the Union was poor. Quite the contrary: the collective wealth and resources of its members were comparable to those of the US. But its budget, in the words of an independent report commissioned by Brussels in 2003, was a ‘historical relic’.
The European Union had started out, half a century before, as a customs union—a ‘common market’—bound together by not much more than a common external tariff. Its pattern of expenditure was driven and then constrained by negotiated An Ever-Expanding Union? The EU in 2004
agreements on tariffs, prices, subsidies and supports. Over the years its ambitions had expanded into the realms of culture, law, government and politics and it had taken on—in Brussels and elsewhere—many of the external trappings of a conventional government.
But whereas conventional governments are free to raise money to meet their anticipated costs, the European Union had and has very few revenue-raising capacities of its own. Its income derives from fixed rates of customs duty, agricultural levies, a Union-wide indirect sales tax (VAT) and, above all, contributions from member-states capped at just 1.24 percent of Gross National Income (GNI). Thus very little of the EU’s income is under the direct control of the Union’s own administration—and all of it is vulnerable to political pressures within the separate member-states.
Most of the latter are recipients of EU largesse rather than contributors to its budget. In 2004, following its enlargement to the East, nineteen of the Union’s member countries received from Brussels more than they paid in. The cost of running the Union was in practice met by net contributions from just six member states: the UK, France, Sweden, Austria, the Netherlands and Germany. Ominously for the Union’s future prospects, all six countries petitioned the Commission in December 2003 to have national contributions to the EU budget reduced in future from 1.24 percent of GNI to just 1 percent.
The Union’s budget, tiny in comparison to that of even the smallest member-state and mostly spent on structural funds, price supports and the EU’s own costly administration, is thus a permanent hostage to the interests of its contributors and recipients alike. The levers of the Union’s economic machinery depend for their efficiency upon the consent of all its constituent parts. Where everyone more or less concurs on the principle and benefits of a given policy—on open internal borders, or unrestricted markets for goods and services—the EU has made remarkable progress. Where there is real dissent from a handful of members (or even just one, particularly if it is a major contributor), policy stalls: tax harmonization, like the reduction of agricultural supports, has been on the agenda for decades.
And sometimes the clock runs backwards. After two decades of Brussels-driven efforts to eliminate state subsidies for favoured national ‘champions’ and thereby secure a level playing field in intra-European economic competition, the EU’s single market commissioner (the Dutchman Frits Bolkestein) expressed his surprise in July 2004 at watching France and Germany revert to the ‘protectionist’ policies of the Seventies in defense of threatened local firms. But then both Berlin and Paris, unlike the unelected commissioners in Brussels, have tax-paying voters whom they simply cannot ignore.
These paradoxes of union are nicely captured in the tribulations of the euro. The problem with a common currency lay not in the technical substitution of a single unit of reference for a multitude of national currencies—this process was already under way long before the a
bolition of the franc or the lira or the drachma and turned out to be surprisingly smooth and painless354—but in the prerequisite harmonization of national economic policies. To avoid the moral hazard and practical risks of free riders, Bonn, as we have seen, had insisted upon what became known as the ‘growth and stability pact’.
Countries wishing to join the euro were obliged to hold their public debt down to no more than 60 percent of Gross Domestic Product, and were expected to run budget deficits of no more than 3 percent of same. Any country that failed these tests would be subject to sanctions, including substantial fines, imposed by the Union. The point of these measures was to ensure that no euro-zone government would let down its fiscal guard, overrun its budget at will and thus place unfair strains on the economies of other euro-zone members who would have to bear the burden of ensuring the stability of the common currency.
To everyone’s surprise the traditionally spendthrift southern tier proved surprisingly disciplined. Spain ‘qualified’ for euro membership by what one Spanish observer tartly described as a combination of fortuna and virtu: an upswing in the economy allowed the government to pay down the country’s public debt just in time for the 1999 introduction of the currency. Even Italy managed to pass the Teutonic tests (which many Italians rightly suspected had been set up to keep them out), albeit with more than a little juggling of figures and the one-time sale of public assets. By 2003 the euro-zone encompassed twelve countries, ranging from Ireland to Greece.
But—as many skeptics had predicted—the strains of a ‘one size fits all’ currency soon began to tell. The newly established European Central Bank (ECB) in Frankfurt maintained from the outset a relatively high interest rate, to support the new currency and secure it against inflation. But the economies of the euro-zone states differed with respect both to their level of development and their point in the economic cycle. Some, like Ireland, were booming; others—notably Portugal—lagged far behind and could have used the boost to domestic activity as well as exports that would traditionally have been achieved by lowering interest rates and ‘softening’ the currency.
Shorn of the power to implement such measures, the government of Portugal was obliged by the terms of the ‘pact’ to reduce government expenditure—or else face substantial fines—just when it ought, in conventional economic theory, to have been spending its way out of recession. This did not make for domestic popularity; but at least the country could boast that it had not reneged on the terms of its participation in the new currency: by 2003 Lisbon had successfully reduced government debt to 59.4 percent of GDP and the annual deficit to 2.8 percent, squeezing under the official limits.
The next year, however, France ran a deficit of nearly 4.1 percent—and Germany, its ageing economy finally paying the price for unification, followed suit with a deficit of 3.9 percent and a debt ratio of nearly 65 percent. Given the size of their respective economies, the fact that neither France nor Germany was adhering to its own rules represented a significant challenge to the whole agreement. But this time, when the Commission set in motion the penalty proceedings, Paris and Berlin made it clear that they regarded the ‘temporary’ deficits as economically unavoidable and had no intention of paying fines or even committing themselves to doing significantly better the following year.
The Union’s smaller states—both those like Greece or Portugal which had striven mightily and at some cost to meet the pact’s terms and those such as the Netherlands and Luxembourg which feared for the stability of what was now their currency too—duly cried foul, but the lesson was clear. Within less than a decade of its appearance, the growth and stability pact was dead. Just how much the euro would actually suffer if the participating countries were allowed more flexibility in their domestic budgets was by no means clear. There were many who felt that the real problem lay not with national governments but rather with the rigid and seemingly unresponsive Central Bank, immovably insistent upon its complete independence and still fighting the anti-inflationary battles of the 1970s.
The difficulties of the euro pointed to a broader shortcoming in the European project: its extraordinarily unwieldy system of government. The problem lay in the original conception. Jean Monnet and his heirs had deliberately eschewed any effort to imagine, much less implement, a democratic or federal system. Instead they had driven forward a project for the modernization of Europe from above: a strategy for productivity, efficiency and economic growth conceived on Saint-Simonian lines, managed by experts and officials and with scant attention paid to the wishes of its beneficiaries. The energies of its proponents and exponents were largely devoted to the complex technical dimensions of ‘building Europe’. To the extent that other concerns ever arose, they were serially postponed.
By the 1990s, then, the European Union was still run along lines that had been laid down decades before and mostly for managerial convenience. The unelected Commission in Brussels administered a substantial bureaucracy, initiating policies and implementing agendas and decisions subject to the approval of a Council of Ministers from the member-states. An unwieldy European Parliament, sitting variously in Strasbourg and Brussels and directly elected since 1979, exercised a slowly expanding oversight role (in the original Rome Treaty its function had been strictly consultative) but no power of initiative.
Uncontentious decisions were typically made in Brussels by experts and civil servants. Policies likely to affect significant electoral constituencies or national interests were hammered out in the Council of Ministers and produced complicated compromises or else expensive deals. Whatever could not be resolved or agreed was simply left in abeyance. The dominant member states—Britain, Germany and above all France—could not always count on getting what they wanted; but whatever they truly did not want did not come to pass.
This was a unique set of arrangements. It bore no relation to the condition of the separate states of North America in 1776, all of which had emerged as satellites of a single country—Britain—whose language, culture and legal system they shared. Nor was it really comparable to the Swiss Confederation, although that analogy was occasionally suggested: in their centuries-old web of overlapping sovereignties, administrative enclaves and local rights and privileges the cantons of Switzerland more closely resemble old-regime France without the king.355
The member-states of the European Union, by contrast, remained completely independent and separate units in a voluntary association to which they had, over time, conceded a randomly accumulated set of powers and initiatives without ever saying what principle lay behind the arrangement and how far this common undertaking was to go. ‘Brussels’—an appropriately anonymous headquarters for an undefined administrative entity, neither democratic nor authoritarian—governed only through the consent of its member governments. From the outset it had presented itself to all of these as a straightforwardly positive-sum undertaking: the Community/Union would contribute to its members’ well-being without subtracting anything of significance from their independence. But this could not continue indefinitely.
What brought matters to a head was not the inherently complicated and incremental nature of the Union’s system of rule, but the impossibility of maintaining it with twenty-five members. Hitherto the chairmanship of the Council of Ministers rotated every six months, with each country getting to host a self-promoting bi-annual European conference—a system already much disliked by the Union’s full-time administrators. The prospect of such a circus shambling around through twenty-five different capitals, from Lisbon to Ljubljana, was plainly absurd. Moreover, a decision-taking system designed for six member-states and already cumbersome for twelve, much less fifteen, would simply grind to a halt with fifty European Commissioners (two from each country), or a European Council representing twenty-five member-states—each with a power of veto.
The likely difficulties were all too well foreshadowed at a meeting in Nice in December 2000. Ostensibly called to lay the groundwork for enlargement and to devise a new voting system
in the EU Council of Ministers—one that would weight member-states’ votes by population while still ensuring that majority decisions could be reached—the conference ended in acrimonious and deeply embarrassing horse trading. The French insisted on maintaining parity with Germany (despite a population disparity of twenty million people) while countries like Spain and Poland, the latter accorded observer status at the meeting, sought to maximize their own future voting strength in the Council by selling their backing to the highest bidder.
The unseemly scramble for influence at Nice, as leading European statesmen like Tony Blair, Jacques Chirac and Gerhard Schroeder spent sleepless nights bargaining and bickering for status and influence in their common European home, illustrated the price that was now being paid for previous neglect of constitutional niceties. By bringing the Union to a new low, Nice led directly to the establishment of a ‘European Convention’: a sort of unelected constituent assembly authorized to produce a practical system of governance for an enlarged ‘Europe’ and, it was hoped, some credible account of the purposes of the whole thing. Following a certain amount of (by now familiar) lobbying from Paris, the presidency of the Convention was assigned to the ageing but ever-vainglorious Valéry Giscard d’Estaing.
After two years of deliberations, the Convention emitted something more than a draft but decidedly less than a constitution. Shorn of its portentous Giscardian preamble (immediately and unfavourably contrasted with the elegant brevity of its Jeffersonian predecessor) the Convention’s document offered little by way of classic constitutional proposals—no sweeping definitions of individual liberty, no clear statement concerning the division of powers, etc. In this respect, as many had predicted, it was a disappointment.
