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No closer to political union

by Otmar Issing

No closer to political union

On its establishment in 1999, economic and monetary union was intended to propel Europe towards political union. In fact, no progress toward political unification has been made – or even really attempted.

The euro is no longer a strong common currency reinforcing a shared European identity. Rather, it is now a source of deep resentment among European peoples – resentment that, 70 years after the end of the second world war, was meant to have been eliminated.

Many observers have suggested that the EMU crisis represents a vital opportunity to overcome these tensions and forge an ever closer union. Supporters of deeper integration often quote Jean Monnet, one of the European Union’s main architects, who stated that crises are critical to spurring progress towards European integration.

But this approach appears unlikely to work when there is so little trust among member states, and at a time when political parties opposed to further integration have gained ground in elections all over Europe.

A landmark referendum

Britain’s forthcoming referendum on EU membership, which seems likely to take place this summer, will be a landmark event. One reason for holding the referendum is that the British government believes the euro area needs further integration to survive and prosper, a move in which the UK itself does not want to take part.

Whatever the outcome, for such an important member of the EU to consider departing is hardly a ringing signal of confidence in the Union’s future. If European governments or the European Commission push forward on the path towards political union under such circumstances, this would be likely to create even more resistance, not just from outside but from inside the euro area itself.

‘Deep, genuine, and fair’ EMU

Last year’s report from the ‘five presidents’ – the European Commission, the European Council, the Eurogroup of finance ministers, the European Central Bank, and the European Parliament – called for progress towards a ‘deep, genuine, and fair’ EMU. This would include economic, financial, and fiscal union, and a political union that provided ‘genuine democratic accountability, legitimacy, and institutional strengthening’.

The report recommended launching an agenda for greater integration only after 2017, following elections in France and Germany. The timing appears to reflect the fear that voters in the biggest countries would respond negatively to the proposal – again, not a sign of great confidence.

In my view, the report, like the proposal to establish a European finance minister, is fundamentally flawed. Its underlying assumption – that steps toward all its goals should be taken in parallel, with a genuine political union emerging at the end of the process – is problematic.

Establishing a political union would require amendments to national constitutions and, in most countries, referendums. But voters are far from enthusiastic about the prospect of ceding more authority to Europe.

The reality is that a European political union is unlikely to be established anytime soon. And without true political unification, efforts to pursue the rest of the presidents’ plan, including transferring fiscal powers to the European level, collective fiscal decisionmaking and the possible setting up of a euro area treasury, would carry serious risks.

Within the existing institutional framework, political responsibility for higher transfer payments among countries must remain with the national governments, controlled by national parliaments and electorates.

Political union through the back door

Political union may be possible in the distant future. But it cannot be achieved through the back door by eroding members’ fiscal sovereignty. Attempting to compel transfer payments would generate moral hazard on the part of recipients and resistance from donors, while the resulting increase in tensions could jeopardise the integration that has been achieved to date.

Given this, Europe’s monetary union will have to exist without political union for a considerable period – in other words, the EMU will remain an institutional arrangement among individual countries that retain their fiscal sovereignty.

The key to making such a system work is to ensure that national governments are held accountable for their economic policies.

European governments must respect all treaties and commitments without exception – including, crucially, the Maastricht Treaty’s ‘no bail-out’ clause. The German government must stick firmly to the principle that EMU should not degenerate into a system for the transfer of wealth and income from more solvent to less solvent euro members.

Otmar Issing is President of the Center for Financial Studies, Frankfurt, and a former member of the European Central Bank's Executive Board.