The European Union has approved a fiscal plan that includes budget cuts after intense negotiations between member states. Governments championing austerity, including Germany and the UK, negotiated with those arguing for growth-centered strategies, led by France. While the new EU budget marks a victory for states advocating a continuation of severe austerity measures, the material impact of the budget cut is expected to be minimal. The largely symbolic victory will be celebrated by some and lamented by others, but the EU continues to avoid addressing the macroeconomic imbalances that are the deep structural fault lines of European integration.
By Stephanie Blankenburg
The compromise on the next long-term EU budget for 2014 to 2020, achieved last Friday in Brussels, has invariably been hailed as a victory for Europe's austerity hawks, led by Britain and Germany, over its austerity doves, led by France. This it undoubtedly is. The new budget plan – which is what it remains for now: an executive plan to be put to parliament – has also been praised as a victory for the European Union on the grounds that any agreement was better than a repeat of the negotiation failure last November. This may be true in the short term, but it is much less clear beyond the shallow euphoria of next-day celebrations.
Economically speaking, the night-long standoff between pro- and anti-austerity factions, with Germany conveniently playing the role of master broker, was a storm in a teacup. The EU budget is pocket money, granted by member states to a supranational rump agency, currently involved in firefighting an existential crisis of its most ambitious project, European monetary union (EMU). And it still must be agreed in advance how that pocket money will be re-distributed to member states.
True, this is the first time that real cuts – mainly to cross-border infrastructure projects – have been agreed, and they will hurt those directly affected. But in the wider picture of an EU budget that amounts to scarcely 1% of the region's gross national income, the victory of austerity hawks over austerity doves is to be counted in pennies rather than pounds, its true significance being ideological and political. By comparison, the US federal budget is nearer 20% of US GDP, and the national budgets of many EU member states are around half of their GDP, at market prices.
More importantly, the real fight about the role of nation-states in promoting European integration is taking place elsewhere. At its heart is the European fiscal compact that entered came into force on 1 January 2013. This in effect prevents EMU governments from borrowing, for whatever purpose, beyond a historically low debt-to-GDP ratio. If the EMU, or any member states, were hit by mass unemployment, an ecological crisis of major dimensions, a war or an invasion by aliens, its governments would have to stand by and let the private sector sort out the problem.
On closer inspection, the political basis for this ideological victory, won for the supposed reason of austerity over the unreason of public profligacy, also looks fragile. Germany's Angela Merkel may have succeeded, yet again, as the EU's undisputed power broker, while re-asserting herself as a credible austerity hawk at home. But she faces an uphill struggle in Germany's national elections in September. While her Christian Democratic party is set to remain the strongest single party, its coalition partner, the Free Democratic party, is heading for political implosion. Merkel thus risks losing the election unless she can strike a deal with the Social Democrats.
François Hollande has been foiled, for now, in forging a strong enough pro-growth, anti-austerity alliance with Italy and Spain. This was mainly due to transitory factors, with Italy's Mario Monti focusing on elections at home, and Spain's Mariano Rajoy preoccupied with a corruption scandal. The battle lines that emerged between Germany and France at the weekend may be redrawn soon enough. With Merkel's hands tied in the runup to German elections, Hollande will gain space for manoeuvre. In this context David Cameron is likely to be no more than one of Merkel's famous tactical allies, useful one day, discarded the next.
Even if the long-term EU budget is approved, in one form or another, by the European parliament, the cuts achieved are economically insignificant in the wider picture. Politically, nothing has been resolved: the north-south divide in the EU (and the EMU) is widening, and the EU budget is woefully inadequate to even begin to address the underlying macroeconomic imbalances and socio-economic tensions. Ideological triumphalism over peanuts is a pathetic substitute for serious debate about deep rifts in the process of European integration.
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