Europe May Fail Due To Sovereignty Issues

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by: James A. Kostohryz

“Fiscal union” sounds nice when contemplated in the abstract. The problem is that as a practical matter, when the details of this arrangement are revealed, and the public is able to truly comprehend what it entails, enthusiasm amongst Europeans will wane. As a result, any true true fiscal union for Europe will probably fail to gain unanimous approval amongst member states. Even if fiscal union is passed, it will almost certainly fail as soon as it is implemented under the sort of adverse conditions that exist at the present time.

Ceding National Sovereignty

There is no exercise of national sovereignty that is more profound than passage and implementation of national budgets. Indeed, without this ultimate power to tax and spend, the concept of national sovereignty is hollow.

A true fiscal union invariably involves an unprecedented cession of national sovereignty on the part of member states in the eurozone. National budgets would be subjected to scrutiny and approval by a supranational entity whose power ultimately superseded national legislatures. Deviations from approved budgets would entail sanctions and various enforcement mechanisms that would be imposed by a supranational entity – by threat of economic and perhaps military force if necessary.

Ceding Democratic Sovereignty

The problem of ceding sovereignty over budgetary matters to a supranational body is not a mere matter of national pride. It is a fundamental problem of democratic governance. In essence, the democratic will of the citizens of a given nation can be disregarded and overruled.

The central issue in this regard is to understand what entity the citizens of European nations ultimately feel themselves identified with politically. For example, are Frenchmen first citizens of France, or are they first citizens of Europe?

If the former, the citizens will perceive the budgetary decisions of the European supranational body as illegitimate and even invasive in terms of their fundamental democratic rights.

Are European Nations Really Ready For Fiscal Union?

In my opinion, Europeans are not ready for fiscal union. They were not ready for it at the inception of the euro (which is why they didn’t adopt it), and after thirteen years of government from Brussels, they are even less disposed to it now. In my view, the attempt to force foist fiscal union upon the various peoples of Europe at this stage of European history threatens to tear apart the entire European integration project.

Even if all seventeen nations of the eurozone were to vote affirmatively to in favor of fiscal union, I believe that such an arrangement would fail as soon as it is put to a severe test.

Imagine for a moment that Italy fails to meet a fiscal target. Inspectors on the ground (from foreign nations) declare Italy in violation of the terms of the fiscal union. From Brussels, an order is issued to cut all pension payments during the next three months by 15% and public salaries by the same amount.

One can only imagine the political ramifications. The front pages of Italian newspapers would be filled with political cartoons depicting a Prussian soldier, complete with spiked Pickelhaube, stomping on an Italian’s neck with jack boot.

Nationalist parties, with demagogic platforms would flourish, disrupting the balance of power in the Italian parliament and eventually forcing secession from Europe – along with total repudiation of debts owed to oppressor countries.

Sarkozy has already indicated that France will not accede to the sort of true fiscal union sought after by Germany that grants wide-ranging powers to a supranational entity. Sarkozy wants each European nation to voluntarily enshrine budgetary restrictions into their constitutions and for national court systems to enforce those restraints. The problem is that such a system is not credible. In the first place, it is not credible because not even Sarkozy has been able to get such legislation passed in the French parliament. Secondly, nobody believes that individual nations are capable of self-enforcement.

Is The Time Ripe For Fiscal Union?

The German leadership has repeatedly stressed that the present financial and economic crisis must be fully “exploited” in order to fix the flaws in the original euro architecture and create a true fiscal and economic union to match the monetary union. While the German stance on fiscal and economic union is understandable, I believe that they have miscalculated politically.

Contrary to German calculations, the present crisis is likely to make passage and implementation of a fiscal union more fraught with dangers, not easier. That is because the citizens of Europe will be able to more readily perceive the consequences of a cession of budgetary sovereignty -- precisely because of the crisis. It is one thing to cede sovereignty when your job and pension are secure and budgetary matters seem rather arcane; it is quite another to cede sovereignty if you fear that your job and pension might be taken away from you. If Europeans do not fully appreciate how momentous this cession prior to approval of fiscal union, they will soon understand it when the time comes for enforcement by supranational powers led by Germany.


In the end, it is likely that Sarkozy and Merkel will arrive at some sort of compromise regarding fiscal union that can plausibly be accepted by all seventeen member states of the eurozone. However, the nature of that compromise can only be such that it that will leave Europe in a highly precarious state. On the one hand, political constraints will make it impossible to propose a true fiscal union with strong and credible enforcement mechanisms. On the other hand, the new scheme is likely to be intrusive and invasive enough to engender great opposition and resentment.

Thus, even if Merkel and Sarkozy manage to strike a compromise that all seventeen nations of Europe are able to approve, it will not be long before the arrangements are tested. Why? Current budget commitments in Europe are hopelessly optimistic. Current fiscal budgets assume revenue collection numbers that will not be met due to a deepening recession. As a result, violations of fiscal commitments will occur almost immediately after approval of any fiscal pact. Non-compliance will trigger whatever enforcement mechanisms are provided for in the new treaty. At that point is when the true acrimony begins. This is when it shall be seen whether the citizens of individual European nations will bow to the will of distant powers, or whether the euro experiment soon unravels in acrimony.

Issues of national sovereignty are the root cause of various flaws in the EU and EZ constitutional framework that have led to the present crisis. And there is every reason to believe that these very issues that caused the crisis in the first place may precipitate the ultimate failure of the European integration experiment. Various analysts believe that fear caused by the crisis may prompt Europeans to accept a loss of national sovereignty that they would not otherwise fathom. However, it is my view that the crisis could generate the opposite effect: By bringing into clear view what fiscal union truly means and its real consequences, revulsion and rejection may be triggered in a context in which old nationalist wounds may be brought to the fore again.

While the majority citizens in several European nations may be willing to abdicate national sovereignty to a supranational European entity based out of Brussels is my view that not all of them will ultimately be so obsequious. As a result, it is my judgment that the eurozone cannot be maintained in its current form.

Because I believe that these issues will come to a head sooner than later, it is my view that all but the shortest-term traders should refrain from attempting to play the equity market on the long side through individual stocks or equity market proxies such as SPDR S&P 500 ETF Trust (SPY), SPDR Dow Jones Industrial Average ETF Trust (DIA) or Powershares Nasdaq-100 Index Trust (QQQ). I believe that investors with longer time horizons should raise cash and avoid purchasing and/or holding equities - even those that appear attractive such as Apple (AAPL), Microsoft (MSFT) and Pepsi (PEP).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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