John R. Gillingham, The EU: an Obituary, London, Verso, 2016. Review and commentary.Part II. France, Germany and world markets.

The second phase of the European project may be dated from the breakdown of the post-war fixed exchange rate regime, whereby currencies were benchmarked to a stable dollar, itself convertible at $34 an ounce gold. The key decision was taken by President Nixon in August 1971, ending the convertibility of dollar to gold, and launching the world on a dollar-centric paper currency system. The system’s virtue from a global perspective lay in its ability to absorb one of the greatest revolutions ever in world history-the extra-ordinary rapid development of the Asian-Pacific economies, the re-entry of China to world markets, the collapse of the USSR, and the unprecedented rise in living standards all around the world. In its wake came a neo-liberal paradigm of public policy, predicated on liberalisation of markets, privatisation of corporate assets and stabilisation of public finances, involving among other measures the idea that central banks should not take orders from their governments, but be independent and charged with maintaining price stability. The latter development echoed the growing status of the German Federal Republic in the global economy, and in particular of the Bundesbank as the manager of a key currency, the DM.

The UK, with Ireland and Denmark joined the EEC in 1973, when the EEC supporters were beginning to present it as a serious challenger to the US. Then came the oil shock, rising and divergent rates of inflation, a floating of EEC currencies on world financial markets, and a quick burial of the dreams to achieve a fully fledged European Union by 1980, announced at a Paris summit in October 1972 by President Pompidou, Chancellor Brandt and Prime Minister Heath. Not for the first time, the realities of Europe’s diversity ensured that European states’ responses to global events remained particular. Trying to stop the global clock for the Europeans to manage their transition to union proved illusory.

It took the EEC approximately one and a half decades to respond to the new challenges of a world fashioned first and foremost by US monetary initiatives, and by the cornucopia of technologies flowing from the US’ own liberalisation of financial and telecommunications markets. In the “dark years”, the title of a chapter, Gillingham tells the story of efforts to create a European monetary regime (the EMS) to stabilise currencies; to fashion an EU-wide industrial policy in textiles, shipbuilding and steel; and to introduce voluntary trade restrictions. President Giscard d’Estaing in the summer of 1974 had a new institution created, the European Council,  whereby heads of state and government could meet to circumvent the weaknesses of the Brussels institutions. The ECJ continued on its course of judicial activism, particularly in the cassis de Dijon case, under which member states were obliged to recognise goods which had been legally produced in another member state. This principle of mutual recognition  of national standards underpinned the liberalisation policy of the internal market, launched in the early 1980s. National norms would no longer be a barrier to trade, unless minimum standards  were transgressed.

In Gillingham’s account, the relaunch of the EU in the 1980s was accompanied by a resurrection of all the Monnet myths and Hallstein teleology from the early years, and that were now applied on a vast scale. The central measure was the launch of the Single European Act of 1986, and its promise of liberalising markets across Community’s markets. But the measure led straight to the Maastricht Treaty of 1992, and through to the 2004 EU Constitution, and its ensuing debacle.

 France and its German Problem.

I must interject here a personal note. I lived through all this period from 1972 to 2014 in France, and followed the development of French politics and its political economy very closely. The one consistent feature linking foreign and domestic affairs over this long period, and well before, and surely as far as the eye can see into the future, was France’s fixation with its German Problem. De Gaulle’s answer was to arm France with nuclear weapons so that no Blitzkrieg could ever be launched again through the Ardennes. But he also signed the Elysée Treaty, on January 22, 1963, one week after scotching Prime Minister MacMillan’s hopes to “pool sovereignty”(a concept which de Gaulle most definitely did not share) in what was then the EEC. The treaty called for consultations between France and West Germany on all important questions and an effort to come to a common stance. Regular summits between high-level officials were also established. The Treaty has been the cornerstone of Franco-German relations since.

Gillingham rightly, in my view, questions whether the 1969 EEC summit in the Hague summit effectively amounted to a “re-launch” of “Europe” after the departure of de Gaulle. Chancellor Brandt was intent on pursuing his national policy of détente, which President Pompidou, along with the Nixon White House, suspected was a bid for Germany’s neutrality in the cold war. Over the coming two decades, the French élites sought repeatedly to bind Germany into a revived EEC, and definitely modified de Gaulle’s histrionic behaviour with regard to NATO and the western alliance.

Binding Germany into a European construct meant two things: first, bilateral relations between Paris and Bonn took precedence over the Brussels machinery. It was the creation of the European Council and the Giscard-Schmidt duopoly that launched the European monetary system (the Euro predecessor), which in effect hitched the French economy to the German, and over twenty years shifted the locus of decision-making from Paris to Berlin.

Second, European governments experimented there way into adapting their national economies as best they could to the nascent global market, and generally in the direction of Thatcher’s market-based reforms in the UK. But, he adds:

“Europe was no panacea for nations faced with the prospect of modernization in the final quarter of the 20th century.” As Gillingham summarises, national political economies had to find their own paths to adapation via trial and error, rather than by joining a European “united front” facing the rest of the world. “The Nordics, he writes, faced painful problems with the high costs of the welfare state but solved them nationally in similar waves. The concerted effort of the Italians to shift the locus of politics from Rome to Brussels misfired. The Spanish struggled with a (Franco) legacy that could not be shunted to a siding, but would take years to overcome. The French attempt to copy the model of the Federal Republic proved to be unpromising. German methods, which worked well enough in their own country, were not necessarily good for the rest of Europe. The Dutch straightened out their economy, but their embrace of multiculturalism was unrealistic. The “construction” of Europe would not be easy”. (p102).

In 1990, German unification launched the world into what we call globalization, the re-creation of a global market driven notably by the application and development of fast moving technologies. Yet the architects of the European project, Gillingham writes, sped forward to implement their dream of a United States of Europe(USE). In their haste, they left the single market incomplete; enlargement to incorporate the newly liberated countries of central and south eastern Europe was niggardly; the machinery of EU governance remained dysfunctional; new technologies met with suspicion; and the continent was saddled with a Euro in a zone that was far from being an optimal currency area.

He quotes Giandomenico Majone, a leading student of EU integration, as ascribing the shortcomings of the EU to “total optimism”, in other words that the future would match the dream. (G.Majone, “”The Deeper Cause: The Collapse of the Political Culture of Total Optimism”, EUI Working Paper Law 2015/10,pp.1-16.)  Gillingham suggests a more direct description: “There is a better term for it: arrogance.”

From BJ (Before Jacques) to AJ(After Jacques)

The key personality in the mid-1980s  relaunch was Jacques Delors, Catholic trade unionist, prominent French Socialist Party member and Minister of Finance before leaving Paris to take up the position of Commission President in 1985. His vision was of a Europe organized like France, but strong enough to hold its own with the superpower across the Atlantic, “about which, Gillingham writes, he had highly ambiguous feelings”. As Gillingham tells it, Delors fundamentally misinterpreted the nature of the ongoing world historical process. He built his EU house on shifting sands -the phrase echoes the title of the account of his Presidency by Charles Grant, Delors: Inside the House that Jacques Built, London, Brealey, 1994.

The new ways of thinking were represented by the other major personality to figure in Gillingham’s account- Prime Minister Thatcher. Her economic pills to cure the deep malaise of a dysfunctional UK economy were cures, he writes, not nostrums. The lodestars of Thatcher were, he writes, small government, the rule of law, and open market capitalism. The lady had, he suggests, three overarching objectives: to break the labour unions, shrink the state sector, and restore confidence in the currency. I would disagree about breaking the labour unions: she subordinated them to statutory law, and in effect introduced reforms from which the Labour party, paid by the trade unions, had always shrunk. Her reforms ran deep, and fundamentally challenged the EU-Delors claim that national governments were helpless in the face of international forces, unless they pooled their resources to form a united front to the rest of the world. Delors was nothing if not a French trade unionist.

When Delors came to Brussels the European Community was a moribund body. (I remember a meeting attended by President of the Commission Gaston Thorn in Paris circa 1983 with about 3 people in the room, including myself). Delors’ task was to breathe new life into Brussels. He grew its machinery; he befriended multinational companies, keen like him, to circumvent national governments; he promoted technology networks with the support of firms like Philips of Eindhoven; he introduced majority voting, with Thatcher’s backing to create a “Single European Market”,(SEM) but in effect to create a European super-state. The SEM begat a negotiated move to free movement of capital, which begat the monetary union, which begat the Maastricht Treaty, intended by Chancellor Kohl at least as a major step to a European federation.

In retrospect, Gillingham observes, it is astounding that Delors was taken seriously. He claimed that the acquis communautaire (the body of EU rules) was permanent and inviolable (whether it worked or not); that the ECJ was in effect a Supreme Court, when it was not; that EU citizenship took precedence over that of the individual state, which it did not; and monetary union was “irreversible”, which it clearly is. He brushed aside warnings that Europe, being diverse, was not an optimal currency area; he believed there was something called a European “social model”, which there is not; he discounted the likelihood that the only EU-wide policy that would be applied uniformly was Thatcher’s Anglo-American capitalism, which he wished to avoid. Not least, as a blueprint for a federal Europe, Gillingham observes, the Maastricht treaty was a “non starter”. The Danes initially voted Maastricht out, and the French voted it in by a mere 51%. Setting a precedent, the Danes were persuaded to vote again, this time for. The French population was less than truly convinced by President Mitterrand’s January 1995 statement to the European Parliament that “nationalism is war”.

Delors’ trick could only have been realised if Europe had a government. It did not. All that Delors conjured was the expectation that it would. EU foreign policy soon descended into farce and tragedy with the implosion of Yugoslavia. The SEM remained a glass half full. The EU’s Regional Fund, he writes, became a slush fund; the Social Charter proclaimed high sounding principles but lacked substance; membership expanded to 28, the  eastern Europeans coming in as second class citizens; the EU made rules and violated them with impunity; quangos proliferated; a “wink-wink” culture(mutual back scratching) took hold, culminating in the sacking of the Commission in 1999. Gillingham reminds us that Commission President Prodi talked to the European Parliament in closed session, that the European Parliament’s own nest was less than clean.

In search of the European government, one inter-governmental conference followed on another. In 2001, Brussels delivered The White Paper on Governance(2001) (http://europa.eu/rapid/press-release_DOC-01-10_en.htm). Gillingham characterises this report as in the line of succession to interwar authoritarian governments, with a strong preference for Gleichschaltung, ie centralization of powers and the subordination of the German regions. In the 2000s, it was the nations that would be subordinated. Readers may consult the document for interest: what strikes me is the high flown rhetoric, allowing for a combination of comforting consensus and maximum confusion. I attended one of the local meetings spawned by this document, held in Melun, in Seine et Marne, and made a plug for national parliaments, but was immediately corrected by the Préfet of Seine et Marne, who, noting I was British, said in true Napoleonic fashion, “The two countries with strong parliaments are Denmark and the UK: we should forge ahead(I think he meant charge) without them.”

The charge went ahead in the Constitutional Convention of 2003-2004, presided by former French President, Giscard d’Estaing. The conference delivered a 400 page draft constitution for the EU, giving the EU a legal personality; the right to represent member states when it wants; a sweeping Charter of Fundamental Liberties; and a supremacy clause actually giving the ECJ the powers to override national laws which it had claimed previously without any Treaty justification. The Constitution was voted down by Ireland, France and The Netherlands. Ireland was invited to think again, voted Yes, but France and The Netherlands were tougher nuts to crack.

So the Constitution was morphed into a Lisbon Treaty. As Giscard d’Estaing told the Constitutional Affairs Committee in the European Parliament in July 2007.

“In terms of content, the proposals remain largely unchanged, they are simply presented in a different way… The reason is that the new text could not look too much like the constitutional treaty.”

This was not entirely true particularly with regard to the powers of the ECJ. The ECJ’s powers were relegated to an annex, which recognised that it had none. As Gillingham states:

“The ECJ is not in fact a legitimate constitutional supreme court, but in essence what it was originally intended to be: an administrative chamber. Any grander notion is a legal fiction”.(p.68).

This is a central point in Gillingham’s analysis, one with which it is impossible not to agree (unless you espouse the idea that judicial activism beyond a treaty remit is permissible). One of the reforms in Part IV I suggest is that the ECJ be granted Treaty powers, that are tightly circumscribed, and not subject to indefinite empire-building-a process that brings the attempt to create Europe as a space subject to the rule of law into serious disrepute.

Meanwhile, the realities of power in Europe were shifting from Paris to Berlin. Although Gillingham does not develop this line of thinking, what he is in fact describing is the re-emergence of European power politics from behind the veneer of liberal institutionalism. The idea of creating a single currency, which had been dropped as far too controversial during discussions leading to the signing of the Rome Treaty in March 1957, was revived in the late 1960s. The incident which brought home to the French élites the re-emergence of German confidence was the headlines of the Bildzeitung, quoting Finance Minister Franz-Josef Strauss in 1968 as saying “Nein”, to de Gaulle’s proposal for Germany to revalue the DM.

Over the subsequent two decades, Paris sought to reconcile its élites’ ambitions for a stable currency arrangement in the EU, or at best a EU single currency, with the post-1945 policy of inflationary growth, followed by regular devaluations. In 1983, Mitterrand opted for less growth as a temporary measure-he hoped- in favour of currency stability. This meant in effect aligning French policy and performance on German preferences. The whole thrust of Delors’ Commission Presidency was to drive the EU to a single currency, so that France would no more receive orders from the Bundesbank. The battle between France and Germany over economic governance is still raging. France, with Italy, in effect wants a large counter-cyclical EU budget run on Keynesian lines; Germany wants a European Central Bank focused solely on price stability, with national governments alone responsible for their own debts.

Since 1990, the central fact of post cold war Europe was and is that France and Germany are no longer equal. France has used its diplomatic leverage to ensure formal equality in EU voting rights, and successive German governments were prepared to play along with appearances. But as demonstrated at the time of German unification, when relations between Paris and Bonn deteriorated sharply for a while, trust between the two was a fragile commodity. France in particular pushed for increased representation of Mediterranean member states, in order to offset Germany’s eastern advantage. Although Gillingham does not mention this, German businesses redeployed out of relatively cheap labour southern European countries, to their own Hinterland in eastern Europe. The new member states of central and south-eastern Europe, while bound to the Germany economic hub, are far from being Berlin’s clients, anymore than the southern European member states are clients of France. What may be said is that German competitiveness is boosted by corporate outsourcing to central eastern European economies, with far lower labour costs combined with a highly skillable workforce. France’s outsourcing options to the Iberian peninsula are much less, given that Portugal and Spain are both Euroland members; by a France-southern European coalition in favour of “growth” does exist, though it has been noticeably ineffective since 2010.

In 2002, Chancellor Schroeder declared that under no condition would Germany back US policy on Iraq-the first time since 1945 that a German Chancellor had overtly said Nein to Washington. In 2003, Schroeder then proceeded with his labour market reforms, designed to keep wages down, drive productivity up, and promote savings. In the coming seven years, Germany developed a current account surplus with western Europe, equivalent to China’s with the United States.

By 2010, and the outbreak of the Greek crisis, Germany was de facto Europe’s great power. It was also bluntly mercantilist, and much less interested in European “construction”. That reality, and global market competition, is the subject of Part III.

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About Jonathan Story, Professor Emeritus, INSEAD

Jonathan Story is Emeritus Professor of International Political Economy at INSEAD. Prior to joining INSEAD in 1974, he worked in Brussels and Washington, where he obtained his PhD from Johns Hopkins School of Advanced International Studies. He has held the Marusi Chair of Global Business at Rensselaer Polytechnic Institute, and is currently Distinguished Visiting Professor at the Graduate Schoold of Business, Fordham University, New York. He is preparing a monograph on China’s impact on the world political economy, and another on a proposal for a contextual approach to business studies. He has a chapter forthcoming on the Euro crisis. His latest book is China UnCovered: What you need to know to do business in China, (FT/ Pearson’s, 2010) (www.chinauncovered.net) His previous books include “China: The Race to Market” (FT/Pearsons, 2003), The Frontiers of Fortune, (Pitman’s, 1999); and The Political Economy of Financial Integration in Europe : The Battle of the Systems,(MIT Press, 1998) on monetary union and financial markets in the EU, and co-authored with Ingo Walter of NYU. His books have been translated into French, Italian, German, Spanish, Chinese, Korean and Arabic. He is also a co-author in the Oxford Handbook on Business and Government(2010), and has contributed numerous chapters in books and articles in professional journals. He is a regular contributor to newspapers, and has been four times winner of the European Case Clearing House “Best Case of the Year” award. His latest cases detail hotel investments in Egypt and Argentina, as well as a women’s garment manufacturer in Sri Lanka and a Chinese auto parts producer. He teaches courses on international business and the global political economy. At the INSEAD campus, in Fontainebleau and Singapore, he has taught European and world politics, markets, and business in the MBA, and PhD programs. He has taught on INSEAD’s flagship Advanced Management Programme for the last three decades, as well as on other Executive Development and Company Specific courses. Jonathan Story works with governments, international organisations and multinational corporations. He is married with four children, and, now, thirteen grandchildren. Besides English, he is fluent in French, German, Spanish, Italian, reads Portuguese and is learning Russian. He has a bass voice, and gives concerts, including Afro-American spirituals, Russian folk, classical opera and oratorio.
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