Why are Eurobonds so difficult? Although it seems to make sense on a superficial level to pool the issuing of EU government bonds so that the cost of borrowing by eurozone countries can be stabilised the issue of Eurobonds is not a technical one about how to finance public expenditure. In fact the issue of Eurobonds, the reason they haven’t happened yet, goes right to the heart of the structural problems of the European Union and the flawed architecture which was created when the European Union which was set up by the Treaty of Maastricht, when the European project apparently set out on the road to ever closer union.
The best way to think about the issue of Eurobonds, and in fact the entire concept of pooling the fiscal systems of the Eurozone, is to compare how the EU works, and what its severe limitations are, compared to how a national state works, and to try to understand why things are so different inside nation states compared to the EU.
How social solidarity works inside the nation states of Europe
Although all the various nations of Europe work in somewhat different ways, for example some have more centralised administrations and some give more control of tax and spending to their regions, they all fundamentally work in the same way. Nations states are zones within which strong social solidarity exists. What is social solidarity? In the western liberal democracies the state delivers very large national income transfers through the provision of social and welfare programs such as unemployment and sickness benefits, free health and education, and old age pensions. Some of these programs are selective and some are universal but even the selective ones are available to all citizens if their personal circumstance change. This system of social solidarity spending is often presented as a post WW2 phenomena but in fact in most of the EU nations it goes back a long way to industrialisation and the birth of the urban proletariate. After WW2 social welfare systems were systemised, deepened and extended but social welfare programs had been growing for decades before the war. Even the so called neoliberal revolutions of the 1980s didn’t really dent the scale of social transfers that occurs routinely within the nations of Europe.
These social transfers are a huge, but varying, percentage of GDP across the EU, as governments of all member states routinely use the tax system (even if it is in the form of obligatory social insurance schemes) to collect money from the richest citizens and transfer it to the poorest citizens. This is a gigantic program of social solidarity. Inside the nations of Europe it is widely accepted across the political spectrum and by most citizens that their nation’s state has significant responsibilities to look after its citizens. People expect their country to look after them and to do so by spending lots of money collected from other, better off, citizens of their own country.
Data from Eurostat shows that in 2011 the average social protection expenditure as a whole in the EU was just over 28% of GDP, that’s around 6 trillion euro annually (based on pre Brexit GDP). Over time this percentage goes up and down a bit but not by much. Within the EU the level of social spending varies from nation to nation, mostly the richer countries spend a higher proportion of their income on social spending, and the highest spender (Denmark) spends twice as much proportionally as the lowest spender (Latvia). That means that as a matter of course somewhere between a quarter and a third of all national income in the EU is being redistributed from the richer to the poorer citizens, but these transfers are ring fenced inside the nation states of the EU. The current EU budget which is about 1% of EU GDP is minute and trivial in comparison to the social spending which is contained inside member states. And all of it is financed by revenues collected inside the nation in which it is spent. No money for social spending crosses any borders in the EU.
Because each of the nations of Europe are each a single space of national social solidarity their citizens have universal social rights and there is a single material system of social solidarity that covers the entire country. This has big and very important consequences. The various national systems of social solidarity are financed through single integrated fiscal systems which finances key social benefits (such as pension payments, social security and welfare payments, education costs etc) from central pools of national tax revenues. What an integrated fiscal and social solidarity system really means is that tax revenues are constantly collected from the richer regions of the nation and then they flow to the poorer regions. This is mostly done in an entirely invisible process. Taking the UK as example there are no entries in the national budget showing how much money London for example is paying in taxes, or how much of these taxes are flowing out London or how much a poorer region, for example Devon and Cornwall, is receiving from London.
In fact London, the richest region in the UK (and indeed in the EU), contributes about 30% of the total tax income of the UK government. London generates as much tax as the next 37 biggest cities in the UK put together. A recent report by the Office of national Statistics for the first time broke down tax revenue collection and spend by region, and the report shows that almost all areas of the UK are in net deficit in terms of public spending (more public money is spent locally than is collected by local taxes) and that London makes a vast contribution of tax revenue that is spent elsewhere in the UK. In fact annually London and the Southeast contributes about £41.5 billion in tax revenues to fund public spending in the rest of the UK, which is approximately £800 million per week. So every week hundreds of millions of pounds flow out of London and, via the state, into the poorer regions of the UK but none one of that has much political consequence because the basis of this massive flow of funding from London to the poorer regions of the UK is the very strong sense of national social solidarity still operating in the UK. This sense of social solidarity was weakened by the Thatcherite political project, has been weakened by mass migration, and is being very seriously undermined by current political projects like Scottish nationalism, but the national system of social solidarity in the UK is still pretty strong. Nobody is seriously proposing that London’s tax income should be withheld from financing the pension payments in Wales or Yorkshire for example. This system of British national and integrated social solidarity, just like all the other systems of national social solidarity inside other European nations, has important consequences for the poorer regions of the country. Most important is that the system operates as a vast safety net preventing regional economic decline from spiralling downward and it maintains a basic level of demand in the economy even in the poorer regions. No matter how poor, or even bankrupt, a British region becomes its pensioners, teachers, the unemployed, doctors and nurses etc, will still be paid because their benefits and wages are not dependent on being financed from the limited tax revenues of just the poor region itself.
If nation states were run like the EU
Imagine if the UK were run like the EU in which case the UK would consist of numerous separate nations/regions each with their own political systems and regionally based political parties, regional tax and spend programs, and all spending on social solidarity such as welfare benefits, health, education, and pensions would be financed by just the tax collected in that region. The way welfare and pension systems worked, how much beneficiaries received, how onerous or generous the systems were, the age at which people retired, how much they received in pensions, etc, would all vary from region to region. The richest region, London, would have loads more tax revenue than, for example, the poorest region, Cornwall (which is the second poorest region in the whole of northern Europe) and so benefits in London would be generally much better than in Cornwall, and employment and wage levels in London would be much higher compared to Cornwall.
Imagine that all these regions had come together to create an integrated single market where workers, capital and goods could all move freely from one region to another and as a result some regions were growing much stronger than the weaker regions. Some regions struggled to contain public debt and suffer from prolonged economic stagnation. It was common for workers, especially the younger and the better educated, to migrate from the poorer to the richer regions. A single currency had been introduced across the entire island of Britain so poor regions couldn’t devalue their currency anymore, regional governments couldn’t print money and inflate away public debt as they had done in the past, and there was one single monetary policy and interest rate system which was too loose for the richer regions and too tight for the poorer regions. What investment did flow from the richer to poorer regions mostly came looking for a lower wages bill and so it tended to depress overall wage levels even in the richer regions. In this imaginary UK, which was run like the EU, above this wide open space for capital there would be a loose and minimalist pan regional political system and a very small state, with a tiny budget, tiny administrative system and a ’parliament’ that had much fewer powers than the old regional parliaments (it couldn’t for example initiate law making and was not the supreme political body). That sounds like a Neo-liberal wet dream but it’s how the EU actually works.
In this imaginary UK, run like the EU, any transfers of money from the richer to the poorer regions would be overt and explicit, and would be seen an act of generosity, as charity. The inter regional transfers would be costed, would appear as a separate entry in the donor region’s budget, and would have to be approved by the donor regions political system with some regional political parties winning popular support by opposing handing over the local tax revenues to other regions, especially if those other regions had a reputation for being wasteful and inefficient with public money, or if they offered what were viewed as overly generous social welfare benefits. In such circumstances in this imaginary UK creating a system of large scale and permanent pan UK social solidarity, as actually exists inside the real UK, would be almost politically impossible.
Clearly the systems of social solidarity inside the nation states of Europe are much, much stronger than anything that has been created at an EU level, in fact the national solidarity systems are an order of magnitude larger and more robust than the EU level systems. It seems that national states are much better at creating and sustaining social solidarity than transnational bodies like the EU. Why?
What are nation states?
Where does the intense and robust solidarity of the nation states comes from? What are nation states? Benedict Anderson characterised nation states as ‘imagined communities’, which did not not mean that a national community was fake, but rather refers to Anderson’s position that any community so large that its members do not know each another on a face-to-face basis must be imagined to some degree. These imagined communities are in fact so powerful that in the last 100 years Europeans have killed tens of millions of each other based on nothing more than which imaginary community a person belonged to. Nation states are powerful because they are based upon, supported, reproduced and embedded by, a very wide range of powerful, complex and interlinked social institutions, and processes, all of which have been slowly assembled over time.
Anderson tied the creation of nation states, a relatively recent historical development, to the rise of capitalism and the resulting social, economic, cultural and technological changes that it brought with it. By looking at the common building blocks of the strong national imagined communities it is possible to understand how and why the imagined community of the EU is too weak to support strong programs of social solidarity. Without delving too deeply it’s possible to come up with a list of some of the more common components of national identity, the typical building blocks of imagined national communities. This is not in any sense an exhaustive list of the various ways imaginary national communities are constructed, just some of the key ones.
Place: Nation states exist in specific territories defined by borders. Before national states political ownership of territory was fluid and attached to kings and emperors not the people who actually lived on the land in question. The rise of nation states involved the fixing of their location to specific territories (although of course it is common that national communities view territory not currently under their control as actually belonging to them and potentially recoverable at a future date – this has cost innumerable lives). This fixed territory with borders means that for imagined national communities there is an inside (where ‘we’ live, ‘our’ space) and an outside. The formation of viable and lasting territories for any given nation state was often facilitated by geographical features such as rivers, mountains, deserts, and coasts which help mark national borders.
Citizenship: Inside the national territory the citizens of modern nation states are all legally equivalent, with the same civil and political rights, the same responsibilities, subject to the same laws. The system of equal citizenship and legal equality has different historical roots in each nation state, and the (often mythical) popular notions of how modern rights came about help bind the national community together. Being a citizen of a nation state carries responsibilities (patriotic loyalty, to pay into the system when one can) and rights (to be looked after and protected). In popular discourse the right to be looked after is tied to the notion of being able to contribute, and people coming from outside who have not previously contributed but now want support are often seen as problematic, especially if they come in large number and in waves. Any national government that fails to look after its citizens in a significant way risks being sacked at the next election. The intensity of responsibility of the nation states in Europe to it’s citizens was evident in the initial emergency measures to deal with the Covid-19 outbreak, all of which were delivered within national silos for national citizens.
Political institutions, law, and political parties: The political and legal systems of most European nation states have deep national roots which gives them their political legitimacy, and are often subtly, or not so subtly, different from each other. Parliamentary and presidential national systems create a national focus to most of politics, and political legitimacy is derived from the national political system and national elections. Democratic political systems all evolved, or were emplaced, at a nation level. Legal systems and laws vary from one nation state to another and although the EU has involved a lot of harmonisation of commercial law most other parts of national legal systems still strongly retain their national characteristics and laws are made at the national level. Political parties also often have deep historical roots bound ups with the history of their host nation and are invariably contained within national boundaries. There are no pan European political parties of any substance. Political parties are active agents in creating and maintaining their community of constituents and supporters, and often have all sorts of associated and sponsored social organisations and are thus important contributors to the building of a national civil society. Political parties by creating their national community of support and focussing on national political structures, even when they regionally or class based, strongly reinforce the imagined national community.
Foundation myth: Every nation has a story about what it it is and where it came from. A story that is created, repeated and embellished through the writing of national histories which invariably projects the origins of recently created nation states backwards in time so that national history is the telling of a tale of inevitable national emergence from deep roots. This story of the nation, its origins, triumphs, disasters, and progress is told again and again through plays, paintings, songs, nursery rhythms, poems, famous speeches and novels. Key events of national history are often marked by monuments and in the historic place names which litter the nation. Above it all flies the national flag which is the pivot of much of the paraphernalia of historical myth and story telling.The story of the nation saturates the everyday culture of the nation state.
Language, media, and mass literacy: Historically language has been one of the two great markers of national identity, the other is of course religion which played a critical role in the formation of many of Europe’s nation states and is still bound up with national identities (Catholic Italy and Orthodox Greece for example). Prior to the modern epoch, and the emergence of the nation states, dynastic states were often multi-lingual, and vernacular languages themselves were not codified and rarely used in the formal conduct of state business. As nation states cohered so language groups cohered. This coincided with the emergence of mass literacy, mass media, the codification of spelling and grammar, and the adoption by the state of the vernacular. The emergence of mass printed culture (books – including the Bible translated into the vernacular, newspapers, journals, leaflets and pamphlets) coincided with the appearance of the first dictionaries and the beginnings of mass education. This created a shared written national linguistic culture even when there were strong regional dialects in the spoken language. The development of mass education cemented the grip of the national language and the cultural clutter of the national foundation myths is what often makes up a significant proportion of the education of children.
Conflict with others: The early cohering and formation of many of Europe’s nation states was facilitated and driven by conflict with adjacent emerging nation states, especially if there were overlapping claims to national territory. It was the successive waves of war in the first half of the 20th century that led directly to the formation of many of the nation states of Europe. The first world war shattered the European multinational empires and numerous new national entities emerged but with a high level of internal ethnic and national diversity. Between the wars the two great ethnic minorities scattered across the newly emerged nations were the Jews and the ethnic Germans but many nations contained very large national minorities. WW2 was the great ethnic clean up where unspeakable violence and ruthless terror moved borders and populations so that the postwar nations that emerged had a much higher degree of internal ethnic and national homogeneity and were thus much more stable. Now inter-national conflict is played out via sports and competitions where national teams can induce great feelings of national belonging, the fervent singing of the national anthem the waving of the national flag.
The upshot of all these powerful components of the imagined national community (and there are many more such components) is that citizens of Europe’s nations still have a strong sense of ethnic belonging, of where their national home is and where their borders are which separate their national community from the outside. Millions of people work and live outside their country of origin in the EU but such people are always a tiny proportion of the population, the vast majority live their lives inside their national communities. Everybody knows that, even with the spread of common global culture, Germany, for example, has a distinctive and different fabric of everyday life than say Greece. If you woke up in a strange random house somewhere in Europe and just walked outside in any town you would most likely be able to quickly recognise the nation you were in.
The weakness of the imagined EU community
When the depth, complexity and strength of the components of national identity, which have been assembled over perhaps the last two or three centuries, are compared to the components of what might be termed the EU national identity it is clear how strong the former is and how comparatively weak the latter is. It is this strong sense of the national imagined community that is the precondition for the establishment of relatively unproblematic large scale, and permanent, national programmes of social solidarity involving the transfer of income from the richer to the poorer within the nation. And it is the weakness of the imagined EU community that makes the idea of large-scale and long term transferring of tax revenues across national border so problematic. It’s not that many politicians in the EU wouldn’t want such transfers to take place, and to grow over time into a large scale permanent feature of the Union, it’s that the respective national electorates in the richer ‘donor’ countries would almost certainly be vote out of office any government that attempted such a thing because there is no strong underlying imagined EU community.
The elites who created the EU knew about this problem of the weakness of the imagined EU community, or at least the most acute did, and they have tried over time to assemble some of the components of an imagined transnational community. This resulted an attempt to mimic the imagined communities of the nation state by a conscious program to create, for example, historical foundation myths (‘it’s the EU that’s stopped war in Europe’, ‘Our common European home’, etc), a transnational flag, a transnational anthem, an administrative apparatus that is like a poorly copied bootleg version of the national state apparatuses with a pretend parliament and pretend ministers and presidents. But it’s all very pallid and weak compared to the national imagined communities which it is seeking to replace.
Trying to create an imaginary community for the EU raises a lot more questions than it answers. Where are the ‘natural borders’ of the EU? Does the current borders of the EU reflect the boundary of a common imagined community and if so what is this community and what are its components? What are the shared elements of a common pan-EU history and foundation myth? Is the Iberian Reconquista part of the national feelings of a second generation muslim living in Germany? Do Orthodox Greeks think that the protestant reformation is part of their history? Do Swedes feel that Auschwitz is part of their history?
This is an interesting lecture by the political economist Professor Wolfgang Streeck from the Max Planck Institute for the Study of Societies in Cologne, Germany, entitled “Caution: European Narrative. Handle with Care”. The main topic of the lecture is how can one construct a unifying narrative that defines Europe. This is not an academic question.
The weakness of EU democracy
In this article I have focussed on the relationship between social solidarity and the imagined national community because of the focus on the reasons why Eurobonds and the transfer of meaningfully large funds across national borders is so deeply problematic, but the same reasons cross border social transfers are problematic are also the reasons why a truly organic and functionally legitimate democratic political system at an EU level has failed to emerge. Even if a significant program of social solidarity could be set up at an EU level, with a pooled EU system of funding for a significant EU expenditure programs, such a system would have to be under democratic control in order to be legitimate. What the government does and does not spend its money on, who is taxed and how much, are the very core political issues of democratic life and if they are passed to the management of an unelected technical elite, then democracy itself is all but lost.
Functional and legitimate democratic polities, within which losing blocks of voters accept the legitimacy of winning blocks of voters, depend for their existence on a strong imagined national community as a necessary precondition. The rise of the imagined community of a nation state is the necessary precondition for democracy and social solidarity. In fact the process of building democracy, along side the apparatus of social solidarity, are processes that strengthens and solidifies national communities. It’s not that no strong national community is possible without democracy, it’s that democratic political systems cannot be constructed without a preexisting, or at least already strongly emerged, national imagined community. If there is no strong imagined community then there is no democracy and no social solidarity.
The issue of the insipidity of the democratic political system in the EU too complex to explore in any detail here but it is worth noting a couple of key characteristics of the EU system that show how it lacks key components of legitimate democracy.
The replacement of open political negotiation and debate by diplomatic mechanisms: The vast majority of the decisions of the Council, Commission and Coreper concern domestic issues that were traditionally debated in national legislatures. But in the EU system these become the object of the sort of secretive diplomatic negotiations traditionally reserved for foreign or military affairs, where parliamentary controls were usually weak to non-existent and where executive discretion could operate untrammelled. Most key meetings where the most important decisions are taken are closed and the policy debates are opaque. What the core system of the EU effectively does is to convert the open agenda and politics of parliaments into the closed world of diplomatic negotiation.
The removal of political parties as the fulcrum of democratic politics: It is worth reminding ourselves of how central political parties are to the sorts of real democratic systems that exist at a national level in Europe. Historically the role of political parties was to organise the citizenry into blocs of opinion, often these blocs reflected pre-existing social blocs (such as religious denominations, organised labour, small holders, regional and sub national ethnic interests etc) and political parties both represented these blocs but also worked backwards into civil society to actually build and strengthen the blocs they represented. Political parties are a critical and central component of democratic government because they allow party based government to exist. Party based government has the following key characteristics:
▪ A party (or coalition of parties) wins control of the executive as a result of competitive elections based on a universal suffrage.
▪ Political leaders are recruited by and through parties.
▪ Parties offer voters clear policy alternatives.
▪ Public policy is determined by the party (or coalition of parties) in the executive.
▪ The executive is held accountable through parties.
Nothing like this sort of party system exists inside the EU system. The EU system is designed to be, in the strict meaning of the word, non-partisan. The EU system has almost no formal role for political parties and there are no pan-European political parties. There is no opposition block inside the EU governing system seeking to topple and replace the incumbent EU government because there is no government that can be sacked by popular mandate, there is just a permanent system, a governing apparatus.
Can the EU evolve into a democratic political and social union?
In order for the EU to be anything more than a union of capital there has to be political and social union to accompany monetary union and the Single Market. But constructing such a political and social union will be fiendishly difficult and is probably impossible. And until there is a political and social union there cannot be a really democratic political system running the EU and there cannot be large-scale and permanent programs of social funding flowing across national borders as they currently flow within nations states. Without those large-scale large-scale and permanent programs of cross border social funding the poor periphery of the EU will continue to stagnate, fall behind and lose population, or more likely, suffer increasing political instability that will lead to ruptures in the EU project itself.
The difficulty of constructing a social union at the EU level can be illustrated if one imagines the creation of a single EU pension scheme, a pressing issue as the European population ages and the fiscal pressure on the poorer and stagnating nations in the EU increases. If there were a pan-EU pension system what level of pensions would be paid? What would be the rules about contribution levels during working life? What would be the age of retirement? How would the program be paid for? If it was paid for by explicit transfers of taxes revenues collected within nation states how could democratic approval for that be achieved in the ‘donor’ nations, and sustained with any degree of permanency? If such an EU pension scheme was funded by a pan-EU tax system who would decide how the tax was collected and how much tax was paid? Even if the EU was run by a sovereign directly elected democratic assemble or president would, for example, the northern block calmly accept without political rupture the legitimacy of being out voted by the southern block, and as result perhaps be obliged to pay more taxes, or pay more generous pensions?
Perhaps the only historical parallel to the EU where a group of relatively sovereign and separate states have come together to create a new successful nation state was the assembling of the federal coalition of the thirteen colonies of America during and immediately after the Americans revolution. Prior to the revolution these colonies all had their own separate semi-sovereign systems of self government and had evolved quite distinctive and different proto-national identities reflecting their different paths of settlement from different social blocks and regions in Britain, and their different systems of political economy. They did all rebel together against rule from London but with different intentions and degrees of enthusiasm. The exigencies of war, above all the creation and financing of popular militia and then a standing army, created a series of common urgent problems what could only be solved by some form of federation and, eventually, a new nation state was created. But it is worth noting that the various colonies that made up this new federal nation already had a great deal in common and could already tick a lot of boxes in terms of the necessary building blocks required for the creation of a shared imaginary community. They were all, more or less, protestant and spoke English, and they all shared an inherited culture based on their British (mostly English) shared origins. Even so the new nation that emerged was intentionally run by a light weight federal political system in which states rights were deeply imbedded in the constitution. The tensions within this federal system, particularly over which region and social block would control the federal apparatus, has been a endless source of internal conflict in the US which has since its inception occasionally erupted into violence, once on a massive scale. This multi state lightweight federal origin has shaped the US body politic to this day, and has resulted in a nation that does far less for its citizens than most European nations.
The national question and the prospects for, and desirability of, greater European union is particularly problematic for the Left, a political tradition which has a strong tendency to see the world in transnational categories of social class, and which has always viewed nationalism and national patriotism as in someways illegitimate. For many leftists French and German workers, for example, have more in common with each other than with their bosses inside their nation state. Generally in Left discourse the creation of systems of social solidarity are seen as class struggles and the key role of the national imagined community in the creation of welfare states is often overlooked. There is also a widespread view on the Left, probably erroneous in my view, which argues that because capital is global only transnational political bodies will be big enough to take on and tame global capital so government has to be scaled up to the transnational level. The Left in general tends to over look, misunderstand and generally under theorise the nation state. The result is that the Left finds itself defending an EU project that is inimical to social democracy, and is out manoeuvred by newly emerged nationalist political parties, and as a result the electoral support for social democratic parties has slumped ever since the creation of the European Union.
Back in 1939 in his essay ‘The Economic Conditions of Interstate Federalism’ Friedrich Hayek, the economist who directly influenced and contributed to the intellectual foundations of Thatcherism, set out the current logic of European monetary union with prescient clarity. Hayek correctly thought that a federation of states would only be able to weakly ‘interfere’ in the operation of the market, and that this interference would be much weaker than that of nation states where political legitimacy conferred by national identity would support far more robust interventions. Hayek argued that transcendence of national sovereignty in a supra-national framework should be of natural advantage to a ‘free’ economy, since the higher and the more remote the level of government which governed the economy – that is, the remoter from local faction and interest – the more insulated it would would be from popular passions. In other words: the less immediately democratic the machinery of decision, the safer it was likely to be for the reproduction of capital.
Hayek’s warm endorsement of a interstate federalism was based on his belief that the task of constructing a supranational popular sovereignty, capable of determining the social path of a supranational economy, would prove impossible, a belief which seems justified after Maastricht and the creation of a Europe with a single market and single monetary system, but without any commensurate elected sovereign assembly.
For Hayek the idea of a federation of nations undermining government ‘interference’ in the market was a good thing, but for any social democrat it surely would be a bad thing.
Here is what Hayek had to say:
“Although, in the national state, the submission to the will of a majority will be facilitated by the myth of nationality, it must be clear that people will be reluctant to submit to any interference in their daily affairs when the majority which directs the government is composed of people of different nationalities and different traditions. It is, after all, only common sense that the central government in a federation composed of many different people will have to be restricted in scope if it is to avoid meeting an increasing resistance on the part of the various groups which it includes. But what could interfere more thoroughly with the intimate life of the people than the central direction of economic life, with its inevitable discrimination between groups? There seems to be little possible doubt that the scope for the regulation of economic life will be much narrower for the central government of a federation than for national states. And since, as we have seen, the power of the states which comprise the federation will be yet more limited, much of the interference with economic life to which we have become accustomed will be altogether impracticable under a federal organisation.”
