A review of 2010 from the perspective of federalism must surely start with the difficulties in the eurozone. The creation of the euro was the most dramatic and substantial step in the history of European unity, which means that talk now of the eurozone breaking up is serious talk indeed.
The European single currency is the perfect example of a federal instrument. Conceived to solve a problem faced by national governments, namely that their currencies were no longer working in the best interests of their economies, the new supranational currency provided a direct link between the supranational level and the citizen. This is what makes federalism work.
The crisis in the eurozone stems from economic policies pursued by national governments without regard to the constraints of economic life. Greece, for example, increased domestic consumption much faster than domestic production could support – compensation rose 6 per cent a year compared with only 1.5 per cent a year in Germany – and disguised much of the excess with inaccurate official statistics. In Ireland, meanwhile, a housing bubble was allowed to inflate to a ridiculous degree: the craze for construction was so great that 20 per cent of the housing stock in Ireland is now surplus to requirements.
Economic policies this mad were bound to lead to trouble, single currency or not, so what has the euro to do with all this? First, it may be argued that membership of the euro reduced interest rates and gave countries access to borrowing on more favourable terms than they would have had outside it (this was one of the reasons for creating the euro in the first place) but national governments did not adapt their other policies to this more benign environment. Secondly, membership of the euro closes off the option of devaluation to restore national competitiveness, which is a policy option recommended by some.
But while devaluation reduces costs at home compared with costs abroad, it also reduces the value of debts owed to foreign creditors, if denominated in the local currency, and increases them if denominated in a foreign currency. The hint of a devaluation, therefore, will devastate a country’s international credit rating, which is one of the reasons why leaving the euro would be hard. If Greece or Ireland faces economic difficulties within the euro, that is nothing compared with the problems they would face outside it.
So what does it take for the euro to survive? First, the governments of countries within the euro need to maintain their ability to borrow on the international markets enough money for long enough to be able to see their way through their current problems. This means that eurozone member states are going to have to provide guarantees for each other. A eurozone member that runs out of cash will cause all kinds of new problems for other European countries, and this must be prevented. This is not to say that there will be no defaults, but rather that any such defaults must be organised and planned with the resulting losses shared, instead of a unilateral crash out of control
Secondly, countries within the euro are going to have to find ways to restart their economies without resorting to devaluation. This entails a mixture of structural reforms in the weaker economies together with boosting demand in the stronger ones.
Both of these actions depend on national governments accepting that major parts of their economic policies need to be designed for the benefit of other countries as well as their own. Membership of the eurozone requires not only that the currency is supranational but that much macroeconomics is supranational too.
Did we see, in 2010, national governments realising that this is what they must do? Not much, it is sad to say. Different national leaders have experimented with different aspects of the solution, but with little coherence or achievement. Certainly, Angela Merkel, leader of the biggest eurozone member, Germany, is still reluctant. All that she will countenance is a modest treaty change that will permit further loan guarantees between the member states, but will that be enough?
Failure to act in a concerted manner will lead to European stagnation and irrelevance and possibly even to the collapse of the European Union altogether. Considering the challenges arising at the global level, that would be a disaster.
For if Europe has been harmed by unsustainable consumption patterns and economic imbalances, so has the global economy, too. The USA has been acting like a larger Ireland or Greece, and China has played the role of Germany, and as in Europe things cannot go on. The world needs to adapt to America being relatively less powerful and China becoming relatively more, and Europeans need to decide whether they want to be part of this adaptation or not. If they do, they will have to do it together, and they cannot do it from a position of stagnation or irrelevance.
And what is at stake is more than just the future of the world economy: liberal and democratic values too are under threat. The Euro-American dream has been that liberal democracy can spread around the world, but is that really happening?
It is hard to be confident. For example, two of the countries that joined the boycott of the award of the Nobel peace prize to Chinese dissident Liu Xiaobo were Iraq and Afghanistan, countries whose governments had been installed thanks to American military power and purportedly in the name of American political values. Instead, they sided with those who want to suppress free speech and democratic ideas.
The American economy is in relative decline, and its military is no longer able to impose its will even on its allies. This means that the European strategy since the second world war of depending on America for support and protection has also run its course. Europeans are reaching a moment when they must decide whether and how they want to be active in the world, to advance their own interests and defend their own values.
For Britain, the question of whether it wants to be part of that European decision remains unanswered. The formation of the coalition government in May imposed some restraints on the worst instincts of the Conservative party, but nevertheless the British drift from the heart of Europe has continued. Preparations to join the euro have been discontinued and the government intends to bequeath to its successors the obligation to hold a referendum on future steps towards European integration.
On the positive side, the new government is pushing forward with further devolution in Scotland and Wales and aims to give local government in England a number of new powers. This might reduce the power of Whitehall a little (although some critics argue that other aspects of government policy might end up increasing it again). The UK is also providing a loan to Ireland in concert with the actions of other EU member states, although it insists it is a purely bilateral act and not a European one.
A mixed picture, then, but overall one must conclude that it is not a good one.
When the Nobel peace prize was presented in Oslo on 10 December, not only were the ambassadors of Iraq and Afghanistan absent but so was Liu Xiaobo himself. He had refused to travel to Norway, as an expression of moral courage. The prize was presented to an empty chair.
The British government is following its own empty chair policy on European issues, but not for the same reasons. In contrast to Liu Xiaobo, it lacks courage and vision and it will lack influence as a result.