Monday, September 15, 2014

European Union: Functionalism and the Ratchet Effect

The euro and the European unification project have reached a difficult point. As Luigi Guiso,
Paola Sapienza, and Luigi Zingales write: "Europe seems trapped in catch-22: there is no
desire to go backward, no interest in going forward, but it is economically unsustainable to stay
still." They discuss these issues in "Monnet’s Error?" presented as part of the Fall 2014 conference of the Brookings Papers on Economic Activity.

For non-EU readers, Monnet is Jean Monnet, a French diplomat who was one of the leaders of the movement toward European Union. Monnet died in 1979, but back in the early 1950s, he was President of the European Coal and Steel Community, the first forerunners of what eventually grew into the modern European Union.

Monnet was "functionalist," who saw each step toward cross-European communication--whether the step was actually a success or not!--as a step toward something eventually resembling a United States of Europe. Here's how Guiso, Sapienza, and Zingales describe the political dynamic:
The functionalist view, advanced by Jean Monnet, assumes that moving some policy functions to the supranational level will create pressure for more integration through both positive feedback loops (as voters realize the benefits of integrating some functions and will want to integrate more) and negative ones (as partial integration leads to inconsistencies that force further integration). In the functionalists’ view integration is the result of a democratic process, but the product of an enlightened elite’s effort. In its desire to push forward the European agenda, this √©lite accept to make unsustainable integration steps, in the hope that future crises will force further integration. In the words of Padoa-Schioppa (2004, p. 14), a passionate Europe-supporter who espoused this theory, “[T]he road toward the single currency looks like a chain reaction in which each step resolved a preexisting contradiction and generated a new one that in turn required a further step forward. ... In the words of Romano Prodi, one of these founding fathers, "I am sure the euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created."
As Guiso, Sapienza, and Zingales note, the "functionalist approach implicitly assumes that there is no risk of a backlash." The past history of the EU project, along with the present experience of the euro, raise questions about whether Monnet's functionalist ratchet may be hitting its limits.

The authors point out that a number of the later entrants to the European Union joined even though only a minority supported the step in  public opinion polls: for example, "United Kingdom (36%) and Denmark (46%) joined with only a minority supporting the EU. So did Greece (42%), Sweden (40%), and Austria (42%)." In addition, each significant move to greater European unification has made the European project less popular over time: "While EU membership has strong support in most of the EU-15, this support dropped every time the European project made a step forward and never recovered. Rightly or wrongly, the Eurozone crisis has contributed to further erode this support, albeit the drop appears more related to the terrible economic conditions and, thus,
potentially more reversible. Today a majority of Europeans think that the EU is going in the wrong direction. They do not want it to go further, but overall they do not want it to go backward either,
with all the countries (except Italy) having a pro Euro majority."

On one side, Monnet's functionalist ratchet effect has clearly worked. On the other side, it may be hitting some political and economic limits:
On the one hand, Monnet’s chain reaction theory seems to have worked. In spite of limited support in some countries, European integration has moved forward and has become almost irreversible. On the other hand, the strategy has worked so far at the cost of jeopardizing the future sustainability. The key word is “almost.” Europe and the euro are not irreversible, they are simply very costly to revert. As long as the political dissension is not large enough, Monnet’s chain reaction theory delivered the desired outcome, albeit in a very non-democratic way. The risk of a dramatic reversal, however, is real. The European project could probably survive a United Kingdom’s exit, but it would not survive the exit of a country from the euro, especially if that exit is not so costly as everybody anticipates. The risk is that a collapse of the euro might bring also the collapse of many European institutions, like the free movement of capital, people and goods. In other words, as all chain reactions, also Monnet’s one has an hidden cost: the risk of a meltdown.
For some earlier posts on the economics of the euro-zone, see "A Euro Narrative" (August 15, 2013) and "Will We Look Back on the Euro as a Mistake?" (February 28, 2014).

Coda: From a U.S. policy perspective, the most recent application of the functionalist view is probably the Patient Protection and Affordable Care Act that President Obama signed into law in 2010. Even those who supported the law four years ago are quick to acknowledge that it has all sorts of flaws and shortcomings, which of course is why the Obama administration has delayed or redefined so many substantial provisions over time. But to many supporters, the details of the law seem less relevant than the belief that a functionalist political ratchet is now in effect: that is, any successes of the law will be a reason to continue the law, and any shortcomings of the law will be an additional reason for federal intervention in the health care industry to address those shortcomings. For example, President Obama has spoken supportively of a single-payer health care system over time, but has also discussed the transitional difficulties that could arise from moving in that direction too rapidly.  Many opponents of course dislike the substance of the law, but my guess is that many opponents would not be so concerned over, say, state-level health insurance exchanges aimed at providing insurance to the uninsured, if they didn't fear that it was part of a ratchet effect for future federal control over the health care industry.  Similarly, my sense is that many of the arguments over the appropriate military stance for the United States in the Middle East are less about what immediate steps should be taken, but instead about either the hope by some, or the fear by others, that those immediate steps will lead to a ratchet effect of additional military steps in the future.