The European Union Today: The Logical Limits of Functionalism

Joseph Stiglitz, writing the foreword to Karl Polanyi’s classic book describing the great transformation of European civilization from the preindustrial world to the era of industrialization, argues forcefully that the issues and perspectives Polanyi raises have not lost their salience.  Among Polanyi’s central theses are the ideas that self-regulating markets never work; their deficiencies are so great that government intervention becomes absolutely necessary.

When we trace regional integration within Europe and the Origins of the European Union, we can argue that initially, integration was first proposed by French Foreign Minister, Robert Schuman as a way to prevent further war between France and Germany.  As a result the European Coal and Steel Community (ECSC), formally established in 1951 by the Treaty of Paris, created a common market for coal and steel to neutralise competition between European nations over natural resources: in essence a political solution.

By 1958, however, following his understanding of Mitrany’s work on functionalism, Ernst Haas, writing in International Organization, on the challenge of regionalism, could argue that economic integration would lead to political spillover.  Commenting on Haas, Antje Wiener and Thomas Diez, aver, “Haas believed that elites were valuable in that once they perceived that problems could not be solved locally due to widening spillover, they would turn their expectations, political actions and even possibly their loyalties to a new centre, thereby adding political stimulus to the process.” Thus we can argue that Haas’s neofunctionalism provided one of the key theoretical reasons why states moved towards a monetary union and ultimately political federation.  The theory remained influential, moreover, through support from Bela Balassa. Balassa, incorporating many of the understandings of neofunctionalism, pushed an ‘economics before politics’ approach, assuming that politics would follow economics.  Balassa, through his structural ‘five stages’ argument, in fact eventually arrived at a federal end-point as the final goal of the process of regionalism. Incredibly, the state was seen as a stumbling bloc to integration as both theories espoused the ideals of extending markets and developing methods of trade expansion.  

With the introduction of a single currency into the Eurozone, one can argue that the ‘European mandarins’ not only ignored fundamental economic considerations that govern an optimal currency area, but also did not understand Polanyi’s dictum that politics should trump economics when creating self-regulated markets.  And indeed in 2001, on the eve of Euro notes going into circulation, Romano Prodi, the then President of the European Commission, presciently predicted to the Financial Times, stating: “I am sure that 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.”   These new economic policy instruments were created in order to pull Europe’s single currency from the brink of collapse in the summer of 2012, but there is no doubt in my mind that the Euro still remains on continuing life support.

The core problem underlying the single currency has to be highlighted as a lack of political embeddedness that supports the deep economic fragilities surrounding Europe’s overall economic and political architecture.  As Erik Jones argues, “Not only do we see a lack of institutions to successfully manage and regulate cross-border financial flows in a single capital market, which includes a central bank that can act as a true lender of last resort for Europe’s sovereigns and pan-European banks, as well as a common debt instrument or Eurobond,” but also as Nicolas Jabko argues more succinctly, “The largely unanticipated contradiction between the concern for traditional sovereignty at the national level and a new conception of supranational sovereignty at the European level is underscored as long as national elites remain reluctant to see their powers diminished.”

In the final analysis, Europe’s monetary union lacks legitimate political support.  Unless and until a fundamental change occurs, the European Union will continue to limp along, burdened by low economic growth and the possible scourge of long-term deflation.