To Integrate or Not to Integrate?

By Stephen J. Morgan, a Philadelphia-Area Business Writer and Frequent Contributor to the Magazine

Euro-Enthusiasts and Skeptics Debate the European Union’s Future

People with an interest in watching the economic and political future of Europe unfold had a lot to talk about this summer, thanks in part to some controversial remarks by German foreign minister Joschka Fischer and French President Jacques Chirac.

Among those watching carefully were Wharton alumni at companies in Britain, France, Germany and Switzerland, as well as faculty members in Philadelphia – all of whom have close ties to Europe and a deep knowledge of the long and tortured history of a part of the world where suspicions abound, national pride is strong and cooperation can be hard to come by. Some alumni, expressing concern about further centralization of government power, were troubled by what Fischer and Chirac had to say, while others found the comments by the two leaders to be pretty much on the money. Alumni and faculty alike were quick to explain that Fischer and Chirac’s statements could only be fully understood, especially by non-Europeans, if you remember something about the Roman empire and the history of the nation-state from your school days.

What was it that got things so stirred up?

In a speech in Berlin in May, Fischer said he felt it was time for members of the European Union to forge a stronger political structure to accompany the kind of closer economic integration that has evolved in recent years. It was time, he suggested, to think about a European constitution and an elected president.

Little more than a month later, Chirac spoke to the Bundestag in Berlin. He echoed Fischer, endorsing the idea of a constitution. Further, he broached the idea of a “pioneer group” of countries – including France and Germany – that would move quickly toward economic and political integration. Other countries that wished to proceed more cautiously, he said, would be able to do so – an idea that was dubbed a “two-speed” approach.

Chirac did say that neither France nor Germany envisioned forming a super-state to replace Europe’s nation states. Still, reaction to his comments was swift, especially in Britain. Euro-skeptics – those who generally oppose relinquishing sovereignty to pan-European bodies – were aghast, interpreting Chirac’s comments as evidence that a Franco-German-led pioneer group could leave Britain in the dust. Even some leaders in Germany and France were none too pleased at the ideas floated by Fischer and Chirac.

Such ideas had never been so bluntly stated by high officials. And the question now facing Europeans is one that they have been asking, in one form or another, since the end of World War II: Where do we go from here? Today, though, the question has reached a point of heightened urgency.

Felix Oberholzer-GeeFelix Oberholzer-Gee, assistant professor of public policy and management and a native of Switzerland, says economic cooperation has been much easier than political integration. “Europe has monetary integration but the political plans have fallen apart. The critical issue in the further development of the EU is whether they can foster political competition between individual member states and yet grow into something like a federation. Whether or not the union will be successful depends on how much political competition they will allow. If they don’t allow much of that, what we’ll see is a very slow, bureaucratic, top-down process.”

For some 50 years the more developed nations of Europe have been moving closer together. Today’s EU traces its origins to the European Coal and Steel Community in 1952, which later became the European Economic Community and then the European Community. The EU emerged with the signing of the 1992 Maastricht Treaty.

Europe has been integrated from the top down,” says Jamshed Ghandhi, associate professor of finance and director of Wharton’s Huntsman Program in International Studies and Business. “A few people decided they had to integrate to prevent the recurrence of World War.”

Many times in discussing the EU, people ask me why the Europeans can’t get their act together,” says Christian Schneider, associate director of Wharton’s Center for Human Resources, who as a boy in 1953 fled the former East Germany with his family. “You have to see it in a long-term context. I think it’s remarkable that in a time span from 1952 till now Europe has come together, even with all the differences they have.”

Maastricht was designed to foster a “new stage” in integration. Among other things, it created the Economic and Monetary Union (EMU), established a single currency (the euro) and set up the European Central Bank. It also enshrined the principle of “subsidiarity,” the idea that the EU would not seek legislation on issues better left to national and local governments to handle.

A Cohesive Political Framework?

EMU is unprecedented and ambitious. Indeed, the whole history of integration since the 1950s has been complex. But integration’s essential intent has been to mesh the economies of member nations, to forge a trading bloc to rival those of the United States and Asia, and to establish a cohesive political framework.

What is largely dividing today’s 15- member EU – a number that will grow as countries in eastern Europe apply for membership in years to come – is whether a cohesive political framework means an out-and-out federalist government, what some call a United States of Europe, or something less encompassing than that. But even economic integration itself is not a settled question. Britain and Denmark, for example, are deeply ambivalent over whether to join the other 11 EU countries – known as the euro-zone or euro-land – that adopted the euro as their currency on January 1, 1999.

Competing visions also abound among Wharton alums in Europe.

Michel Fleuriet“I think [Europe] is heading towards a federation,” says Michel Fleuriet, PhD’73, advisor to the chairman of Credit Commercial de France, which was acquired by HSBC Holdings over the summer. In Fleuriet’s view, this would mean that each nation state must relinquish important powers – justice, defense, education and health – to a federal body, while also making the federal government more accountable to citizens. A European constitution is necessary both to transfer powers from nation states to a federal government and to ensure “that this government really represents the will of the people,” he says. “I envision a United States of Europe, absolutely. But I don’t think we will have a federation as all encompassing as the U.S. federation.”

Klaus Zumwinkel, WG’71, chief executive officer of Deutsche Post, Germany’s state-owned mail and parcel service, says integration is doomed without both strong economic and political ties. “The European economy and currency union is on its way and has already evoked positive economic effects on the EU countries. The political union is in a period of stagnation, it is true, but there is no alternative to strengthening the political bonds between EU members,” he says. But Zumwinkel cautions that integration is not synonymous with “assimilation.” He says that a “convergence of national systems is necessary, but diversity and autonomy have to be kept in some areas.” He admits it is possible that more regulatory power in the hands of the EU could stifle competition and the workings of free markets. That, he says, “has to be avoided.”

Zumwinkel says Chirac’s notion of a pioneer group may be necessary. “Politically, a larger number of EU countries quite simply complicates decision processes. The unanimity principle that has governed the EU for so long is no longer feasible in an enlarged community. Of course, this means that smaller countries will lose influence. If this development is not universally accepted, there is little alternative to going ahead with a pioneer group of countries which would be willing to give up further parts of their national autonomy.”

It is talk of a United States of Europe that so grates on the British.

The ultimate goal of integration as defined [in the Maastricht Treaty] is to develop a third large trading bloc vis a vis the Far East and the United States,” not a superstate, says L. John Clark, W’63, WG’68, an American and founding partner of Compass Partners International, a leveraged buyout and strategic advisory firm with offices in London, Frankfurt and New York. “Its emphasis should be more from a trade and monetary perspective. But what is actually happening over here – under the guise of the monetary side, led by Germany and France – is that a centralized, United States of Europe is definitely the way they’re going.”

Clark opposes the approach suggested by Fischer and Chirac.

The EU is making a big mistake in centralizing the power in Brussels and in taking over, more and more, the legal and court systems and other powers of individual nations here,” he says. “What’s interesting is they’re going toward a centralized process, while the U.S. is trying to decentralize to push power more and more to the states. The superstructure cost is high, and as they engage in harmonization, social programs are being spread country by country.”

Sir Paul Judge, WG’73, who serves as part-time executive chairman of Isoworth Ltd., a beverage dispenser company in England, and on the boards of other companies and charities, says the comments by Fischer and Chirac “went down extremely badly in Britain. Few people wanted to hear it.”

Paul JudgeJudge says people who support further political integration are doing so for a number of reasons. “France and Germany have had wars for centuries. That’s one powerful factor. Certainly, Germany, Italy and Belgium are comparatively new countries; they were only formed 150 years ago or so. Before that, there was a whole series of separate states. I think they are less cohesive as countries. In the Italian case, and to some extent the Spanish case, they have lost faith in their own governments and they see a European government sorting it out.”

Among many in Britain, Judge says, “there is no wish for British institutions to give up their rights to institutions in Brussels. Where the EU has acted, it has tended to act very differently from the federal government in the U.S., which is the quintessential federal model. If you look at Pennsylvania or California, they have clear authority over everything which isn’t federal, whereas the EU and the EC [the European Commission, the EU’s executive arm] tend to integrate and normalize as much as possible, even on details.”

Oberholzer-Gee agrees that the idea of subsidiarity is often ignored. “I’m not sure we see implementation of that principle. The arguments about the shape of Europe revolved around how much centralization is needed. We know that decentralization makes economies work much better than centralization. My fear is what we get with EU is more control.”

Deciding the Size of Tea Cups

Barry Wilson, WG’67, president of Switzerland-based Medtronic Europe, a unit of a U.S. firm that is the world’s leading maker of medical devices such as heart valves and pacemakers, also believes political integration is a long way off.

“What the ‘founding fathers’ [of European integration] are thinking of is to integrate on the financial side and then on the political side. That’s the push,” Wilson says. “But then there is the pull of these different groups in Europe, which differ by language or culture, that says we need to recognize our differences. Political integration will take a long time.”

Wilson, born in England and raised in South Africa, declined to say whether he favored or opposed the views espoused by Chirac and Fischer. But he did say that he is “not in favor of everything that’s decided in Brussels,” where EU bureaucrats make pronouncements on “what the size of tea cups will be in every country.”

A major controversy in the integration saga is whether Britain should join the EMU. Euro-supporters say that, although Maastricht removed trade barriers, the creation of a truly single market requires one currency that can eliminate uncertainties about exchange rates. In addition, a country that joins a wider market can reach more customers and operate on a wider scale, enabling them to produce goods and services more efficiently. Moreover, they argue, it will be harder for Britain to attract inward investment as long as it stays outside the euro-zone.

“As a businessman, I think Britain should embrace the euro,” says Clark of Compass Partners International, “but then they should fight like hell to avoid [the expansion of EU] social programs” and to work on behalf of British interests. “The popular perception is that France and Germany overpowered smaller countries on the continent and got them to agree early on, while the U.K. and Denmark held out. The U.K. held out because at that time the Tories were in power, with Margaret Thatcher and then John Major.”

The general view in Britain, adds Clark, is that “business supports the euro but not the centralization of all the other powers, but that labor very strongly supports the centralization of powers because it will give labor more power. It will take the socialist platform in a number of countries in Europe and push it farther and farther. The next thing you know, you’ll have a 35-hour work week, like France has, and be like Germany, which has more holidays than any country in Europe.”

Britain is expected to hold a referendum on joining the euro within the next two years. If a vote were held today, the euro would lose, Clark says.

This is typically British,” responds Fleuriet of HSBC. “Their brains say yes and their hearts say no. Honestly, I don’t see how they can survive with a currency like sterling being caught between the euro and the dollar. At a time when we need to move toward a more federalist government for the region, we need the Brits.”

Zumwinkel agrees. “In the long term, the British pound will not be strong enough to survive as a third ‘world currency’ next to the dollar and the euro, if only for reasons of psychology.”

In addition to the difficulty of relinquishing their currency, many Britons fear that adopting the euro would be a prelude to relinquishing sovereignty and giving the EU the power not only to print money and set interest rates, but to institute pan-European taxation. “Like with other matters, we will first coordinate before we have a unified tax-man,” says Fleuriet of CCF in France. A system of unified taxation, he says, would prevent citizens from one country going to another to engage in “tax shopping.” “You don’t have that in the United States, and we can pretty much do the same.”

Christian SchneiderWharton’s Schneider says further political integration will take place slowly, but he doubts that a true United States of Europe will emerge. Integration will stop short of establishing a European capital and a parliament with a U.S.-like House and Senate. “The autonomous nation will remain,” he says.

Ghandhi points out that Britain’s hesitancy about supporting more integration has deep roots. “The British don’t have a written constitution. A written constitution flies in the face of everything they believe in. There is no overriding of parliament by any judge in Britain. However, what the British don’t like to admit, but it’s happening, is that parliament is being overridden by the European Court of Justice,” which is part of the EU.

Ghandhi says the views of Britain are hard to reconcile with those of France and Germany because of the weight of history.

The basic principle in Anglo-Saxon common law is that everything is permitted which is not prohibited,” Ghandhi says. “On the continent, where the tradition is Roman law, the opposite is the case: nothing is permitted except that which is stated in law. You can push the envelope in Britain – and America – in terms of change. In Europe, you have to get permission. The origin of the state as protector goes back to Rome. At the turn of the Christian era, the pax Romana,the peace of Rome, was brought to the barbarians in other parts of Europe. This is the fundamental difference between the two traditions, and that is why the Anglo-Saxon model is the one that says you can take risks. Now, can you write a law to reconcile that? I don’t know. But I’m an adviser to the EU on financial innovation and I think I’ll have annual trips to Brussels for years.” .

Switzerland’s View: Thanks but No Thanks

Not all European countries are debating whether to join the European Economic and Monetary Union or apply for membership to the European Union. Switzerland feels it’s doing quite nicely on its own, thank you.

Several differences between Switzerland and other countries explain this reality, says Felix Oberholzer-Gee, an assistant professor of public policy and management who visits his native Switzerland on a regular basis.

For one, Switzerland is a wealthy country with a healthy economy and low unemployment. This stands in contrast to countries like Spain, Portugal and Greece, which have lots of catching up to do when it comes to personal income, and are more willing to relinquish some sovereignty for the chance to get their fiscal houses in order, gain access to new markets and boost their economies.

In addition, Switzerland’s economy is well integrated internationally. About half of its gross domestic product comes from the operations of multinationals like Nestle, UBS and Credit Suisse. “Businesses in Switzerland don’t have too many problems doing business in the euro-zone,” says Oberholzer-Gee. Another big chunk of GDP, he adds, is produced by industrial cartels that are insulated from competition by government regulation.

Switzerland’s system of government is another reason the nation likes the way things the way they are. “It’s a funny political system where people participate in politics to a much greater extent than in other parts of Europe, ”Oberholzer- Gee explains. “The notion that policies have to conform to the preferences of individuals is very strong. And,of course, we know this is the weak part of the EU. Here’s an example: to a person in Switzerland, the experience of a German citizen having to give up his or her currency without being consulted is just unimaginable. Now that Europe is at peace, the historical neutrality of Switzerland doesn’t have as much meaning anymore. But the sense that the EU is not a very democratic institution to begin with is a major issue for the Swiss.”

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