Year LVIII, 2016, Single Issue, Page 60

NATIONAL FISCAL SOVEREIGNTY
OR EUROPEAN TAXATION?

With its two recent proposals for Council directives,[1] the European Commission has, once again, brought the issue of the harmonisation of corporate tax bases into the spotlight, its aim being, initially, to introduce a single criterion for determining the common tax base, and at a later stage to move on to the issue of a consolidated tax base. The proposed regimes — these would be mandatory for EU groups with a total consolidated group revenue exceeding €750 million and for non-EU groups that generate such a revenue in the territory of the Union, and optional for corporations with a lower revenue — would not involve the imposition of a single rate across the EU territory, only the establishment of criteria for determining taxable profits. It is a scheme that would not allow derogations through individual agreements and that should lead to lower administrative costs for businesses operating in several member states; furthermore, certain profits, such as investments in research and development, would not be taxable.

The idea of introducing a common corporate tax base actually dates back to 2011, when the Commission first issued a proposal for a Council directive on a set of common rules for computing the tax base of European companies.[2] However, that proposal, which envisaged an optional regime, was opposed by some member states and never resulted in an act of the European Union.

The European Commission’s latest attempt to propose common rules in this field may be seen as a response to recent tax scandals, especially the one involving the Apple companies in Ireland. The Commission has declared that Ireland’s fiscal treatment of these companies is illegal under EU state aid rules,[3] and that, as a result, the Irish government must recover the unpaid taxes, which amount to around €13 billion, plus interest. This particular affair has attracted more media attention than others not just because of the huge amount of money involved, but also because the Irish government has indicated that it (like Apple) intends to appeal against the Commission’s decision; indeed, it is unwilling to recover the sum in question for fear of losing its status as a tax haven for multinational corporations. This situation arose because Ireland had previously issued Apple Sales International and Apple Operations Europe, two Irish incorporated companies, a tax ruling that allowed them to allocate the majority of their profits to a “head office” that, not being based in any country and having no employees or premises of its own, did not actually exist; consequently, these profits were not taxed anywhere. According to figures released during US Senate public hearings, Apple Sales International recorded profits of around €16 billion in 2011, but as an effect of the tax ruling only a small proportion of this total (€50 million) was considered taxable in Ireland: as a result, the corporate tax effectively paid by Apple Sales International corresponded to a rate of 0.05% on its overall annual profits.

This affair, like the other tax scandals that have come to light in recent years, raises the issue of the fiscal sovereignty of the EU member states and the impact that EU law has on it. Even though the power to levy taxes remains exclusively in the hands of the member states and the European Union has no fiscal capacity of its own, there can be no doubt that European Union law does, to some extent, interfere with this sphere of state action.

As a case in point, the Apple/Ireland affair seems to have arisen from two conditions: first, the fiscal sovereignty of the member states, which allows each one to decide, independently, its tax treatment of companies operating on its territory, and second, the freedom of movement provided for under the Treaties, which allows enterprises to move around freely within the Union. As a result of the coexistence of these conditions, together with the absence of a harmonised fiscal system, multinationals seek to transfer their profits to the member states where the tax burden is lowest; at the same time, the member states become engaged in an out-and-out fiscal race, competing with each other to lower their tax rates so as to encourage investments in their territory and protect their tax base.

The measures provided by EU law for countering such behaviours are actually rather weak. Specifically, with regard to the possibility, for companies, of taking advantage of the freedom of movement provisions in order to transfer profits to countries with more favourable rates of taxation, the European Court of Justice (Halifax[4] and Cadbury Schweppes[5]judgments) has underlined that this conduct, perfectly legal if it corresponds to effective business transactions, is prohibited only in cases in which a company creates fictitious scenarios (i.e. not corresponding to its true business activities) solely for the purpose of wrongfully obtaining advantages provided by Community law. Furthermore, the EU does not prohibit member states from applying favourable tax rates to companies operating on their territory; what it does prohibit is the selective granting of preferential treatment to certain companies, as this conduct would harm competition and violate the state aid rules.

However, the coexistence of 28 different tax systems undoubtedly makes it hard for smaller enterprises to conduct business within the territories of a number of member states, as it is more difficult for them than for large multinationals to form a clear picture of the applicable tax regulations. A harmonised corporate tax base would serve, precisely, to simplify this picture. Although it would not in fact entail the imposition of a single rate of taxation, it would make it possible to establish what profits are taxable and in which member state they are payable, and would also significantly reduce administrative costs, especially for medium and small enterprises. The Commission has estimated that, under the proposed Common Consolidated Corporate Tax Base regime, the costs, to these enterprises, of opening a subsidiary abroad could in fact fall by as much as 67%, while they could see an up to 30% reduction in their tax burden.

In view of Apple’s tax affairs in Ireland, the issue of fiscal sovereignty also clearly needs to be addressed from another, more strictly macroeconomic, perspective. In fact, the Irish government’s intention to contest the Commission’s decision concerning the recovery of the aid and thus, ultimately, to forgo €13 billion, provides a clear illustration of just how important it has become for some eurozone countries to implement a fiscal policy aimed at attracting investments within their territory, given that they are no longer able to use monetary policy instruments to achieve their macroeconomic objectives. As Apple pointed out in a letter to the Apple Community in Europe following the Commission’s decision, this decision, should it be upheld, “would strike a devastating blow to the sovereignty of EU member states over their own tax matters”.

It should nevertheless be stressed that it is an illusion to believe that member states are entirely sovereign in fiscal matters. Although back in the 1970s, the Werner Plan, envisaging the possibility of a single currency, insisted that monetary policy could not be separated from economic and fiscal policy, the choices made in Maastricht, namely to transfer monetary policy to European level and leave economic policy and fiscal policy in the hands of the member states while coordinating them at European level, went entirely against this. The economic and financial crisis of recent years, creating a need for increasingly stringent measures to coordinate the economic and budgetary policies of the eurozone countries, and effectively leading the European institutions to interfere more and more in the areas that are still the responsibility of the member states, has certainly shown this model to be unsustainable. Although fiscal policy continues to be considered one of the cornerstones of state sovereignty, this is clearly true more in theory than in practice: indeed, many decisions concerning the choice and use of fiscal resources are now dictated by Europe.

As a result of a reluctance to take the important step of transferring economic and fiscal policy competences to supranational level, we are now left with a situation in which there is no longer any level of government equipped with effective economic policy tools — a situation that has serious implications from a democratic legitimacy perspective. Indeed, what we are seeing in the euro area today is an erosion of the power of the states to exercise their fiscal powers autonomously and, as a result, an erosion of the power of the citizens to control, through the national parliaments, the management of these powers; at the same time, increasingly stringent supervisory powers are being transferred to a level (the European one) where there is no democratically legitimated government. As a result, the power to determine the orientation of the eurozone member states’ fiscal policies is in the hands of organs over which the citizens have no control. This is a contradictory situation that can be remedied only by linking monetary with fiscal policy, in short by creating a eurozone fiscal capacity under the supervision of the European Parliament.

Giulia Rossolillo

[1] Proposal for a Council directive on a Common Corporate Tax Base, COM(2016) 685 final, 25.10.2016 and Proposal for a Council directive on a Common Consolidated Corporate Tax Base (CCCTB) COM(2016) 683 final, 25.10.2016.

[2] Proposal for a Council directive on a Common Consolidated Corporate Tax Base (CCCTB), COM(2011) 121 final, 16.3.2011.

[3] Cf. European Commission – Press release, 30 August 2016 (http://europa.eu/rapid/press-release_IP-16-2923_en.htm).

[4] ECJ, judgment of 21 February 2006, case C-255/02, Halifax and others.

[5] ECJ, judgment of 12 September 2006, case C-196/04, Cadbury Schweppes.

Year LVIII, 2016, Single Issue, Page 64

FEDERAL UNION AND EUROPEAN DEFENCE

As we have seen at different junctures over the decades, it is not easy to solve the problems that, still today, prevent the Europeans from enjoying autonomous capabilities and credibility in the area of their foreign and security policy. This was seen to be true shortly after the end of Second World War, with the failure of the European Defence Community project when the process of European integration was still in its infancy. Similarly, in the decades following the end of the bipolar world order, a period that had seemed to offer openings for the construction of a new continental and global order based on a logic of mutual security between East and West, no easy answers could be found. At the start of the present century, when the occupation of Iraq by US and British troops prompted France, Germany, Belgium and Luxembourg to renew calls for the creation of a European military headquarters with greater autonomy from the USA, once again the depth of the difficulties to be overcome was clearly apparent.

Today, as a result of the British vote for Brexit, to say nothing of the election of Donald Trump as President of the United States, Europe’s defence has become a pressing issue once again, and, as in the past, we are seeing just how great the difficulties are. The proposals put forward so far are extremely cautious for two reasons: first, the national governments and the European Commission are aware of the present tensions between the different European countries, and second, the single governments, unwilling to take chances that might damage their performance at the polls, are opting for inertia. As repeatedly underlined by Federica Mogherini, High Representative of the Union for Foreign Affairs and Security Policy and Vice-President of the European Commission (HRVP), the idea of creating a European army in a short space of time is currently out of the question. Indeed, not only is this objective not even on the table, and impossible to pursue in the framework of the current Treaties, it would also be pointless, given that “even NATO does not have a NATO army”.[1] This latter assertion is actually true only in a formal sense, however, as there can be no denying that NATO’s credibility is based on the strength and capacity for action and deterrence of an army — the US army — that has played a fundamental role in all the major military operations in which it has intervened since the end of the Second World War, and remains a decisive force today.

Donald Trump, tapping into a sense of malaise and discontent that has been brewing for some time on the other side of the Atlantic,[2] has repeatedly and emphatically called for a loosening of America’s commitment to Europe’s defence. Yet even the anxiety generated by the prospect of a US disengagement, financial as well as military, from Europe does not seem to be enough to convince the Europeans that they need to abandon the mindset that leads them to pursue nothing more than a mere strengthening of their existing military alliance, and instead endeavour to create a true European defence union .

To take stock of, and summarise, the concrete developments in the debate on these issues now unfolding in Europe, we here briefly outline, in chronological order, the various proposals that have so far been advanced.

I. The European Commission’s Global Strategy for the European Union’s Foreign And Security Policy (EU Global Strategy, EUGS), submitted to the European Council in late June, rests on three guiding principles, all of which are taken up in the various other proposals mentioned below.

The first principle is to make full use of the possibilities offered by the existing Treaties. To begin with, Europe could finally deploy the EU Battlegroups. Directly controlled by the Council of the European Union, the EU Battlegroups are military units, each consisting of 1500 troops provided, in rotation, by member states. Although the system reached full operational capacity in 2007, no Battlegroup has yet seen active service. It is easy to see why this instrument has never been used. The headquarters of the groups rotates, according to their composition, and the resources at their disposal depend on the amount that each of the single states contributing to a Battlegroup is willing to spend. Their organisational and operational structure is further complicated by the fact that the countries participating in the different groups also include non-EU NATO members (Norway and Turkey), as well as countries that are not members of either the EU or NATO (Macedonia and Ukraine). On the other hand, other countries (Denmark and Malta), despite being EU members, do not contribute to any of the Battlegroups. But the most important point highlighted by the EUGS is the possibility to implement Articles 42.6 and 46 TEU, which gives certain EU countries the possibility of strengthening their cooperation in military matters through the mechanism of permanent structured cooperation. This, too, is an instrument that so far has never actually been used given that, even though it can be implemented through a qualified majority vote by the Council, its workability is limited by the fact that adoption of the cooperation’s decisions and recommendations is subject to unanimity among the participating Council members (which must therefore have decided unanimously, beforehand, what they intend to do together). Conscious of the difficulties inherent in launching and implementing this mechanism in practice, HRVP Mogherini also recalled the possibility of evoking Article 42.7 (on the obligation of aid and assistance towards member states that are the victims of armed aggression on their territory) and the hitherto unused Article 44 (under which the Council can entrust a group of states with certain military tasks).

The second guiding principle of the EUGS is to fully explore the possibilities for better planning and coordination of joint military and civilian operations in crisis areas, while its third is to identify the strategic industrial and technological capabilities in the field of defence that need to be promotedjointly, also through financial incentive mechanisms.

Clearly, on an institutional level, the development of the EUGS, to which the member states were invited to respond with considerations and proposals of their own, never goes beyond the framework of the intergovernmental method as defined and structured (for the field foreign and security policy) by the existing Treaties. Accordingly, both the launch of closer cooperation and, above all, the implementation and funding of this mechanism are issues that remain firmly in the hands of the Council.

II. France and Germany were quick to respond to the EUGS, putting forward considerations and suggestions that, however, remained essentially in line with the approach adopted by the Commission. Indeed, following the presentation of the European Commission’s strategy, as many as three papers were submitted jointly by French and German government ministers. The first was presented by foreign ministers Jean-Marc Ayrault and Frank-Walter Steinmeier (27 June), the second by interior ministers Bernard Cazeneuve and Thomas de Maizière (23 August), and the third by defence ministers Jean-Yves Le Drian and Ursula von der Leyen (11 September). In this latter paper, the two ministers underlined the importance of translating the EUGS into concrete actions, of actually using the permanent structured cooperation mechanism, and of setting up a central military headquarters. But they also specified that any chain of command should be headed by the Brussels-based EU Political and Security Committee, which is composed of the member states’ ambassadors in Brussels and chaired by representatives of the European External Action Service. On the financial side, the two ministers, while calling for the creation of new dedicated financial instruments, failed to specify how these might be sourced and governed.

III. German finance minister Wolfgang Schäuble, delivering a speech last October, was similarly vague. While stating that the European Union would “soon need a common defence budget” and that the EU countries’ financial resources in the defence sector, if pooled, would greatly exceed Russia’s military budget, he failed to outline the framework that would allow such a sharing of resources, or how his proposal might be reconciled with current German policy in this area. Indeed, the German government, after 25 years of cuts, recently decided unilaterally to significantly increase its national defence budget for the next five years.

IV. Italy’s contribution to the ongoing process of reflection on the EUGS is a paper recently presented by then foreign minister Gentiloni and defence minister Pinotti. Although this document, too, remains in the ambit of policies that can be pursued within the existing framework, and among other things expresses support for deployment of the Battlegroups and recourse to the permanent structured cooperation mechanism, it nevertheless urges the European partners to go a step further. Indeed, the paper suggests that full use of the possibilities offered by the Treaties should go hand in hand with discussion, among interested member states, of a more ambitious option, namely the launching of a kind of European Defence Union, modelled on the Schengen system. By pooling their forces and commands and sharing their control, manoeuvre and response capabilities, the countries participating in this Union could create, as the core of a future integrated European force, a joint military European force permanently available to the EU military headquarters. This proposal, unlike the previous ones, addresses the issue of the nature of a future European military force, yet it fails to consider the institutional context in which this should be set. This is actually rather surprising in view of the paper’s opening assertion: “when the context no longer corresponds to the aspirations of the times in which we live, then we must change the context”.

V. On November 14, 2016 the EU’s 28 foreign affairs and defence ministers approved the Implementation Plan on Security and Defence presented by Federica Mogherini.[3] This plan, which will be presented to Europe’s heads of state and government at forthcoming summits, has been hailed by the French and German defence ministers as an important step, moving Europe closer towards greater strategic autonomy in military matters and decreasing its dependence on Washington. In reality, however, it does not constitute a significant advance with respect to the other proposals on the table. In two parts in particular (the ones dealing with the financial aspects and the actual implementation of permanent structured cooperation in the defence area), it only provides confirmation of the various governments’ difficulties and hesitations when faced with a real chance to set out on this route. With regard to the need for increased financial solidarity, it merely remarks that “Member States to agree to consider financing in a comprehensive manner, reinforcing solidarity, effectiveness and flexibility to underpin the Level of Ambition and enhance CSDP [Common Security and Defence Policy] responsiveness” (point 11 of the document). With regard to the second aspect, i.e. making full use of the Treaty potential, the member states simply declare that they “agree to explore the potential of a single and inclusive PESCO [Permanent Structured Cooperation] based on the willingness of Member States to strengthen CSDP by undertaking concrete commitments. If so requested, the HRVP can provide elements and options for reflection” (point 12 of the document).

For the moment, then, the need to change the institutional framework in which decisions are made and action is taken does not seem to be a priority concern among those apparently wanting to give Europe its own defence capability. And yet this is, precisely, the crucial point, as was recently emphasised by, among others, the authors of comments on the German government’s 2016 White Paper on German Security Policy[4] published by Stiftung Wissenschaft und Politik, from which we quote a particularly significant passage. “In short,” write the authors of the comment “CSDP has failed to fulfil its potential due to a lack of political will. Using the concept and the term “union” in the context of European integration implies that this can only mean a long-term communitisation of the policy field, as has been the case with monetary union. This could mean, for example, creating the post of a fully-fledged EU Commissioner with authority over EU troops and transferring parliamentary approval from national parliaments to the European Parliament. This significant leap towards integration may well be an objective of German security policy. But those in favour of this objective should be absolutely clear about it and outline the steps to get there with a binding timetable, as was the case with monetary union. Given the current widespread aversion to greater integration, the argument in the White Paper for a Security and Defence Union initially appears ambitious, but it suffers from the impression of indecision and half-heartedness. ”[5]These are, in fact, criticisms that may be extended to practically the whole of the ongoing debate on Europe’s defence.

* * *

The EU countries, geopolitically caught between the US and Russia, and situated on the fringe of African and Middle Eastern regions that are plagued by persistent and acute political and economic instability, are structurally exposed to the risks of unrest and agreements made at their expense. And unless these dangers are addressed rationally and systematically, European security will be undermined and the EU itself will be at risk of disintegrating. It is no longer just a question of preserving Europe’s level of well-being; what is at stake now is peace. Given the close interactions that exist between security policy and foreign policy, which, in turn, are closely intertwined with trade and infrastructure and policies on transport and communications, as well as industrial and energy policies, it is clear that the value of any attempt to address Europe’s security, both internal and external, can only be palliative if it amounts to nothing more than the pursuit of greater sectoral cooperation in the military field between states and governments, and fails to even consider the issue of the creation and management of a European army (however big or small this may be, and however complex and coordinated, between national and European levels, its operational framework). Furthermore, in an era in which nuclear deterrence is destined to continue to play an important role, it is equally unrealistic to imagine that the nature and structuring of a European defence capacity are issues that can safely be left in abeyance. This is, after all, an era in which, as remarked last April by the Russian-American Valdai Discussion Club in a report entitled What Makes Great Power War Possible, we are seeing “a clear trend away from strict rules of warfare or the existence of any tangible separation between war and peace.” It is an era in which conflict between major continental powers has extended to the space and cyber domains, to the great electronic control and monitoring infrastructures, and to the energy, financial and information domain, and one in which even a regional flare up, to say nothing of an eventual conflict, could “destroy important parts of the modern world all states depend on. ”[6]

As history itself has taught us, attempts to achieve sectoral integration in the military field, being inextricably linked with foreign policy and with the issue of political scrutiny, are bound to fail unless they are accompanied by a project for political union. We need only recall the failed attempt to create a European army through the European Defence Community (EDC). The idea behind the EDC project was to create institutions similar to those of the European Coal and Steel Community, but with military as opposed to economic competences, and without any reference to political institutions of a democratic and federal nature. It did not take long, in fact, for the negotiations to come up against the obstacle represented by the contradictory situation of attempting to address the defence of 1950s Western Europe without also resolving the crucial issue of the government that would be needed to manage it. Altiero Spinelli and Alcide de Gasperi found a way of overcoming this contradiction, namely to link the creation of a European army to the establishment of a supranational political body to be elected directly by the Europeans. This solution found concrete expression in the draft European Political Community (EPC) Treaty drawn up by an Ad Hoc Assembly established for the purpose. It is worth recalling here the opening words of the Information and Official Documents of the Constitutional Committee, a text prepared up by Von Brentano (chairman of the Constitutional Committee set up within the Ad Hoc Assembly) as an introduction to the Draft Treaty embodying the Statute of the European Community: “When signing on 27 May 1952 the Treaty of the European Defence Community, the Six Governments said that they were conscious ‘that this is a new and essential step towards the creation of a united Europe’. The Treaty did not confine itself, in point of fact, to giving verbal expression to the common determination of the Six Countries to integrate their armed forces in a European army within the framework of a supra-national community; it also laid down the procedure to be followed in determining the definitive structures of Europe. Under Article 38 of the Treaty, the Assembly of the EDC was instructed to examine within six months from its inauguration ‘the constitution of an Assembly of the European Defence Community, elected on a democratic basis’ which might ‘constitute one of the elements in a subsequent federal or confederal structure, based on the principle of the separation of powers and having, in particular, a two-chamber system of representation’.”[7] In short, the original plan for sectoral integration in the military field, to be feasible, should have been set within an unambiguous plan for political unification, that, had it been carried through to completion, would certainly have marked the start of the construction of a true European federal state .[8]

It is no coincidence that Guy Verhofstadt, speaking before the European Parliament Committee on Constitutional Affairs on July 12, 2016, recalled the historical precedent of the EPC, and did so precisely in order to underline that the key issue that must be addressed, if Europe is to find a way out of the various crises and overcome its own powerlessness, remains the creation, a process still unfinished, of a political community, a political union . In fact, the Verhofstadt report[9]sets the issues of defence and foreign policy in the framework of a federal-type reform of the European institutions .

* * *

In the light of all that has been said above, it is clear that today, as in the last century, the crucial problem of Europe’s defence cannot be resolved merely by tackling certain sectoral issues and without creating the conditions that will allow an evolution, in a federal direction, of the current EU structure. By merely pursuing greater integration in the military field without really wanting to overcome the purely intergovernmental perspective, Europe runs a very high risk of failing, precisely because, in the defence field, even more than in the monetary one, capacity to act is not just a question of rules, but of power and sovereignty.

As happens in other sectors, first and foremost the economic and financial sectors, where effective European policies are urgently needed, the governments’ reluctance to build a true supranational (federal) power at European level means that the current proposals on defence are limited by the will to keep them within the intergovernmental framework. Instead, as Wheare pointed out, it is only in a federation that a government with the power to decide and operate in areas of common interest can be the tool for action.[10]

The time has come to stop making excuses and instead strive to combine the issue of European defence with the development of a federal union design. This must be the priority for all those who truly appreciate the desperately urgent need to work for peace in Europe and in the world.

Franco Spoltore

[1] See, in this regard the statements made by Federica Mogherini in her addresses given on 5 and 27 September and in the press conference of November 14 on the occasion of emergency meeting of the 28 foreign affairs and defence ministers to discuss the implementation of the Global Strategy proposed by the Commission.www.facebook.com/f.mogherini
/?fref=ts.

[2] An explicit and formal request to the Europeans to shoulder more responsibility for their defence had already been advanced during the Obama presidency by the then US Secretary of Defence Robert Gates, who issued the blunt warning that “there will be dwindling appetite and patience in the U.S. Congress — and in the American body politic writ large — to expend increasingly precious funds on behalf of nations that are apparently unwilling to devote the necessary resources or make the necessary changes to be serious and capable partners in their own defense.” The Security and Defense Agenda (Future of NATO), as delivered by Secretary of Defence Robert M. Gates, Brussels, Belgium, Friday, June 10, 2011, https://www.scribd.com/document/57526818
/Secretary-Gates-Address-About-NATO-s-Future.

[3] Implementation Plan on Security and Defence, by the High Representative of the Union for Foreign Affairs and Security Policy, Vice-President of the European Commission, and Head of the European Defence Agency, 14 November 2016,
http://www.consilium.europa.eu/en/press/press-releases/2016/11/pdf/
implementation-plan-on-security-and-defence_pdf.

[4] The 2016 White Paper on German Security and the Future of the Bundeswehr, Federal Ministry of Defence, https://www.bmvg.de
/portal/a/bmvg/!ut/p/c4/04_SB8K8xLLM9MSSzPy8xBz9CP3I5Eyrp
HK9pNyydP1wkHxOun5kap5-QW6uIwDwHf6z.

[5] Markus Kaim, Hilmar Linnenkamp, The New White Paper 2016 – Promoting Greater Understanding of Security Policy?, Stiftung Wissenschaft und Politik (SWP) - German Institute for International and Security Affairs, Comments 2016/C 47, November 2016 - https://www.swp-berlin.org/fileadmin/contents/products/
comments/2016C47_kim_lnk.pdf.

[6] http://valdaiclub.com/files/10683.

[7] http://aei.pitt.edu/991/1/political_union_draft_treaty_1.pdf.

[8] In this regard, see Sergio Pistone in Il ruolo di Altiero Spinelli nella genesi dell’art. 38 della CED e del progetto della CEP, Contributions to the Symposium in Luxembourg, 17-19 May 1989, Publications of the European Community Liaison Committee of Historians, Giuffré, Milan 1993.

[9] This report is currently under discussion in the European Parliament, which is due to vote on it by the end of 2016.

[10] K.C. Wheare, The Constitutional Structure of the Commonwealth, Oxford University Press, London, 1963. See, in this regard, his considerations on considerations on the limits of cooperation, pp.128-129 and 135-136.

Year LVII, 2015, Single Issue, Page 144

THE PARADOX OF GERMAN POWER

The global economic and financial crisis that began in the United States in 2007-2008 really began to be felt in Europe as from 2010, where it has been reflected, in particular, in the fragility of the monetary union (which faces a very real risk of disintegrating and thus causing the collapse of the process of European unification) and in increasingly marked economic and social imbalances, reflecting territorial differences, between the strong and the weak member states of the Economic and Monetary Union. Essentially, these correspond, respectively, to a core group that is led by Germany and comprises Benelux, Austria and Finland (as well as France in a more intermediate position) and a peripheral group whose main “members” are Italy, Spain, Portugal, Ireland and Greece. This asymmetry, which is clear from the disparities existing in a number of areas (growth rates, unemployment levels, internal imbalances, poverty belts, levels of productivity and of competitiveness, trade and balance-of-payments imbalances, national debts and the related spreads) is the main reason for the precarious state of the euro. It is, moreover, the key factor underlying the recent strengthening of nationalistic currents opposed to European unification and the related emergence of nationalistic ill-feeling between different European countries. The accusations of selfishness levelled at the economically strong countries, which are held to be profiting from the integration process at the expense of the weak countries, are countered with accusations of parasitism and of slack economic and financial discipline directed at the countries in difficulty. In this context, there are widespread concerns over Germany’s hegemonic role within the EU, which evokes ghosts of the past when the “German question” was, on two occasions, the crucial element of conflict that led to the outbreak of war on a world scale. In relation to these concerns and the debate that has developed around them, mention should be made of the book The Paradox of German Power (London, Hurst Company, 2014) by Hans Kundnani (research director at the European Council on Foreign Relations and associate fellow at the Institute for German Studies at the University of Birmingham). Through a brief but effective reconstruction of Germany’s relationship with Europe from the time of Germany’s national unification through to the current crisis of European unification, the author asks essentially whether, and in what terms, it still makes sense to talk of the “German question”. In my view, an examination of the essential aspects of Kundnani’s treatment of this issue, seeking to bring out its strengths and weaknesses, can contribute to efforts to achieve a proper overview of this question.

As regards the period between national unification and 1945, Kundnani supports the view that Germany played a decisive role in the onset and unfolding of the two World Wars, both of which were, essentially, attempts to impose German hegemony on Europe. Accordingly, there is continuity between them, despite the clear and profound difference between the Wilhelmine regime and the National Socialist regime – the latter being guilty of appalling internal criminal acts and acts of war, typical of a perfect totalitarian system. This quest for hegemony, by Germany, was based on an interweaving of two factors: one structural and the other ideological.

The structural factor was basically the position of “semi-hegemony” that Germany found itself occupying, in Europe, after its unification in 1871: when it became a nation-state, Germany assumed a size and thus a level of power that was excessive, and therefore incompatible with a stable balance of power in Europe, but at the same time insufficient to allow the realisation of a stable and peaceful hegemony. This structural situation naturally prompted the other European powers to form coalitions in order to counterbalance the weight of Germany’s power. In turn, these coalitions inevitably began to be feared in Germany – they were dreaded because of the threat of encirclement – and drove it to take measures to protect itself. But these measures were inevitably peceived as a threat by the other powers and therefore had the effect of accelerating the formation of coalitions. This vicious cycle – in itself a classic example of the security dilemma – was accentuated in the 1890s, when Germany embarked on its Weltpolitik, in other words its no-holds-barred participation in the imperialism race, without any of the qualms that had held Bismarck back. Germany’s aim was to build a large colonial empire, so as to acquire dimensions in line with those of the world’s major powers (Great Britain, Russia and the United States) and thus to obtain the vital space for development that was crucial in order to avoid the decline that represented the destiny of Europe’s nation-states. The Weltpolitik revolved around the construction of a powerful sea fleet that had to be strong enough to overcome Great Britain’s global naval dominance. Since Britain’s security depended essentially on its naval supremacy, the Germans’ decision forced Westminster not only to strengthen the British navy, but also to side with the Franco-Russian alliance; this thus became the Triple Entente as opposed to the Triple Alliance, whose stable pillars, given the relative weakness and uncertain position of Italy, were Germany and the Austro-Hungarian Empire. Europe thus saw the emergence of a bipolar balance, at which point it became inevitable that there would be a transition from situations of serious conflict between two powers from opposing blocs (as seen between Austria-Hungary and Russia, for example) to a situation of general conflict. Therefore, as regards the origins of the First World War, Kundnani maintains that the decisive factor lies not so much in miscalculations by, or faults on the part of, the protagonists (particularly Germany), as in the presence of a systematic cause, namely Germany’s semi-hegemonic position and, as an effect of it, Europe’s evolution towards a bipolar order. Precisely in order to move beyond its extremely difficult and unstable semi-hegemonic position, Germany, following the outbreak of the war, pursued a new goal – full hegemony over Europe, in other words, the overcoming of the balance of power that left Germany constantly exposed to the risk of being surrounded and hindered its prospects of becoming a global power.

Following its defeat in 1918, Germany, stripped of colonies, vast territories in Europe and major economic outlets, subjected to extensive arms limitations, and obliged to pay hefty reparations under the terms of the Treaty of Versailles, found its power considerably diminished. Yet, at that same time, in a situation in which peace continued to depend on the balance of power – partly because of the flimsiness of the attempt to replace power politics with the collective system of security based on the League of Nations, which had no power of coercion –, Germany actually found itself, relatively speaking, in a stronger position than before, given that the other empires were collapsing, France had been drained by its huge war effort, and even Great Britain was severely weakened. In this European framework, characterised by a precarious equilibrium and general economic decline, Weimar’s Germany set out to recover the sovereignty curtailed by the Treaty of Versailles, to obtain formal equality with the other powers, and to recover the territories that had been relinquished to Poland. Even though it was clear that revisionism would lead to an even more acute imbalance in the European system than that which had existed before the war, these aims were shared by the vast majority of political forces in Germany, and they were pursued through efforts (always based on diplomatic and peaceful means) to exploit the divergences between the Western powers and the tension between the latter and the Soviet Union. The situation changed as a result of the crisis of 1929, which had disastrous consequences in Europe and especially in Germany, where it drastically limited the prospects of economic development, already weak following the 1918 defeat. This is the setting in which the Nazi Party came to power and succeeded in building a totalitarian state whose foreign policy was not just to obtain a revision of the terms of the Treaty of Versailles, but also to pursue, and by the most brutal means, full hegemony over Europe, in order to definitively overcome Germany’s semi-hegemonic status. The war unleashed by Hitler in pursing this design instead ended with the definitive defeat of Germany and, at the same time, the overcoming of the central role of the European system of states, which was absorbed into a global system dominated by the US and USSR.

Having underlined the importance of Germany’s semi-hegemonic status as a central, structural factor in its policy that led to the two World Wars, Kundnani also draws attention to the ideological factor, namely nationalism, that increased the objective momentum coming from the structural one. German nationalism, like the nationalism of all great powers, tended to pursue as a priority the national interest and, therefore, in a framework of anarchic international relations, to exploit every opportunity to increase its power and expand its economic influence. This tendency, however, was associated with three characteristics that set Germany apart from the Western European powers, and in particular from Great Britain and France.

The first and most significant of these was its rejection of the liberal democracy that, rooted in the Enlightenment, had established itself in Western Europe and North America. After the failure of the 1848 revolution, there became established, in Prussia – and subsequently in the whole of Germany unified on the basis of the Prussian hegemony –, a political system that, formally, had certain hallmarks of democracy, such as universal suffrage, but in which power was concentrated in the hands of the monarchy and the army (dominated by the large landowning class, the Junkers) – essentially an illiberal, authoritarian system. In the wake of the Weimar Republic interlude, which had seen an attempt to create a liberal-democratic system, the authoritarian character of the German nation-state became particularly strong with the coming to power of the National Socialism movement, which built a pervasive and efficient totalitarian system and, on this basis, was able, in the absence of obstacles internally, to embark on the second attempt to achieve German hegemony.

The second peculiar characteristic of German nationalism, after the illiberal authoritarian trend just described (generally referred to as Sonderweg, meaning a different direction compared with that of the West), was the idea that Germany had a mission. The ruling class of the German nation-state developed the firm belief that the German social-political system was not only different from that of the West, but far superior to it, and therefore that strengthening Germany’s power and then pursuing the objective of German hegemony in Europe was also a way of disseminating the fundamental aspects of this system outside Germany. This is an idea that National Socialism exacerbated.

The third peculiarity of German nationalism (albeit looked at in less depth) is its use of social imperialism and Bonapartism, in other words its exploitation of imperialism as a means of overcoming and checking internal tensions generated by the authoritarian, and ultimately totalitarian, political-social system.

Kundnani’s view of the profound reasons underlying Germany’s attitude and policies, which we have briefly summarised here, is a step in the right direction towards achieving a real understanding of the German question, overcoming the limits inherent in a mere chronicling of events or in misleading simplifications regarding the faults of the German nation. Indeed, the author refers explicitly to the interpretation of the German question developed by Ludwig Dehio (the concept of semi-hegemony in particular), which is by far the most illuminating and, indeed, remains unsurpassed[1]. However, it has to be pointed out that Kundnani omits two fundamental clarifications proposed by the last great representative of the Rankian school.[2]

First of all, he does not take into consideration the issue of the link between the position of Prussia, and then Germany, in the system of states and the authoritarian character of the Prussian-German political system. Dehio draws on the theory hinging on the distinction between island states and continental states that was developed by Alexander Hamilton in the eighth of the Federalist papers,[3] by the Rankian school[4] and by John Robert Seeley.[5] Island states (key examples being Great Britain and the United States), being in a strategically privileged position in which theyare not under threat from powerful neighbours, have historically been characterised by their comparatively peaceful foreign policies and tendency to evolve internally in the direction of liberal, flexible and decentralised political-constitutional and social systems; continental states (such as Prussia-Germany, Austria and to a lesser extent France), on the other hand, have been characterised by comparatively more aggressive and bellicose foreign policies and, as a corollary, by a tendency towards authoritarian centralism internally. This difference is related ultimately to the decisive influence that foreign policy has on domestic policy. In continental states, the need to defend land borders against the threat of attack by land has traditionally necessitated tendentially more aggressive foreign policy lines (with not infrequent recourse to surprise attacks in order to pre-empt adversaries) and therefore led to the creation of huge armies that can be rapidly deployed. Inevitably, therefore, centralised and authoritarian political structures, able to achieve rapid and complete mobilisation of all available energies, be it for defensive or for offensive purposes, have prevailed within such states in order to ensure the survival of the state itself. All these considerations apply far less to island states, given that their strategic location allows them to rely primarily on the military navy for their defence, and thus avoid the cost, in economic but especially political and social terms, of creating the huge land armies typical of continental states and the related centralised bureaucracies that, in the life of a state, necessitate a strengthening of the dimension of authority at the expense of that of freedom. In the light of these considerations, Prussia-Germany, surrounded by powerful neighbours and obsessed with the real prospect of war on several fronts, would seem to be the continental state par excellence. And it is therefore understandable that in this state, compared with Europe’s other major powers, liberal-democratic trends had comparatively less chance of becoming established.

Naturally, this does not justify in the slightest its totalitarian-authoritarian tendencies and the crimes it perpetrated, both internally and internationally, but it does serve to clarify the objective situation that undoubtedly helped these to prevail over the liberal-democratic trends that were also present in the Prussian-German experience. If one fails to take into account the powerful conditioning arising from Germany’s position in the system of states (and the “supremacy of foreign policy”), one cannot gain an adequate understanding of the German question, and thus risks falling for the lame national character theory, which basically expounds the absurd notion of an inherent wickedness of the German nation.[6]

The other fundamental clarification offered by Dehio, and neglected by Kundnani, is the notion of the historical crisis of Europe’s nation-states as the constant theme running through the period of the two World Wars. It is not an alternative to the theory of semi-hegemony, but rather complements the latter, significantly strengthening its explanatory power. Kundnani, talking about Wilhelmine imperialism, explains that this, in a period in which industrial development was paving the way for global domination by states having continental dimensions, was justified by the need to expand the influence of the German state, and thus economy. However, although this argument is presented essentially as an ideological justification of imperialism, Dehio points out that it was actually a response to the real problem of the historical crisis of the European nation-states, whose size left them structurally obsolete in the late Industrial Revolution period that required states of continental dimensions. This situation presented a drastic choice: either peaceful unification of Europe along federal lines (a concept that, with difficulty, began to emerge in political and cultural debate in the late nineteenth century), or the creation of larger states through imperialistic means. Precisely because none of the ruling classes in Europe were yet showing any inclination towards the first of these choices, the latter prevailed and logically led to the development of European hegemonic designs by Europe’s strongest nation-state, which started from a semi-hegemonic position.

The German drive for hegemony which manifested itself through the two World Wars can be seen as the continuation of a series of hegemonic attempts that, throughout modern history, have been mounted by Europe’s strongest continental states when these reached the height of their power – first Spain, then France and finally Germany. The new element in Germany’s case was the fact that its hegemonic attempt was an imperialistic response (through the “sword of Satan” as Einaudi put it) to the historical crisis of the European nation-states, whose decline coincided with the weakening of the nation-state model and with the opening of a new phase of history, characterised by the drive for peaceful unification of Europe (through the “sword of God”)[7]. The fact that Kundnani does not adequately grasp this important aspect of the German question in the period from Germany’s national unification to its collapse in 1945 detracts from the explanatory power of his analysis and prevents him from reaching a satisfactory understanding of the problem of European unification. At this point, we come to his interpretation of the evolution of Germany after 1945, whose essential aspects I will now outline.

This evolution can be divided into two phases that, according to the author, present significant differences: the first coinciding with the period from 1945 to the reunification of Germany in 1990, and the second with the period from reunification to Europe’s financial and economic crisis of 2010-2014. The main thread running through the first phase was the overcoming, in West Germany, of two of the characteristics of German nationalism discussed earlier.

First of all, with the historical decline of German power – the decline in power was a phenomenon that spared none of the European nation-states, not even those that had formally emerged victorious from the Second World War –, which was accompanied by the emergence of a stable hegemony of the United States over Western Europe, Germany’s expansionary approach came to an end and, with it, its tendency to use military power as a decisive instrument for guaranteeing security and economic development. These ends were instead pursued through the country’s inclusion as a stable part of the US-led Atlantic community and its involvement in the process of European integration, which were now regarded as the irreplaceable foundations for achieving national reunification. The use of West German military forces – these were re-formed after the failure of the EDC project, even though Germany’s rearmament was subject to strict restrictions and, importantly, set firmly within the framework of NATO – was allowed, under the German Constitution, only in Europe and only for the defence of the Atlantic community (restrictions that would be overcome in the late 1990s). Basically, the model that West Germany tended to pursue was that of a “civil power”, an expression that indicates not only commercial as opposed to military power, but also a state whose foreign policy is aimed primarily at overcoming policies based on power (security based essentially on national military might), i.e. at realising a multilateral monopoly on the use of force similar to the monopoly on the use of force existing within the domestic setting, or put another way, peace in the Kantian sense[8].

The other fundamental aspect of German nationalism that was dramatically overcome in the experience of the Bonn Republic, through its inclusion in the Atlantic community and participation in the process of European integration, was Sonderweg, meaning opposition to Western liberal-democratic values. Here, we refer to what Heinrich August Winkler called the long road West, which ended with the reunification of Germany[9]. West Germany became, as also shown by its federal structure and social market economy system, one of the world’s most advanced liberal-democratic states. Alongside the Westernisation of Germany(Westbindung), as the background to its Europeanisation (the choice to work towards a “European Germany” as opposed to a “German Europe”), there emerged, in Germany, increasingly systematic, firm and widespread condemnation of its authoritarian and, even more, its totalitarian past, together with acknowledgement of its terrible crimes. West Germany, driven by a strong sense of historical guilt, is the country that has done more than any other to face up to its past. Indeed, it progressively founded its identity on absolute condemnation of the crimes committed by nationalism, especially in its final, totalitarian phase. There in fact exists a term that is used to refer to a German sense of identity based on horror over Auschwitz (Auschwitz Identität).

Whereas the German question seemed to be superseded in the experience of the Bonn Republic (the end of which, upon German national reunification, has even been considered, in line with Winkler, the German equivalent of Francis Fukuyama’s idea of the “end of history”), in the period following the events of 1989-1990, which resulted in a geopolitical change as dramatic as that of 1871, the situation changed significantly. The nature of Germany’s more recent evolution, i.e. in the new international framework – we are referring to its evolution in the period between German reunification and 2014 –, indeed led to a progressive return of the German question, particularly in the years of Europe’s economic and financial crisis which began in 2010.

The main aspect to note is that in recent decades there has emerged the, once again, a situation of German semi-hegemony, even though this differs, in various ways, from the semi-hegemony of Germany in the period before 1945; in other words, it is not geopolitical – the European governments have definitively lost their role as great powers –, but rather geoeconomic. Basically, in today’s integrated Europe, Germany has become too large economically to remain on par with its partners, on whom it therefore tends to impose its views on the governance of the European economy and the best way to tackle the crisis. Yet, at the same time, it is too small to act as a complete hegemonic power, with all the costs that this would entail. In other words, a profound imbalance has been created between Germany and its partners, yet Germany refuses to take on the task of boosting their economies, an objective that could be accomplished through the introduction of measures to reduce trade surpluses, allow a moderate increase in inflation, and allow Germany to act as consumer of last resort, as well as measures to create a system of solidarity including forms of debt pooling and the launch of a Marshall Plan in favour of Europe’s indebted economies. On the contrary, this approach is systematically rejected and all that is offered in its place is monotonous insistence on austerity, an approach that, instead, makes it harder for the peripheral countries to return to growth, exacerbates the gap that separates them from Germany, and can only deepen the crisis. The most general and worrying effect of German policy in the context of European integration is the presence of a growing instability across Europe. This is manifested both in a re-emergence of nationalism and in the formation, once again, of coalitions seeking to reduce Germany’s predominance. Obviously, we are no longer talking about diplomatic and military coalitions implying the prospect of conflicts – these are now inconceivable given that the European nation-states have definitively ceased to be autonomous powers –, but we are nevertheless seeing a growing instability that represents a serious threat to European integration.

According to Kundnani’s depiction of the situation, the emergence of a German semi-hegemony within the framework of European integration, which has disturbing implications, goes hand in hand with the resurgence of nationalistic tendencies in Germany. While Germany’s historically established choice of liberal democracy is certainly not in question and there is no suggestion of geopolitical aspirations on Germany’s part, there are, nevertheless, certain rather worrying developments to be noted. To begin with, some key political figures (we may cite, in particular, Egon Bahr, Helmut Schmidt and Gerhard Schröder) and intellectuals are insisting on a return to normality, by which they mean that Germany should feel free to pursue its own national interests and sovereignty without allowing itself to be conditioned, in this endeavour, by the uncomfortable shadow of Auschwitz. Also significant is the fact that German economic and social policy is repeatedly presented as by far the most valid model (Modell Deutschland), which should thus be imitated by the other European partners – a model that Germany, taking advantage of its dominant economic position, is effectively seeking to impose. Basically, what we are seeing is a revival, albeit in new and certainly less coercive forms, of the idea (already seen in the period that ended in 1945) of a German mission. There have also been signs of cracks in Germany’s relations with the rest of the West, which are worth examining here. These include, in particular: its lack of support for the 2003 occupation of (and subsequent regime change in) Iraq; its failure to participate in the intervention in Libya in 2011; and its stance towards Russia over the crisis in Ukraine, which in some ways recalls its policy of swinging between East and West, which was a characteristic of the interwar years and subsequently resurfaced in some aspects of the Ostpolitik pioneered by Egon Bahr. Its harsh criticism of Anglo-Saxon neoliberal theories and practices and, in this framework, of economic growth driven by unbridled debt may also be considered a weakening of the Westbindung.

Having examined the essential aspects of Kundnani’s view of Germany’s evolution between 1945 and the present day, I feel that it contains a number of very interesting points and observations, but it is also necessary to note its limits, which make the author’s effort to clarify the re-emergence of the German question since Germany’s reunification rather unsatisfactory.

First of all there emerges a fault in his treatment of a perceived loosening of Germany’s bond with the West. The clearly unacceptable aspect of his argument is the fact that he mingles a concept of Westernisation understood as constant adherence to liberal-democratic values – values rooted in the Enlightenment (of which Kant was one of the most lucid figures) and whose first practical applications were seen in Western countries (particularly Anglo-Saxon countries and France) – with the idea that a bond with the West equates with systematic alignment with US policies. The United States, supported by its global hegemonic position, has undoubtedly played a hugely valuable role on the world stage, especially in the fight against totalitarianism and in the peace process, the democratisation and integration of Europe, and to some extent the phenomenon of decolonisation. But it must also be said that since the end of the Cold War it has also made choices that were far from constructive; these include, in particular, the international adventurism of the administration of Bush junior and also its policy towards post-Soviet Russia – choices related to a desire to build a world order based more on US hegemony than on a pluripolar system of cooperation. German resistance to these choices stemmed from common sense, not from a distancing from the West. And the same can be said of its criticism of neoliberalism, which can only weaken the liberal-democratic system, unlike the social market economy model which is an indispensable factor in its consolidation.

Having said that, Kundnani’s main shortcoming is his failure to properly set the German question (as this has emerged since Germany’s reunification) in the context of the process of European integration. He is basically right to underline that the relationship between Germany and the rest of Europe is characterised by Germany’s semi-hegemonic position – a position that, resulting in a serious imbalance between it and its partners, means that it tends to impose its own vision on how to overcome the economic crisis and therefore its own economic policy direction. But unless it is tied in with the issue of the incompleteness of European integration, this argument is not sufficiently explanatory.

The point is that European integration – understood as the response to the historical crisis of Europe’s nation-states that, in phase in which they were great powers, was the root cause of Germany’s hegemonic imperialism – constituted the framework that ultimately proved decisive in overcoming the German question that arose in the period 1871-1945. There is no doubt the sharp decline in the power of the nation-states and the subsequent American hegemony that eradicated power relations between the European states, paving the way for their lasting and peaceful cooperation, were hugely important factors too. But European integration, whose initiation was favoured by the Marshall Plan that made the provision of vital aid subject to the overcoming of entrenched national positions, was the really crucial factor as it constituted a means of remedying the problem of the economic insignificance of the nation-states. In short, it allowed the European states to continue their economic development, and thus make up some ground on the United States, through the peaceful construction of a continent-wide economic system rather than through an imperialistic quest to obtain vital space. The advent of economic (and therefore social) progress, no longer impeded by national protectionism, together with the overcoming of the logic of power politics – war between European states had become practically impossible – was the decisive factor in the general democratic progress in Europe, which, in Germany’s case, corresponded to its Westernisation, i.e. its overcoming of entrenched authoritarian tendencies.

On the other hand, the process of European integration, given that it has not yet culminated in full federalisation, is still incomplete and this is the root cause of the imbalance between the strong countries and the weak ones and, in particular, between Germany and its partners. Indeed, this imbalance is a result of the failure to make the transition from an essentially negative form of economic integration (namely the elimination of obstacles to the free movement of goods, persons, services and capital, of which the monetary union is an essential aspect as it eliminates the protectionism related to exchange rate fluctuations) to positive economic integration (that is, strong policies favouring economic, social and territorial cohesion, capable of addressing the imbalances inevitably created when the market is inadequately governed). It was inevitable that pushing ahead with the economic integration of countries having marked growth, productivity and efficiency differentials, yet without introducing any structural solidarity – in Europe, with the so-called structural funds, this concept is now present in a barely embryonic form –, would produce, albeit in a framework of overall growth of the European economy, the serious imbalances that we are so familiar with and that are the source of the fragility of the euro and the spread of nationalist tendencies. If this is clear, it should also be clear that positive economic integration, and therefore organic solidarity between strong and weak countries, demands a supranational institutional system that is efficient (this implies the elimination, without trace, of national rights of veto) and democratically legitimised (the supranational institutions must be based on the consensus of the European citizens gathered simultaneously in the strong and the weak countries)[10].

All this points to a federal choice in the full sense, which is, therefore, the condition that will make it possible to save European integration and, at the same time, the framework in which the issue, fraught with dangers, of the relationship between Germany and its European partners is superseded. After all, the emergence of a real prospect of harmonious development for all the European countries would inevitably lay to rest the concerns over Germany’s economically dominant position. Moreover, upon the transition from a prevalently confederal system (that of the current EU) to a federal one the political problems linked to demographic size would be relativised (it is not Germany’s fault that it has the largest population of all the EU countries), since decisions would, without exception, be taken by a majority, albeit with the application of the weighting systems typical of federal voting mechanisms. It should also be pointed out that creating a fully federal Europe, which would obviously have a common foreign, security and defence policy, would also mean introducing, in addition to economic and social solidarity, organic solidarity between the EU member states on issues of security. This would put an end to opportunistic behaviours whereby some countries are more consumers than producers of security; this is a widespread phenomenon within the EU and also concerns Germany.

If it all comes down to a question of creating a European federation, the real difficulty lies in the national governments’ intrinsic resistance to the idea of transferring sovereignty to a supranational level, despite the fact that they are obliged, by the historical condition of powerlessness in which the nation-states find themselves, to pursue a policy of European integration. In this context, it has to be noted that Germany, among the major European states, is the one most open to an unambiguously federal choice. It certainly tends to resist a system of organic solidarity to be implemented within an intergovernmental setting, i.e. outside the framework of a true federal system founded on democratic decisions taken by majority vote. And this is understandable because in the intergovernmental system the national leaders, whose unanimous agreement is necessary in order to create a European economic policy providing for solidarity of the strongest with the weakest, are accountable to the national and not the European electorate (think of what would happen were economic policies at national level to be decided by a council of presidents of regions deciding unanimously!). Although Germany’s political leaders are, in fact, opposed to a “transfer union”, at the same time they hold the view that any transfer of resources should be be linked to the transfer of competences, meaning the creation of a federal system. If anything, the real issue needing to be resolved is that of the recalcitrant stance of France, Germany’s most important European partner, in the face of the need for a clear federal choice. Indeed, France, despite insisting on solidarity on the economic and social level, and also on that of security, is still dominated by a sort of antifederalist sovereignism. This problem might be seen as the “French question”.

In conclusion, Kundnani, by taking as his key of interpretation the question of Germany’s semi-hegemony (a condition that re-emerged following its national reunification), opens up a line of reasoning on the German question that is far superior to that associated with notions such as “the return of the fourth Reich” or the idea that “the Germans will never change”, whose subtext, never explicitly stated, is the fabricated notion of the German nation’s demonic soul. However, his systematic analysis, which draws on Dehio, is incomplete because he fails to consider Dehio’s fundamental teachings on the way in which a state’s position within the system of states impacts on its internal evolution, on the historical crisis of the European nation-states, and on European integration which, to the extent that is brought to fulfillment, constitutes the framework for overcoming power relations and therefore imbalances of power. For this reason, in Kundnani’s analysis, the German question is not clarified satisfactorily and ultimately not seen to have a solution, with the result that his book is pervaded with a sense of resigned pessimism over both Germany and the future of Europe.

Sergio Pistone

[1] The key works by Dehio to which Kundnani refers are: The precarious balance (1948), New York, Knopf, 1982; Germany and World Politics in the Twentieth Century (1955), London, Chatto-Windus, 1959. He also takes into account an excellent work by an author who can be considered a pupil of Dehio: David P. Calleo, The German Problem Reconsidered. Germany and the World Order 1971 to The Present, Cambridge, Cambridge University Press, 1978.

[2] The reader is referred to Sergio Pistone, Ludwig Dehio, Naples, Guida, 1977.

[3] Cf. Alexander Hamilton, John Jay, James Madison, The Federalist, New York, McLean, 1788.

[4] The reader is referred to: Sergio Pistone, F. Meinecke e la crisi dello Stato nazionale tedesco, Turin, Giappichelli, 1969, Sergio Pistone (editor), Politica di potenza e imperialismo. L’analisi dell’imperialismo alla luce della dottrina della ragion di Stato, Milan, Franco Angeli, 1973.

[5] Cf. John Robert Seeley, The Expansion of England (1883), Cambridge, Cambridge University Press, 2010. See also Luigi V. Majocchi, John Robert Seeley, The Federalist, 31, n. 2 (1989), pp.159-188.

[6] Here it is worth recalling a consideration by Alan I.P. Taylor in The Origins of the Second World War, London, Hamish Hamilton, 1961. He remarked that if a phenomenon of nature had resulted in the formation of a vast sea between the Germans and French, the German character would not have been predominantly militaristic, and that if (and this is a more readily conceivable hypothesis) the Germans had been able to exterminate their neighbours the Slavs, rather as the Anglo-Saxons in North America exterminated the Indians, the Germans would, just like the Americans, subsequently have become promoters of fraternal love and international reconciliation.

[7] Cf. Luigi Einaudi, La guerra e l’unità europea, edited by Giovanni Vigo, Bologna, Il Mulino, 1986. For general remarks on the theory of historical crisis of nation-states developed by the federalist school (with which Dehio converges), see Mario Albertini, Il federalismo, Bologna, Il Mulino, 1993.

[8] The author refers in particular to Hans Maull, Germany and Japan. The New Civilian Powers, Foreign Affairs, Winter 1990-1991.

[9] The key work referred to is that of Heinrich August Winkler, Germany: The Long Road West, 2 volumes, Oxford, Oxford University Press, 2007.

[10] Cf. Sergio Pistone, The Debate in Germany on Democracy and European Unification: a comparison of the positions of Habermas and Streeck, The Federalist, 55, (2013).

Year LVII, 2015, Single Issue, Page 159

FEDERALIST THOUGHT IN FRIEDRICH VON HAYEK

Many free-market conservatives like to make frequent reference to the liberal authors of the past in order to strengthen the basis of their own arguments. One of the authors most often quoted is undoubtedly Friedrich von Hayek, who tends to be cited in order to back up criticism, or rather rejection, of the idea of a federal Europe. Generally speaking, this position is accompanied by criticism of the European civil service, which is accused of being bureaucratic and excessively large. However, those who hold these views often end up depicting despotic scenarios, in which the freedom, democracy and civil rights of European citizens are undermined by a tyrannical Soviet-style government. In so doing, however, these thinkers equate these values with defence of national sovereignty, consistently both with the idea that these principles can be defended only at national level, and with a mistaken interpretation of the Hayekian principle of “methodological individualism” in international relations, which, in the way they interpret it, basically becomes “methodological nationalism”. This error of interpretation derives from the opinion that individuals do not constitute subjects of international law, and thus from the failure to make them the focus of reflection.

Instead, von Hayek focused very much on the individual, and in all his intellectual output he took great care to emphasise this aspect of his thought. In the decades between the two World Wars, and subsequently in the period leading up to the start of the Cold War, he elaborated his own theory of international relations, which was completely at odds with that of the thinkers and liberal politicians of the nineteenth century, who in his view had failed to understand and address the political and economic tensions that had led to the two World Wars. In particular, he believed that their main intellectual shortcomings had been their failure to draw a clear distinction between nationalism and political liberalism, and the fact that they had forgotten the universal dimension of liberal thought.

In working out this stance, von Hayek was led to elaborate a theory of international federalism; however, over the years this theory has been obscured by other, more widely analysed and more extensive, aspects of his philosophical output and, as a result, has tended to be ignored by many free-market conservatives.

Friedrich von Hayek expounded his internationalist theory in his essay “The Economic Conditions of Interstate Federalism”, in chapter XII of his collection of writings Individualism and Economic Order, and in “The Prospects of International Order”, a chapter of his book The Road to Serfdom. Some elements that allow us to view von Hayek as a supporter of European unity can also be found in his book Denationalisation of Money, even though the federalist issue did not emerge clearly in this work; this latter book may actually be regarded as von Hayek’s contribution to the debate on the introduction of a single European currency that unfolded in the 1970s and 1980s.

What distinguished the international order presented by von Hayek was, essentially, the fact that it was based on the objective of limiting state intervention in the economy and preventing distortions of free trade and competition deriving from public action. He thus supported the idea of creating a supranational government, seeing it as a way of limiting the power of the nation-states, and believed that it should be an authority organised according to strict federal principles.
 

“The Economic Conditions of Interstate Federalism”.

This essay was first published in 1939, in the scientific journal New Commonwealth Quarter; it was subsequently included, as the last chapter, in Individualism and Economic Order. It illustrates the need to get rid of economic barriers between states in order to achieve the objective of founding a federation: an “interstate federation that would do away with the impediments as to the movement of men, goods and capital between the states and would render possible the creation of common rules of law, a uniform monetary system, and common control of communications.”[1]

While von Hayek recognised that the main objectives of federalism are internal peace between the federation’s member states and harmonious relations between the states and the federal authority, he nevertheless believed that a simple political union would not be sufficient to ensure an enduring federation, and therefore that an economic union should also be created, together with a common foreign and defence policy.

The federal system, as conceived by von Hayek, helps to prevent national governments from intervening in the economy, and in particular from introducing protectionist policies that distort free trade and competition. Realising that a central government in a multi-ethnic and multinational federation would find it more difficult to launch, plan and support economic policies, due to issues of heterogeneity and lack of internal cohesion, von Hayek considered the creation of a federal system a way of restricting, on a constitutional basis, recourse to the economic policy measures typical of nation-states. This is not to say that heterogeneity does not also exist at national level, for example between different regions, between urban and rural areas or between social classes, producers and economic sectors, but the fact is that national governments, thanks to the “myth of nation”, are ultimately able to generate consensus on such measures and overcome any kind of opposition to public intervention.

The conclusion reached by von Hayek was that, in a federation “certain economic powers, which are now generally wielded by the national states, could be exercised neither by the federation nor by the individual states”[2] and he realised that this opened the way for “less state”.

He was thus led to declare that “the abrogation of national sovereignties and the creation of an effective international order of law is a necessary complement and the logical consummation of the liberal program”,[3] or as Lionel Robbins put it, “There must be neither alliance nor complete unification; neither Staatenbund, nor Einheitsstaat, but Bundesstaat”.[4] Furthermore, in von Hayek’s view the liberals’ support for nationalism, between the end of nineteenth century and the dawn of the First World War, constituted their greatest political and intellectual mistake. In Hayekian thought, liberalism and nationalism are completely incompatible and it is fundamental to prevent them from being combined. Liberalism serves man understood as an individual, whereas nationalism sets out to subordinate the individual to a supposed collective interest.

The Austrian philosopher thus created a new vision of federalism, which has been defined “functional”,[5] in the sense that it is not meant to be an end in itself, and is not defined in positive terms, but is, rather, conceived as a means of curbing the powers and action of nation-states. From this perspective, supranational coercion is essential in order to defend and strengthen the freedom of individuals.
 

Federalist elements in The Road to Serfdom.

The last chapter of The Road to Serfdom is entitled, and focuses on, “The Prospects of International Order”.

This chapter may be regarded a continuation or expansion of “The Economic Conditions of Interstate Federalism”. In it, von Hayek stresses, from the outset, that supranational institutions could provide a solution to the need both to limit the power of the national governments, and to return powers to individual citizens and political units at subnational level. The system he proposes thus integrates a top-down and a bottom-up approach: on the one hand, the national governments are restricted from above, thanks to supranational federalism, and on the other, their action is limited from below, as a result of the return of power and competences to individuals and local communities. These two processes must advance in parallel and both are parts of a federalist and liberal vision of inter- and intra-national relations.

Hayek devotes the first pages of the chapter to the crucial topic of his liberal position, that is to say his criticism of economic interventionism and of the proposal that the federal government should have industrial policy powers. He also strongly attacks the very idea of national solidarity: “[t]here is little hope of international order or lasting peace so long as every country is free to employ whatever measures it thinks desirable in its own immediate interest, however damaging they may be to others.  Many kinds of economic planning are indeed practicable only if the planning authority can effectively shut out all extraneous influences: the result of such planning is inevitably the piling up of restrictions on the movements of men and goods.”[6] Hayek is also harshly critical of the New Deal approach, and of the idea of economic planning at federal level, even if this is implemented through a democratic procedure, because, in his opinion, it would give numerous privileges to minorities at the expense of others and because the federal government of a heterogeneous state would end up having to use a greater degree of coercion than that which is required by more homogeneous or smaller states in order to carry out economic policy programmes. The “international government” should be guaranteed narrow and limited powers, sufficient to achieve its aims, whereas the role of national bureaucracies should be weakened in favour of the underlying units and centres of power, which should once again assume responsibility for their own needs and tasks.

By this, von Hayek does not mean that the international government should be weak and at the mercy of its member or federated states, but rather the opposite, that it must be strong. “While for its task of enforcing the common law the super-national authority must be very powerful, its constitution must at the same time be so designed that it prevents the international as well as the national authorities from becoming tyrannical”. What is needed, therefore, is a very even balance of power.

The federalism described in The Road to Serfdom is federalism conceived in global rather than European terms. According to von Hayek’s analysis, it should succeed in realising the liberal principle at every level, from that of the individual to supranational level. This, as far as he is concerned, is the most genuine definition of federalism: it is not in itself an ideology, but the application of a purely liberal system whose only possible dimension is global and in which, therefore, “reasons of state” and nationalism can no longer be used as excuses.

For this reason, an “international authority which effectively limits the powers of state over the individual will be one of the best safeguards of peace. The international Rule of Law must become a safeguard as much against the tyranny of the state over the individual as against the tyranny of the new super-state over the national communities. Neither an omnipotent super-state, nor a loose association of “free nations”, but a community of nations of free men must be our goal”.
 

Federalist thought in von Hayek after the Second World War.

Friedrich von Hayek remained a committed federalist after the Second World War. He was a longstanding member of Europa Union-Deutschland and remained a supporter of the process of European integration. He regarded the European Community as a suitable ambit for trying out a new form of economic governance. Accordingly, he believed that the European Community should be prevented from evolving into a kind of centralised nation-state, and called for a new form of federation able to prevent national governments from interfering with economy and free trade. On this basis, von Hayek opposed the idea of a single currency, not because he was opposed to the European project, but because he did not accept the idea that the state, whatever form it might take, should have a monopoly on the currency. “Though I strongly sympathise with the desire to complete the economic unification of Western Europe by completely freeing the flow of money between them, I have grave doubts about doing so by creating a new European currency managed by any sort of supra-national authority”.[7] Instead, he proposed that Europe should have a free banking system in which private, local, national and continental/multinational currencies could compete with each other and be freely exchanged. He believed that European unification should advance not through the transfer of monopolies from national to European level, but through their total destruction; von Hayek did not like the idea of a single monetary authority as he thought it “highly unlikely, even in the most favourable circumstances, that it would be administered better than the present national currencies”.[8]

Therefore, we can assume that if von Hayek were alive today, he would not approve of the European Central Bank and the role it is playing, but would very probably approve far less of all the proposals to return to the old national currencies, and to everything that is related to the idea of “monetary sovereignty”.

The fact that von Hayek’s works and studies on federalism dried up after the Second World War seems to suggest that, as the international situation stabilised around the US-Soviet duopoly and the European national governments embraced Jean Monnet’s functionalist approach, he gradually abandoned his federalist ideas. Nevertheless, von Hayek remained a strong supporter of the European integration process, although its slow pace led him to pursue his ideas through a more nation-based approach, according to which economic freedom and the reduction of the functions of government became political objectives to be achieved primarily at national level.

As he gradually became detached from the process of European integration, von Hayek progressively espoused a position more in line with Mises than with Robbins. Nevertheless, von Hayek, like Robbins, remained of the opinion that a form of international federalism could exist only between countries with a capitalist economy and a liberal ideology. These are elements that might be seen to explain the way in which his ideas evolved, from those set out in “The Economic Conditions of Interstate Federalism” and The Road to Serfdom to the rather more sceptical proposals contained in Denationalisation of Money.

Anyway, it can be said that during the post-war period von Hayek set aside the idea of top-down restriction of the actions of states. He never explicitly turned his back on this idea; it was simply that the unfolding of history led him to appreciate more the value of a bottom-up approach, or in any case, one based on the action of political forces at national or local level.

Whether or not one shares his ideas, examining federalism as interpreted in the work of von Hayek is interesting not only as an intellectual exercise, but also as a reminder of the liberal ideas underlying federalist theories, ideas that are also typical of the British federalist school during the inter-war period: restriction of the role of government and a growing acknowledgement of individuals as independent units. Furthermore, it should always be borne in mind that von Hayek’s ultimate objective was the elimination of the kind of economic tensions, present during the period in which he wrote the first two works discussed herein, that were cause of the two World Wars.

If we look at international law today, and consider how it has evolved since the Second World War, both globally and at European level, we can see that the international institutions now effectively play a role similar to the one von Hayek had in mind. The supremacy of the states in the international community has been progressively reduced, and various agreements and new practices of international law have tended, and are tending, to lead to the emergence of the individual as a subject of international law. In the same way, in Europe, the Union (previously the Community) often plays a role that is more “negative” than “positive”. In other words, it is tending to limit member states’ interventions liable to distort the economy, but at the same time lacks a true capacity for economic and industrial policy making. However desirable or undesirable this may be argued to be, the fact is that, voluntarily or involuntarily, Europe has adopted an “Austrian approach” to integration, and this is destined to co-exist for many years with new approaches of the positive type.

The other element that makes it valuable to study federalist thought in von Hayek is his belief in the principle that every political goal of universal significance, be it liberal or socialist or social-Christian, has its own raison d'être only if it is achieved at supranational level.

Francesco Violi

[1] F. von Hayek, Individualism and Economic Order, Chicago, Chicago University Press, 1948, p. 255.

[2] Ibidem, p. 266.

[3] Ibidem, p. 269.

[4] Ibidem, p. 270.

[5] F. Masini, Designing the institutions of international liberalism: some contributions from the interwar period, Constitutional Political Economy, 23. n. 1 (2012), pp. 45-65.

[6] F. von Hayek, The Road to Serfdom, London, Routledge Classics, 1944, 2006 Edition, pp. 225-244.

[7] F. von Hayek, Denationalisation of Money – The Argument Refined, 3^rd Edition, London, The Institute of Economic Affairs, 1990, p. 24.

[8] Ibidem.