Is it time to repatriate powers from the EU? Such a bold option is a matter of interest not only in the UK, where David Cameron, the prime minister, has proposed a referendum on British membership of the union based on his hope to do just that. More surprisingly, it has also become the most hotly debated issue in the eurozone – albeit for different reasons.

The latest, weighty contribution to this debate comes from Ashoka Mody, a former senior official of the International Monetary Fund now at Bruegel, a think-tank in Brussels. In an essay, “A Schuman compact for the euro area”, he starts from the premise that he wants to preserve the euro. But he finds the most pragmatic way of achieving this goal is to end all pretensions to a fiscal union and a banking union, and to repatriate policy.

The argument is that these are policy areas that require a clear delineation of competences. The present system of shared sovereignty over fiscal policy between member states and European institutions has demonstrably not worked. Genuine political union, with a central fiscal authority and a central authority over banking, is not politically feasible, he says. The best alternative to integration is a return to national responsibility.

This is my summary of Professor Mody’s essay. He explains Europe’s dysfunctional policy response to the crisis in much greater detail. I agree with him on the central part of his analysis: you cannot run a complex monetary union through a system of shared sovereignty. Somebody has to be in charge.

My disagreement with Prof Mody lies in his conclusion, which consists of two related arguments. The first is that a political union is not attainable. The second is that a repatriation of fiscal policies, and banking, could work. He proposes to do this through enhanced “compacts” – contractual agreements in the form of binding treaties that regulate fundamental principles of economic policy co-ordination. They would fall outside the competence of the EU and its institutions.

On banking union specifically, Prof Mody supports a German proposal, which amounts to repatriation. This proposal calls for a loose alliance of national supervisors, based on an agreed set of rules and standards with rigorous benchmarks for best practice. For this to work, Germany itself would have to set an example and “shed its reputation for diluting the new generation of international bank regulatory standards”. As a first step, it should merge its fragmented deposit insurance system.

But how likely is that? Put another way: is the probability of a political union really that much lower than the probability that Germany would do any of the things Prof Mody stipulates? If we take away banking union, Germany is more likely to cement the current system than to change it.

This brings me to the main counter-argument to Prof Mody. A wise friend once remarked that the only thing that is harder to do in Europe than to integrate is to disintegrate. This is why the policy is to muddle through on the basis of existing law and institutions. All radical options – a dissolution of the eurozone, a formal default or repatriation – would require a consensus that is simply not there.

I am not ready to give up on the big idea of a political union. The history of the EU has shown that integration can be irritatingly slow and grinding, but when it occurs it is ultimately forceful. The reason people are discussing banking or fiscal union today is precisely because member states have been facing a collective action problem and because a crisis left them with no alternative.

Loose co-ordination has been tried, and it did not work. One reason is that sovereignty entails the freedom by people and governments to disregard what previous generations inserted into their compacts. Just look at Europe’s stability pact.

For me, the main lesson of the eurozone crisis is that without a minimally sufficient central power, with the right to impose economic policies, a monetary union is ultimately unstable. Reasonable people can disagree on how large and powerful this centre would have to be. They can also disagree on whether the goal is attainable or not in our specific case. But it is not reasonable to assume that going back to the status quo ante is going to solve the problem. It is the place where we came from.

munchau@eurointelligence.com

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