Conclusions

Since its creation, European integration has been a process of gradual centralization. A re-evaluation of the current situation is likely to identify areas where more centralization is desirable, but there may exist other areas where less centralization is needed as well. This would represent a major new approach to integration, not seen as transfers from member states but as improvements to the overall architecture that happen to in the reverse direction. While this is mainly a political process, some conclusions stand to be drawn from the relevant small literature.

The "even closer union" has always been an ambiguous objective. There has never been an agreement on what the end of the road should be, and disagreements about an evolution towards federalism are as deep as ever. Of course, many Europeans dream of going into this direction, for many good reasons. This dream, however, must be widely shared by the citizens. Stealth integration has worked well in the past – the single currency is a shining example – but it is unlikely to work in the future, for several reasons.

First, the low-hanging fruits have been picked. More integration involves deeper sovereignty transfers.

Second, citizens are more aware now of the trade-offs of further integration. The failed attempt at adopting a Constitution has revealed the end of the "pioneer period" when European integration was automatically seen as an end by itself.

Third, collective policy mistakes have dented the perception that European integration is raising welfare. The impact of the mismanagement of the sovereign debt crisis, as described in Wyplosz, has been dramatic. In both the affected countries and the other ones, the memory of this historical event will linger for generations, as all traumatic events have always done.

Finally, in every country, the elites are seen with increasing suspicion. European integration has always been pursued by the elites. This association is now backfiring in almost every member country, and it affects citizens' consent to transfers of sovereignty to the EU.

This means that the objective of "an ever closer union" must now be replaced by the objective of "a more perfect union". The "bicycle theory of integration" is not based on any established theory; rather, as stated by Moravcsik and Nicolaidis, it is a rhetorical statement that is "both misleading and unproductive". The challenge is to make the EU work better. After half a century of construction, the EU is a spectacular success but it has its defects, as any institution. It is more cleaning-up time than further integration time.

The current state of public spending centralization is the result of history, partly well thought through, partly the outcome of particular events long gone such as the transformation of Europe from largely rural economy to a modern economy where farmers represent a small fraction of the labor force or the wave of enlargements in the 1990s. Dedicating much of the EU budget to the CAP and the Cohesion policy made sense at some point. The logic has now disappeared but powerful interest groups have emerged to preserve these programs. On the other hand, a centralized research budget rips the benefits from significant returns to scale with no local preferences or information asymmetries. Much progress has been achieved in this area, but interest groups prevent a full transfer, often in the name of industrial policies that conflict with the Single Market.

With a budget very limited in size, most of the EU power derives from transfers of sovereignty on a number of explicitly designated areas as well as from creeping centralization in the name of fiscal discipline in the Eurozone. The Single Market is arguably the most spectacular success of European integration. It fully justifies sovereignty transfers in a number of areas, including the four freedoms and competition policy. Other areas of full or shared competences are less obvious. Public opinion is regularly alerted to European-level decisions that provoke outrage because they are perceived as needless entrenchments on national sovereignty. The justification of outrage is that ordinary citizens do not see any way to challenge European-level decisions while similar national-level decisions can be quickly reversed as the result of strong rejection. While most such decisions are anecdotal, the political impact should not be underestimated. A thorough overhaul is called for.

The Single Currency is a more ambiguous success. The case for centralization is weaker. Importantly, the crisis has shown that a common currency requires more than a shared currency and one central bank. Bank regulation and fiscal discipline were either ignored or poorly thought through in the Maastricht Treaty. The Banking Union fills a major oversight and will have to be completed. Fiscal discipline is thoroughly needed, but centralization is not necessary. A revision of the SGP is called for. The main objective must be to decentralize both the design of fiscal rules and their implementation, while restoring the no-bailout clause. Ignoring this clause has opened the way to further centralization, which is a major source of conflict and an approach that will ultimately fail. In addition, adding structural reforms to the SGP package mixes up fiscal discipline and unrelated but important issues, while laying the ground for further conflicts.

It is of course impossible to deal with the whole architecture of the EU in one paper. The thread line here is the usefulness of fiscal federalism principles. These principles involve trade-offs so they are flexible and call for judgment. They would be a good place to start from.