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The Eurogroup memorandum and state sovereignty

By Costas Apostolides

In a discussion on whether Cyprus should consider leaving the eurozone (see video on www.cyprus-mail.com) I raised the significance of maintaining state sovereignty, which is severely restricted by the troika/Eurogroup memorandum. The response was that sovereignty had been given up when Cyprus joined the European Union in 2004, an argument which to my surprise was accepted by many observers, but which is not based on fact. Joining the EU does not of itself mean that everything goes on auto-pilot from Brussels.

It is true that in any relationship, whether personal or institutional or regarding states, the freedom of deciding what you can do is limited by the benefits of maintaining the relationship. If the benefits are fewer than the disadvantages then that relationship must be reconsidered and either the problems resolved and the margins of individual action reset, or the relationship is broken up and each goes their own separate way. The same goes for international relations, but there the relationship is determined by treaties, consequently there is (as in marriage) a procedure for exiting a relationship.

A unitary state, such as Australia has much greater freedom to operate on the basis of its own policy judgements, though it is constrained by its desired relationships with other countries, notably its defence agreements with the United States (it has supported the USA in most of its conflicts including Vietnam and Iraq) and by its perceived threats. A federal state has certain limitations in its structure because many functions are held at the provincial or federated state level, and not at the centre. Its distinguishing feature is that for the provinces there is no right of exit from the union, as was most vividly demonstrated by the American Civil War in the 19th century. In such cases sovereignty lies with the federal government, even though it is restricted as the extent to which it can interfere in the areas that are the exclusive function of the provinces.

The European Union has some of the characteristics of a federation of states, but is not a federal entity. Sovereignty still lies with the states, and even European Union legislation differs owing to the principle of subsidiarity, whereby each member state applies European Union directives and other laws in its own way, though they must meet the requirements of EU law. This means that the implementation of laws differs from one member state to another, though the essence is maintained. State sovereignty is maintained also by the fact that the right of veto exists for member states on a limited number of crucial issues that have to be decided, including enlargement of the EU itself. Once, however, a law is agreed in the EU each state must apply it, and if it fails to do so penalties may be imposed by the European Court of Justice.

The European Union is also not a confederation, which generally implies more functions and freedom of movement of the provinces than in a federal state. Nevertheless, the distinguishing feature is that the various component states may leave the confederation. Therefore, if a state is unhappy, it can walk out. Unfortunately there is no provision for an orderly exit from the eurozone or the EU.

The European Union is therefore neither a federation of states nor a confederation, and is certainly not a unitary state. It is technically something weaker, but it instils discipline on its members by the laws, regulations and policies agreed. In many cases these are much more detailed than in federal states, or even in some cases counties of unitary states. So membership of the EU does severely limit the ability of states to act freely, though overall the degree of such limitations is moderated by the subsidiarity principle and the areas where the EU has no policy or mandate.

The European Union is considered a supranational union of member states, the distinction being that the member states delegate functions to an authority (actually a number of authorities, the Council, Euro parliament, Court of Justice, Commission etc). This term was used in the Treaty of Paris in 1951 and for the Coal and Steel Community, but has not been used in subsequent EU treaties. One could argue that the strengthening of the EU that has taken place since 1951 implies that the term supranational union is outdated, and that something stronger is required, bearing in mind that the EU is not yet a federation or even a confederation.

Within the EU there is also a difference in the extent to which the powers of the member states are constrained, between those that are in the eurozone and those that maintain their currencies. This demonstrates one area where there is a great difference in the power of states to develop their own policies. There are constraints here also, but in reality this is an area where the states decide.

Having your own currency means that a state can manipulate its currency within limits and print however many notes it judges are required, though it should still relate to constraints in the Maastricht criteria in terms of low inflation, public sector debt and government budget deficits. Nevertheless, even with these constraints states have tremendous leeway in determining their economic policies when they have their own currency. This is particularly the case when the currency, as in the UK, is an international reserve currency. The UK has one of the highest public deficits in Europe, and yet the pounds status as a reserve currency protects it from downgrades by the credit rating agencies.

Within this overall framework even eurozone members, the most constrained group of member states, have considerable ability to determine their own economic policies. This is demonstrated by the quite different policies of states in the eurozone, even among those not considered to be in need of support. The problem is that the memorandum virtually takes away policy from the state, and forces the member states to adopt a policy of austerity under strict supervision, ignoring the fact that IMF and other research has demonstrated these austerity policies have failed to stimulate growth. Without growth the youth of Cyprus and the other troubled states will be lost for years to come (beyond 2020), and without a policy of growth (which is excluded in the memorandum) we are presiding over a social disaster. It is this constraint imposed by the troika/Eurogroup memorandum that poses the greatest threat to Cyprus, though the more immediate threat arises from the haircut of deposits.

If Cyprus is to get out of the current difficult situation it must develop a policy for growth over and above what is being done to develop hydrocarbons, because that also will not create revenues until 2020. To do that Cyprus needs to proceed to make targeted budget cuts to improve efficiency and reduce benefits to those who do not need them, in order for the state to obtain the funds to apply a growth policy. To do that Cyprus must reclaim its national sovereignty, and examine all the alternatives to the memorandum in order to be able to implement plans B (euroexit) or Plan C (debt restructuring) if the need arises because we failed to implement the memorandum.

Costas Apostolides is Chairman of EMS Economic Management Ltd ([email protected])

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