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Monday, January 28, 2013

Carbon Allowances: Merkel's E.U.?

Fundamentally, a union of states is in trouble when any federal action is predicated on consent from the governor of the largest state. The U.S. Senate was proposed precisely to give the smaller states a means to thwart the domination of a few large ones in legislating at the federal level. The European Council’s qualified majority vote mechanism and the unanimity requirement on “big ticket items” such as taxation permit a supermajority of states to reject the proposal of a few large ones. The U.S. House of Representatives and the European Parliament offer no such avenue for small states because those chambers are based solely on population. California and New York, and France and Germany, can through their peoples’ representatives have great clout in those bodies. Therefore, bicameral (i.e., two chambers) legislatures are distinctly advantageous at the federal level of a union of states.
I suspect that the lesson has been lost on many Americans, who have not bothered to study their own history. As for Europeans, whom I as an American so much admire, I suspect that the problem is a mix of denial as to the E.U. being a federal system rather than a mere alliance or common market. Europeans thus leave themselves vulnerable to informal political dynamics, such as informal pressure from a large state on smaller ones, exacerbating the stress points in federalism. After all, no political design is perfect. Lest federalism be presumed to be tantamount to a central government dominating those of the states, the divisions of competencies can be made, on parchment at least, such that the state governments retain most (but not all!) of the governmental sovereignty in the federal system.  However, as the case of the U.S. in the twentieth century demonstrates, de facto political consolidation is a danger even if the parchment is said to guard against it. Even so, this danger does not justify the denial that leaves Europe so vulnerable as it steers its Union ahead almost purblind among icebergs.
 Denial is not limited to political systems. Particularly in the U.S., awareness of a warming planet has had to contend with the salience of corporate America in shaping the public discourse. Indeed, the naïve assumption that what is good for General Motors is good for America leaves the public good susceptible as citizens unwittingly defend the interests of large corporations even against the interests of the individuals themselves and the common long-term good of America and even the planet.
In Europe, global warming has had more currency. Even so, corporations have compromised the European approach. Additionally, Angela Merkel’s effective veto in reforming the strategy enervates the path ahead as well as sets a bad precedent for the European Union itself as a union of states.
                            Jose Barosso, President of the European Commission, conferring with Angela Merkel, chancellor of the state of Germany. Was she giving Barosso his marching orders? Vielleicht, ich glaube.  
The E.U.’s carbon market was at least by 2013 the world’s largest. Yet the price of a carbon allowance had fallen perilously low due a weak economy and a related glut of allowances. Even though part of the fault lies in not having tied the total number of allowances in the market to the GDP of the E.U. in a given year, companies were sitting on so many extra allowances because most of them were given for free. This points to a conflict of interest in the regulated having too much influence on the regulators and thus the regulatory system itself. One might thus predict that the E.U. would have great difficulty deciding to remove allowances from the market in order to raise the market price. Such a reform would not be in the interests of the regulated.
The rejection by the European Parliament’s industry committee of a stopgap plan to prop up the market by temporarily removing 900 million allowances in early 2013 was thus hardly a surprise. Less transparent was the impact of the division within the German government as an impediment to even a stopgap measure. Peter Altmaier, the environment minister, supported an E.U.-led intervention, but Philipp Rösler, the state’s economics minister, “flatly ruled it out,” according to the Financial Times. With Angela Merkel standing on the sidelines, there was insufficient political impetus in the European Parliament to push through the measure.
The Financial Times observed at the time that “Germany’s seeming paralysis over even a short-term remedy has raised doubts about the EU’s ability to agree on the more fundamental changes that many believe are necessary to correct an oversupply of allowances.” That is, the de facto requirement of the leader of the largest state renders the E.U. too weak to take on even fundamental reforms that are necessary to the continued viability of the Union. “Angela Merkel needs to step in,” says Bas Eickhout, a representative in the European Parliament from the Netherlands. “She holds the key.” It is no wonder that David Cameron had just announced a future referendum in Britain on whether that state should secede from the Union.
According to the Financial Times, moreover, through the three years of a debt crisis that threatened the very existence of the euro, one thing became evident: “no meaningful action—be it a multibillion-euro bailout or new fiscal rules—can go forward without the consent of Angela Merkel, Germany’s chancellor.” This ought to be a wake-up call even to those who deny the basic federal infrastructure of the Union. A union of states needing the consent of its largest state is not viable. Indeed, the de facto consent violates a basic sense of fairness. The continuance of this violation therefore subtly undermines the very legitimacy of the Union—hence making it vulnerable to external shocks such as a financial crisis.
It could not have been missed by the business lobby that Angela Merkel’s consent was necessary for the market-based system of carbon-allowances to be fixed. The easiest strategy of the business sector would be to make a deal with her, rather than having to lobby in other state capitals or in Brussels. At the time, Merkel was up for re-election so there was fodder for a deal friendly to the regulated. Lest it be concluded that the problem was merely excessive influence of the regulated, a basic flaw in the E.U. itself can also be blamed.
The de jure checks against the domination of a large state were insufficient to thwart de facto vetoes from Germany. It could be that informal power relations, such as a club mentality, play too great a role in Europe. Even though Slovakia could veto increasing the bailout funds, for instance, it did not take much for the real players in Western Europe to put the eastern state in its place. Yet if Germany or France wants to veto a proposal, the obstruction stands. Such a double-standard renders the E.U. vulnerable in the long-term. At the very least, peripheral state governments could become indifferent to the club, for nobody relishes being a second-class citizen.


Joshua Chaffin and Pilita Clark, “EU’s Carbon Trading Hopes Rest on Germany,” The Financial Times, January 28, 2013.