The
global financial crisis began in mid-2007.
It was a chain of events that ultimately led to the eurozone sovereign
debt crises (Kunstein and Wessels 2012, p.5).
Since October 2009 when problems surfaced in Greece, each of the
periphery eurozone countries (Portugal, Ireland, Italy, Greece and Spain), has
been the target of market pressures as a result of its fiscal difficulties
(Cohen 2012, p.4). The crisis has
threatened the stability of the eurozone and called into question the single
European currency (Kunstein and Wessels 2012, p.5).
What
is the future of the European Union (EU)? Possibly ‘more Europe’: a tighter
political and economic union, by supplementing Economic and Monetary Union
(EMU) with fiscal union. Or perhaps ‘less Europe’: a looser confederation, with
a smaller eurozone comprising a “coalition of the willing”, with or without
fiscal union (Razin and Rosefielde 2012, p.11).
At this present time, “[t]he gradual extension of EMU to most EU members
remains as a paramount political goal” (de Schoutheete and Micossi 2013, p.11). In December 2012 the European Council stated
that deeper integration would apply first to eurozone countries (de Schoutheete
and Micossi 2012, p.2). There is deep
political commitment to the Euro (Cohen 2012, p.1) and preventing the collapse
of the single currency is the EU leadership’s priority (Baimbridge et al. 2012,
p.105).
To
answer the question this essay looks first at the systemic problems of EMU. Then it considers the responses to the crisis
and reforms in its wake to understand the most likely future outcome. There are innumerable future scenarios for
the EU and predicting it is laden with uncertainty. However, this essay concludes that the more
compelling of these narratives is one of ‘more Europe’, with the continuation
of piecemeal current reforms and institution building, with varying groups of
participating Member States cooperating more closely in different policy areas.
It
is widely acknowledged that the eurozone’s architecture is defective (Razin and
Rosefielde 2012, p.12) and the financial crisis has revealed the cracks. To begin with, the EU is far from an optimum
currency area. The economies of Member
States vary greatly in their ability to compete in a single currency area. Whilst the Maastricht Treaty included ‘convergence
criteria’ the rules were applied “with generous flexibility” for strictly
political reasons - thus it opened up the single currency area to greater risk
of internal balance-of-payments problems.
The policy response for managing this risk was the Stability and Growth
Pact (SGP), created to “constrain member states’ budgetary policy to prudence” (deSchoutheete
and Micossi 2013, p.6).
The
single European currency was the next stage of an “integrationist European project,
but without the necessary political coordination to underpin it” (Baimbridge et
al. 2012, p.96). The Maastricht Treaty
implied a clear discrepancy between “the intentionally rather modest political
integration and monetary integration”.
There were no steps on such a scale as monetary union planned for the government
system (Issing 1996, p.15). Rather, it
was intended that EMU would generate both “economic convergence and political
unity” (Baimbridge et al, 2012, p.105), in other words that monetary union
should take the lead as a pace-setter for political union (Issing 1996, p.16).
For
Cohen (2012, p.6) the root of the problem is Europe’s lack of a genuine
transfer union – impossible without a commitment to a federal Europe with a
large central budget. As Razin and
Rosefielde (2012, p.16) argue, if there had been political consensus for fiscal
union then the EU project may well have proceeded in reverse order, as with the
US precedent (fiscal union 1790 and monetary union 1913) where the transfer
system underpins the common currency.
Using a single currency as a pace-setter turns this idea on its head:
rather common money creates a transfer requirement, and in turn is expected to
establish political structures (Issing 1996, p.19).
Baimbridge
et al. (2012, p.97) argue that the eurozone’s response to the crisis and
reforms have been piecemeal; ad-hoc loans to Greece and Ireland and the
creation of a bailout fund “deal with the symptoms rather than the fundamental
causes of the euro’s structural weaknesses”.
Reforms have happened both at EU-level and, outside of the treaty
framework, as projects of “differentiated integration” with only some Member
States participating. At the EU-level the
European Financial Stabilisation Mechanism ‘firewall’ has been established – enabling
the Commission to borrow against the EU budget on behalf of struggling Member
States, and the ‘Six-Pack’ – a revised SGP aimed at correcting macro-economic
imbalances (Kunstein and Wessels 2012, p.6).
Outside the EU treaty framework, intergovernmental agreements with
varying membership have been established.
This round of institution building established a formal safety net of €750 billion for troubled debtor countries in the temporary
European Financial Stability Facility (EFSF) and its permanent successor the
European Stability Mechanism (ESM) based on an intergovernmental treaty between
all 17 eurozone members (Cohen 2012, p.6).
However, to prevent ‘moral hazard’, Member States in receipt of support
must make far-reaching economic reforms.
This conditionality is underpinned by an enforcement mechanism - the
Treaty of Stability Coordination and Governance (TSCG) (containing the ‘fiscal
compact’) (Kunstein and Wessels 2012, p.9).
In March 2012, 25 of the 27 EU members (excluding the UK and the Czech
Republic) signed up to the fiscal compact, which requires “formal
balanced-budged rules to be written into national law or constitutions” (Cohen
2012, p.6).
The
aforementioned lack of a European transfer union means the response to the
crisis has necessarily been on terms set largely by the creditors (i.e.
Germany), whose deflationary strategy in the short-term has been austerity as
the price for a bailout; and, in the long-term, fiscal discipline through far-reaching
economic reforms, such as the fiscal compact.
“Adjustments to shocks therefore come down to painful internal price and
wage deflation haphazardly ameliorated by the kindness of strangers and
bottom-fishing speculators” (Razin and Rosenfielde 2012, p.15). Within the eurozone deflation “has become the
sole adjustment mechanism to the detriment of its citizens”, as members cannot
set interest rates or exchange rates to stabilise their economies (Baimbridge
et al. 2012, p.96-98). Yet, without the adjustment
of the exchange rate reducing public spending comes with at least an equivalent
reduction in output. However, at present,
there isn’t a glimmer of hope that long-term resource redistribution will be a
reality within the Eurozone; Germany’s manoeuvring in its Constitutional Court
to limit its liability in this regard is an indication of the scale of such a
task (Baimbridge et al 2013, p.104).
In
conclusion, there is no doubt that a different EU is emerging from the
crisis. These responses and reforms have
pushed the EU and the eurozone closer towards a tighter economic and political
union. With the Six-Pack comes an
“intensification of the oversight of national fiscal policies”, and the EFSF
and ESM provide support in case of liquidity problems (Kunstein and Wessels
2012, p.10). Furthermore, non-members
are “mired in ambiguity”: queasy about enhanced integration, but afraid of
loosing contact with the inner circle.
It is significant that 25 Member States are participating in the fiscal
compact (de Schoutheete and Micossi 2012, p.3).
Whilst the political will to defend the eurozone persists, at the same
time manoeuvring towards a genuine eurozone transfer union seems highly
unlikely. Indeed, “[i]nertia favours
doing nothing fundamental” (Razin and Rosefielde 2012, p.16).
Kunstein
and Wessels (2012, p.12) expect an EU that increasingly relies on
intergovernmental coordination outside the treaty framework: a likely future of
‘more Europe’. Specifically a
‘multi-speed’ Europe, in as much as there will be various groups of Member
States cooperating more closely in different areas, either inside, or where
necessary, outside the EU treaties (Kunstein and Wessels 2012). Yet, ‘more Europe’ does not mean that
“Europe’s half-built house” will ever be completed (Cohen 2012, p.8). “Europe’s leaders will not let it fail.
Europe’s politics will not let it succeed.
The euro, defective but defended, will simply endure”.
References
Baimbridge, M.,
Burkitt, B., and Whyman, P., 2012. The Eurozone as a Flawed Currency Area. The
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Cohen, B., 2012.
The future of the Euro: Let’s get real. Review
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de Schoutheete,
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of decision-making and political accountability. Centre for European Policy Studies Essay, 4.
Issing, O., 1996.
Europe: Political Union Through Common
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Kawalec, S., and
Pytlarczyk, E., 2013. Controlled Dismantlement of the Eurozone: A Strategy to
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