Future of EU

The Eurozone Crisis and Its Repercussions for the Future of the EU

Some repeatedly maintain that the European Union developed as a response to crises, such as the current one. In contrast, some (such as Cohn-Bendit and Verhofstadt) think that the current small steps method of integration has reached its limits and that the choice of the only appropriate political regime can no longer be protracted: European federalism, as the Union’s political process would gradually fall prey to oblivion.

Politically, options today are not as clear cut. What do we see? Up to now, the Eurozone crisis has had a double effect on the EU. On the one hand, it weakened the Union. On the other, governments’ decisions in response to the crisis reinforced the Union’s role (Council and Commission) in framing national economic policy of Member States. In other words, the process of political integration continues but it is fragile; it appears as imposed upon policymakers by investors’ real or anticipated constraints rather than as outcome of a shared vision of the European interest. What comes next is difficult to predict as striking differences in opinion regarding the desired level of political integration within the Union persist.

For cultural and political forces in favour of European integration, obstacles not only stem from the absence of any agreement regarding legal and institutional foresights, but area equally beholden to governments’ political solutions to exit the crisis. The emphasis placed on reducing public debt levels in all countries on the one hand and on the other hand on structural reforms aimed at labour market and salary regulations have led to continued economic recession and increased unemployment and inequalities. The outcome is social regression for a substantial portion of Europeans. As this choice is made in the name of Europe, those who typically plead in favour of “more Europe” are faced with a daunting task. Given current circumstances, deepened integration will be possible only when a new social contract (both social and environmental) is placed at the heart of public debate and public opinion convinced that the Union has a positive and necessary role to play in its implementation. Meanwhile we see the opposite situation unfolding in front of our eyes.

The Eurozone crisis uncovers the Union’s political fragility…

The Eurozone crisis and the Greek situation in particular, but also a possible referendum in the UK in 2015 on Union membership, all remind us that European integration is not irreversible.

Before the beginning of the financial crisis, the very idea that a country could opt out of the euro was unimaginable. The Treaty of Lisbon does allow for Member Countries to leave the Union, but no one seriously considered this scenario. To the contrary, European enlargement to all former Yugoslavian countries remains a strongly advocated objective on the Union’s agenda.

The Eurozone crisis and its management at the national level has lain bare the extent of the Union’s political fragility. This fragility is not only institutional, it also stems from the diversity of Member States’ respective situations and the lack of convergence in terms of rights and more emphatically in political, cultural and social practices. The loss of trust among states and, especially, strong criticisms from multiple citizen groups have further contributed to this fragility. These four contributing factors are described as follows:

  • The institutional architecture defined in the Treaty is unbalanced because European powers are insufficient. A number of economists argue that these powers are needed to manage the single currency, without them the Union lacks the characteristics of an optimal monetary zone. After the first ten calm years (1999-2009), the first asymmetric shock of significance in the aftermath of the financial crisis confirmed the 1992 Treaty of Maastricht’s ineffectiveness. The treaty has not once been amended since, not even during the process of drafting the European Constitutional project in 2002-2003.
  •  The behavioural change of private lenders in differentiated treatment of each Member State has highlighted economic and social heterogeneity within the eurozone. The most indebted governments have found themselves on the defensive and the Union?s institutional inability to assist members (specifically, the absence of a lender of “last resort”) has further weakened the position of governments with respect to their lenders.
  •  With regard to cultural and political relations among national governments within the Union’s Council, loss of trust and cultural stereotyping among nations has re-emerged, alarmingly. Loan conditionality negotiations are argued on the basis of moral imperatives rather than sound guarantee of economic sustainability. Germany’s dominance in the decision process suggests a new de facto hierarchy among States rendering the Union’s legal principal of State equality purely rhetorical. Outside of the eurozone crisis, the political situation in Hungary and Romania are also illustrations of weakness of the Union?s agreement regarding values and fundamental rights and impacts negatively on relations among governments within the Council.
  • In terms of public opinion, electoral results and polls have indicated growing discontent with “Europe” over the past several years. These results vary from country to country and are not necessarily as negative as sometimes portrayed in the press. The European project continues to be perceived as necessary but the crisis and the Union?s remedial measures have exacerbated the progression of flaunted euroscepticism (1).

The Council and the Commission: determination of national socio-economic policies…

Under pressure from financial actors and in spite of its political fragility, the European Council made qualitative changes to the rules of “coordination” on economic policy. The eurozone crisis is interpreted according to two, not necessarily mutually exclusive, perspectives. In the first scenario, institutional weaknesses of the monetary zone is the key culprit and in the second scenario emphasis shifts to national budgets and public debt policies (2). Both dimensions have thus far been taken under consideration.

Europe’s macroeconomic policy has been transformed on two major fronts (3). A European Stability Mechanism (ESM) will come into effect in 2013 after ratification by national parliaments and the national budgets coordination mechanisms will be strengthened, which includes a review prior to adoption and sanctioning, strict compliance and quasi automatic penalty enforcement for failure to comply. Both measures effectively reduce the degree of Member States’ freedom in drafting and implementation of their respective national budgetary policies with the view of rendering the 1992 Treaty of Maastricht objectives effective.

The Van Rompuy report presented to the European Council in June 2012 goes far beyond tightening budgetary coordination. Indeed, it opens doors to greater integration, especially for the financial and banking sectors (4). The document, however, remains very general and should have specifics spelled out by the end of 2012. The questions sent in September indicate that additional transfers of power toward EU institutions will be required leaving the legitimacy of Europe’s decision-making process on questionable grounds (5).

…An opportunity to push neoliberal reforms that exacerbate inequalities

After the interlude of two years (2009-2010) which saw the deficits soar to stabilise the banking system and mitigate the effects of the financial crisis on growth, governments across the EU began cutting deficits, thus preventing the continuation of European macroeconomic contra-cyclical policies (6,7).

In addition, structural market reforms have re-emerged as a priority. Structural reform is not a new priority. It has been subject to a number of strategic proposals in the course of the last 30 years, such as “objective 92” in 1985, the “Lisbon Strategy” in 2000 and “Europe 2020” in 2010. As the 2003 Sapir Report and the 2010 Monti Report accurately remind readers, internal market integration is the EU’s principal intervention mechanism by which it ensures the Union’s competitiveness and for which community institutions are availed appropriate powers (exclusive or shared), decision-making instruments and control.

Governments(8), the Commission, and the ECB, have currently expressed the desire to push market reform forward despite prevailing economic recessions, especially in the labour market. The claim is that such reforms have been too long in waiting and are inevitable if Europe is to recover international competitiveness. That being said, internally, the EU remains an uncooperative economic environment. Members struggle for individual survival dampening internal demand while trying to increase export levels to the USA and emerging economies as a means to overcome growth stagnation at the national level. This macroeconomic strategy is contradicted by current results as the Commission’s last forecast in autumn confirms Europe’s economic stagnation and growing rate of unemployment.

References

(1) In addition, to the Eurobarometer polls, there is also Daniel Debomy’s Les européens croient-ils encore en l’UE?, Notre Europe, June 2012, www.notre-europe.eu
(2) A very succinct and interesting summary can be found in Jose Ignacio Torreblanca’s note, Saving the Euro: the Spanish perspective, ECFR, 2012, www.ecfr.eu
(3) The European Council and Parliament adopted six pieces of legislation in November 2011 (JO L 306, 23.11.2011). The Treaty on budgetary coordination, currently in the process of parliamentary ratification, confirms this mechanism.
(4) Toward a genuine economic and monetary union, June 25, 2012
(5) The Van Rompuy document mentions this but without specifying anything more than having a Parliamentary consultation at the national level on the existing protocol within the Treaty of Lisbon.
(6) See for example a good macroeconomic summary by Simon Tilford, Economic recovery requires a better deal for labour, Centre for European reform, London, November, 2012
(7) IMK, Fiscal Pact deepens euro area crisis, Report 71, March, 2012
(8) See, for instance, the common letter from 12 prime ministers addressed to the presidents of the European Council and of the Commission: A plan for growth in Europe, February 20, 2012

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