A Global Perspective on the European Economic Crisis

Bruno Dallago, Gert Guri, John McGowan

• Publisher: Routledge
• Year: 2018
• Print ISBN: 9780367668419
• eBook ISBN: 9781317281160
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The financial and economic crisis in Europe is not over, and the radically opposing strategies on how to proceed has only increased the complexity of problems in the region, revealing the shortcomings of the EU's architecture. The European Union, perhaps for the first time in its history of more than seventy years, is being perceived as a threat to the financial and monetary stability of the world.

A Global Perspective on the European Economic Crisis explores the connection between internal EU actions and institutions and the external factors that influence the ongoing response to the European crisis. With a unique collection of international and interdisciplinary essays, this book considers the complex macroeconomic and challenging political landscape of Europe, looking at how and why the European Union is untenable in its current state. The chapters outline what should be done to make the common currency area more resilient, and explain why external events are particularly problematic for the EU, ultimately offering suggestions for what Europeans should do in order to avoid harmful internal consequences.

This volume confronts the causes of the crisis' persistence, its economic and political consequences, and the impact of more recent events and policy decisions. It will be of interest to researchers and policy-makers keen to understand the EU relations and the influence of international organizations in the European economic crisis.

Part I

The European project

Moving forward with dry eyes

Steven Rosefielde

Introduction

Klaus Gretschmann contends that the economics and politics of the EU Project are on life support.¹ Will the project survive? The answer is yes, even with Grexit and Brexit (Greek ejection from the Eurozone/British de-accession from the EU) because EU supranationality is legislatively embedded, immensely difficult to dissolve, and has as its mission subject to perpetual rationalization.² However, should Europe cling to its current supranational project? This is the right question.

The answer depends on opportunity costs and context, not on visionary wishful thinking. If as a practical matter, independent European nations can outperform the EU in the emerging post-global partnership epoch, transnationality and welfare-impairing programs should be abandoned, preserving as much of supranationality’s benefits as possible through bi and multilateral agreements. If not, EU supranationality should be preserved. The ideal possibilities of perfect markets, perfect plans, and perfect governance, often the centrepieces of net assessments, are subsidiary because satisficing, power-seeking, unscrupulousness, wilfulness and anti-competitiveness excluded from rationalist models often critically determine real outcomes (Rosefielde and Pfouts 2014). Rational actor theories shed some light, but mostly conceal fundamental factors determining EU behaviour. The substantive issue therefore isn’t what might be if people were comprehensively upright, rational actors, but what actually can be achieved by European nations independently or within the EU framework.

This is an elusive problem because the comparative merit of EU and national arrangements cannot be laboratory tested under controlled conditions. Nonetheless, some insight into the matter can be gleaned by examining contemporary sources of dysfunction and vulnerability. Let us consider three issues among a multitude of possibilities:

1 Is the EU violating its credo by evolving toward hegemonic supranationality?

2 Does Putin’s great power restoration campaign challenge the EU’s identity?

3 Is supranationality contributing to EU growth retardation?

Hegemonic supranationality

The European project is a vision, framework, and strategy for constructing a post-war united Europe.³ The vision is rational, ideal, democratic, and harmonist. It postulates a two-tiered supranational (transnational) governance regime where matters of common concern are amicably managed in Brussels;⁴ and a space reserved for national authorities, often with shared jurisdiction for local and joint activities (Razin and Rosefielde 2012a, 2012b; Rosefielde and Pfouts 2014; Kaiser and Starie 2009; Baldwin and Wyplosz 2012). This division of responsibility doesn’t preclude discord, but facilitates conflict resolution through administrative, judicial, democratic, and consensus building methods. Some of these mechanisms have coercive aspects. Supranational administrations including the European Central Bank (ECB) are supposed to compel without being authoritarian, operating under the rule of law with democratic consent, buttressed by cooperative consensus.

The European Union’s founders conceived EU supranationality as a unique system of democratic governance that enabled members to preserve their autonomy and culture while simultaneously reaping the benefits of the collective management of a common market with shared values, standards, and regulations under the rule of law. Diversity and universality were to flourish where they should in their respective spheres, requiring supranational governors to restrain themselves from circumscribing national and local liberties.

Advocates understood that these principles occasionally might be violated, but claimed that transgressions would be minor because members shared the same vision and were committed to mutual support, without carefully considering the possibility of hegemonic capture. If a single powerful member, or cabal at the supranational level finds ways to coerce and dominate, then the EU can be transformed from a democratic into an authoritarian regime without altering its formal structures. Supranationalism is an organizational form, not a guarantee of harmonious diversity and universality. It can be co-opted in the twinkling of the eye.

The danger can be appreciated by pondering Germany’s hidden agenda in the recent fracas over Grexit: usurping control of Greece’s public finances by coercive means (putatively for Athens’s own good; see Schäuble 2015). German Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble worried that Greece had adopted a too-big-to-fail strategy in the hopes of never having to repay its debts. They feared that this disease might become contagious (De Grauwe and Ji 2013); that other highly indebted states (GIIPS: Greece, Ireland, Italy, Portugal, and Spain) might follow Greece’s bad example, and sought a structural solution that forced Athens to accumulate the budgetary surpluses needed to pay down its obligations (Cline 2014). The appropriate recourse in a democratic supranational union should have been to work out a collective program for debt resolution and abide by it,⁵ even if this compelled Germany to bear some losses.⁶ Merkel and Schäuble, however, decided to bully Athens instead by using Germany’s control over the ECB to deny Greek banks the euros needed to avert bankruptcy.⁷ They demanded that Greece relinquish substantive control over its public finances to assure debt repayment,⁸ or face the consequences,⁹ effectively imposing new hegemonic rules of the game on what was supposed to be a democratic resolution process.

Greece was brought to its knees by “supranational” capital flight, an exotic form of capital flight associated with otherwise independent nations using a common currency.¹⁰ Greeks and foreign depositors began withdrawing unsustainable amounts of euro deposits from private banks because they correctly feared that the ECB might cut off currency supplies in an attempt to jawbone Greek Prime Minister Alexis Tsipras into accepting public finance structural reforms. Capital flight traditionally has been equated with hot money fleeing currencies ripe for devaluation. The Greek case was different.¹¹ Euro devaluation wasn’t an issue. Depositors fled Greek banks because they wanted to retain access to the euro, not because they feared euro devaluation.¹² They recognized that the ECB might curtail euro access and that Greek banks might collapse if a run-for-the-liquid-euro couldn’t be accommodated because banks assets were illiquid.¹³

This vulnerability and the difficulty of quickly re-adopting the drachma were invisible as long as supranational cooperation and consensus were mandatory.¹⁴ Shutting the ECB spigot was unimaginable, Cyprus being viewed as a special case (Economist 2013).¹⁵ Compassion and the mishandling of Germany’s debt after World War I were supposed to have precluded a draconian debt settlement (Mankiw 2015; Keynes 1920), but didn’t (Marks 2013). Now that the genie is out of the bottle, however, it can be assumed that Germany will exert hegemonic power again whenever there is a looming threat of supranational capital flight. The right of EU member nations to autonomously manage their public finances, unless sanctioned by supranational consensus, has been infringed, and may herald a more comprehensive thrust of powerful members to impose their authority on the weak (Tirole 2015).¹⁶

Coping With Russia

The EU’s identity is tied to the claim that its supranationality is superior to the competition of nations and a model for the world. EU leaders have sought to spread their gospel through the Eastern Partnership Project and beyond as a paradigm for virtuous globalization.¹⁷ The EU successfully championed Enlightenment-based universal rights of man, humanism, democracy, competitive markets, liberalization, traditional social democratic entitlements, affirmative action, internal and external egalitarianism, free migration, convergence, and the international rule of law in a world without potent opposition until Russia annexed Crimea. Suddenly, the glue binding EU identity is being seriously challenged by Russian President Vladimir Putin, who seeks to restore Russian great power, thus thwarting EU expansion and rolling back some past gains (Rosefielde 2016). EU leaders and the community more generally therefore can no longer be confident that the future is theirs, or even that member solidarity is secure. Some countries are sympathetic with Putin’s brand of authoritarianism, providing fertile ground for mischief. This means that supranational rules and policies are going to chaff more in the future at the regional, national, and local levels than they did before March 2014,¹⁸ with unpredictable consequences. Supranational authorities may choose to turn a blind eye to the bickering, or follow Germany’s hegemonic gambit against Greece in novel forms. Whatever the specific reverberations, the harmony and solidarity that purportedly epitomized the EU project are unlikely to prevail, calling into question whether the gains from the EU supranationality outweigh transnationality’s costs. EU supranationality isn’t the free ride advocates claimed and seems to be strewn with snares.

European Union growth retardation

European economic growth has fallen persistently since 1975, after postwar catch-up possibilities petered out. The European project didn’t prevent this loss of vitality and there are sound grounds for believing that superfluous supranational regulation contributed to the dyspepsia. Klaus Gretschmann reminds us that the EU supranational structures for a multiplicity of reasons relentlessly expand their regulatory reach without adequate justification.¹⁹ Over-regulation is wasteful by definition and often impedes growth by warping and dis-incentivizing innovation, technological progress, entrepreneurship, and investment. Over-regulation devitalizes national economies; supranational over-regulation compounds the problem by adding an additional level of obstruction and waste.

European Union woes

Hegemony, Putin’s great power restoration campaign, and secular economic stagnation cannot be blamed on supranationality or the EU project’s intent. Germany might well have pressed its claims against Greece as an independent nation state (Eaton and Gersovitz 1981).²⁰ Putin’s gripe is with America and Europe poaching on Russia’s pre-war spheres of influence, and the micro and macroeconomic causes of Europe’s impaired growth are attributable to policies that may have been adopted anyway had members remained independent. Nonetheless, EU supranationality doesn’t seem to have added much value in coping with these challenges, despite its immense expense.

The EU project as originally conceived has secured the peace in Europe and this virtue is likely to endure, but it hasn’t been a ringing economic and political success as the chapters in Part I make plain. Nor is it poised to recover its lost lustre anytime soon because its credo-driven policies are counterproductive. Its supranational institutional structure is vulnerable to capture by special interest groups and hasn’t provided the miraculous benefits promised. It is premature to predict the ultimate outcome, but the time is at hand for policymakers and economic theorists alike to take dry-eyed stock of the EU dream in order to better address tomorrow’s challenges unencumbered by idealist blinders (Obstfeld 2015).²¹

Notes

1 See Chapter 1, this volume: “Both in economic and political terms, the EU is on life support. Its former attractiveness as an economic powerhouse, a political “soft power” and a much appreciated social model seems to be waning in the face of the Eurozone troubles and the political and military challenges at its borders.”

2 See Chapter 6, this volume: “the whole apparatus of fiscal governance and conditional lending … is entrenched in law, treaties, and member state constitutions, and in theory subjects member states to a broad, deep, and automatic mechanism that shapes their fiscal and therefore public policies.”

3 There are currently 28 members of the European Union. Bulgaria, Croatia, Czech Republic, Denmark, Hungary, Poland, Romania, Sweden and the United Kingdom have their own currencies and do not participate in the Eurozone. The Maastricht Treaty established the European Union in its present form in 1993. There are 19 members of the Eurozone: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, and Spain. It is officially called the euro area, and is an economic and monetary union (EMU). Other EU states are obliged to join once they qualify, except the United Kingdom and Denmark. Members cannot secede or be expelled in principle. Monetary policy is the responsibility of the European Central Bank (ECB). Monaco, San Marino, and Vatican City have concluded formal agreements with the EU to use the euro. Andorra did so on July 1, 2013. Kosovo and Montenegro have unilaterally adopted the euro, but are not EU members.

4 The governing bodies of the EU’s supranational governance tier are the European Parliament, Council of the European Union, European Commission, the European Council, European Central Bank, Court of Justice of the European Union, and European Court of Auditors. Supranational bodies have exclusive competence over: (1) the “customs union,” (2) competition policy, (3) Eurozone (EZ) monetary power, (4) a common fisheries policy, (5) a common commercial policy, (6) conclusion of certain international agreements. They also have the right to shared competence in (7) the internal market, (8) social policy for aspects defined in the treaty, (9) agriculture and fisheries, excluding the conservation of marine biological resources, (10) environment, (11) consumer protection, (12) transport, (13) trans-European networks, (14) energy, (15) the area of freedom, security, and justice, (16) common safety concerns in public health aspects defined in the treaty, (17) research, development, technology, and space, (18) development, cooperation, and humanitarian aid, (19) coordination of economic and social policies, (20) common security and defence policies. Additionally, supranational bodies enjoy supporting competence in (21) protection and improvement of human health, (22) industry, (23) culture, (24) tourism, (25) education, youth sport, and vocational training, (26) civil protection (disaster prevention), and (27) administration.

5 Every country has laws that regulate default and bankruptcy in the private sector to protect debtors from rapacious creditors. Germany’s threat to destroy Greece’s banks is tantamount to Germany’s Chancellor dictating intra-EU default and bankruptcy law to Greece instead of developing more flexible solutions. A Euro monetary system with no fiscal union or ability to politically agree on debt mutualization is the main cause behind the Greek debt crisis. In June 2012, the European Council launched the movement of the euro area toward banking union. In December 2012, it adopted a three-step process to achieve this goal (Veron 2013). The first step is the concentration of supervision and regulation in an SSM under the aegis of the ECB. The second step is the adoption of legislation set forth in two proposals of the European Commission: Bank Recovery and Resolution Directive (of June 2012) and the Deposit Guarantee Schemes (DGS) Directive (of July 2010). The third step is the creation of a Single Resolution Mechanism once the BRR and DGS legislation is in place. Véron (2013) and Veron and Wolff (2014) identify the need for a fourth step: to go beyond the Single Resolution Mechanism in the areas of insolvency, r...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of figures
• List of tables
• List of contributors
• Preface
• Introduction: where is Europe headed?
• PART I The European project: moving forward with dry eyes
• PART II The external context and the European Union: between threats and opportunities
• Index