European Integration in Times of Crisis

Theoretical perspectives

Demosthenes Ioannou, Patrick Leblond, Arne Niemann

• Publisher: Routledge
• Year: 2017
• Print ISBN:
  9781138099135
• eBook ISBN:
  9781317388517
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

Few events over the past few decades have given rise to an amount of debate and speculation concerning the state of the European Union (EU) and the future of European integration as the economic and financial crisis that began in 2007. In spite of substantial media, policy-making and academic attention, the fundamental questions of why and how the euro area (EA) has remained not only intact but also expanded and integrated further during the crisis require deeper theoretical investigation. One needs to understand not only the economics but also the politics and institutions of the crisis. A lack of such an understanding is the reason why a number of observers, at least initially, had a hard time making sense of policy-makers' decisions (and pace thereof), including why the EA did not implode as some predicted. Economic theories provide a certain perspective for why the crisis occurred and what economic policies were and are needed to resolve it; however, they fail to capture the deeper roots and management of the crisis.

In order to improve our understanding of a discussion that has oscillated between fears of EA disintegration on the one hand and the concrete advancement of integration during the crisis on the other, this special collection brings together leading scholars of European integration who apply key theoretical approaches – from liberal intergovernmentalism and neofunctionalism to other prominent theoretical accounts that have been applied to European integration such as historical institutionalism, critical political economy, normative theory, and a public opinion approach – to the economic and financial crisis. The contributions seek to analyse, understand and/or explain the events that occurred and the (re)actions to them in order to draw conclusions concerning the applicability and usefulness of their respective theoretical perspectives.

This book was published as a special issue of the Journal of European Public Policy.

European integration and the crisis: practice and theory

Demosthenes Ioannou, Patrick Leblond and Arne Niemann

ABSTRACT This is the introduction to a special collection of contributions that analyse the financial and economic crisis through various theoretical lenses. Accordingly, it does four things. First, it describes the EU’s institutional response to the crisis in order to provide a reference point for the contributions. Second, it summarizes the contributions. Third, it compares them in order to develop a theoretical dialogue. Finally, it answers the fundamental question at the heart of the crisis and this special collection: why did Economic and Monetary Union become deeper and more integrated when many feared for its survival?

INTRODUCTION

Few events over the past few decades have given rise to an amount of debate and speculation concerning the state of the European Union (EU) and the future of European integration as the financial and economic crisis that began in 2007. In spite of substantial media, policy-making and academic attention, the fundamental questions of why and how the euro area (EA) has remained not only intact but also expanded and integrated further during the crisis require deeper theoretical investigation. One needs to understand not only the economics but also the politics and institutions of the crisis. A lack of such an understanding is the reason why a number of observers, at least initially, had a hard time making sense of policy-makers’ decisions (and pace thereof), including why the EA did not implode as some predicted.¹ Economic theories provide a certain perspective for why the crisis occurred and what economic policies were and are needed to resolve it (e.g., Pisani-Ferry [2014]); however, they fail to capture the crisis’s deeper roots and management (see Leblond [2012]).

In order to improve our understanding of a discussion that has oscillated between fears of EA disintegration on the one hand and the concrete advancement of integration during the crisis on the other, this special collection brings together leading scholars of European integration who apply key theoretical approaches – from liberal intergovernmentalism and neofunctionalism to other prominent theoretical accounts that have been applied to European integration such as historical institutionalism, critical political economy, normative theory and a public opinion approach – to the financial and economic crisis. The contributions seek to analyse, understand and/or explain the events that occurred and the (re)actions to them in order to draw conclusions concerning the applicability and usefulness of their respective theoretical perspectives.

We view the approaches included in this special collection as complementary rather than competitive and search for a productive coexistence of the various perspectives advanced here (see Diez and Wiener [2009]). In addition, there may be scope to identify the ‘home domains’ of each approach, thus enabling us to ascertain how a division of labour between them may add up to a larger picture, in the sense of additive theory (Jupille et al. 2003: 21), without being combined or subsumed into a single grand theory through full-fledged synthesis.

In this introductory contribution, we do three things. First, we describe the EU’s institutional response to the crisis, which serves as a reference point for the contributions in this special collection in order to avoid unnecessary repetition across them. Second, we present in summary form the contributions to this special collection. Third, we compare the different theories and offer some thoughts concerning the possibility for dialogue among them. Finally, we conclude by answering a key question posed earlier: why did EMU become deeper and more integrated when many feared for its survival during the crisis?

EUROPEAN INTEGRATION DEEPENS WITH THE CRISIS

The contributions to this special collection have either explicitly or implicitly chosen as their dependent variable the events that took place during the crisis, and in particular the decisions taken and integrative steps that were agreed in relation to EMU. This section therefore provides a brief overview of the crisis and the integrative steps taken. We provide as much as possible a factual overview and leave the (theoretical) explanations behind the events to the contributors, which we summarize and discuss in the next sections.

A (very) short history of the crisis

The crisis began as financial turmoil in the United States (US) and Europe in 2007, when some credit institutions found themselves in an increasingly precarious position arising from ‘toxic financial assets’ on their balance sheets, which had been produced over a prolonged period of credit expansion and public and private over-indebtedness. Within a very short period of time these assets proved to be of much lower value than previously assumed. In the context of the liquidity shortages that ensued worldwide, the European Central Bank (ECB) injected liquidity into the European banking system in August 2007. Illiquidity became acute in the US and elsewhere following the collapse of Lehman Brothers in September 2008. The collapse of a systemic financial intermediary at the heart of the US financial system led to a confidence crisis and a rapid and widespread repricing of risk and retrenchment in international capital markets, which quickly led to sharp drops in economic activity. In such a situation, illiquidity may quickly lead to insolvency and the collapse of the financial system (Rajan 2011). Nevertheless, in the European context, the support of illiquid banks to ensure financial stability became difficult for over-indebted national governments, especially given the absence of a clear crisis management framework that included a lender of last resort and a fiscal backstop (de Grauwe 2011).

A number of EA member states proved too weak, not only in defending their banking systems but also in allowing automatic fiscal stabilizers to fully absorb the impact of the resulting economic recession, let alone considering fiscal and financial policy activism in an environment where imbalances had been building up for a number of years. Against this background, the shortcomings in the EMU’s architecture came to the fore, as did the political economy spanning 17 EA members sharing the single currency. The crisis uncovered among other things the lack of appropriate firewalls that could ensure shock absorption and the prevention of contagion, while at the same time avoiding moral hazard in public and private actors and across the borders of member states.

For the sake of brevity, Figure 1 illustrates the key decisions taken since 2007 against the background of one measure of financial tension and of sovereign bond yields, which are used as a simplified barometer of the intensity of the financial and sovereign debt crisis in various EA member states. The details of the institutional reforms that took place in the same period are described below.

Integrative steps taken in response to the crisis

In December 2012, the presidents of the European Council, the European Commission, the Eurogroup and the ECB published a report whose objective was to develop ‘a vision for the future of the Economic and Monetary Union [EMU]and how it can best contribute to growth, jobs and stability’ (Van Rompuy et al. 2012). According to the report, there are four building blocks necessary to create a ‘genuine’ EMU: an integrated financial framework (i.e., banking union); an integrated budgetary framework (i.e., fiscal union); an integrated economic policy framework; and appropriate mechanisms of democratic legitimacy and accountability commensurate to the increased levels of integration (i.e., political union). As a result of the crisis, the EU and the EA implemented several governance reforms and put together a series of institutional mechanisms to help resolve the crisis and prevent others in the future. Many of these mechanisms came before the ‘Four Presidents’ Report’ was published. As such, they form part of the building blocks identified in the report and on which future steps would be built.²

Figure 1 The European financial and economic crisis at a glance: money market spreads and 10-year government bond spreads against German Bunds (%)

Source: Bloomberg for money market data and Haver Analytics for bond yield data (cut-off date: 21 October 2014), and authors’ calculations, and, for the signposting of the main events, judgement taking into account EU/EA decision-making procedures and possible differences between i.a. announcement of Commission proposals, political agreements between EU Council and Parliament, adoption of legislation, entry into force of legislation and so on (see more below).

Notes: The measure of tension in government bond spreads is shown as the difference between each country’s 10-year government bond yield and that of the German government’s 10-year bond yield (in percentages on the left hand scale). The measure of tension in money market spreads is here shown as the difference between the longer-term 12-month Euribor and short-term Overnight Index Swap (in percentages on the Right Hand Scale (RHS)).

• ECB: European Central Bank; LTROs: ECB Long-Term Refinancing Operations (six-month, one-year, three-year); TLTROs: ECB Targeted Long-Term Refinancing Operations; FRFA: ECB refinancing operations conducted with a Fixed (as opposed to minimum-bid) Rate and with Full Allotment; SMP: ECB Securities Markets Programme; OMT: ECB Outright Monetary Transactions; ABSPP: ECB Asset-Backed Securities Purchase Programme; CBPP3: ECB third Covered Bond Purchase Programme. All these events are shown as dark blue vertical lines in the colour (online) version of this Figure.

• GLF: Greek Loan Facility; EFSF: European Financial Stability Facility; EFSM: European Financial Stability Mechanism; ESM: European Stability Mechanism. All these events are shown as green vertical lines in the colour (online) version of this Figure.

• GR/IE/PT/ES/CY Programme: EU Economic Adjustment Programme for EFSF/EFSM/ESM financial support. All these events are shown as red vertical lines in the colour (online) version of this Figure.

• ESRB: European Systemic Risk Board; ESAs: European Supervisory Authorities, i.e., European Banking Authority (EBA), European Securities Markets Authority (ESMA), European Insurance and Occupational Pensions Authority (EIOPA); SSM: Single Supervisory Mechanism (SSM); SRM: Single Resolution Mechanism

• State Aid Rules: the Commission’s COM of 1 August 2013 updating the framework of the Single Market’s State Aid rules. All these events are shown as magenta vertical lines in the colour (online) version of this Figure.

• Economic and fiscal governance events are shown as light blue vertical lines in the colour (online) version of this Figure, and include: the initiation of European Semester (January 2011), the political agreement on the ‘Six-Pack’ (November 2011), the signature of Treaty on Stability Co-ordination and Governance (TSCG/‘Fiscal Compact’) (March 2012), the political agreement between Council and Parliament on the ‘Two-Pack’ (February 2013).

European Stability Mechanism

When Greece was shut out of capital markets in May 2010, there was no crisis ‘firewall’ for supporting EA member states that were faced with bond investors’ panic. The Greek Loan Facility (GLF) was thus constructed under severe time pressures and as an ad hoc solution for Greece. However, the GLF quickly led to the creation of the European Financial Stability Facility (EFSF) as a broader (albeit also temporary) rescue mechanism for EA member states experiencing fiscal problems. Nevertheless, soon after the EFSF had become official, sovereign bond investors began worrying about what would happen when it expired at the end of June 2013. It quickly became obvious that the fiscal and banking problems experienced by Greece and others would not be resolved in the ESFS’s three-year time frame. The solution was to set up a permanent firewall/financial assistance mechanism: the European Stability Mechanism (ESM).³

The European Council adopted the ESM in principle at its meeting on 16–17 December 2010. On 11 July 2011, finance ministers from EA member states signed the Treaty Establishing the European Stability Mechanism, which is an intergovernmental agreement between the 18 members of the euro area.⁴ The treaty came into force on 27 September 2012 when Germany ratified it, thereby surpassing the minimum ratification threshold of 90 per cent of the ESM’s original capital requirements. The ESM began its operations on 8 October 2012 with a lending capacity of €700 billion (including the remaining capacity of the EFSF). Unlike the EFSF, which was based on guarantees, the ESM has €80 billion of paid-in capital and €620 billion of callable capital used to issue money market instruments and medium- to long-term debt. It disbursed its first loans to Spain on 11 December 2012. As will be made clearer below, the ESM is an important element of both fiscal and banking unions.

Towards a European fiscal union

In light of the severe fiscal problems experienced by numerous EU member states, Greece being the most notable, it was clear that the existing Stability and Growth Pact (SGP) was insufficient to prevent EU governments’ public finances from becoming unsustainable (Ioannou and Stracca 2014), though its weakness was widely acknowledged even before the crisis (see Heipertz and Verdun [2010]). Therefore, fiscal co-operation had to be bolstered, along with stricter rules.

The first step towards tighter fiscal governance at the EU level was the so-called ‘Six-Pack’, whose process was launched in March 2010 in the midst of the Greek debt crisis to culminate in five regulations and one directive adopted in October 2011, with entry into force on 13 December 2011. The Six-Pack reinforces the SGP’s fiscal surveillance, which is now embedded in a pre-determined yearly economic policy co-ordination cycle called the ...

Table of contents

• Cover
• Half Title
• Series Text
• Title
• Copyright
• Contents
• Citation Information
• 1. European integration and the crisis: practice and theory
• 2. Liberal intergovernmentalism and the euro area crisis
• 3. European economic integration in times of crisis: a case of neofunctionalism?
• 4. A historical institutionalist explanation of the EU’s responses to the euro area financial crisis
• 5. Public opinion and the crisis: the dynamics of support for the euro
• 6. Political legitimacy and European monetary union: contracts, constitutionalism and the normative logic of two-level games
• 7. Europe’s ordoliberal iron cage: critical political economy, the euro area crisis and its management
• Index