The EU and the Eurozone Crisis

Policy Challenges and Strategic Choices

Finn Laursen

• Publisher: Routledge
• Year: 2016
• Topic: Politics & International Relations
• eBook ISBN:
  9781317033516
• Subtopic: European Politics
• Index: Politics & International Relations

The global financial crisis, which started in the United States in 2007, spread to Europe in 2009. It especially hit Portugal, Ireland, Italy, Greece, and Spain, countries which have introduced the single currency, the euro. These eurozone countries no longer have monetary policy autonomy, so they do not have the option of devaluation to increase competitiveness. The crisis has shown that the Economic and Monetary Union (EMU) created in 1993, and which led to the single currency in 1999, is faulty. Its built-in asymmetry, with centralised monetary policy and decentralised fiscal policy, should be expected to create problems. Part of the response to the crisis so far has been incremental moves towards fiscal and banking union, which will mean a deepening of European integration at a time when many observers believed that a certain equilibrium had been reached after the entry into force of the Lisbon Treaty in 2009. This book focuses on these developments as well as analysing other economic policies that affect the general economic welfare of the EU, including agriculture, trade and immigration policies. The book puts the eurozone crisis into the wider context of deepening and widening.

PART I
Introduction

Chapter 1
The Eurozone Crisis and Other Policy Challenges in the EU

Finn Laursen

Introduction

The European Union (EU) is facing a fundamental crisis, which especially affects the countries that take part in the single currency, the euro. The group is usually referred to as the eurozone, and when the ministers of finance from these countries meet they are referred to as the Euro Group. This group has its own president, currently Jean-Claude Juncker from Luxembourg. It can be seen as a subgroup of the Economic and Financial Affairs Council (ECOFIN) of the Council of the EU. The current 17 members of the eurozone are Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. It means that there are 10 member states of the EU which are not members of the eurozone, namely Bulgaria, the Czech Republic, Denmark, Hungary, Latvia, Lithuania, Poland, Romania, Sweden and the United Kingdom. This kind of situation, where not all member states take part in a certain policy, in this case Economic and Monetary Union (EMU), has been referred to by many names, such as ‘flexibility’ or ‘variable geometry’. Assuming that those which are ‘out’ will eventually join those which are ‘in’, it can also be seen as two-speed or multispeed integration. The literature on European integration is full of discussions about the pros and cons of flexibility (e.g. CEPR 1995; Stubb 2002a, 2002b). In the academic literature it is also sometimes referred to as ‘differentiated integration’ (Kölliker 2006).

At the outset of European integration in the 1950s the idea was that all member states should take part in all common policies and institutions. New member states were expected to accept all existing rules, treaties and legislation, known as the acquis communautaire. No permanent exceptions were on offer, only transition periods of varying lengths.

Sometimes a smaller group of member states would start closer cooperation outside the treaties which had established the three European Communities (EC) in the 1950s, such as for instance when France, Germany and the Benelux Countries started the so-called Schengen cooperation in the 1980s with the view of abolishing border controls. The membership of Schengen would grow the following years, and eventually the Schengen acquis was incorporated into the EU by the Amsterdam Treaty, which entered into force in 1999, although the United Kingdom (UK) and Ireland remained outside the Schengen cooperation.

EMU was first outlined as part of the Maastricht Treaty, which established the EU in 1993. It outlined three stages towards EMU, which would establish the single currency, the euro, and the European Central Bank (ECB) in 1999, among 11 member states at the time. The treaty included so-called convergence criteria, basically economic conditions, for participation. This sanctioned two-speed integration in the monetary area. Further, the UK and Denmark got opt-out clauses in protocols to the treaty, although other member states are in principle expected to join the eurozone once they fulfil the criteria.

The Maastricht Treaty also included a second pillar in the form of cooperation on Common Foreign and Security Policy (CFSP) and Justice and Home Affairs (JHA). Cooperation in these areas had taken place outside the Community framework prior to the establishment of the EU.

The Lisbon Treaty, in force since December 2009, abolished the pillar structure, but CFSP has retained its own decision procedures, basically remaining as intergovernmental cooperation, while JHA has become more integrated under the so-called Community method, where decisions can be made by a qualified majority vote (QMV) in the Council, and the European Commission, and the European Parliament (EP) and the European Court of Justice (ECJ) play stronger and more important roles.

The treaty has an article now sometimes referred to as the ‘flexibility clause’ (Art. 352 TFEU, ex-Art. 308 TEC).1 This article actually goes back to Article 235 in the Treaty of Rome establishing the European Economic Community (EEC) in 1958. It allowed the Council of Ministers to take action not explicitly foreseen by unanimity as long as they were necessary to attain one of the objectives of the Community. It got the name ‘flexibility clause’ in the defunct draft Constitutional Treaty (Art. I-18) (Piris 2006). Its scope was extended to include CFSP and JHA and the consent of the European Parliament (EP) was required. The clause survived in the Lisbon Treaty, but the name ‘flexibility clause’ was dropped. It refers to the objectives of the treaties, since the term ‘Community’ has been abolished in the treaty (Piris 2010).

This kind of ‘flexibility’ is different from the multispeed variant we see in the case of EMU. Apart from EMU and a few explicit opt-outs eventually accepted – mostly for the UK and Denmark – the treaty introduced provisions on ‘closer cooperation’ by the time of the Amsterdam Treaty in 1997 (Stubb 2002a, 2002b), subsequently amended by the Treaty of Nice, which entered into force in 2003, to make their application easier. At the same time the name was changed to ‘enhanced cooperation’ (Olsen 2006). So ‘enhanced cooperation’, as it is now officially called, can take place on the basis of the treaties, on certain conditions which are outlined in the treaty. Enhanced cooperation post-Lisbon Treaty requires at least nine member states to participate (Art. 20 TEU).

Dimensions of Integration

European integration, the process associated with the three European Communities created in the 1950s and continuing with the EU from 1993, can be seen as a process of creating common institutions and developing common policies among a certain group of states. It started with the European Coal and Steel Community (ECSC) in 1952. Basically, six countries pooled their coal and steel sectors and set up an independent supranational body called the High Authority to manage these sectors jointly. The institutional set-up also included a Council where the ministers from the member states would meet and make certain decisions. The purpose of the Council was to create a degree of political accountability. From the beginning a strong European Court of Justice (ECJ) was created. However, the original parliamentary assembly was relatively weak. The following two communities, the European Economic Community (EEC) and European Atomic Energy Community (EAEC, or EURATOM), created by the Treaties of Rome in 1958, established two independent, but slightly less supranational, ‘executives’ – called ‘Commissions’ in both cases – as well as two separate Councils of Ministers. The Assembly and the ECJ were common for the three Communities from the beginning. Eventually the Merger Treaty in 1967 merged the ‘executives’ and Councils to form a single Commission and a single Council. The latter could meet in separate configurations though.

The important institutional part of the three Communities was an independent European ‘executive’ representing the ‘Community’ interest with a right of initiative, sometimes an exclusive right, and a high degree of autonomy. Further, in the Council some decisions could be made by a qualified majority vote (QMV). The Court was a real court that made binding decisions. So Community law started resembling federal law. This decision-making system became known as the Community method. Arguably, it has served Europe well. The alternative is the much weaker intergovernmental cooperation, which has also been used in Europe, especially in the area of foreign policy cooperation, where the attachment to national sovereignty has been too strong for adoption of the Community method. When the Maastricht Treaty created the EU, intergovernmental cooperation was retained in CFSP and JHA. The Lisbon Treaty still retains it for CFSP.

Figure 1.1 suggests three important dimensions of European integration. Over time more and more countries joined the process, and more and more policy areas were included. That more and more countries have chosen to do more and more together suggests a certain degree of success for European integration. Developing good common institutions arguably has been one of the reasons for this success.

Figure 1.1 Dimensions of integration

Source: Compiled by the author.

Expanding Policy Scope

Table 1.1 provides an overview of the functional scope of European integration. The focus is on the addition of formal policy chapters in the treaties establishing the EC/EU. Some policies were gradually included even before they were formally mentioned in the treaties. Such is the case with environmental policy. By the time that this was formally included by the Single European Act (SEA) in 1987, a number of environmental directives had already been adopted using various articles in the treaties, including Article 235 in the EEC Treaty, which, as mentioned, allowed the Council by unanimity to adopt measures considered necessary to reach the objectives of the Community.

During the first four decades the focus was on the four freedoms of the internal market: free movement of goods, services, capital and people. Since the necessary harmonization of national legislation, according to the Treaty of Rome (Art. 100), required unanimity, it was necessary to improve the institutional capacity by introducing QMV for this harmonization. When this happened through the SEA, it gave integration a new momentum (Laursen 1990). Thus institutions clearly matter.

Table 1.1 Expanding functional scope of European integration

The functional scope received the biggest boost with the Maastricht Treaty, which was to a large extent the response to the end of the Cold War (Laursen 1992). It included EMU, which had been put on the agenda before the end of the Cold War. EMU was a radical upgrading of the European Monetary System (EMS) which dated back to 1979. The treaty changes since Maastricht also increased the policy scope, but less so. They were mostly about upgrading the institutional capacity considered necessary to accommodate new member states, especially Central and Eastern European Countries (CEECs), which wanted to join the EU after the end of the Cold War.

The Eurozone: A Step Too Far?

Given the central importance of the eurozone crisis at the moment, EMU deserves extra space in this introduction. Arguably, it was the most important novelty of the Maastricht Treaty, and it was controversial among politicians as well as professional economists, who asked the question whether Europe constituted an ‘optimal currency area’ and whether the institutional aspects of EMU were adequate.

The theory of optimum currency areas was mainly developed by the Canadian economist Robert Mundel at Columbia University in the 1960s. Mundel saw mobility of production factors as most important (Geza and Vasilescu 2011). Along this line of thinking, the four freedoms in the EC could be seen as contributing to making the EC/EU an optimum currency union. Free movement of capital was slow to be realized in the EC, but it eventually was realized from the late 1980s. Free movement of labour existed on paper, but many unemployed people hesitated to move to another member state, where they might not know the language, for instance. Other economists have looked at a host of factors, including openness of the economy, degree of diversification of production, financial integration, similarity of inflation rates, flexibility of prices and salaries, and finally degree of political integration. Compared on these factors, the EU obviously scores lower than the US or Canada. Therefore the big question when the EU set out to create the EMU was whether it could sustain so-called asymmetrical shocks, where member states face different economic policy developments and challenges, but have lost their monetary policy autonomy. Low labour mobility and real wage inflexibility are problems in the EU. This leaves fiscal transfers as a possibility, but the EU budget is relatively small (Dyson 2000: 193–5). Further, the Maastricht Treaty has a no-bailout clause, which put strict limits on transfer possibilities through the European Central Bank (ECB) to the member states.

There had been monetary cooperation among EC states before Maastricht. The Treaty of Rome called for macroeconomic cooperation, especially concerning conjunctural policy (Art. 103) and balance of payments (Art. 104) and established a Monetary Committee with advisory status (Art. 105). According to Article 104, it was up to the member states to ‘pursue the economic policy needed to ensure the equilibrium of its overall balance of payments and to maintain confidence in its currency, while taking care to ensure a high level of employment and a stable level of prices’.

The idea of EMU was subsequently proposed at the Hague Summit in 1969 and a plan, the Werner Plan, was worked out. It foresaw the establishment of EMU over the following decade. This was at about the time that the Bretton Woods system was starting to crumble. However, the Werner Plan was too ambitious at the time and the energy crisis in the 1970s had a negative effect on the possibilities. In 1972 some member states did start cooperating on limiting currency fluctuations, within the so-called ‘snake’, limiting exchange rate fluctuations to a maximum of ± 2.25%. This cooperation had its limits and flaws, so in 1979 the European Monetary System (EMS) was initiated. EMS established an Exchange Rate Mechanism (ERM) and a European Currency Unit (ECU) based on a basket of currencies. Currency movements were limited to 2.25% around parity (Hodson 2010; Verdun 2011).

EMS was successful in creating macroeconomic convergence in the 1980s and EMU got on the agenda again, as a next step. The SEA added a new Article 102a about cooperation in economic and monetary policy. It mentioned ‘Economic and Monetary Union’ for the first time in the treaty, but in a bracket. Although EMU was on the agenda, the member states were not yet ready for treaty-based commitments. In regard to cooperation, the SEA stated that ‘In order to ensure the convergence of economic and monetary policies which is necessary for the further development of the Community, Member States shall cooperate …’ (Art. 102a). The experience acquired within the EMS should be taken into account. Should institutional changes be necessary, it would require another treaty amendment, it was said.

The treaty amendment followed with the Maastricht Treaty. In the meantime a committee chaired by Commission President Jacques Delors had prepared a report in 1988, which outlined three phases towards EMU. These phases became part of the Maastricht Treaty. The third phase saw the creation of the European Central Bank (ECB) and the introduction of the common currency, the euro, in 1999.

To qualify for taking part in the euro the member states had to fulfil the following convergence criteria:

• Price stability: Inflation rate may not be higher than 1.5% of the average inflation rate of the three best performing member states;

• Sound public finance: The government deficit may not exceed 3% of the GDP;

• Sustainable public finance: The government debt may not exceed 60% of GDP;

• Durable convergence: The nominal long-term interest rate may not be higher than 2% of the average of the three best performing member states in terms of price stability;

• Exchange rate stability: Observance of normal fluctuation margins in the European Exchange Rate Mechanism (ERM), without devaluation for at least two years (Art. 109j and Protocol no. 6 on the Convergence criteria; Hodson 2010: 162).

After the entry into force of the Maastricht Treaty, the Germans in particular wanted to establish stricter rules for fiscal policy, which basically remained a national responsibility according to the Maastricht Treaty. Some governments hesitated, including the French government. These governments wanted to be able to use fiscal policy to create jobs, especially as they lost their monetary policy autonomy. The outcome was the adoption of the Growth and Stability Pact at the time when the negotiations of the Amsterdam Treaty were concluded in June 1997. The main elements were:

• Governments will aim to achieve a balanced budget;

• Countries with a budget deficit exceeding 3% of GDP will be fined up to 0.5% of GDP;

• These fines will not be applied if there...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• List of Figures
• List of Tables
• Notes on Contributors
• Preface
• Acknowledgements
• List of Abbreviations
• PART I: INTRODUCTION
• PART II: THE EUROZONE CRISIS
• PART III: OTHER POLICY DEVELOPMENTS AND CHALLENGES
• PART IV: DEEPENING, WIDENING OR MULTISPEED INTEGRATION?
• PART V: CONCLUDING CHAPTER
• Index