Redefining European Economic Governance

Michele Chang, Georg Menz, Mitchell P. Smith

• Publisher: Routledge
• Year: 2016
• eBook ISBN: 9781317639121
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

The global financial crisis and sovereign debt crisis exposed the inadequacy of European economic governance. Despite the multitude of new mechanisms and institutions that have arisen over the last few years, many contend that economic governance remains inadequate and the EU must integrate even further to calm still-volatile markets. A tension exists between creating effective instruments that will not overstep the authority delegated to an EU that has integrated economically but not politically. Can the EU's economic governance system satisfy the demands of markets and politics? Relevant issues include the ability of supranational institutions to dictate policy to national governments, the harmonization of economic policies and institutions across Europe, and a substantial increase in the transfer of funds across borders. Can monetary union continue without political union? How will the new institutions alter the distribution of power between EU institutions as well as between member states?

This edited volume analyzes the major policy challenges and institutional mechanisms at the EU- and international levels to combat the global financial crisis and the EU's sovereign debt crisis such as financial integration, fiscal cooperation, and the rising power of the ECB.

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

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INTRODUCTION

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Kicking the Can Down the Road to More Europe? Salvaging the Euro and the Future of European Economic Governance

GEORG MENZ & MITCHELL P. SMITH

Department of European Political and Administrative Studies, College of Europe, Belgium

Recent assessments of the nature of the eurozone’s problems, their origins, and of policy choices and likely outcomes inform our understanding of the crisis and explain its persistence. These accounts detail weaknesses in design of economic and monetary union (EMU) and its implementation (Meyer 2010; Dadush and Stancil 2010; Cooley and Marimon 2011); the manner in which political constraints have limited or distorted policy choices (Scharpf 2011); and the failings of political leadership at both European and national levels (Featherstone 2011). But more or less lost in the welter of commentary is any account of how we identify and account for the trajectory of European economic governance in response to the eurozone’s troubles.

Few observers of the single currency correctly predicted the extraordinary economic problems the euro has created for Europe: mass unemployment, depression, social unrest, and rule by technocratic government in southern Europe and billions of public funds diverted to sustain the speculative transactions of French and German banks with concomitant years of debt service for future generations in the North. If the economic instability caused by the euro were not serious enough, the political ramifications have been equally severe: an exchange of xenophobic stereotypes in the German and Greek press cast serious doubt on just how much pan-European sentiment the integration process has produced, while imposed austerity in southern Europe appears to nourish the emergence of far-right movements as in Greece, also strengthening separatism as in Spain.

As students of European integration we are intrigued by a currency upheld as a symbol of European integration that is purportedly worth saving at any cost and by the political implications of the recast architecture of European economic governance. While the prevailing narrative inscribes the euro crisis as one of irresponsible budgetary policy in southern Europe (Scharpf 2011), the official response strategy is one of making the Maastricht criteria stick, whilst marginalizing treaty provisions to allow the creation of well-funded vehicles that convey northern public funds to purchase largely worthless southern government bonds originally acquired by northern banks.

Economic governance — the set of institutions and mechanisms for ensuring the orderly pursuit of shared economic policy objectives — has in fact evolved at multiple levels, including policy processes, policy outcomes, and institutional dynamics. Collectively, these shifts amount to a redefinition of European economic governance consisting of an unlikely amalgam of diminished reliance on the ‘Community method’ characterized by European Commission agenda setting, along with a series of institutional innovations that strengthen common fiscal surveillance and oversight of macroeconomic imbalances and thereby advance integration. Institutionally, select nodes within the Council of Ministers — the permanent Council presidency and the Economics and Finance Council — have taken a firmer hand in agenda-setting; the actions of the European Central Bank have drawn national economic domains more directly into the European governance mix; and the European Parliament has sought to become a more active interlocutor of all of these actors as the voice of European citizens. Ironically, amidst the eurozone’s severe strains, we are witnessing the emergence of a more ‘European’ European economic governance through unexpected means.

This trajectory provokes critical questions. How can we explain the form taken by institutional innovations? What role do existing EU institutional structures and policy inheritance play in determining the contours of these arrangements? How have institutional roles in the establishment of those mechanisms varied over time, and why? And what is the significance of the national economic divergence highlighted in much of the recent analysis of the eurozone crisis — not simply as outcome of the flaws in the design of EMU, as emphasized in the recent commentary — but as cause of policy patterns and decision processes?

In this issue, we assemble contributors who explore the dynamics of European economic governance in response to the ongoing troubles of the single currency, which are intertwined, of course, with the major global recession sparked by the collapse of trade in overvalued US home loans and the subsequent closer attention paid by international banks to the macroeconomic data of southern and northwestern European governments whose securities they had readily purchased in the early 2000s. Our common theme is an institutional focus that analyzes both policy output produced by European institutions in the wake of the crisis and the dynamic interactions of these institutions themselves. Consequently, several contributors employ historical institutionalist arguments about path dependency as a central element shaping policy choices, while others deploy the prism of a principal-agent framework to explain the evolution of European economic governance.

Through these approaches, the volume brightly illuminates the choice of institutional innovations. Elements of the EU treaties and existing institutional arrangements, choices and constraints appear to have been vital in shaping the overall response to the mounting eurozone banking and sovereign debt crisis. The response itself has hardly been either linear or inevitable. As observers have explained relentlessly, the Maastricht Treaty did not create sufficiently powerful corrective mechanisms (especially in the fiscal realm), yet also closed off policy options by placing restraints on actions (the prohibition on monetary financing of national governments, for example) and actors (ECB). Crisis resolution has as a consequence proven elusive. But our analysis cannot end there. These treaty components not only account for the casting about for politically acceptable and economically effective solutions throughout the crisis; these omissions and constraints also help us understand the course that has been taken by eurozone member state governments.

Of course, the very existence of prohibitions that produced policy paralysis pushes to the fore the question of incorporating into European economic governance an ultimate element of supranational executive discretion authorizing measures to salvage the eurozone in dire circumstances, creating once and for all a credible commitment to irreversibility of economic and monetary union. Kenneth Dyson carefully maps this terrain of ‘supreme emergency’ in his article, motivated by the insight that rules relying on the behaviour of markets and states are unlikely to operate as expected in crisis conditions. He establishes that any authority to invoke such a prerogative would have to be vested in an independent agent. Nonetheless, as Dyson informs us, this is inherently a normative question that, inevitably raised by the tensions inherent in European economic governance, inevitably will remain unresolved.

It is a widely accepted insight that European integration has often thrived on difficulty and proceeded because of and in spite of extremely adverse circumstances. A number of — very cautionary — regulatory attempts have been made to somewhat limit the awesome powers of financial markets, while EU actors have created rescue vehicles, crucially the European Stability Mechanism (ESM) and the European Financial Stabilisation Facility (EFSF). Critically, in the process of attempting to salvage the single currency new power dynamics have unfolded, with a decisive shift away from the ‘community method’ and a much more intergovernmentally inspired response pattern. Initially, of course, eurozone crisis response efforts adhered to the community method. This was true of the ‘six-pack’ of economic reforms proposed by the European Commission in fall 2010, which addressed tighter fiscal surveillance, oversight of macroeconomic imbalances, and strengthening of the Stability and Growth pact and followed traditions of Commission agenda-setting. But a change in the dynamics of policy making quickly ensued, as national governments actively sought to reduce agency slack accruing to supranational institutions, shifting agenda setting authority to the Council President and members of the Economics and Finance Council (Ecofin) and in essence established a hierarchy that subordinated the role of the Commission to these actors.

Such a shift towards what Angela Merkel describes as the ‘Union method’ is perhaps unsurprising given the substantial long-term financial commitments entered into by northern governments. However, the robust role that key national governments, especially the German, but also the French, have played in the process of elaborating a response, must not distract us from the noteworthy policy entrepreneurship of an institution that has quietly emerged from relative obscurity to being a major eminence gris. The European Central Bank (ECB) has been a crucial actor in helping usher in the institutional and practical foundations for fresh cash injections into the strapped governments of the South. The ECB is also playing a role in the enforcement of austerity programmes largely resembling Washington Consensus-style structural adjustment programmes in Greece. In the ongoing tug-of-war between the Commission and the member states, the response thus far seems ultimately more shaped by member state influence, the latter understandably keeping the rescue vehicles on a tight leash. However, broadly speaking, European-level influence in devising a response is hardly absent, notably in the form of both the enlarged ECB role and a very activist European Parliament (EP).

Rather than confining ourselves to one preferred approach or school, our contributors employ a variety of mid-level theoretical approaches, while all broadly subscribing to an institutional focus. All concur that the response seems to be geared towards affirming both the single currency and the Maastricht criteria with tougher enforcement mechanisms and imposed austerity and structural adjustment programmes meant to redress the mounting and persistent economic imbalances highlighted during the past few years. Whether such strategy is viable, as senior economists openly question, whether the euro has been salvaged once and for all given the obvious economic mismatch in terms of its membership basis and the severe dislocations this will continue to produce, and whether the response strategy has thus merely ‘kicked the can down the road’ are valid questions worth contemplating.

In their contribution to the volume, Jonathan Yiangou, Mícheál O’Keeffe and Gabriel Glöckler demonstrate how the monetary financing prohibition, by closing off one channel to the resolution of the eurozone crisis, pushed the process onto an alternative path. Consistent with the European Central Bank’s independence and mandate to pursue price stability, the prohibition on financing of governments’ debts was intended to protect monetary policy from the intrusion of a fiscal imperative generated by the budget positions of national governments. Both this group of authors and Nikos Zahariadis in his essay on the Greek debt crisis point out that the dynamics of fiscal federalism, according to which markets and voters were to hold individual governments accountable — through risk premia and electoral choice — did not function effectively. Costs of fiscal choices spilled across national borders. As contagion spread, the potential costs of eurozone disintegration rose sharply.

At this point, institutional constraints become critical to the course of EU economic governance. The ECB resisted any dramatic deviation from its mandate and limits. As Yiangou, O’Keeffe and Glöckler indicate, this impasse accounts for the shape of the first concrete efforts toward alleviating the crisis: restructured mechanisms to address macroeconomic imbalances; measures to assure sound national reporting of economic data; closer monitoring of peer fiscal policies, since financial assistance was to come in the form of fiscal transfers from other governments rather than monetary financing from the ECB; plans for centralized bank supervision and a framework for bank capitalization.

Initial economic governance choices made in the face of deteriorating conditions and diverse and uncertain preferences also have had lasting consequences for the subsequent course of European economic governance. Ledina Gocaj and Sophie Meunier establish that the creation of the European Financial Stability Facility (EFSF) in spring 2010 decisively shaped the permanent European Stability Mechanism (ESM) devised less than a delete second part of sentence 8 October 2012. The EFSF, to be available to governments cut off from capital markets, itself was hardly pre-determined; the institution was crafted in the context of near panic in financial markets, grave worries about domestic political constraints, and a wide range of conflicting views on how to respond effectively. In this environment, the EFSF emerged as a wholly inadequate instrument, as market and political forces quickly demonstrated. The response was a push from several quarters — from the ECB to national finance ministers — to expand the resources available to the EFSF. The apparent inadequacies of the EFSF structure and its intended temporary nature notwithstanding, time compression and the political dynamics of approval of any new bailout mechanism generated an ESM that was a modified version of the EFSF.

The decision of the Economics and Finance Council to create the EFSF represented an alternative to a European Commission proposal for an EU stabilization fund that would borrow on the strength of guarantees from member state governments. In this sense, as Meunier and Gocaj underscore, the form of the EFSF put economic governance decision making on a firmly intergovernmental path. Picking up on this very dynamic, Dermot Hodson explores the role of the Barroso Commissions, finding them a cautious player carefully safeguarding the institution’s political capital and strategically supporting minimalist re-regulatory activity with substantial political support in the member states. The center-right political leaning of Commission President Barroso further contributes to an ultimately limited Commission-led response, effectively affirming the monetarist-inspired Maastricht criteria and avoiding substantial taming of the financial markets.

Michele Chang similarly investigates the weight of member states relative to the Commission, arguing that through the skilful appointment of constrained agents the member states maintain a key role in controlling the re-financing of southern government debt. Resonating with Chang’s argument, while turning toward the external representation of the EU in institutions of global economic governance, Charlotte Rommerskirchen explores the incomplete Europeanization of representation of member states in international economic institutions, where despite some cautious delegation at the G-20, principals remain very restrained in employing agents and jealously safeguard their hold on interest representation in global fora.

Ironically, while Commission entrepreneurship appears to have waned in the crisis, at least in part due to divergence of national economic positions, national economic divergence and insufficient economic policy coordination have produced a very different institutional dynamic involving the European Central Bank. The operation of the ECB is based on delegation by the national governments to a completely independent agent, an act required to achieve credibility in the pursuit of price stability. Coupled with national economic divergence and the incomplete contracting characteristic of economic and monetary union, the process was likely from the start to require additional policy coordination. As indicated by Francisco Torres, soft policy mechanisms (such as the Lisbon Strategy) proved wholly inadequate to this purpose. The result has been the creation of a succession of new institutional mechanisms to advance the goal of stability amidst national economic divergence.

More precisely, th...

Table of contents

• Cover
• Half Title
• Series
• Title Page
• Copyright
• Contents
• Citation Information
• 1. Introduction: Kicking the Can Down the Road to More Europe? Salvaging the Euro and the Future of European Economic Governance
• 2. Sworn to Grim Necessity? Imperfections of European Economic Governance, Normative Political Theory, and Supreme Emergency
• 3. ‘Tough Love’: How the ECB’s Monetary Financing Prohibition Pushes Deeper Euro Area Integration
• 4. Time Will Tell: The EFSF, the ESM, and the Euro Crisis
• 5. Fiscal Policy Coordination and the Future of the Community Method
• 6. The Politics of Risk-sharing: Fiscal Federalism and the Greek Debt Crisis
• 7. The EMU’s Legitimacy and the ECB as a Strategic Political Player in the Crisis Context
• 8. The Little Engine that Wouldn’t: Supranational Entrepreneurship and the Barroso Commission
• 9. Merged Into One: Keystones of European Economic Governance, 1962–2012
• 10. Banking on Stability: The Political Economy of New Capital Requirements in the European Union
• 11. Keeping the Agents Leashed: The EU’s External Economic Governance in the G20
• 12. Eurozone Crisis and European Integration: Functional Spillover, Political Spillback?
• Index