Long Read: Was the Eurozone ‘doomed’?

Part of what I love doing is not just journalism related but also analysis of major news events. The following paper is a muse of sorts – asking whether the single currency union is still politically viable in the post-GFC world. It’s not perfect, and it’ll almost certainly attract questions and attention from those who don’t agree with my viewpoint. And that’s absolutely fine.

I hope you enjoy reading it as much as I did writing it – again, copyright laws apply as soon as this piece is published!

Enjoy, H.

Header Picture Credit: Politico Europe

The opening question of this paper relates to a Norman Lamont op-ed in The Telegraph (Lamont, 2015) and asks whether the ambitious single currency union was on the backfoot from the start. While initial answers were varied, the Global Financial Crisis undoubtedly marked a turning point in the credibility of the Euro and should have reshaped the European Union’s policy making process. Today, European nation states are still able to assess how much regional integration they wish to take on but do not have the same democratic weight in expressing their concerns. Nowhere is this more relevant than the single currency union where there are opportunities to succeed as an economic bloc but constraints on how monetary policy is enforced in member states.

In analysing what a nation state’s agency and capacity in economic policy is, several key questions need to be asked. As the EU is both a political and economic coalition, the extent of individual nation influences is crucial in analysing the success of policy creation and enforcement. This paper will address those concerns in line with claims that the European Union is in fact too “undemocratic”. It is well known that the Union addresses policy conflicts on a regular basis, but the paper aims to address whether their individual and political differences actually place the Eurozone in jeopardy (Hefeker, 2014). The paper will also question the influence of international organisations like the IMF and WTO – and whether their neoliberal approach to economics are entirely negative influences in the policy transfer process. The paper will also examine the implications of nation states surrendering their monetary sovereignty (Zimmermann, 2013). Finally, this paper will then put those questions in relationship to the post-GFC world which should answer whether the single currency union presents more opportunities or constraints for the European economy.

In the 21st century, economic policy is more powerfully linked to globalisation than ever before. Globalisation has firstly increased trade between member nations. As of the end of 2017, intra-EU trade doubled its 2002 levels and has continued to trend higher since the bottoming out of the GFC in mid 2009 (Eurostat Statistics Explained, 2017). Globalisation has also had many positive impacts on the European Union’s external trade balance include increasing export specialisation in Europe’s emerging economies and the elimination of tariffs amongst regional trading partners. This increased trade has also helped develop the EU as the world’s largest single market. Another key advantage of globalisation is that it has not made nation states unnecessary whether the onus of policy implementation is transferred to a larger union or not. Theorists like Martin Wolf will admit that global governance does need to be improved – including in the EU. However, improving governance will always need the “expression” of both rich and emerging nation states with their domestic expertise and timing for optimum implementation (Wolf, 2001). Globalisation has also presented the European Union with opportunities to respond better unilaterally to world economic challenges than nations alone. The installation of policies like the European Globalisation Adjustment Fund has been an example of responding to “trade-adjustment redundancies” and ongoing labour disparity issues as a union (Cernat and Mustilli, 2018).

However, globalisation has also eroded nation states’ abilities to control their own monetary policy and diminished some states’ influence while exaggerating others. It could also be argued that a negative side effect of this is allegations that the EU remains “fundamentally undemocratic” (Ellery, 2016). This claim is based on how key legislatures like The Council of Ministers conduct their work – often behind closed doors – to the point that it “constitutes maladministration” (Hervey, 2018). This all exists while the common union continues to reduce national determination. This has left the EU at a difficult crossroads to decide whether nation states deserve more agency or whether the political union needs to reach full development to pair with the existing monetary union. 20 years after the Euro was first initiated, the answer to this question remains unclear, despite economists continuously saying that full a fiscal and political union is necessary to fix the fragile Eurozone (Rodrik, 2012). In the post-GFC world, where policy debate should be more reformed and equal, policy hysteresis still reeks. Here, there is no greater example than the Brexit process which has its key exit terms still being negotiated two years after it was first decided that the UK would leave the Union. Thus, while globalisation presents opportunities for trade and monetary unity, member nations have found it increasingly difficult to exercise state agency as Brussels continues to be afflicted by policy gridlock.

The agency of nation states is also determined by the politicking of the global system. Policy debate can be (by virtue) equal in their power sharing and the formation of a common legal order which has formed the basis of the European Union’s governance. However, the Union is now infamous for its institutional inertia as well as a political imbalance which favour the rich economies. While the original intent for periphery economies may be to renounce its monetary sovereignty in favour of a potentially more stable regulatory framework (Zimmermann, 2013), the reality is that bad data in core economies now carry more weight to the success or downfall of the regional economy. This imbalance has brought about questions over whether the EU’s bureaucracy is a victim of the Wallerstein’s world systems theory and whether this is being encouraged by debate ‘stickiness’ in Brussels. Political theorist Hans Hubbard has suggested that the “core” European states (Britain, France, Germany) remain crucial in the EU but outside of it, are semi-cores to other world states like the US and China. Yet these EU heavyweights continue to coerce other member nations to mimic their policies regardless of their individual contexts – something Hubbard describes as a long term paradox of European integration (Hubbard, 2015). Some political analysts also suggest that this regional integration strategy has intensified investment dependence. As the European Union admits more states, the chance of economic divergence increases (Beckfield, n.d.). Others claim that the Union is less a reflection of the world systems theory but still acknowledge that because of the mimetic nature of economic policy implementation, member nations feel coerced and dependent on Brussels. In this sense, monetary policy transfer is done in the hope that the supranational ECB will bring stable monetary convergence and create a “paradigm of policy credibility” (Radaelli, 2000). This has worked in some cases, including sustained price stability and increased direct investment in the Eurozone in the post-GFC world. However, the Eurozone has also failed in the GFC recoveries of the major Mediterenean economies through the failures of severe austerity. The affected economies now don’t have the domestic agency to create their own reform without consequences or opportunities for recourse – and yet are still recovering 10 years after the initial shocks. A last school of thought suggests that the EU was always politically incomplete – so its experiment in “monetary governance” without a government was always doomed to fail. The politicking claim here is that the EU is prone to being “insulated from intensive public scrutiny” (McNamara, 2015) due to its ‘undemocratic’ policy making process. Scholars such as Matthias Matthijs have said that the currency union does not have the necessary political authority to give the Euro any credible stability. This presents opportunities for the creation of those political authorities, but the constraint might be time and how individual nation states will act should those institutions come too little too late. Thus, political dependency determines greatly how much agency a nation state has. The political imbalance which has been a feature of Brussels’ policy making must be sorted out because a smaller and less democratic EU would do more harm than good to the continent.

The rise of creditor and debtor states has also reshaped the role of the nation state and in turn, allowed creditor states to force their debtor neighbours to mimic their economic decisions. While economic crises are not new, the nature of the Eurozone leaves Brussels at a unique divide over what framework will solve the foundational problems that the Euro fuelled. The resulting divide over creditor and debtor states has also fuelled questions over the dependency of smaller economies on the European heavyweights while raising more questions about the ineffectiveness of debtor countries to control their own economic fates, let alone spread it to others (Comelli, 2012). In the debate over how to solve the “bad debt” problem, creditor countries along with international organisations like the IMF have called for “fiscal restraint” and “structural reforms” (Comelli, 2012) as the adjustment burden is shifted onto debtor countries. Because of their economic leverage, creditor countries tend to yield more conditions and possess a more politically robust mandate. This makes debtor countries dependent on them for bailout money and any future lending capacities – leaving them at a ‘cash for reform’ situation directly coerced by their creditor colleagues. Separating Europe into creditor and debtor countries has also divided the continent geographically – with its policy creation and enforcement dominated by the northern European economies (the creditors).  These economies – like Germany and France came out of the GFC better and kept the power to freeze debtors out of the market. When these economies are tied to other international organisations like the IMF, debtor states claim that the remedies pushed by Brussels (itself an enduring institution) are too dominated by singular countries in a union that champions equal voice and accessible economic integration. However, not all blame lies with the creditor states. Debtor states, such as Portugal and Greece also remain in gridlock about what “internal adjustment strategy” would require the least political harm and most economic success (Frieden and Walter, 2017). In the 10 years that has followed the Global Financial Crisis, policy compromise has still been hard to find. As late as May 2018, former Greek Finance Minister Yanis Varoufakis claimed that European creditors “were simply not interested in compromise” (Ossa, 2018) whilst the Mediterenean economies continue to attempt to end austerity. With both Italy and Spain experiencing renewed political turmoils*, the European Central Bank is an economic dependent again. The longer that necessary political institutions remain a plan, more support can be garnered for those who want to see the return of some domestic policy customisations to individual nation states (Pistor, 2015). Thus, creditor and debtor states have enhanced the political problems of the Eurozone present since the introduction of the single currency union. However, nation states have also taken the experience as an opportunity to re-evaluate the regional integration process while the EU remains “on the path” towards its long term dream of complete regional integration (Vetterlein and Moschella, 2016).

Finally, the influence of international organisations in conjunction with the European Union further present challenges for nation state agency. A clear point to be made here is that the involvement of organisations like the IMF and the OECD is not new – the end goal of a common EU political and economic position remains elusive. However, the aftermath of the Global Financial Crisis changed the way national governments could respond to the common EU platform – particularly in debtor states where international organisations are viewed less favourably. Frieden and Walter have said that debtors constantly seek external support from organisations like the IMF as other options (e.g. defaulting) tend to have large political consequences. However, finding a lasting solution has been difficult as the response of the Union tends to involve “more Europe, more centralisation” – heightening political tensions between the dominant nation states like Germany and France and the peripheral states such as Greece and Slovenia (Lamont, 2015 and Frieden and Walter, 2017). Another problem has been the IMF and World Bank’s long term requirements on debtor countries – coercing them to restructure their market in a more neoliberal form rather than giving much respect to the context of that nation state’s economy. Greece’s struggles – building to the 2015 referendum on bailout conditions placed these restrictions into the limelight. When Greece voted overwhelmingly in negation of accepting the bailout conditions, the European Commission retaliated by claiming its austerity conditions were not excessive. Even in June 2018, the European Stability Mechanism is still placing pressure on Greece to enact creditor-written reforms in addition to its three bailout programs (Maltezou, 2018). Again, the IMF is involved in this process – showing that despite popular opinion swaying away from the Union in debtor states, Brussels remains defiant and continues to work with their international partners. Further, this experience along with others in Spain, Portugal and Italy since the GFC has proven that although the policy dynamic should have changed, there is little will from those with large individual influences to budge. Should the policy gridlock persist, analysts already claim that extremist groups will benefit the most and that any nation state which leaves the EU serves as endorsement of the collapse of the European project (Rodrik, 2012). Therefore, the role of international organisations in conjunction with the EU is crucial in identifying the future of nation state agency. While there are economic opportunities in common political goals and a common currency union, the dominant states must shake off their short term gains and neoliberal influences if they are to gain the total support of the Eurozone. This paper has shown that as a consequence, this may involve returning some monetary agency to the individual nation states as policy mimesis has definitely not garnered the support of all EU citizens.

In conclusion, the European Union has left more constraints than opportunities for nation state agency. The Union appears to have shown little interest in finding an equal resolution that takes into account all member states’ contexts and concerns – an issue that has become ironically even more prevalent since the Global Financial Crisis. For now, most analysts do not believe that the currency union will be broken up. However, if the Union doesn’t heed on opportunities to fix its policy debate gridlock and the structural problems of its currency, nation states will exercise their own agency by leaving the EU. If that were to happen, economies would default across Europe and the Union can do little to restrain the global economic instability that would follow (Zimmermann, 2013).


*Note: This paper was written during the unfolding geopolitical instability in Rome as well as imminent unrest in Spain during May and June 2018.

Bibliography on request.

(C) Hans Lee, 2018.