Can Europe Make It?

Beyond the eurocrisis - institutional consolidation and social fragility

Far from endangering European integration, the Eurocrisis has contributed to strengthening EU institutions. Thus, it should be seen as a strategic integrational step, not as a mistake. Nevertheless the social fabric of the emerging European society remains fragile.

Georg Vobruba
25 January 2015
coin.png

Flickr/Gregor Gregoriou Crowe. Some rights reserved.

Devaluation nostalgia

Speaking of a permanent crisis is a contradiction. At least in social sciences crises are understood as constellations in which a set of institutions are facing more problems than they are able to cope with, and in which relevant actors perceive this as a crisis. Hence the need to solve it in due course. Time pressure is an essential feature of a crisis - think of the hectic rush of meetings during it - but the particular awareness and special political room for maneuvre means that the interpretation of a social constellation that a crisis provides can’t be maintained forever. Crises tend to seep away. Six years after the outbreak of the Eurocrisis one might summarize its results, achievements and remaining problems.

In its history, the process of European integration already went through several crises. But so far not a single one has been so widely perceived and broadly debated as the Eurocrisis. This is a strong sign that by introducing the common European currency, European integration eventually has reached peoples' living conditions, thus forming interests and prompting awareness for European-wide mutual dependencies. Even if there is disagreement about causes, costs and solutions of the crisis, there is consent about one central point: from its very beginning it was clear that the project of the commonon currency was built on an imperfect economic basis, for it integrated economies on different levels of productivity, hence different levels of competitiveness.

The theory of optimal currency areas, which was developed already in the 60s (Mundell 1961), forecasts that such an attempt inevitably causes problems. There is no doubt that this diagnosis is correct. Introducing a common currency means abandoning any possibility of devaluation, hence depriving less competitive economies of any protection against superior external competition. Several scholars stress this point as a crucial fault, hinting at a solution in some nation states practice, in earlier decades, of modest devaluation in order to regain international competitiveness at least temporarily.

But such devaluation nostalgia (Streeck 2014) is misleading (Vobruba 2013). What is the main important objection? Under the condition of economic globalization in general, and transnational production chains in particular, all attemps to shield a national economy by devaluation are in vain. Given transnational chains of production, devaluation means lower export prices (in terms of the currency of the importing country), but also higher prices for all kinds of imports, in particular energy, raw materials and upstream-products.

This consideration leads to a rather ironic conclusion: that of economies with high dependency on imports and a poor autonomous value creation which need to be shielded against external competition; and in an age of globalization, it‘s exactly the same kind of economies where devaluations don’t provide such a shield.

Was it a mistake?

In order to discuss the political implication of the Eurocrisis, another aspect seems to be of even more interest. As I already mentioned, overlooking the heterogeneity within the Eurozone is seen as the great opening mistake of the common currency. A mistake is something that happens against an actor's will, it is a non-intended effect, primarily caused by a deficit of information about the consequences of one’s own decisions. In the case of the common currency there was no lack of information at all.

Years before the Euro started, many economists issued warnings that there is no sane economic basis for a common currency. Comparative research aimed at highlighting the differences between the USA and the (then) would-be Eurozone as common currency areas. In 1990 the Commission issued "an evaluation of the potential benefits and costs of forming an economic and monetary union", stating that "there will be costs as well as benefits" (p. 18), and concerning the costs it reckons with "intensified competitive pressure in due course on national public expenditute and tax systems", such "that unsustainable public deficits and debt cannot be monetized anymore." (p. 23) In other words: it was not overlooking the consequences of economic heterogeneity within one currency but rather accepting it.

All relevant political actors were informed (or had easy access to information) and obviousely accepted the predicted problems related to the Euro. At the very most it was the intensity of the problems that were a surprise as the crisis became manifest. Indeed, the severity of the Eurocrisis was not expected. Thus it makes much more sense to think of the common currency as an important element of an integration strategy, than as an integrational accident. And there can be hardly any doubt that this strategy works.

All these turbulences related to the parlamentary elections in Greece in January 2015 don’t prove the opposite. In the eventuality that the result of these elections causes any serious problems at all, these will be problems for Greece, not for the EU. This rather proves that institutional progress is spurred on by the crisis. The argument of "contagion" no longer counts. The financial self-destruction of a single member is no longer seen as a threat for the whole Eurozone.

Rational self-binding

The history of European integration shows that integrational progress usually follows this pattern: a step of integration causes problems, these problems can hardly be solved by other measures than by further steps of integration, which in turn, cause new problems and so on. This – by the way – immediately reveals that naming the introduction of the common currency as a case of "over-integration" doesn’t make any sense.

During the whole process of European integration, every integrational push first led to over-integration. One might call this a political method or a superior long-term political strategy. I am inclined to prefer the latter, for one simple reason. Introducing the common European currency in an all-but-optimal currency area was rational in the sense of being politically self-binding: making the decision today to give up my decision-making capacity for tomorrow, due to the expectation that tomorrow no rational decisions will be possible (Elster 1979). Applying this idea to the case of the common currency is easy. Political originators of the Euro in their time didn‘t trust their successors to continue with the project of European integration. Given this, it was rational to install future political constraints that political actors in our time can hardly ignore.

The good of the crisis

You don’t have to be a fan of further European integration to find a silver lining in this crisis. The vicious circle of "system relevant" banks‘ bankrupcies and states‘ insolvencies has led to the Europeanisation of bank supervision, to strengthening the rules for equity ratios and it has created a political climate of sufficient pressure to dry out tax-free havens, impede money laundering and slacken bank secrecies (for instance in Austria, Belgium, Liechtenstein, Luxemburg, Swizerland, San Marino and the Vatican).

Such measures, together with a limited amnesty for tax evasion (in Italy between 1. 1. and 30. 9. 2015) have already led to capital flows back to the home countries. The Austrian newspaper Der Standard (10. 11. 1. 2015, p. 15) reports the repatriation of capital of Prada, Benetton, Ferrero, Diego della Valle and Exor (Agnelli-Holding) from Luxemburg to Italy. It is estimated that due to this measure an additional volume of 23 billion euros is now subject to Italian taxes.

As national governments revealed themselves hardly able to cope with the Eurocrisis, the European Central Bank grew into the role of crucial crisis management, acting quickly and convincingly, hence restoring creditors‘ trust.

Guaranties in order to stabilise creditors‘ trust in several Euromember states were given simultanously with strict conditions in order to discipline national public expenditures. Such measures should be seen as important steps towards the Europeanization of fiscal policy. On the one hand, they lead to de facto Europeanization of public debts and to reorienting creditors‘ trust towards the Eurozone as a whole (Preunkert, Vobruba 2015). On the other hand, they represent a dramatic shift of political sovereignty from the nation state to the EU.

In a next step the economic and social damage caused by disciplining public spending is about to trigger a public investment program of about 315 billion euros, coordinated by the Commission. However social problems like unemployment, youth unemployment and poverty are still subject to national policies, whereas the Europeanization of socio-political awareness and a fortiori a genuine European social policy is still in its infancy.

All in all, the Eurocrisis has triggered a dynamic of institutional integration which started by national crisis management and has evolved via European coordination of national policies into a remarkable gain of competencies for European institutions, the Commission, the European Court and in particular the European Central Bank. This is institutional consolidation, not failing integration.

Democracy and social policy

Nevertheless, the democratic legitimation of this push for integration remains an open question. In times of crises, quick and affective action is required. In particular, as far as financial matters are concerned, the efficacy of political measures can only be achieved under the condition that their addressees are not informed in advance. Financial regulations run the risk of leading to bank runs and some kinds of Central Bank policies or devaluations of a currency are cases in point. All these must be unreckonded measures, thus must be implemented quickly and stealthily.

But democratic control is hardly compatible with speed and secrecy. In institutional terms this means that in times of crises political executives tend to elude parlamentary control. One might see this as a necessary evil. But after the crisis, politics are obliged to find a way out of its executive-centered mode. It seems to be an open question whether this will happen. At least there is no theory in sight which might supply arguments to predict sufficient transparency and democratic control at the European level. All I can do is gather together some observations indicating a certain switch towards democratisation.

The first observation concerns a recent gain in authority of the European Parliament. European elections in May 2014 yielded an increasing reputation for the European Parliament. This is due to the personalization during the election campaign focusing at least in some countries on the alternative Jean-Claude Juncker (conservative) or Martin Schulz (social democrat). Significantly, Spitzenkandidaten almost over night became an internationally borrowed word from German. The making of Spitzenkandidaten created public awareness of a link between peoples‘ votes, the parliament and the composition of the Commission, hence at least a modest step towards parliamentary influence at the EU-level. And not least British Prime Minister David Cameron, who contributed to this gain in reputation, by likewise energetically and unsuccessfully opposing Juncker becoming president of the Commission. (Fox 2014)

The second observation is about the changing constellation in world politics (see also Shishkin 2014). The Ukraine-Russia-EU-conflict represents a clash between two basic concepts of politics. The one concept emerging in the course of European integration and enlargement, consists of integrating countries on the basis of a generalized political exchange between the core of the EU and its periphery: participation in material wellbeing and democracy in exchange for providing a stable cordon sanitaire and a buffer function towards outside (Vobruba 2007).

Over decades, the EU has expanded in concentric circles. It is often said that by annexing Crimea and trying to force neighbouring countries into the Eurasian Economic Union, Russia suffers a retrograde step in geopolitics, a concept the EU already has left behind. But this diagnosis lacks precision. The EU's expansionist dynamic perhaps has not achieved its intended geopolitical results, but it can certainly be seen by others as a geopolitical strategy – and indeed Russia perceives it this way. The EU's foreign policy should have been able to anticipate that, realistically. So in effect, the Ukraine-Russia-EU-conflict is not a clash between geopolitics versus post-geopolitics, but between attracting or attacking neighbouring countries in order to integrate them. This difference implies an important source of legitimation for the European Union, as it clearly demonstrates the advantages of democratic, non-authoritarian politics.

The Eurocrisis did not interrupt European integration. Quite the contrary: the crisis has contributed to the consolidation of EU-institutions and has widened their room for manoeuvre. But the aftermath of the Eurocrisis consists of two bundles of problems - a growing democratic deficit and enormous social problems within all deficit countries. Integration politics are obliged to cope with these problems, first in the interest of people concerned, and second in order to avoid destructive reciprocal effects between both.

Beyond the Eurocrisis we can see the European Union consolidated in its institutions - but its social fabric remains fragile.

References

Commission of the European Communities (1990). One market, one money. An evaluation of the potential benefits and costs of forming an economic and monetary union. Directorate-General for Economic and Financial Affairs. Brussels.

Elster, Jon 1979. Ulysses and the Sirens. Studies in Rationality and Irrationality. Cambridge: Cambridge University Press.

Fox, Jeremy 2014. Cameron’s Juncker blunker. OpenDemocracy 2. 7. 2014.

Mundell, Robert 1961. A Theory of Optimal Currency Areas. In: American Economic Review, Vol. 51, No. 4, pp. 657-665.

Preunkert, Jenny, Georg Vobruba (eds.) 2015. Krise und Integration (Crisis and Integration). Wiesbaden: Springer VS.

Shishkin, Mikhail 2014. The Russian myth of Europe. OpenDemocracy 28. 7. 2014.

Streeck, Wolfgang 2014. Bying time: The Delayed Crisis of Democratic Capitalism. London, New York: Verso Books.

Vobruba, Georg 2007. Die Dynamik Europas. (The Dynamic of Europe) Wiesbaden: VS.

Vobruba, Georg 2013. The Eurozone Crisis: No way back. OpenDemocracy 15. 5. 2013.

Get weekly updates on Europe A thoughtful weekly email of economic, political, social and cultural developments from the storm-tossed continent. Join the conversation: get our weekly email

Comments

We encourage anyone to comment, please consult the oD commenting guidelines if you have any questions.
Audio available Bookmark Check Language Close Comments Download Facebook Link Email Newsletter Newsletter Play Print Share Twitter Youtube Search Instagram