The European Monetary Union and the Eurozone crisis

The gradual transfers of authority from the national to the supranational level reached a defining moment with the establishment of EMU in 1993 and the consequent entry into force of the Euro in 1999 as the official common currency. Countries adopting the common currency gave up their monetary sovereignty. For these countries, monetary policies were no longer under the control of a national central bank, but became instead competence of the ECB. At the same time, however, the Euro was not backed by a fiscal union, and featured many internal imbalances, as the Eurozone crisis made clear. EMU is therefore the case in point for understanding how the process of EU polity formation has remained stuck between the national and supranational level.

The case of EMU is also an example of how both intergovernmentalism and neofunctionalism are useful tor understanding the process of European integration. On the one hand, the establishment of EMU has been driven by national interests: as a response to German reunification, many member states, most notably France, acting on the basis of calculations of relative power and national interest, insisted on an enlarged Germany giving up the Deut- schemark, as a sign of commitment to the integration process (Niemann et al. 2018). Though the intention was to prevent German hegemony in Europe, it ended up increasing its relative power (Schmitter and Lefkofridi 2016). On the other hand, EMU has also triggered various spill-over effects, as — particularly in the aftermath of the Eurozone crisis — it has driven a banking union and a fiscal union on the political agenda (Howarth and Quaglia 2014; Niemann et a. 2018).

The Eurozone crisis has uncovered the lack of clarity regarding the locus of political authority in governing the European economy. Particularly significant was the initiative taken by the ECB in 2012 to extensively buy national bonds of EU member states, whereby large amounts of liquidity were injected in the European economy. This action was the direct result of the plan of the ECB President Mario Draghi to ‘do whatever it takes’ to save the common European currency.1 This action raised more than one eyebrow, particularly among European constitutionalists and legal scholars, who observed that by injecting practically an unlimited amount of liquidity' in the economy, the ECB was in direct contrast with some of the foundational rules of the EU, namely that capital should be allocated through competitive markets (Menen- dez 2017: 58; Scicluna 2017). At the same time, Draghi’s action was also praised because it helped prevent the European common currency from collapsing. This episode is significant because it taps into the main peculiarities of the EU’s political economy, namely the existence of a monetary union without a fiscal union, and a currency that is not shared by all EU member states.

Currently, only 19 of the 28 EU member states share the common currency and are thus part of the ‘Eurozone’. Most of the non-Eurozone members are countries that joined the EU in the latest rounds of the enlargement process (see Box 28.4) and are obliged to join EMU once they meet the eligibility criteria, which essentially consist of macroeconomic indicators, including price stability, sustainable public finances, exchange-rate stability and long-term interest rates. Other EU member states — such as Denmark and the UK — instead, have maintained their monetary sovereignty. These peculiarities make the EU in various respects a non-optimal currency area (Scharpf 2011) as, particularly in times of crisis, they appear rather as imperfections. Some scholars, for instance, argue that during the global financial crisis of 2008—2009, the Bank of England was able to prevent an outflow of capital in the financial markets because of its monetary autonomy, that allowed to print and inject British money in the national economy (De Grauwe 2017: 118-122).

Outflows of capital, instead, were much easier in those countries adopting the common currency, and happened in large magnitudes to those countries that were most severely hit by the crisis (see Box 28.2). As markets started to lose confidence in the ability of countries such as Spain or Portugal to pay back their debts, bond-holders started to sell these bonds and buying bonds of countries that were perceived as having more solid public finances, such as for example Germany (De Grauwe 2017: 118—122). This practice was facilitated by the fact that the various countries had the same currency. Consequently, large amounts of capital flowed from (mainly) Southern European countries towards (mainly) Northern European countries. This mechanism pushed various European countries (mostly in Southern Europe) towards a sovereign debt crisis.

These imbalances within the Eurozone — and the relative facility through which markets can push states towards a sovereign debt crisis — had two main consequences. First, they unveiled a vacuum of political authority that, as mentioned above, induced the ECB to arguably move beyond its institutional mandate and to buy Southern European sovereign bonds. Second, they co-caused a vast redistribution of public money, signifying essentially that the Northern European governments had to bail-out their Southern partners under very strict conditions; consequently, through the bail-outs, Northern EU governments became more involved and had more direct interests in seeking to influence long-term economic policy in the Southern European countries. As a result, the bail-outs not only fuelled high political tensions among member states — rendering intergovernmental cooperation more difficult — but also triggered the start of a wave of austerity measures throughout the whole Eurozone (advocated by elected governments in the North).

Box 28.4 The enlargement of the EU, 1957-2018

The EU currently counts 27 member states, excluding the UK, which left on 31 January 2020. The various member states joined the EU at different points in time:

Founding members (1957)

Belgium, France, (West) Germany, Italy, Netherlands and Luxemburg.

1973 enlargement

Denmark and the UK

Mediterranean enlargement (1981-1986)

  • 1981: Greece
  • 1986: Portugal and Spain
  • 1990s enlargement
  • 1995: Austria, Finland and Sweden

Eastern and Central European enlargement (2004-2007)

2004: Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia 2007: Bulgaria and Romania

Western Balkan enlargement (2013)


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