Europe and the EU

The 2007/8 GFC created a liquidity crisis, forcing governments in the EU and the US to bail out ailing financial institutions and inject liquidity into their banking systems. Thus, a liquidity crisis became a sovereign debt crisis which, in turn, became an issue for the peripheral countries of the Eurozone (Wunderlich, 2017, p. 126). The Eurozone crisis began in Greece when high levels of public debt combined with negative economic growth threatened to push the country out of the Eurozone (Rankin, 2018). Spain, Portugal, Ireland, and Italy were also brought to the brink of a sovereign debt default, threatening the stability of the Eurozone as a whole and exposing the holders of those government bonds (mostly in Germany, the Netherlands, France, and the UK) to a tsunami of negative loans and write-offs.

The crisis exposed a set of institutional deficiencies and design flaws at the heart of the Eurozone and fundamentally undermined solidarity among its member states. Throughout the 1990s and the 2000s, the EU focused on adapting its institutional infrastructure to the post-Cold War enlargement and European Monetary Union (EMU), which had set the EU on a firm course for integration in concentric circles. Rather than moving in the direction of ‘ever closer union’ as envisaged in the 1950s, the Maastricht treaty had sown the seeds for permanent differentiation. The institutional reforms of the 1990s and 2000s also led to the increasing politicisation of the EU and of EU governance in domestic debates (Hurrelmann et al., 2015; Hutter et al., 2016; Grande & Hutter, 2016). These issues would play an important role during the Eurozone crisis.

The creation of the Euro was as much a political project as an economic one, a symbol for a collective European identity (Risse et al., 1998, p. 32). When the Euro was established as a common currency in 1999, the emerging monetary union was not underpinned by fiscal union. The structural problems dividing the Eurozone economies were thus not addressed and the Euro effectively created two categories of members: ‘producers’ in the Northern core and ‘consumer’ countries in the Southern periphery. Core ‘producers’, such as Germany and the Netherlands, ran large current account surpluses while Southern European countries, unable to increase their market share in intra-EU trade, effectively absorbed Northern European exports (Heinrich & Kutter, 2013). Increasing current account deficits were financed through rising levels of public and private debt, facilitated by abundant credit readily provided by banks, pension funds, and other financial service providers from surplus countries (Micossi, 2016, p. 3).

As core states of the Eurozone, France and Germany assumed particular roles in shaping the institutional response to the crisis. Both states are heavily embedded within EU trade and investment. Moreover, Paris and Berlin had a long-term institutional commitment to European integration and the EMU as key architects of both. Paris advocated for a swift bailout of Greece and stressed mutual responsibilities and solidarity between Northern European surplus countries and Southern deficit countries. Germany was reluctant to endorse these French proposals, focusing squarely on rule-compliance within the EMU (Crespy & Schmidt, 2012, p. 351). Despite their different approaches, France and Germany had a common interest in preventing a collapse of the Eurozone. Both countries were the largest holders of public and private debt of the Southern periphery. Rescue mechanisms were developed from April 2010 onwards, first on a bilateral basis, then culminating in the European Financial Stability Facility, bundling guarantees from Eurozone members, the Commission, and the IMF. This was superseded in 2012 by the European Stability Mechanism (ESM), a permanent intergovernmental institution (ESM, n.d.). The Commission proposed the so-called Six Pack, a set of legislative measures to reform the Stability and Growth Pact (European Commission, 2011). This was complemented by the Two-Pack of 2013 (European Commission, 2013). The crisis had highlighted the high levels of integration of the economic and financial sectors, particularly among Eurozone economies. Further institutional initiatives aimed at addressing economic governance issues, resulting in the Euro Plus Pact and the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (TSCG). New regulatory measures were also established at the sovereign debt-financial sector nexus. In 2012, the Commission published two documents, the first detailing a plan to complete the EMU and the other setting out a roadmap to achieve a banking union (European Commission, 2012a, 2012b). Based on this, EU institutions and Eurozone members agreed to set up the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM) as the first two pillars of a banking union. In 2015, the creation of a European Deposit Insurance Scheme (EDIS) was proposed to harmonise already existing national insurance schemes across the Eurozone and reduce their vulnerabilities to large external shocks (European Commission, 2015).

There are some notable differences between the Asian financial and the Eurozone crisis. The East AFC was primarily a liquidity crisis caused by a heavy reliance on short-term portfolio investments denominated in foreign currency. The Eurozone crisis was a solvency crisis. The bailout programmes imposed severe budget controls and austerity measures in the Southern periphery of the Eurozone which turned a solvency crisis into near-political collapse and a deep social and political crisis (Wunderlich, 2017, p. 126). In the mid-2010s, almost 27 million Europeans, 11% of the workforce, were unemployed. Greece and Ireland had seen their GDP fall by 20% between 2007 and 2012 as private firms were forced into bankruptcy, with salaries, welfare payment, and pensions slashed and public sector spending on public goods such as health, infrastructure, and other services dramatically cut back. Unemployment rates in 2012 were between 25 and 30% for Greece and Spain compared to 5.5% in Germany or 5.3% in the Netherlands. This opened up new divisions between Europeans that threatened the very core of European integration (Copsey, 2015, pp. 13-15). Moreover, those bailout programmes and their draconian conditionalities were not imposed by external institutions such as the IMF but by EU institutions and fellow EU members with devastating implications for intra-EMU trust and solidarity.

The difference between creditor and debtor states split the Eurozone, undermining the principle of solidarity and any notions of European identity. The framing of the crisis is important here (Lafflan, 2014). As we have seen, the AFC was largely framed as an externally induced crisis, at least within the region. The IMF and the ‘West’ in a broader sense were marked as the main perpetrators, serving as a catalyst for addressing the institutional deficit within East Asia. In Europe, the crisis narrative differed significantly, pointing to internal deviants and institutional deficiencies. Links to the GFC were by and large downplayed or were completely absent from the public discourse.

In summary, the Eurozone crisis has been a multiyear crisis that has not been entirely resolved at the time of writing in the very early 2020s. The crisis exposed the structural and institutional problems at the heart of the Eurozone. It caused a lasting division between Member states rather than uniting them and moving closer to political union. The impact of exogenous shock, financial, economic, and social crisis fundamentally undermined the trust in European institutions among large parts of the public.⁷ It brought down governments, pushed millions of people across Europe into unemployment, opened up large chasms in living standards within and between EU members, and fostered the rapid growth of extremist parties (Copsey, 2015, p. 15). Not only has the appeal of European integration as model of institution-building been waning in the developing world (Lazarou, 2012), but also the resistance to European integration and the EU’s political and economic agenda in the form of Eurosceptic populism has dramatically increased in recent years, raising questions about the future of the entire project. This can be taken as a sign of public discontent with European integration (De Wilde & Trenz, 2012, p. 14). The crisis triggered a rupture: despite a series of institutional adaptations and transitions within the Eurozone, the fragmentation of the EU remains a strong possibility. The UK’s departure from the bloc serves as a stark reminder of this.