The future of the Euro-zone: more integration or disintegration?

Dr. LeTalani, professor within the Department of European and International Studies at King’s College London.


Overall, the European Union does not seem to have been particularly well-equipped to cope with the financial crisis, nor does it seem as yet to have the political will and capacity to truly move forward in the necessary process of political and fiscal integration. The crisis of the sovereign debt in the periphery of the eurozone seems to have been the consequence of the combined effect of the global financial crisis and the structural asymmetries that had affected the EMU from its establishment.

The European Commission was taken completely by surprise by the global financial crisis and the subsequent recession. Moreover, European responses to the financial crisis have been fairly scattered and erratic, and EU authorities have not been capable of initiating coordinated responses to the crisis unless at the very last minute. The ECB did little to curb the expansion of the financial sector and to stop growing speculation in Central and Eastern European countries by powerful Western European banks, which as a result became heavily exposed. The Commission seemed to be more interested in liberalising the labour and product markets, whilst allowing for a widespread deregulation of the financial sector, UK style. Equally, macroeconomic responses to the crisis have not been coordinated at the EU level. Stimulus programs were decided at the level of the nation state, had a national scope and produced a number of controversies regarding ‘financial protectionism’ regarding the support of national industry or national economic players vis-a-vis their European competitors. This might even have a disruptive impact on the EU as a whole, especially in the wake of the sovereign debt crisis affecting the weakest countries in the eurozone. Finally, external support for Europe’s periphery has been largely delegated to the IMF.

All this must be inserted into the context of the limited potential of the Euro as an international reserve currency. Although the international role of the Euro had increased somewhat in the 10 years following its introduction, there are a number of limits to its further expansion. The improvement in the international role of the Euro took place mainly in its first years of existence (up to 2002 and 2003). Subsequent developments have essentially been due to the appreciation of the European currency with respect to the US dollar or are limited to the Eurozone’s neighbouring countries. This has been reversed with the outburst of the crisis. Furthermore, there does not seem to be sufficient scope for furthering the development of the Euro as an international currency in the political, institutional and ideological framework of economic policy making in the EU as the sovereign debt crisis has perfectly made clear. As a consequence, the idea of the Euro rivalling the dollar as an international reserve currency remains largely a dream.

These institutional constraints may be removed in the future. The global financial and economic crisis could indeed have stimulated further reflection on the role of the EU and the Euro in the international monetary system and on global economic governance. However, although at the onset of the global crash the weaknesses of the US economy were fairly evident, this did not lead to a run on the US dollar or to a strengthening of the international role of the Euro. On the contrary, rather than exposing the limits of global dollar dominance, the crisis has highlighted a lack of either credible alternatives to US power (monetary and otherwise) or  a capacity for the EU to take the lead of the global economy. To be sure, it was the US Federal Reserve and Treasury, not the European Commission or the ECB, to act as the leading institution in crisis management and provide for the much needed role of ‘lender of last resort’ at the onset of the global financial crisis.

There is, finally, very little evidence of growing European solidarity in the face of recession.  For example, Central and Eastern European countries have been in a very dire situation, experiencing a serious decline in their industrial production as well as the bursting of a housing bubble with all that entails in terms of capital shortage. This was further aggravated by the almost complete dominance of the CEEC’s banking system by Western banks, especially Austrian, German, Italian, and Swedish. Indeed, the depth of the recession in the East was a consequence of the failure of a post-1989 growth model that was embedded in the EU accession program and based on the dominance of foreign finance, the integration of Eastern economies into the Western financial model, and regulatory convergence with the EU. The risk was that the CEECs would collapse both economically and socially as a consequence of the outflows of foreign capital. Eventually, the situation was kept under control not so much by the intervention of the EU Commission as by the loans provided by the IMF, which says a lot about the degree of solidarity in the EU. Since November 2008, the IMF has agreed to intervene to financially support eleven countries in the region, starting with Latvia, Hungary, and the Ukraine.  Among them, only Poland has received special treatment by virtue of its positive track record in financial stability. The other countries had to implement pro-cyclical structural adjustment programs that certainly had serious repercussions on the standard of living and the employment level of their populations. All of this took place under the wings of the IMF, as if entry into the EU had never happened.

Something more has been done to react to the sovereign debt crises affecting Greece and Ireland within the eurozone, and spreading quickly to the other members of the PIIGS group. This, however, took the form of mainly ad hoc decisions providing for impromptu solutions lacking institutional depth and democratic legitimacy, such as the European Financial Stability Facility (EFSF). A more institutionalised rescue mechanism for member states of the eurozone under attack for the lack of sustainability of their fiscal position was approved in December 2010. This took the form a European Stability Mechanism (ESM); although it is debatable whether these plans configure a future fiscal union in any ways.

In conclusion, the burden of the costs of the crisis was inflicted on the weakest countries of the system. This was far from having been socialised among the members of the eurozone and of the EU through the adoption of a real common fiscal policy and the attribution to the European Central Bank of its natural role as lender of last resort. It happened instead through the imposition of savage austerity plans. Indeed, the main characteristic of the EU approach to crisis management, quite apart from the rhetoric about the establishment of a new economic governance, was ‘internal devaluation’ with all that means in terms of pro-cyclical effects, popular resistance, political instability and eventually the threat of disruption to the EU integration process as a whole. It remains to be seen if this is a price worth paying.


 

DISCLAIMER: The opinions and views expressed in this opinion piece belong to the author and are independent of the Department of Political Economy and KCL Politics Society.

 

Works Cited:

Soedeberg, S., (2010), Corporate Power and Ownership in. Contemporary Capitalism: The Politics of Resistance and Domination, London: Routledge

Cafruny, A., (2010) “The Global Financial Crisis and the crisis of European neo-liberalism”,in Talani, L.S., (ed.)The Global Crash, London: Palgrave, pp: 121-140

Cafruny, A., (2010) “The Global Financial Crisis and the crisis of European neo-liberalism”,in Talani, L.S., (ed.)The Global Crash, London: Palgrave, pp: 121-140

Plashcke, H.,(2010), “Challenging the Dollar in International Monetary Relations? The lost opportunities of the Euro”, in Talani, L.S., (ed.), The Global Crash, London: Palgrave, pp: 73-100

Plashcke, H.,(2010), “Challenging the Dollar in International Monetary Relations? The lost opportunities of the Euro”, in Talani, L.S., (ed.), The Global Crash, London: Palgrave, pp: 73-100

Cafruny, A., and Talani, L.S, (2012), “The consequences of the global financial crisis on Europe”, International Political Economy Yearbook, Volume 18 Boulder: Lynne Rienner

Cafruny, A., (2010) “The Global Financial Crisis and the crisis of European neo-liberalism”,in Talani, L.S., (ed.)The Global Crash, London: Palgrave, pp: 121-140

Cafruny, A., (2010) “The Global Financial Crisis and the crisis of European neo-liberalism”,in Talani, L.S., (ed.)The Global Crash, London: Palgrave, pp: 121-140

Cafruny, A., and Talani, L.S, (2012), “The consequences of the global financial crisis on Europe”, International Political Economy Yearbook, Volume 18 Boulder: Lynne Rienner

See http://www.efsf.Europa.eu/about/index.htm as accessed on December 15, 2010

For more details, see http://www.consilium.Europa.eu/uedocs/cms_data/docs/pressdata/en/ec/118578.pdf, as accessed on December 21, 2010.

Categories Europe

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