One issue that many scholars face with analysing the failures of the Eurozone – and there are many – is the disconnect between the prism through which these issues are considered, and the realm of the issue itself. For more than a decade now, the Eurozone has been marred by recession, unemployment and sclerotic growth. Southern European nations, their currency artificially propped up by German manufacturing prowess, bound by rigid austerity measures under the supervision of the Bundeswehr, have been utterly unable to emerge from the deep recessions they entered during the Global Financial Crisis. How did this catastrophe occur? How did such an ambitious project fail so utterly? To trace the roots of the Eurozone’s failure, one must consider the intellectual foundations of the European project.
The European Project and the Beginnings of the Eurozone Crisis
The European Union as an intellectual project emerged in response to the Second World War. Scarred by the internecine destruction that characterised early twentieth century life on the continent, Europeans sought through integration to make renewed warfare not just unthinkable, but impossible. It was with this hope for peace that the architects of the Maastricht Treaty wholeheartedly endorsed the principles of free trade, freedom of movement, the unification of national currency in the form of the Euro and later, the creation of a singular, central European bank to administer monetary policy on behalf of member nations. In this piece I will argue that it was the political nature of the EU, predicated on an optimistic conception of integration, both economic and political, that precipitated the worst effects of the Eurozone crisis that are still being felt today. The EU is unable to have a unified or coherent amalgamation of fiscal policy, due to the structural issues of the Eurozone, and the inherent tensions of a political project that seeks to unify inchoate nation states into a coherent bloc subject to unilateral governance.
Following the conclusion of the Maastricht Treaty, the Euro was introduced in 1999. The ECB, which was inflation averse, was encumbered with the task of managing the EU’s monetary policy and the inflation of its currency. The presence of an ostensible ECB guarantee of member nations’ economic viability led to an overinvestment in the sovereign debt of peripheral member nations. For instance, the costs associated with Greece’s borrowing on ten-year bonds fell by 20 per cent following their entrance into the Eurozone. The inability of member nations to exercise deflationary control over their currency mitigated their ability to reign in the worst effects of a crisis as by design – the ECB was the only body empowered with deflationary control of the Euro. In early 2009 the Greek government announced that their national deficit was significantly higher than expected, far outreaching the limits outlined in the Maastricht Criteria and throwing the banks of the Eurozone into chaos. The ECB was forced to absorb the vast debt in order to stop the vulnerable banking system crashing entirely. The political and economic costs of this temporary bail-out would be drastic. Following the collapse of numerous national banks, the debt that had previously been private became public as governments continued to bail banks out to maintain functional credit and prevent a crash of the entire Eurozone. As the economies began to recede, the now-sovereign debt bloomed and borrowing interest rates soared as lenders realised the insecurity of their bonds, and harsh austerity measures were implemented into bailout nations. Nations now consider defaulting or leaving the EU entirely, and the political-turned-economic project of the Eurozone appears tenuous at best.
Monetary Policy Fissures
Despite the economic hegemony that the ECB exercises in the Eurozone, it has a lack of ability to create appropriate policy. The fundamentally poor policy, based on a lack of understanding of economic unification of the ECB and EMU spurred the debt that brought the Euro crisis to fruition. After the ratification of the Maastricht Treaty, long term government bond interest rates dropped from 16% to less than 4% by 2005, with the interest risk premiums dropping from more than 7% to almost nothing in the same period. The encouragement of the ECB to use government bonds as collateral in banking exchanges was paired with their face of low inflation policies, relaxing nations into lending with no inhibitions leading to high sovereign debt. Upon the bursting of the multiple housing bubbles in 2008 the banks were exposed, panicking lenders into raising interest rates exponentially. The monetary policy of the ECB to lower interest rates to precipitate demand in Germany and France, also created the glut of cheap money available to Ireland and Greece that would go on to induce their sovereign debt crisis.
The ECBs responsibility for the Euro crisis can also be attributed to its lack of ability to uphold its monetary guidelines. The monetary governing body of the ECB, the European Monetary Union, recognised some of the issues that may arise from autonomy of fiscal policy and created the Stability and Growth Pact in an attempt to enforce similar fiscal policy across the Eurozone. However, the regulations of the SGP as well as the requirements for being able to enter into the Maastricht Treaty were never enforced and both France and Germany – who together account for 50% of Euro output – shirked them within the first five years of the EMU, leading other influential states to lobby to have the regulations tweaked in their favour. Politically, the lack of authority carried by the EU and ECB allows the Eurozone’s economically dominant nations to become the most politically dominant, undermining the entire concept of a “union of equals”, and ensuring the political power falls to nations rather than the banks. The relaxing of the Maastricht and SGP requirements under Franco-German lobbying allowed nations to pursue more unstable fiscal policy, an important precursor to the crisis eventuating in 2008.
Structural Issues Associated with Fiscal Sovereignty
The unwillingness of European nations to surrender their fiscal sovereignty resulted in an uneven dichotomy between fiscal and monetary regulation, as well as wage and price flexibility, that results in nations with vastly different economic standards being given the same privileges and expected to acclimatise to the same conditions. The economic climate of the 1990s was suboptimal for the EU to financially converge but the political desire for unity was bolstered by economists claiming that the presence of the Euro would spur integration that would support it, rather than creating economic infrastructure to then support the introduction of the single currency. Countries had already surrendered their monetary autonomy when joining the union, which enhanced the importance of their fiscal policy power ensuring they were hesitant to abdicate their last tool of macroeconomic policy. Moravcsik notes that “[all nations] got what they wanted, but no one [wanted] to create a viable macroeconomic union”. Notably, there are no legitimate impediments to implementing universal fiscal policy that could resolve the Euro crisis and ensure a stable Euro. It is theoretically possible, but now and for the foreseeable future, politically infeasible.
The variation in monetary and fiscal policy due to cultural differences in the Eurozone contributed to the Euro crisis as it instilled a sense of false confidence into lenders from nations with weak economies that lead to vast irresponsible spending that drove up private and sovereign debt. The economic needs of the Eurozone were vast and so in the ECB trying to reconcile the political and economic demands of, for example Spain and Germany, it failed to implement a policy that suited either. The fiscal variation and disparities between nations in both prices, wages, and culture also ensured that imbalances accumulated to worsen inflation. When the peripheral nations fell into debt it became clear that it would be difficult to rebalance the rapidly deteriorating Euro, particularly given the lack of rebalancing mechanisms within the Eurozone architecture. Problematically, nations residing under the same monetary policy of the ECB ensures they cannot respond to upsets by lowering their interest rates or increasing wages to promote competition. Iceland operates on the independent króna and following the Euro crisis was able to mechanise currency depreciation in order to promote competition and restabilise their economy. Comparatively, debt-stricken Greece is restricted by the inflexible monetary policy of the EMU that ensures it cannot adjust its own currency to boost competition and stimulate the currency into rehabilitation. The issue that this presents is that any major upset in the market is extremely difficult to rebalance into surplus.
Ultimately, the Eurozone was an economic unit founded with inherently political goals. Its foundational myth was that an inchoate array of nations could be seamlessly integrated into a coherent and manageable economic bloc. Whilst this may have been possible if all the nations had agreed to surrender their national sovereignty, and most relevantly, their ability to control their own fiscal policy, the piecemeal approach that prevailed ingrained a system waiting for crisis. If the ECB and EMU were able to have complete control over both the fiscal and monetary policy of the Eurozone they would be able to ensure both interacted in such a way that would combat debt and promote growth – both Angela Merkel and Jean-Claude Trichet, former president of the ECB, have called for this. With the decentralised policy as it sits under the status quo, this is not possible. This solution is wistfully simplistic and, as noted above, politically infeasible.
To its credit, the EU politically was able to take the dictatorships of Portugal, Spain, and Greece and reform them into stable democracies, but the economic downfalls of this project have and continue to be vast. The reality that must be confronted by the architects and proponents of the EU is that if the mantra of integration can be followed by actual results in favour of member nations, a complete realignment of the EU’s structure has to occur. It must either involve absolute integration of fiscal and monetary policy to allow for better policy making or it must seriously contemplate doing away with the strictures of the ECB to allow member nations to have more autonomy in the implementation of monetary policy, to complement their independent fiscal policy. Until these issues are confronted, the EU will never resolve its structural and institutional deficiencies.