Brussels, barricades and the future of EMU

europeonthestrand |

By Scott James

The recent demonstrations in Brussels have perhaps brought home to many of us the scale of the challenge facing Europe, and the Eurozone in particular, in its efforts to learn and adapt to the global financial crisis. A recent postgraduate workshop at King’s College London on the subject of ‘Rethinking Europe after the Financial Crisis’ raised some very interesting questions and, I have to confess, certainly caused me to question a number of pre-conceived notions that I held about how and why the EU should respond. 

Firstly, the financial crisis has found the traditional ‘ways of doing things’ in Brussels to be seriously wanting. In particular, the recent turmoil has highlighted the limits of supranational supervision of national economies. The lesson of the failure of the Stability and Growth Pact was not simply that national governments prevented the appropriate warnings and recommendations from being issued to serial offenders – notably France and Germany. It was in fact also looking at the wrong things – focusing on budget deficits and public debt at the expense of underlying imbalances within the economy, such as unsustainable housing bubbles, levels of leverage in the private sector and declining productivity rates. Remember that two of the worst hit member states (Spain and Ireland) were actually running quite healthy budget surpluses when the crisis hit. Indeed the Celtic Tiger was being held up as a model of prudence and dynamism only a few years ago. This must surely call into question the entire existing institutional framework surrounding EMU?

Second, surprisingly little concern has thus far been directed towards how monetary union may have exacerbated the economic asymmetries that now risk tearing the eurozone apart. In particular, several questions need answering. To what extent did the single interest rate contribute to the unsustainable construction booms in Spain and Ireland? Did the availability of cheap capital enable countries to put off awkward decisions aimed at increasing competitiveness through labour market reforms? How have low interest rates and the weakness of the euro contributed to Germany’s trade surplus? These questions raise the prospect of a pernicious form of Europeanisation – one in which the existence of the euro is exploited by member states for short-term economic self-interest, at the expense of the longer-term stability and viability of monetary union. In other words, a classic collective action problem in which governments engage in ‘free riding’.

Third, it goes without saying that the open method of coordination, which many heralded as an important breakthrough in experimental ‘soft’ governance, has proved wholly inadequate as a mechanism for raising competitiveness through the Lisbon Strategy. Conventional wisdom states that this is because the mechanisms of governance are simply too weak to enforce compliance – which in turn reflects a broader lack of consensus amongst European leaders over what sort of an economic model the EU should be promoting. Yet this no longer strikes me as the central dilemma facing EMU. As a discursive framework, the Lisbon Strategy sought to promote a clear transformative agenda which, in theory, set out to redefine the scope and nature of public action within the member states. The nub of the problem is instead a fundamental clash between economics and politics, pithily summed up by Jean-Claude Juncker’s comment that ‘We all know what to do. It’s just we don’t know how to get re-elected once we’ve done it’ (European Voice, 5th Feb 2009).  

For this reason, simplistic solutions that call for the strengthening of supranational supervision of national economies risk missing the point. The Commission’s far-reaching proposals to strengthen the governance of EMU – through the monitoring of national economic imbalances and the imposition of fines for failing to meet competitiveness targets – potentially extends the reach of Brussels into new and unchartered territory. In many ways, the EU’s greatest strength has been its ability to reconcile competing economic models and narratives of the good society (whether ‘social’ Europe or ‘neo-liberal’ Europe). Yet if Brussels is increasingly seen as imposing reform and austerity on member states from above, then it runs the risk of addressing one crisis (a financial one) only by creating another one (a legitimacy one). How far and how fast the economic can progress ahead of the political therefore remains the defining challenge facing Europe today.