By Scott James
The Economist’s front cover this week set me thinking about the prospects for the euro’s survival. There has been much coverage in the press over recent weeks about the impending collapse (or at least the shrinkage) of the eurozone as a consequence of the sovereign debt crises afflicting several member states, the weakness of existing supranational modes of governance (notably the Growth and Stability Pact), and the inability (or unwillingness) of leading European politicians to get a grip of the situation. On the one hand we are told that the likelihood of Greece, Ireland, Portugal or even Spain leaving the eurozone has risen as those countries grapple with the austerity measures being imposed (implicitly or explicitly) by an alliance of the Commission, IMF, Germany and international investors. Such an outcome would allow those countries to increase their competitiveness through devaluation by restoring their own national currencies. On the other hand, Germany may consider leaving of its own accord under the economic strain of having to bail-out a seemingly endless list of peripheral economies and/or the political obstacle to doing so posed by the German electorate and Constitutional Court.
Yet this speculation is based on a crude rationality that assumes that national governments are self-interested utility maximisers and that national preferences are reducible to the desire for power, wealth and prestige. As political scientists and political economists however we have a responsibility to challenge these lazy assumptions. By contrast alternative analytical lenses, such as those offered by the four ‘new’ institutionalisms, offer a far less pessimistic outlook for the euro’s survival and one that policy-makers and commentators would do well to reflect upon.
Firstly, rational choice institutionalism acknowledges that political agents may be ‘rational’, but that their decisions and actions are facilitated and constrained by the institutional opportunity structures within which they are located. Applying this to the eurozone crisis we see that the prospects of Greece (or anyone else) withdrawing from the euro any time soon is unlikely. The most important institutional constraint is the simple fact that there is no constitutional mechanism for any member to vacate the eurozone, short of leaving the EU altogether. The constitutional-legal complexity of doing so therefore constitutes a huge practical obstacle which would only be realistically surmountable in the most extreme of economic circumstances. The likelihood is that political leaders will therefore continue to muddle through, not least because there is simply no Plan B.
Second, historical institutionalism tells us that institutional change is path dependent and ‘sticky’: policies have a tendency to continue along well-worn developmental trajectories unless and until they are confronted by an exogenous shock to the system. The sovereign debt crisis could conceivably constitute just such a critical juncture. Yet it is worth reflecting upon the fact that the peripheral economies have a great deal at stake in the continued survival of the euro. The single currency has been the guiding project of modernisation and reform in these states for over twenty years and their economic and political elites have staked their reputation on remaining a part of it. History also tells us that the integration process has not only survived but has also been strengthened by previous periods of turmoil. From the Empty Chair Crisis in the 1960s and eurosclerosis in the 1970s, to the British budgetary dispute of the 1980s, ERM crisis in the 1990s and the failure of the Constitutional Treaty in the 2000s, the EU has been defined and driven by crisis throughout its existence. Those predicting the collapse of EMU (or even the EU as a whole) need to explain why today is any different.
Third, sociological institutionalism suggests that political agents are guided by a ‘logic of appropriateness’ according to the shared cultural norms, values, beliefs and identities that are embedded within institutions. This offers perhaps the most convincing account of why we should avoid writing the euro off just yet. In essence decades of monthly ministerial councils, weekly working group meetings and daily communications mean that European policy makers share a powerful sense of collective belonging. The socialisation effects that derive from regular interaction, shared experiences, information exchange, mutual learning and the development of trust contradict simplistic rational choice assumptions by helping to explain why national preferences remain so doggedly pro-euro. The continued survival of EMU therefore rests in large part upon the fact that no leader wants to be subject to the shame and disapproval of their peers that would inevitably result from being seen to be the first to pull the rug from under a project.
Finally, we should avoid downplaying the power of discourse and ideas. Discursive institutionalism reminds us that institutions are structures and constructs of meaning. Political agents therefore don’t simply react as utility maximisers to the ‘objective’ context in which they are located, but must first learn to ‘subjectively’ interpret and understand that context. There is little sign that the idea of European integration has been tarnished by the crisis and it is striking how the communicative discourse of leading policy makers continues to stress the continued viability and desirability of the single currency. Of course this degree of elite discursive consensus may simply be for public (or rather market) consumption. But it is notable how policy makers have thus far framed the cause of the crisis in terms of national failure (to control housing booms or reform labour markets) and inadequate supranational integration (the weakness of the Stability and Growth Pact for example), rather than as a consequence of monetary union itself (such as the part played by low ECB interest rates in fuelling asset and credit bubbles, or the pain inflicted by German-inspired Commission/IMF austerity packages). Unless and until the mask starts to slip from this prevailing discourse I foresee little appetite amongst European leaders for throwing in the towel.
For those international investors currently speculating against the euro’s survival over the next few years I would therefore highly recommend hedging your bets.