EMU (European Monetary Union) and the Euro/crisis Flashcards
Outline the historical process of the Euro
1970s: path to EMU began in 1970s but was fast derailed due to _____
1980s-90s: picked up again in the late 1980s to 1990s whereby many member states agreed there was now a need for economic and monetary union prior to the EMU’s creation, although some did not wish to participate such as UK and Sweden
What is meant by the monetary union?
Monetary policy would no longer be formulated by national levels, but is decided upon at a European level by a single authority: the ECB, with national banks being branches off of this centre under the ESCB (European System of Central Banks)
What is the ECB responsible for?
The Eurozone.
The eurozone is dependent upon the ECB in delivering monetary stability and on MS being loyal and complying to the rules to support it.
Introduced to attempt to ease the formulation of an EMU.
Why was the Euro introduced and what does it mean for it being a political or economic tool?
- Easiest way for the countries to converge in a Monetary Union. Whereby a single currency would reduce transaction costs across countries (economic) whilst also being politically pleasing as it would signal full commitment to the EMU (political).
Main argument for it being a political tool?
- Citizens engagement: Meant that citizens would be in constant interaction with what was essentially European integration
- US dollar no more: May give the EU further presence in the markets as it will offer an alternative to the US dollar as the EU market now stands to be slightly more than the US.
Main argument for it being an economic tool?
- No currency exchange for travel
- Price of goods easily identified so increase in trade
- Flow of Goods: Labour and goods can flow more easily across borders to where they are needed, making the whole union work more efficiently.
What was the historical process of the euro crisis and how did the EU and nations react at each stage?
- 2007-8: Major financial crisis hit the global economy after US major banks collapsed, resulting in stock exchange drops, credit dry up and further banks at risk of collapse. Despite it being US led, it hit the EU economy harder.
- Reaction of governments: offered deposits, nationalisation of banks and putting together rescue packages
- 2009: real economic collapse, with almost all EU countries showing negative growth or were already in a recession
- Reaction of nations: governments chose to spend more than they taxed, leaving them with high public debt.
- Reaction of EU: creation of EFSF (European Financial Stability Facility) and ESM (European Stability Mechanism) which led to an increase in importance in monitoring countries debt, rather than just their deficit, whereby if a country goes into too much debt they shall be sanctioned and it would require QMV to stop these sanctions.
- ECB: In the end however it was the ECB’s commitment to do whatever it takes to maintain the single currency which prevented the sovereign debt from widening. Most notably their support to Greece, Spain, Portugal, Cyprus and Ireland who received emergency financial support from both the EU and the IMF termed as a ‘bailout’.
2010 onwards:
- EU Regulating: introduced numerous policies to better regulate EU MS spending’s. Made sure that there was centralised supervision and resolution of banks in the Eurozone to stop banks going under and prevent panic from both citizens and nations which may have re-fired the crisis.
- EU insurance: ensured consumers’ deposits across EU with guaranteed 100,000 euros if a bank went under
- No Exit: Exit was not included for states, with the Eurozone threat being seen as a discipline on recalcitrant member states such as Greece.
- Controlling Contagion: The logic of contagion pointed toward a need for a full banking union, as well as a monetary and currency one… and so debt restructuring was introduced as pressured by the IMF to assist Greece in bailout.
- Technocratic Trajectory: The Eurozone, as tackled in this way created a technocratic trajectory whereby there was a wedge between elite discourse and bargaining, and public engagement. The Eurozone became less transparent as a result. The European Parliament lacked contact with public spheres and was unable to speak on behalf of the EU to domestic medias.
- Democratic deficit and identity as no public engagement: Eurozone became more of a problem of democratic deficit and identity rather than their solution… with technocratic discourses only working efficiently when there is public engagement, which led MS to unattractive scenarios of how to act next and led to divides and less integration at the time… and led the EU to attempt to be optimistic about MS complying at the last analysis.
How does intergovernmentalism explain the eurozone crisis?
- typical intergovernmental crisis scenario: an exogenous economic shock threatening the welfare and autonomy of the member states and dramatically increasing their interdependence.
- intergovernmental bargaining based on partly converging and partly diverting MS interests: explained by intergovernmental bargaining based on partly converging and partly diverging member states interests that were designed to strengthen the credibility of member states commitments to the common currency.
- United but conflicted: Since beginning of crisis, govts. Were united in their commitment to the survival of the market and Eurozone but had conflicting views on the means of achieving the common goal.
- Northern coalition: Northern coalition of Germany, Austria, finland and Netherlands sought to minimise their liabilities and financial assets, demanding debted countries adjust through internal devaluation.
- Southern coalition: the southern coalition of Greece, Portugal and spain whereby they were less wealthy, more highly indebted, and under pressure from the financial market.
- Resultant Chicken game: Mixed motives created chicken game characterised by hard bargaining. All wanted continuation of the euro, but sought to avoid backing down and taking over the burden of adjustment. N. Coalition delayed supporting indebted coalition, who in turn sought to postpone their painful adjustment measures until n. coalition saw that rescue was inevitable.
- Intergovernmentalism in sum: intergovernmentalism gives plausabile but shallow explanation of exogenous origins, the mixed state preferences, the chicken-game negotuitoations and the commitment enhancing integration outcomes during the crisis, but would be better understood with a mix of neofunctionalism and intergovermentalism.
Could the EU have done more to prevent the eurocrisis?
Dampened: affects of the eurozone crisis were dampened by the euro
Actions of EU: actions of the EU, most notably the ECB were considered more a ‘balm’ than a cure, and several years on there remains sceptics.
- Central approach to fiscal policy and financial supervision?: it has now been argued that it would not have prevented the eurocrisis and actually made it worse.
- ECBs role: ECB’s belated efforts were not based upon new policies but on pre-existing ones and so one may argue by turning cause into consequence, we see the EU as tending not towards supranationalism system of policy-making, but reinforcing the new intergovernmentalism which prevails within the field of EMU economic governance. This is shown with EU MS being reluctant to give commission empowerment post-crisis
Has the eurocrisis been resolved?
- Whilst indeed numerous policies were put in place, with the EU now able to overview nations banking and spendings, there remains scepticism that it will never happen again, with there continuing to be countries within the EU such as Greece whom are financially unstable. Further integration in the European monetary union may be required, if only to redistribute more evenly the costs and benefits of EMU. At the same time, this should not be pushed before its time, as the EU lacks legitimacy and has shown time and time again that is is a reactive agent, rather than proactive.
- The political controvsery surrounding Greece in 2015 provided a dramatic illustration of this disconnect between elites and citizens. The decision to offer debt relief was one that was political unpopular but economically necessary to end the euro crisis once and for all. Despite this, Greece remains in a deficit and only further relief would bring it out, so the question remains whether politics trumps economic values of states.
Scholars used?
- Hodson (policy making in the EU)
- Verdun (European politics)
- Hodson et al (European politics)
- Moravscik
How was the EU’s move to create both an EMU and ECB thought of?
High stakes: Relying on the ECB in delivering monetary stability, the EMU was thought of as a way to catalyse further, both an economic and political union. It was a clear sign that the EU was playing for high stakes.
