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Reforming EU governance: political problems of the Greek financial crisis

By Jo Coghlan - posted Wednesday, 27 July 2011


In 2009 the American government, reacting to the sub prime crisis, unconditionally agreed that no bank central to the stability of the U.S. economy would be allowed to fail. The decision was political as much as it was economic: it was fiscal stabilisation and confidence building all rolled into one. Events currently occurring in Europe are not dissimilar. Greece's solvency problems mean a financial bailout is required from European Union (EU) members in order to rebuild confidence in the Euro as well as eurozone regulators, the EU itself and the European Economic and Monetary Union (EMU).

The current financial crisis in Greece – that is, Greece can not pay its debts, hence it is broke - exposes structural weaknesses within the EU and strengthens the legitimacy of those calling for structural reform: specifically in relation to the need for a single EU voice on fiscal, wage and social welfare policy. What the current Greek crisis has exposed is deficiencies in the ability of EU fiscal governance.

While EU members have sovereign control over domestic economic matters including their budgets and responsibility for their own debts, the EU is only able to intervene in sovereign economies when they have defaulted on their debts. Only then can EU intervention occur and when it does so the mechanism for returning them to a balanced budget is austerity measures. This requires states to commit to "solemnly reaffirm their inflexible determination to honor fully their own individual sovereign signatures", so they are still responsible for standing behind all of the debt". This is what has occurred recently in relation to the fiscal crises in Ireland and Portugal.

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Measures in Greece are more complicated. Having voluntarily defaulted on private debts the state - without intervention - may default on official debts, which would see it forced out of the EU. The possibility of a broke, rogue Greece operating in the Eurozone outside of EU trade and monetary regulations is not a situation the EU wants to see emerge. The even larger crisis facing the EU (and the IMF) is the need to prevent the contagion from spreading.

Rather than examine how Greece became an economic and political problem for the EU, it is worth considering how the Greek crisis exposes governance issues within the EU and the EMU. Most commentators are examining the actions of the Greek government's irresponsibility as the cause of the crisis. Few are asking what the Greek crisis says about the need for EU reform.

What the Greek crisis has done is to expose (again) the EU's lack of power in relation to fiscal, wage and social welfare policy. While the EU and the EMU conduct monetary policy in the eurozone, it is unable to regulate domestic economic policies. Allowing states to retain sovereignty over domestic policy while regulating regional monetary policy exposes the weakness of EU economic governance. This weakens it economic authority in the region and globally.

Moreover, as the Greek crisis demonstrates that the EU (much like the American government's response to the sub prime crisis) will intervene in domestic policy when conditions dictate. A contradictory set of governance policies are in place. The EU can't intervene in a member states domestic economy, unless that domestic economy is on the verge of failure and only then it can and will intervene if there is a threat to other eurozone members. When the intervention occurs it is likely very invasive, will introduce harsh austerity measures likely to last decades, and will de-legitimise the authority of the sovereign state to control domestic affairs.

While positioning itself as the benefactor of the troubled states, the reality is that driving the intervention – as in the case of the Greek bailout – is to protect the overall economic and political system regardless of the cost and for as long as it takes. As the Council of the European Union statement of 21 July said: "We reaffirm our commitment to the euro and to do whatever is needed to ensure the financial stability of the euro…" Without a single currency, there is no EU

Unlike sovereign states, the EU and specifically the EMU, is not a single government that conducts fiscal policy at a federal level. Rather the EU, and more directly the EMU, is supposed to be a mechanism for addressing fiscal imbalances between rich and poor member states. EMU measures to achieve this are: the development and advancement of preferential trading areas (including tariff reductions); free trade areas (with no tariffs on some tariffs on all goods); common trade and customs policy; single market economy with free movement of goods, capital, labour and services; a single common currency and monetary policy; and complete economic integration.

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Even though there is a common currency in the eurozone there is no common labour, wage or social welfare provisions. While the EMU conducts monetary policies centrally, fiscal policies remain the responsibility of individual member states. Any recession experienced by a member state has always been likely to uncover weaknesses in the EU and threaten the legitimacy of the EMU to stabililse Eurozone economies. The lack of authority over sovereign economies questions the strength of the EU as a regional and global economic power. Even the International Monetary Fund (IMF) concede that the EU needs to take "decision action" and turn themselves into a "full integrated monetary union" if only to prevent the types of fiscal crises facing state like Greece, Ireland and Portugal becoming global.

To have an organisation such as the EU which has monetary but not fiscal authority over sovereign economies – especially in a state like Greece when there are high levels of domestic debt but also high levels of unemployment, low wages and a weak social welfare net – weakens not only the EU but the economic and ideological foundations upon which it was built. This asymmetry (supranational monetary policy versus national fiscal policies) has however been evident since the 1980s. This is when Keynesian economic policy was supplanted by the neo-liberal demands for balanced budgets and running down public spending while withdrawing the state from active fiscal stabilisation in the market. This shift, coupled with the current Greek crisis has exposed two related issues.

Firstly, the EU and EMU under the influence of neo-liberalism has allowed Greece to supervise their own fiscal policy. Without EMU supervision over fiscal policy (although the EU retains authority over monetary policy) it exposes weaknesses in EU governance. Distinctions in control over monetary and fiscal policy undermines the Maastricht Treaty and its aim to: "promote economic and social progress which is balanced and sustainable, in particular through the creation of an area without internal frontiers, through the strengthening of economic and social cohesion."

Secondly, the lack of fiscal control has meant Greece will now faces a recession that will probably last longer and be deeper than needed. It is seeing austerity measures (pension cuts, pay cuts and tax rises, selling government assets and infrastructure, deep public spending cuts and wholesale privatisation, for example) introduced that will be harsh on Greek citizen. And this is the problem of the austerity measures themselves. As Yanis Varoufakis, Professor of Economics at Athens University argues:

Greece must swallow austerity's bitter medicine again and again both because it is the only way back to health and because it is right that the Greeks learn a lesson the hard way. There is a snag, however, that undermines both motives behind the current austerity drive: the prescribed medicine neither cures the disease (which now threatens to engulf the whole of the eurozone) nor punishes the over-reachers.

Austerity measures also have negative economic ripple effects for EU members as they share the burden of recession, trade and earn wages with a weakened Euro, and face widening social unrest. There are also political effects. States most affected by the Greek crisis, France, Germany and the U.K, face hostility from domestic constituencies who are opposed to their taxes bailing out other states.

From the introduction of the Euro in the early 2000s to the onset of the global financial crisis (GFC) in the late 2000s, calls for reform in EU economic governance have been present. While there is a centralised monetary policy, the lack of authority on sovereign budgets and policies have seen disparities in wage policies emerge across the eurozone; this is a factor not unrelated to the Greek crisis. The EU advocates a cost-neutral wage policy that theoretically does not affect the mutual competitive positions of the member states. The idea is that as long as national wage rates move in line with productivity, labour costs should remain constant.

However with the weakening of trade unions across the EU wages have generally declined. States like Greece for economic or politically pragmatic reasons have increased wages – albeit in forms of subsidised incomes in industries like agriculture. Unregulated by EMU oversight, wage increases and wage subsidisations are then considered (by the EMU) as a core cause of the fiscal crisis and the first thing to go in austerity measures. The lack of uniformed wage policy is a key argument of those that advocated EU monetary and fiscal management of EU member states.

Highlighting the impact of a lack of an EMU voice on fiscal policy was the uneven fiscal benefits that occurred in some member states between the same period (the Euro's introduction in the early 2000s and the GFC in the late 2000's). Currency booms in Ireland and Spain and stagnation in Germany and Italy – exposed the lack of EMU fiscal policy and authority in areas like interest rates.

Had the EMU been empowered on domestic fiscal policy it is likely that a more interventionist fiscal policy would have seen Germany and Italy adopt a less restrictive interest rate policy, which could have freed the domestic economy enough to avoid economic stagnation. Conversely, there would have been more restrictive measures placed on Spain and Ireland to slow down their domestic economies. The latter may have also dampened the effects of the global financial crisis on Ireland in particular as it was hard hit by a sub-prime mortgage crisis.

Because the EMU lacks the authority to make fiscal policy means that there is no European institution that can prescribe changes in national fiscal policies: policies that introduced early in the currency booms and even early in the GFC and Greek crisis might have averted the harshness now being experienced because of austerity measures, regional toxicity, a weakened Euro, and social and political unrest.

The larger concern here of course is that giving fiscal and well as monetary control to the EU, means giving control of member states national economies, including domestic budgets to the EU The rejected 1970 Werner Proposal advocated that very thing: arguing for a three-stage integration of national currency, regional economic policy and domestic fiscal policy. Opposition, mainly from France, Belgium and Luxemburg came in the view that the Werner Proposal would lead to the installation of a European government. The question is assuming it would lead to a European government, would have helped or hindered the fiscal crises recently facing Italy, Portugal, Spain, Ireland and now Greece?

It is almost past determining who is responsible for the Greek crisis. There is growing consensus that the austerity measures will harshly affect Greek citizens and will only deepen and prolong the recession (as it did in Portugal). The larger issue the EU will now face is what if the measures don't work? Will then the EU consider reform of its economic governance? If not, with the EU be faced with this type of crisis again or does it signal the beginning of the end of the EU?

While not users of the Euro, there is significant political concern in Britain about the likely impact of the crisis on the British economy. The fear is palatable as British MP's now openly talk about the end of the Euro and are floating alternatives to a European single currency.

The Greek crisis highlights again the need for reform within the EU, and particularly of the EMU. Ideally it is governance reform that would empower a single EU fiscal voice in order to avoid the crisis situation that has enveloped Greece. Crisis prevention likely requires one instrument to regulate both monetary and fiscal policy. Moreover, this instrument could integrate economic and fiscal policy with wage and social welfare policy thus bringing about a more genuine and balanced EU

The other argument driving governance reform in relation to EU authority over sovereign fiscal policy is that without a unitary authority European politics might again return to trade boycotts, migration driven xenophobia, and types of social and economic tensions that have led to the wars and ethnic cleansing of the past. The overcoming of these practices was a central rationale for the development of the EU and eurozone.

The argument was that as long as states could move in a free trade system, Europe's extraordinarily diverse political economy could benefit from 'internal' trade and protection. Financial devaluations and positive adjustments in wages and social welfare provisions would emerge overtime while states could maintain their distinctive autonomies and political cultures. This in turn would lead to increasing prosperity and decreasing hostilities.

The current situation, especially resentment from strong economies in bailing out weak economies and in the flow of large subsidies from high-performing to low-performing states within the eurozone to finance sovereign debts, threatens the very existence of the union if allowed to continue or be continually repeated.

If there is to be an EU, then monetary and fiscal policy surely need to be under one umbrella. Just as the Single European Act was necessary to enforce free trade, reform is now required to deliver a single EU economic system. While many states should be concerned at what impact an EU with control over a nation's domestic economy will have on nationhood and sovereignty, the alternatives may be devolution of the EU Consensus in the EU, particularly over the Greek bailout, is already deteriorating. Britain and Slovakia have already said they wont contribute but the German's will pay whatever is required to protect the regional economy. They will however want significant assurances for domestic reform in Greece (so much for Greek sovereignty). Without a true fiscal union, what will stop another Greek crisis? The question that needs to be asked is what are the consequences of a genuine EU monetary and fiscal union versus the consequences of retaining control only over monetary policy?

There are ominous signs that trust in the EU in faltering and the politics of euroscepticism are rapidly returning. While the current Greek bailout may solve some of Europe's financial problems, the larger issue of the future of the EU remains. Does it reform and take control of sovereign economies, does it devolve under the weight of the contradictions of neo-liberalism or does it maintain the status quo and wait for the next fiscal crisis? Inaction is hardly an insightful economic or political response.

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About the Author

Jo Coghlan is a lecturer in the School of Arts and Social Sciences at Southern Cross University.

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