Has the Eurozone Crisis Brought About “a European Autumn?”

Aslıhan P. TURAN
24 December 2011
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Since its inception, the European Union has experienced both political and economic crises and overcome these difficulties through charters and changes within the structures and authorities of its institutions. As it is known, an important political crisis among the EU members arose during the acceptance phase of the EU Constitution.

 
The constitution of the union had been rejected by France and the Netherlands -two of the most powerful and efficient members of the Union- resulted in grave concerns among the union members for the future progress of the organization. 


At this stage, it was decided that a new treaty would be prepared, thanks to which the member states would not feel that their national symbols and sovereignty were under any threat. Within this scope, the Lisbon Treaty was accepted and the treaty entered into force in 2009. Thus, the EU members have taken a big step, since the treaty has provided the EU with modern institutions and optimized working methods to both efficiently and effectively tackle challenges in today's world. Additionally, The Treaty of Lisbon has reinforced democracy in the EU. (1)


Despite the many regional and global crises the EU faced since its foundation, the repercussions of latest crisis upon the Union have been unprecedented. Member states, by decreasing trade amongst themselves through some non-tariff barriers, reacted to the economic crisis erupting in the middle of the 1970s. Hence, in the early 1980s, an EU which was made up of divided markets appeared and it totally lost its power of competition against the US. Thanks to the steps taken for the solution of this problem, the EU formed a Common Market which was free of any obstacles, unprecedented in the world. Non-EU countries such as Norway and Switzerland also became part of this market. (2)


It is a well-known fact that in the essence of the project for the integration of Europe lays the increase of economic power, thus welfare level. This, in fact, directly depends on the removal of customs walls or protectionism. For this end, customs walls were removed among the EU members and through the agreements signed with the third countries, tariff walls were, to a certain extent, mutually removed. The Customs Union did not physically remove the customs. But instead, with the appearance of the Common Market, the customs procedures came to an end. As of 1993, vehicles carrying goods have not been subject to transactions in the borders of the member states. Moreover, the EU as a whole has been regarded as a single country and import-export transactions have started to operate in the destination cities. As for the auditing of these transactions, they are conducted through strong computer networks. (3)


Before analyzing the reasons of the Eurozone crisis (with which the EU has been grappling  for a while) and the ways on how to overcome it, this analysis will focus on the economic and monetary union and the EU’s economic integration steps.


Economic and Monetary Union/Eurozone

On the basis of the EU economic integration lies competition which is based on the tit-for-tat understanding. However, the humanistic and social dimensions of the issue have not been ignored as well. As a whole, development, in addition to increasing the welfare levels of the EU’s backward areas, has been seen as the crucial complementary element of the common policies of the institution. The implementation of this policy has manifested itself as an aid to the countries and regions that are in need. The amount of the aid is determined according to the economic development level, population and unemployment rates of the countries. Within this context, countries such as Portugal, Spain, Greece and Ireland, which are economically weak, have been granted with high rates of the afore-mentioned aids. These countries have also been able to receive credits from the sources of the European Investment Bank as much as they demand. Nevertheless, France and Germany, the countries which provide the bank with net contributions opposed this. (4) In a parallel fashion, it has been France and Germany which have been efficient in seeking solutions for the Eurozone crisis.


In order to have an insight about the economic integration that the EU is undergoing, it would be of use to touch on the steps of the economic integration. Six steps could be taken for the completion of the economic integration: These steps are as follows:


       • Preferential economic territory - lowering the customs tariffs among the countries
       • Free trade zone – the removal of internal customs imposed upon certain/all goods among the state

         parties
       • Customs union - applying the same tariffs for the third countries and acceptance of a common trade

          policy
       • Common Market - establishing common rules upon goods and ensuring the free movement of goods,

         capital, work force and services
       • Economic and Monetary Union - formation of a Common Market through a common currency unit and 

         determination of a common monetary policy depend on  the  following: 


              a. coordination of the economy policies among the member states
              b. coordination of monetary policies, public debt and deficit
              c. establishment of monetary policy, common currency unit and Eurozone that are independently

              governed by the European Central Bank


       • Complete economic integration - implementation of the aforesaid steps and the harmonization

         between fiscal and other economic policies.


“Currently, the EU is not fully economically integrated as needed.” However, its economic and monetary union has been achieved with the acceptance of the common currency unit. It was first decided by the European Council that convened in Maastricht on December 1991 to establish an economic and monetary union. With the Maastricht Agreement (1992), this decision was institutionalized as well. Therefore, thanks to the economic and monetary union, the EU has taken a huge step for the realization of its economic integration. In this sense, economic integration has been regarded as an important means for the consolidation of the Europe’s economy in general and specifically the member states’ economies. New business lines (likely to arise with economic stability and growth) have been seen as opportunities for the EU citizens to directly get the benefits of the integration. (6)

The responsibility of the economic and monetary union is not at the hands of a single authority. But instead, responsibility has been shared by the member states and the European institutions. These institutions that are the main players of the union are as follows: Council of Europe (which determines political orientations), the EU Council (which coordinates European economic policies and determines whether a member state can use the Euro as their currency units), the Eurogroup (which is in charge of coordination of the common politics of the Eurozone states), member states (which determine their national budgets within the designated borders), the Commission that audits whether the determined criteria are put into practice, and the European Central Bank (ECB) authority which decides about the monetary policy of the union. (7)


Acceptance of the euro as a common currency unit dates back to the 1969 Werner Plan. At that time, six member states (that formed the Union) took steps to have a common economy and monetary policy and wanted to accept a common currency unit with a 1971 agreement signed in  Brussels. However, due to the crisis in the international monetary system and oil price shocks, attempts for this end came to a halt.  In 1979, the “European Monetary System” was accepted; thereby national currency units were being united under the ECU (European Currency Unit). Thus, the process leading to the acceptance of the euro had started.


The Maastricht Agreement aimed at the formation of a common currency unit, yet there was no information about how this union would be realized. To fill this gap, the report of the Technical Committee was approved in the Madrid Summit between December 15-16th  1995 and put into practice since then. Similarly, it was also decided in this summit to name the common currency unit as “euro.”


An economic and monetary union requires the coordination of economic policies and budgets, adoption of common monetary policy and the use of a single currency unit. Acceptance of the euro as the common currency has been one of the most concrete steps for the implementation of the European integration. 17 of the 27 member states accepted the euro as a single currency unit of Europe, and thus euro entered into force as Europe’s common currency unit as of January 1, 2002. This, in turn, has averted fluctuations in exchange rates. Moreover, the acceptance of a single currency unit has facilitated commercial relations among a good number of companies, leading to a more stable economy, bigger growth rate and provided consumers with alternatives as such. A single currency unit has also increased the opportunities of individuals for travel and trade. The European Central Bank (ECB) is in charge of the EU’s monetary problems. The main objective of the ECB, which works as an independent institution, is to maintain price stability. Even though taxes and budgets are arranged on a national level, member states have decided upon joint regulations in the field of public finance and thus have been provided with the opportunity of coordinating their actions, ensuring stability, growth and establishing new employment fields. (9)


The Eurozone Crisis

One of the most important reasons of the Eurozone crisis underlies the fact that national economies are of heterogeneous structures. Additionally, it would not be wrong to say that citizens of the Eurozone have some negative reactions to the euro. After the acceptance of the common currency unit, prices of the goods and services have increased and the Eurozone has displayed a weak performance. As a result, the Euro has not found sufficient support. (10) In 2008 when the approval process of the Lisbon Treaty was still going on, the global financial crisis started to negatively influence the EU states. At first, this crisis was perceived as a crisis of “Anglo-Saxon capitalism” that would not greatly influence continental Europe. However, with time, it has led to a considerable increase of the problems which have been the results of the Eurozone debt crisis. In this sense, in countries such as the United Kingdom, Ireland and Spain (where the rate of fiscal services is high in their national income) serious problems soon arose. As a consequence of the global crisis, there has been an increase in consumer trust and shrinkage in world trade volume. This, in turn, has negatively influenced the German economy, one of the few biggest importers of the world. What’s more, repercussions of the crisis upon certain new EU member states have been much worse: in 2009, national income in Latvia had decreased at the rate of 20%. Apart from Latvia, Hungary and Macedonia had to apply for assistance from the International Monetary Fund. (11)


The EU states, which have been greatly affected by the crisis, have not performed well in “their joint combat against the effects of the crisis.” This is partly because of the fact that precise judgments do not exist in the EU agreements regarding the coordination of the economic and fiscal policies. Thanks to responsible behaviors of certain EU member states in this sense and the coordination, the crisis has not brought about a disaster. Nevertheless, these responsible attitudes have not been able to avert low rates of growth and high unemployment rates. The lesson drawn from the EU’s most important crisis has been that there is a need for a more efficient economic governance, financial audit and coordination within the EU. This need has been reflected in the 136th article of the Treaty of Lisbon in this way: “The Eurozone countries shall accept rules for common economic policies and strengthen coordination in their budget disciplines.” The Council of Europe, also due to the concerns on whether or not it would be able to steer the crisis in a positive way, has seen that the “Lisbon Strategy” has fallen short of solving problems of the EU economy and so prepared a new agenda for reform that could replace this strategy. (12)


The following two are the main reasons why the Eurozone debt crisis has reached at such high levels in today’s world: the euro has resulted in considerably unsustainable macroeconomic inequalities among the states and the Eurozone does not have an organizational structure to tackle with this situation. Saying that the crisis is not related to the zone itself, the countries of Northern Europe reject these reasons and state that it has come into being as a result of individual behaviors within the EU. This explanation proposed by the countries of northern Europe has been generally agreed upon as the onset of the Eurozone crisis. The corruption of governments and disappearance of competition have been among the deficiencies of the countries causing the crisis. (13)


The Eurozone or, in a more general sense, the Economic and Monetary Union (EMU) has been questioned not only because the control on whether EU states (that will join the Union) comply with the Maastricht criteria does not proceed properly. But also because, perhaps more important than the former reason, coordination -necessary for economic/fiscal policies- does not have the required legal and institutional background within such a structure where sovereignty completely belongs to the European Central Bank in the field of monetary policy and exchange rate policy, pursuant to the terms of the EMU. These arguments mainly flow between the monetarist and economist approaches. On the one hand, the monetarist approach is based on the assumption that economies of the EU states are structurally similar to each other and demands that economic and monetary union should be established as soon as possible and with the requirement of minimum prerequisites. On the other hand, the economist view, which adopts a more cautious approach, takes into account such real factors as growth rates, inflationary pressures, unemployment and flexibility of the labor market. From this point of view, the economist approach emphasizes that there are differences among the EU member states in this sense and proposes that, without the removal of these differences, one could not form a sound economic and monetary union and thus a common monetary system. In a nutshell, the argument between these two approaches derives from whether or not the fiscal and structural policies of the countries (which are determined according to the economic requirements of the countries themselves at a national level) would sometimes contradict with the common monetary policy (whose main objective is to maintain price stability). (14)


The envisaged method for overcoming the Eurozone debt crisis is to consolidate the public finance and revive competition through the increase of production. If the “periphery” countries can put into practice these methods, it could be said that Eurozone crisis will be settled and there will not be any need for an institutional transformation towards a tax union. The arguments of the countries of northern Europe could be partially accepted. The reasons of regarding it as partial here are as follows: while the countries of the northern Europe are claiming their own arguments, they laid the whole burden on the corrupt governments, yet responsibilities of the private companies or the creditor nations have not been taken into account, as it has been in Spain and Ireland. Therefore, the current crisis does not only result from irresponsibility or loss of the competitive power but also due to unbalanced capital distribution and because of the fact that macroeconomic imbalance has come to be unsustainable. (15)


Immediately after the Treaty of Lisbon entered into force, there was such a general idea that the treaty would be a turning point for the EU to overcome the inertia it is going through and the EU has been successful in preventing the economic crisis from turning into a disaster. Right at these days, a multidimensional financial crisis broke out in Greece. This, crisis, due to its reasons and results, is of utmost importance for the future of the EU. The biggest problem of Greece was that the rate of total public debt is almost 125% of the country’s national income. Additionally, it was also realized that Greece acted a bit “economic” when it explained the country’s macroeconomic indicators (Maastricht criteria that is required for a state to be a member of the Eurozone) to the EU authorities. This has led to a considerable loss of credibility for the Eurozone and euro has depreciated vis-à-vis the dollar. For the solution of the financial crisis of Greece, the EU ministers of finance have taken a resolution with the purpose of ensuring the maintenance of fiscal stability in the Eurozone. This resolution requires “a coordination system, including a mechanism for sanctions” for the fiscal policies. However, the current institutional structure of the EU does not allow for this. It is for this reason that Olli Rehn, European Commissioner for Economic and Financial Affairs, basing his reasoning on the 136th article of the Lisbon Agreement, said that he would prepare a draft regulation that would enhance the “supervision and coordination of economic policy.” (16)


During the transition period into the Eurozone, there was a general agreement on the need of a common governance mechanism which would gather the national economies of the member states and provide the members that are in dire straits with aid and support. Additionally, the idea of decreasing competition in fiscal and social fields among the member states, and establishing a fiscal federalism that would include the eurozone, was proposed. However, French economist Michel Dévoluy claims that these ideas have not been implemented due to the EU Commission (which supports liberal doctrine) and member states that do not want to waive their authorities.


The euro crisis of the EU has also highlighted the competition between France and Germany to be an EU leader. Even though the other members are aware that without France and Germany, the integration process will not progress, the ambitious attitudes of the two countries have resulted in a negative atmosphere within the Union. Under such an atmosphere, if Eurozone countries start reusing their national currency units, this will cost them greatly. Instead of this, it is generally proposed that agreements should be reviewed and the idea of federalism should be rethought. (17)


For the settlement of the Euro crisis, especially Germany and France have been conducting bilateral talks. On the one hand, this is perceived as their attempt to be the EU leader and the other countries react to this. On the other hand, the other member states need a road map to be determined by the two lead states, the strongest countries of the EU. In the latest Intergovernmental Meeting at Brussels on December 8-9th 2011, both French and German authorities suggested that treaty provisions should be enforced by March 2012. 17 member states of the Eurozone have ratified these provisions. What’s more, countries such as Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania -which are within the EU but outside the Eurozone- have also approved the treaty provisions. As for the Czech Republic and Sweden, they are in the process of consulting with their parliaments while England and Macedonia rejected the provisions.


The agreement signed at the Brussels meeting consists of five main elements. One of the decisions is to impose automatic sanctions upon the countries whose budget deficit exceeds 3%. There is no exact provision on what these sanctions –which could be rejected through qualified majority resolution- will be. The second element relates to all the member states and wants the budgets of each member country to be well-balanced. Whether the member states implement this provision in their domestic laws or not will be controlled by the Court of Justice. The third element is related to the increase of aid that is given to the countries which are most affected by the crisis. The fourth resolution reads that precautions that will be taken for the settlement of the crisis within the European Stability Mechanism (ESM) will not be accepted by unanimity but instead by the majority of votes. As for the fifth factor, it says that private sector and public sector shall be called to aid the countries that are at an equally dire strait. (18)


Conclusion

There is no doubt that these problems are also reflected in the EU’s expansionist policy, a policy that stands as the most successful foreign policy tool of the EU and in the same vein, the EU’s reluctance in the face of the new developments gets more and more clear. Since the current economic crisis has disrupted some of the new EU members’ transition into democracy and free market economy, this reluctance has become much more apparent. As a result of this clear reluctance of the EU, EU candidate and potential candidate countries are losing their trust in the conditions of being an EU member,  further damaging the role of the EU as catalyst in the reform process. It is crystal clear that the EU is in need of strategic decisions in order to overcome this difficult period. (19)


The Eurozone crisis has also led to government reshuffles within the EU members. Governments in Greece and Italy fell, while in Spain, José Luis Rodríguez Zapatero failed vis-à-vis the right-wing opposition party. Decisions that are taken during the meetings between France and Germany determine how the countries grappling with high debt rates will come out of the crisis. What’s more, it is seen that there is a competition between these two countries in order to become the EU’s leader. Even though, the other EU members negatively react to this competition for the EU leadership, the  reality is that they need France and Germany to overcome the crisis. In western Europe, right-leaning parties are on the rise vis-à-vis the left-leaning parties, while in western Europe, it is the center-left parties that come to power. In the recent elections held in Croatia and Slovenia, governments that had been ruled by the center-right parties were replaced by the center-left parties.


Apart from the economic crisis of the EU, there is another important crisis. This is the crisis of values, which should be seriously dealt with and could be the topic of another in-depth analysis. The EU, which is the supporter of basic values such as democratization and secularism, has not been successful in ensuring that its own members put into practice the same values. Within this scope, the rise of Islamophobia has become much apparent with the attacks against the Muslims in the EU states. For the solution of this, the EU has neither made a correct description of the situation nor determined how to solve this in the future. 

 

Endnotes:

(1) Official portal of the European Union: http://europa.eu/lisbon_treaty/index_en.htm, data accessed: December 7, 2011.
(2) Nilgün Arısan Eralp, “Avrupa Birliği’nde neler Oluyor?”, TEPAV değerlendirme notu, April 2010, p 5-6.
(3) Nurettin Bilici, “AB’de Ekonomik Bütünleşme ve Türkiye’nin Entegrasyonu”, Ankara Avrupa Çalışmaları Dergisi, Volume 5, No 2, Winter 2006, p 41-42, p 39-45
(4) Ibid., s 43.
(5) Official website of the European Union Commission http://ec.europa.eu/economy_finance/euro/emu/index_fr.htm, data accessed: December 6, 2011.
(6) http://ec.europa.eu/economy_finance/euro/emu/index_fr.htm
(7) http://ec.europa.eu/economy_finance/euro/emu/index_fr.htm
(8) Interview with Michel Dévoluy, “L’Euro est-il un échec”?, İRİS, Actualités Européennes, no 47, October 2011.
(9) Officila portal of the European Union: http://europa.eu/about-eu/basic-information/money/euro/index_fr.htm, data accessed: December 8, 2011.
(10)  Interview with Michel Dévoluy
(11)  Nilgün Arısan Eralp, ibid., p 2.
(12)  Ibid.
(13)  Simon Tilford & Philipe Whyte, “Why stricter rules threathen Euro zone?”, Centre for European Reform Essays,  November 2011, p 3.
(14)  Nilgün Arısan Eralp, ibid., p 3-4.
(15)  Simon Tilford & Philippe Whyte report, ibid., p 4-5.
(16)  Nilgün Arısan Eralp, ibid., p 3-4
(17)  Interview with Michel Dévoluy
(18)  Official website of the Le Figaro newspapaer: http://www.lefigaro.fr/conjoncture/2011/12/09/04016-20111209ARTFIG00374-

les-5-points-majeurs-de-l-accord-signe-a-bruxelles.php, data accessed: December 10, 2011.
(19)  Nilgün Arısan Eralp, ibid., p 5-6.

 

Translated by Hacer Şartepe

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