The reason for the morphing of the 2008 global financial crisis into a sovereign debt crisis in the Eurozone is to be searched in the neoliberal structure of the euro area. And even if today the Eurozone growth rate has reached its highest level in a decade, it is relatively weak, and the lingering social costs of this crisis are fueling right-wing populism across the euro currency bloc.
Riccardo Mastini is an ecological economist working and writing on degrowth, steady-state economy, sufficiency, and environmental justice
A brief history of the Eurozone
The genesis of the Eurozone can be traced back to the Maastricht Treaty, signed on 7 February 1992, which set out the rules for EU member states to adopt the euro as their currency. The treaty required that the countries joining the Eurozone satisfy so-called “convergence criteria” intended to ensure that their national economies would in fact converge.
Governments joining the euro had to limit their deficits (the annual amount by which their revenues fell short of expenditures) and debts (the cumulative amounts they owed). They were required to have deficits less than 3 percent of GDP and debts less than 60 percent of GDP. Subsequently, at the end of the 90s, all the countries of the EU (and not just those within the Eurozone) reinforced their commitment to these deficit and debt constraints, in what was called the Stability and Growth Pact. Finally, in 2013, a new stricter version of these criteria was adopted with the European Fiscal Compact. Member states bound by this treaty had to transpose into their constitutions the provision that national budget has to be in balance or surplus under the treaty’s definition. These treaties reveal the philosophical core of the euro project: to take fiscal sovereignity away from national governments to ensure the long-term sustainability of public finances regardless of the consequences for the real economy and workers.
The structure of the Eurozone was designed in the years when the hegemony of neoliberal thinking was undisputed. However, it has now become obvious that the vision based on a liberalism regulated by stability criteria, to which member states’ budgets have to comply, has failed. The “institutional mechanisms” that should render political decisions unnecessary and keep democracy under control are actually fueling a wave of discontent across the continent.
As Joseph Stiglitz explains in his book The Euro: How a Common Currency Threatens the Future of Europe, the founders of the euro were guided by a set of ideas that were fashionable at the time but that we now know are simply wrong. They had faith in markets and lacked an understanding of the limitations of markets and what was required to make them work. While in most of the world neoliberal ideas have been discredited, especially in the aftermath of the 2008 global financial crisis, those beliefs survive and flourish within the Eurozone’s dominant power, Germany. They are held with such conviction and certainty, immune to new contrary evidence, that these beliefs are rightly described as an ideology.
As a matter of fact, German policy makers are “ordoliberals” rather than neoliberals. In the book Austerity: The History of a Dangerous Idea, Mark Blyth argues that German ordoliberal tradition stresses the importance of state provision of the framework conditions within which markets can operate. According to this view, states must provide regulation to make the market possible, rather than regulation to police its rough edges. This, along with strong budgetary discipline, is the core of a Sozialmarktwirtschaft (social market economy), where the state regulates but doesn’t stimulate or experiment, especially with the budget. Ordnungspolitik, a politics of order and stability, especially financial stability policed by a strong independent central bank, is the result.
Indeed, the most powerful institution in the Eurozone is the European Central Bank, which was constructed to be independent—not answerable to or guided by elected leaders—another neoliberal idea that was fashionable at the time of the construction of the euro. Furthermore, as opposed to the mandate of the Federal Reserve in the United States—which incorporates unemployment, growth, and stability as well—the ECB focuses only on inflation, even in times of high unemployment.
Where the power lies in the Eurozone
The Council of the European Union is one of the two bodies of the bicameral EU legislature (the other being the European Parliament). The Council is composed of the heads of state and government of the EU’s member states. It was created in 1975 and for a long time remained a mere informal meeting without any real decisional power. Over the years, however, the importance of this institution increased. In 2008, the heads of state and government of the 19 countries part of the Eurozone met to agree a co-ordinated response to the banking crisis. The meeting took the name of ‘Euro summit.’
French President Nicolas Sarkozy called for the Euro summit to become a “clearly identified economic government” for the euro, stating it was not possible for the Eurozone to continue without it. Currently, the Euro summit takes place twice a year in Brussels, even though during the European sovereign debt crisis it has met more frequently. Sarkozy stated that “only heads of state and government have the necessary democratic legitimacy” for the role. However, the Euro summit takes place behind closed doors without the European Parlimanet—which represents all the European citizens—nor national parliaments being able to review the decisions taken and pass a vote on them.
This sort of executive federalism represented by the Euro summit is increasingly becoming the model of a post-democratic exercise of power. It should, therefore, come as no surprise that nationalist political parties are on the rise across the continent rallying voters around the issue of lack of democracy in EU decision making.
As Jürgen Habermas explains in his book The Crisis of the European Union: A Response: “Such a regime would make it possible to transfer the imperatives of the markets to the national budgets without proper democratic legitimation. This would involve using threats of sanctions and pressure on disempowered national parliaments to enforce nontransparent and informal agreements. In this way, the heads of government would transform the European project into its opposite. The first transnational democracy would become an especially effective, because disguised, arrangement for exercising a kind of post-democratic rule.”
Furthermore, the Euro summit takes decisions by unanimous consent. In this regard, the Eurozone is more an intergovernmental organization than a federal system. This structure makes it impossible to adopt decisions without the biggest member states agreeing on the policies being debated. This is especially true for the biggest Eurozone member by GDP and population: Germany. The old adage that “he who pays the piper calls the tune” has by and large played out in the economic decisions taken by the Euro summit on how to manage the euro debt crisis. With the strongest economy in the Eurozone, Germany’s dominance of policy is not a surprise.
Even though many leaders of other member states of the Eurozone talk tough at home about how they would stand up to Germany, somehow most outcomes of the meetings leave their views in the margins, while most strongly reflecting the views of Angela Merkel—the German chancellor since 2005. It’s fair to speculate that other members of the Eurozone, not yet in a crisis, don’t insist on their demands because they too worry they may need a bailout sometime in the future and they don’t want to get on the bad side of Germany.
This misalignment between the political sphere and the economic sphere is increasingly causing frustrations in many Eurozone countries: even though their economies are deeply integrated and share the same currency, no real democratic debate is happening at the level where political decisions are taken. As Joseph Stiglitz argues, the experience of the Eurozone so far has offered one important lesson: be careful not to let economic integration outpace political integration. Be skeptical of the idea that political integration will naturally follow from economic integration. And be especially skeptical of anyone who proposes a monetary union in the absence of adequate political integration.
A proposal to democratize the Eurozone
In March 2017, the economist Thomas Piketty—along with a team of legal experts—published a book in French titled Pour un traité de démocratisation de l’Europe (the book has not yet been translated into English, but an overview of the project in English is available online). In this book, Piketty puts forward a concrete proposal for a treaty—called “T-Dem”—aimed at establishing a Eurozone Parliamentary Assembly tasked with democratizing decision-making regarding the euro. In fact, only a parliamentary assembly can have the legitimacy needed to hold the Euro summit accountable for its political responsibilities.
But how would that work in concrete terms? The main idea is that national parliaments of the 19 Eurozone member states send a number of representatives to this federal parliament with the objective of contributing to the drafting of policies regarding the common currency. Each national parliament would send a specific number of representatives based on the population of its country. For instance, in the case of a Eurozone Parliamentary Assembly composed of 100 members, Germany would send 24 members (because it represents 24% of the population of the Eurozone), France 20 members, Italy 18 members, Spain 14 and so on.
In a blog post from Spring 2017, Piketty analysed the political composition that the Eurozone Parliamentary Assembly would have presented if it had been established at the time of the publication of his book. He stresses that the political composition of the assembly would lean distinctly to the left given the current number of MPs across national parliaments that belong to political parties that identify themselves as leftist and radical leftist. The fact that progressive parties could control the majority of seats in the Eurozone Parliamentary Assembly is potentially a way of outvoting austerity policies that so far have been imposed by Merkel’s government. The T-Dem would in fact modify the present balance of power and ensure that a rationale of public, pluralist and democratic debate prevails over the cult of diplomacy behind closed doors and opaque decision-making.
But what would happen if the German government, frightened that it might be outvoted in the Eurozone Parliamentary Assembly, closes the door on any negotiation? If a Eurozone country were to publicly propose the adoption of the T-DEM and other countries were to stubbornly refuse any discussion of such a proposal, then it is probable that the outcome would be a climate of suspicion and exasperation which would ultimately destroy the euro project. How could a democratically elected government justify in front of its citizens that it refuses to adopt measures for democratizing decision making at the Eurozone level without undermining the basis of its own legitimacy?
The T-Dem project also envisions endowing the Eurozone Parliamentary Assembly with a treasury that could be used for making investments and intervening to balance the economies of the countries in difficulty through anti-cyclical spending. The Eurozone treasury could finance itself fiscally by directly levying a corporate tax across the euro area, which so far has been in the hands of member states. Setting a common corporate tax rate across the Eurozone would also avoid the race to the bottom that has incentivised countries such as Ireland to give away huge tax breaks to corporations with negative effects for all the other EU countries.
But Piketty goes one step further by arguing that the T-Dem project entails also the mutualization of Eurozone member states’ debt above the 60% threshold set out by the Maastricht Treaty. However, he does not elaborate further on the exact details of this form of debt mutualization.
On this issue it is useful to return to Stiglitz’s work on the euro crisis. He argues that the mutualization of debt could be accomplished through a number of institutional mechanisms, such as having the European Central Bank issue a Eurobond underwritten by the Eurozone as a whole with the revenues on-lend to different Eurozone countries. The amount of mutualized debt could be limited and the funds coming in from the new debt issues could be spent only on investments in, for example, infrastructure or education. These new measures would allow governments of the Eurozone periphery to borrow money at a lower interest rate than the usurer rates required by private investors at the moment and, in so doing, finance the recovery of their national economies stifled for a decade by austerity measures.
So far, the idea of Eurobond has been a no-no for Merkel’s party on the grounds that Europe is not a ‘transfer union.’ Stiglitz retorts that this claim is wrong because it exaggerates the risk of default, at least the risks of default if debt is mutualized. At low interest rates, most of the euro crisis countries should have no trouble servicing their debts. Instead, in the absence of debt mutualization, there is a serious risk of partial default (which has already happened in the case of Greece). The irony is that existing arrangements may actually lead to larger losses on the part of creditor countries than a system of well-designed mutualization.
The point here is that any system of successful economic integration must involve some assistance from the stronger countries to the weaker. At this stage of the euro project, German political leaders must be faced with the fatal question: what degree of federalism and risk-sharing are they willing to accept in order to overcome the euro crisis and prevent the implosion of the Eurozone?