EMU and Democracy in the Eurozone Crisis: A Political Economy Perspective

This is part of our special feature on The Crisis of European Integration.

 

The Eurozone crisis has been a turning point for the European Union (EU), and especially for the Eurozone – the epitome of the economic and monetary union (EMU) – bringing to the surface long-standing structural weaknesses. The attempt by the EU to address these issues involved assuming measures that can be separated into two broad categories. The first category included measures aimed at providing conditional financial assistance to Eurozone Member States with difficulties through a variety of mechanisms (namely, the European Financial Stability Mechanism, the temporary European Financial Stability Facility Societe Anonyme, and the now permanent European Stability Mechanism). The assistance was provided under an initially ad-hoc and now permanent cooperation with the International Monetary Fund (IMF). The second category included measures aimed at combating the structural issues of coordination between Member States, essentially overhauling the EU modus operandi in relation to financial governance. Relevant legislation included the EU-based Six-Pack and Two-Pack, and the internationally-based Fiscal Compact (Treaty on Stability, Coordination and Governance; Kyriakidis 2016a). What has been the impact of these measures on the democratic process of the Eurozone?

The analysis of democracy at the EU level has become known as the EU Democratic Deficit, and is based on two main aspects of broader democratic theory: legitimacy, the ex ante process through which citizens provide their consent for decision-making to a governing structure and accept the authority of such structure (Scharpf 2009, 173; Birch 1993, 32), and accountability, the ex post facto process through which citizens evaluate the actions and policies of their governors and decide whether to reward or sanction them (Huller 2012, 252-3). In essence, the Deficit can be seen either “as an absence of public accountability or as a crisis of legitimacy” (Moravcsik 2008, 331 and 340). Based on these two aspects, the Deficit scholarship is divided across the three main approaches of Input, Throughput, and Output. The main subject of the analysis of all approaches is whether the EU has the ability to influence key national policies with redistributive effects or not, and if so, whether there exists citizen input through appropriate processes with relevant safeguards, ensuring proper democratic representation (Follesdal & Hix 2006, 548-551; Moravcsik 2013; Schmidt 2013, 10-6).

In the EMU, Member States had a lot to gain from joining, primarily in relation to a reduction of transaction costs and the promotion of stable financial relations (Crum 2013, 614). Concordantly, participation also unavoidably resulted in the restriction of national fiscal and monetary sovereignty, with monetary policy transferred to a common central bank and thus depriving individual members from the ability to utilize it as an instrument according to their specific needs. In addition, fiscal and economic policy becomes restrained in order for convergence to occur. Hence, legitimacy of an economic program of a Eurozone member loses considerable ground (Crum 2014, 619; Raess et al. 2015). Issues are then raised in terms of democratic safeguards. The political structure of the Eurozone should, ideally, compensate for the above through adequate provisions that ensure equal representation, emergency fiscal transfers in case of asymmetric shocks, and efficient convergence of economic policies. However, this has not been the case.

The deficit in the democratic process within the Euro area is not owed to mere participation in it, but to its structural weaknesses, which have allowed for considerable influence by and expression of interests of, specific Member States vis-à-vis others, the latter also suffering from the resulting imbalances without any capability to address them (Crum 2013, 617-8, Steinberg et al. 2016, 390; Vines 2016, 865). The crisis measures seem to have exacerbated, rather than addressed, this phenomenon. The intergovernmental nature of the permanent financial assistance mechanism of the Eurozone (European Stability Mechanism) and of the Fiscal Compact allowed for political weight to play a major role in their structure and underlying ideological foundation of ordoliberalism (Kyriakidis 2016a, 218-20). Consider the introduction of even stricter budgetary policy, with specific limits for when a budget is to be considered balanced (maximum 0.5 percent GDP structural deficit) and for a 1/20 rate per year reduction of the debt if it is in excess of 60 percent GDP (European Council 2012, 9-11 and 14). Here, competition between rivaling ideas over budgetary restrictions within the Euro area were absent, harming legitimacy.

Another case is the lack of any meaningful representative input or oversight by the European Parliament in the arguably innovative Macroeconomic Imbalance Procedure, and in the breakthrough capacity of the Commission and the Council of Ministers to scrutinize the budgets of Eurozone Member States before they become binding, and in the Troika (Commission, ECB, IMF). This constitutes a democratic deficiency, as there is no forum within which common economic matters could enjoy direct representative input and competing ideas could be presented and chosen by citizens, and it also harms accountability, as the participating actors are not scrutinized by representative institutions (Kyriakidis 2016a, 220-1).

Yet, under these adverse conditions in relation to proper democratic process, Eurozone Member States once again relinquish even more authority over key national policies to actors at the supranational level, based on a reinforced ordoliberal paradigm. The authority of the Commission and the ECB has been considerably augmented vis-à-vis the national level in relation to key national policies of Member States, especially the periphery/Southern ones (Kyriakidis 2016a, 219-21). For example, the wide-ranging introduction of Reverse Qualified Majority Voting across the Six-Pack (EP & CEU 2011a, 10-11 and 2011b, 10 and 2011c, 31) not only makes it much harder to abolish EC-proposed acts, but makes a blocking majority virtually impossible without any of the first five most populous countries (Germany, France, UK, Italy, Spain, Poland).

Even in the case of financial assistance, which could be considered a form of fiscal transfer to Member States with financial difficulties, the policies implemented, heavy on liberalization, privatisation, etc., were clearly ordo(neo)liberal (e.g. for Greece in Kyriakidis 2016b, 13-20). In fact, the very narrative employed during the crisis was heavy on the ordoliberal notion that “economic problems only emerge from budgetary indiscipline and not from risky and unsustainable economic behaviour in the private market,” without any regard for the potential balancing effect fiscal transfers may have (Regan 2012, 473). The economic problems of periphery/Southern Member States were blamed on profligacy, reinforcing the belief that the financial assistance programs were about German or Austrian or French taxpayers are bailing out Greek or Irish citizens (Matthijs 2016, 376). However, economic booms to periphery Member States were financed by excessive and cheap capital inflows from the core/North Member States leading to a loss of competitiveness with little ability of restoration without access to monetary policy instruments (Steinberg et al. 2016, 390). The implementation of predatory lending practices in the pre-crisis period because of the moral hazard resulting from the absence of a Eurozone-wide  banking union (leaving bailouts as the only option), was kept mostly silent. In the case of Greece for example, the largest portion of financial assistance went towards repaying the financial sector that irresponsibly lent to Greece[1] the amounts it irresponsibly borrowed (Attac 2013; Alderman & Ewing 2012).

Throughout the crisis measures, EU-level actors have acquired even more authority to influence key national policies, but being restricted to implementing the same ordoliberal paradigm without any challenge or alternative offered, or even without any platform where such an alternative could be offered. The entire Eurozone has turned into a strict TINA (There Is No Alternative) based formation. While it may seem that certain advances towards completing the Euro area’s true character as an Economic, along with Monetary, Union have been introduced, in reality there is a reinforcement of the application of the ordoliberal model that has constituted a primary reason for its structural weaknesses. The majority of Eurozone Member States have been left with, realistically, a single option: to follow this paradigm. The only other alternative is exiting the single currency, with disastrous socio-economic and political consequences. This issue has been particularly pertinent in relation to financial assistance programs. Consider the fact that the ECB President mandated specific reforms, including retirement provisions, wage reforms, privatizations, etc., to be assumed in Italy through a letter sent to the Italian Prime Minister (Kyriakidis 2016a, 224). Even more importantly, consider the inability of successive Greek governments from 2010 onwards to implement their electoral platform if and where it clashed with commitments included in the EU-IMF financial assistance programs, reaching a true crescendo during 2015, with the then government being elected on an anti-austerity platform and then, eventually, entering yet another program (Kyriakidis 2016c, 3-8).

All the above create an absence of citizen input in the direction that economic and fiscal policies take. They also result in an absence of competition of different perspectives. If Europe’s economic and monetary union is to be completed and become true to its purpose in a democratic manner, many more steps are needed towards establishing proper democratic processes at the EU level. This will have to include true convergence and the elimination of disequilibria between Member States, an actual mechanism for fiscal transfers to Member States that are in financial difficulties, and, primarily, a forum where different paradigms for the direction of the Eurozone could be heard and materialize.

 

Alexandros Kyriakidis is a PhD candidate, and co-founder and administrator of the Research Unit European Policies & Democracy, at the Department of International & EU Studies of the University of MacedoniaGreece.

Photo: Euro sign of flags of the European Parliament Brussels | Shutterstock

 

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Published on November 2, 2017.

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