Economic Governance in the EU after the Eurozone Crisis


The aim of this report is to provide a general overview of the evolution of the EU’s economic governance architecture, and in particular of the impact that the Eurozone crisis has had on that evolution, as well as to present a broad outline of its economic and political consequences.



By Pedro CHAVES, Facilitator of the transform! Economic Governance Working Group

This report is the first of a project that seeks to address in depth the issue of economic governance within the European Union, its impact in economic, social and political terms, and the various visions and proposals of the alternative Left in relation to this issue.

This task is undoubtedly an ambitious one, but it is also absolutely necessary. The transform! europe team working on this project, as well as the author of this report, Christakis Georgiou, share a central idea: that this element of what we might call EU public policy needs to be analyzed and understood well, including in terms of its implications and consequences. First, this is a matter of explaining with rigor that which appears obvious: an economic-institutional structure at the service of austerity policies. But this report has sought to – and succeeded in – departing from the beaten path of easy criticism. Instead, it uses and explores in depth the dynamics of economic governance, the reasons and logic behind the institutional mechanisms that have been put in place, and their consequences at various levels.

At the heart of the analysis lies one concern: to a large extent, the problems that arise in relation to economic governance require us, and the Left as a whole, to engage in deep reflection on the articulation of economic policy at the transnational level. The idea of ​ solidarity and the internationalist project associated with the alternative Left is a very condition of our existence; an irreplaceable element of our political genetics. And yet we must recognize that we have rarely made the leap from general considerations to concrete proposals. And we have to admit something more, too: that some of the strategies of other global regions have proven to be impotent in the face ofthe economic challenges of globalization and its demands. Neither mechanisms of solidarity, nor structured cooperation, nor resource transfer, have been effective – I am referring here to experiences such as ALBA or UNASUR in Latin America.

For this reason, an in-depth reflection on economic governance must go beyond the typical litanies of our tradition against the logic of capitalism, and instead seriously address the reasons behind our criticisms. If we take this path, eventually, we will discover that there are things worth reflecting upon. We will learn how to build institutions and institutional relationships that are virtuous in democratic terms, while being mutually-supportive and generous in economic terms.

The willingness to tackle this work with rigor and seriousness also has another purpose. We are aware that there are different perspectives and opinions on the issue of economic governance within our tradition. And, because of this, the political parties associated with our political space offer clearly differentiated, and sometimes antagonistic, alternatives. To a large extent, to talk about economic governance is to talk about the integration project itself and its future.

It is not the intention of this project to defend one position against others, and this is not for reasons of intellectual eclecticism. Rather, we think the debate is far better served by our attempting to do two things: provide quality input into the analysis, and promote spaces for dialogue between the various alternatives.

That is why we invited professionals, academics and activists who defend different and opposing positions to participate in drawing up this document – and we must say that the experience has proven to be highly enriching.

We are very confident that the continuation of this project will contribute to this dialogue between different perspectives. Of course, there are other ways and paths that have been opened, but this space can make an important contribution.
This work owes a great deal to the generous and selfless efforts of several dozen people who have given us their ideas, proposals and time. We owe a debt of gratitude to each of them on behalf of the team of people working on this project, and on behalf of Transform.

This report is the culmination of sevaral preparatory meetings, contact with many people, and a workshop held in Brussels on 13 and 14 October 2016. When preparing the report, we sent the first draft to all of participants in the initiative, as a result of which the text has undergone changes that have undoubtedly made it both richer and more nuanced.

The debate continues and looks set to continue in the coming years: the EU’s activities in the field of economic and monetary union have not stopped, and nor will they. One of the most powerful conclusions of this work is that we should take great care when applying the word “crisis” to European Union. In the face of the somewhat mechanistic idea that the EU would endure an inevatible collapse associated with the Euro or economic and monetary union, this report argues that Europe’s economic and political elites have a vested interest in maintaining the EU, and that, by one means or another, the project will therefore be maintained and strengthened. The key to the vault was the European electoral cycle, and it seems that the outcome – elections in the UK included – could not have been more favorable to the mainstream.

And so the natural disintegration of the European project has been ruled out. However, it still remains to be seen what we should do, say and propose in a scenario where the EU is a cornerstone of the economic, social and political life of our countries.
We are confident that this report will, in some way, provide rigorous analysis on a subject that is of the utmost importance for our capacity, as forces for political change, to design alternative scenarios.

Members of the transform! Economic Governance Working Group

Pedro Chaves: Team Coordinator

Members of the Team: Elisabetta Cangelosi, Sigfrido Ramírez, Christakis Georgiou, Dimitri Zurstrassen, Pablo Sánchez, Judith Dellheim, Angelina Giannopoulou

Participants in the Workshop: “Is it possible to reform EU economic governance?”
Held in Brussels on 13 and 14 October 2016

Máxime Benatouil, Maite Mola, Pedro Chaves, Sigfrido Ramírez, Kenneth Haar, Agustín José Menéndez, Daniel Albarracín, Dimitri Zurstrassen, Katherine Sifakis, Ramón Boixadera, Judith Dellheim, Vladimir Cvijanovic, Bruno Estrada, Christakis Georgiou, Elisabetta Cangelosi, Corinne Gobin, Gabriel Moreno, Pablo Sánchez, Paloma López, Paul Jorion

Executive summary

1. The institutional framework for economic policy that emerged in the EU following the Maastricht treaty was incomplete and imbalanced. The key institutional deficiency was that while monetary policy became centralised, fiscal, wage and banking policies remained highly decentralised. Crucially, the policy framework did not provide for a lender of last resort for member states and lacked clarity on the Eurosystem’s role in preserving financial stability. The Eurozone lacked sufficient state capacity to guarantee the credit risk-free status of public debt and to deal with potential adverse shocks, in particular with so-called asymmetric shocks that require inter-regional transfers to be smoothly dealt with.

2. The Eurozone crisis exposed the deficiencies of the EU’s economic governance architecture and has already resulted in a number of more or less substantial institutional innovations in an attempt to bridge the most glaring gaps. The lack of a lender of last resort for member states was dealt with and the Eurosystem’s role in preserving financial stability was made clear while the banking union reforms have substantially centralised banking policy. However, fiscal and wage policies remain decentralised despite tentative steps towards a greater degree of coordination among member state policies. Thus, some of the key levers of economic policy in the Eurozone, namely German fiscal and wage policies, are wielded solely in view of how Germany is to conform to the SGP’s criteria and irrespective of the collective needs of the Eurozone as a whole.

3. The economic consequences of the deficiencies of the EU’s economic governance architecture were clearly visible in the shape of the Eurozone crisis. The single monetary policy gave a huge expansionary push to deficit member state economies and stoked various bubbles, notably in the property market. The decentralised structure of banking policy further fuelled these bubbles because of each member state regulator’s attempt to protect and promote the banks under its watch. Finally, the decentralised structure of fiscal and wage policies allowed Germany to pursue a policy of competitive disinflation which contributed in the accumulation of macroeconomic imbalances within the Eurozone.

4. The EU’s economic policy framework – despite the innovations introduced under duress during the crisis – reinforced the recessionary impact of the 2010-12 speculative crisis and imposed an asymmetric adjustment process on deficit member states. The introduction of a lender of last resort for member states and the Eurosystem’s unconventional monetary policies slowed down the pace of the unwinding of macroeconomic imbalances but the persistence of a decentralised and uncooperative fiscal policy framework meant that the Eurozone’s overall fiscal stance was pro-cyclical and contractionary until 2014. Moreover, the decentralised banking policy framework slowed down the cleaning up of bank balance sheets and prolonged the financial crisis conditions – in particular the credit crunch in the interbank market – which furthered weighed down on economic activity in the Eurozone. The overall direction of the Eurozone since 2010 has therefore been strongly disinflationary.

5. The institutional innovations introduced as a response to the Eurozone crisis have also had significant constitutional consequences. Substantial powers have been shifted from the national to the European level of government in an unconventional and improvised manner. This shift has been at the detriment of democratic legitimacy and accountability in that its net result has been to empower the executive branch of government to the detriment of the legislative branch. This ‘executive federalism’ is, moreover, asymmetric in character because its intergovernmental nature in the fields of fiscal, economic and labour market policies means that it functions according to the logic of relative bargaining power, thus empowering surplus member states to the detriment of deficit member states. Its intergovernmental nature also sets it apart from the established constitutional settlement based on the Commission’s legislative initiative and the co-decision procedure involving the Council and the Parliament. As such, it has fuelled a crisis of the constitutional consensus.

6. The impact of the Eurozone crisis on mass politics is more difficult to discern. Broad developments in labour movement strength and labour struggles, the electoral rise of the populist right and Euroscepticism in public opinion largely follow pre-Eurozone crisis trends and do not seem to have been much impacted by the crisis. Rather, the crisis has polarised the European body politic between fiscal conservatives in surplus member states and left-wing opponents of adjustment efforts in the deficit member states.

The aim of this report

The aim of this report is to provide a general overview of the evolution of the EU’s economic governance architecture, and in particular of the impact that the Eurozone crisis has had on that evolution, as well as to present a broad outline of its economic and political consequences.

The Eurozone crisis and its consequences have been the most important political development in Europe over recent decades. By general admission, the crisis shook the EU’s institutional foundations to their very core and has highlighted the fundamentally incomplete nature of its overall economic policy framework. Almost every single commentator agrees that the Eurozone needs to further integrate if it is to prevent the recurrence of similar crises and the prospect of disintegration.

As the report will outline, the crisis has already yielded quite significant institutional innovations. However, there is much more to come, especially since the major political players involved in the process – the Commission, the European Central Bank, the French and German governments – have already explicitly signalled their willingness to contemplate steps towards the setting up of a Eurozone finance ministry and Treasury that would operate its own budget. The December 2015 meeting of the European Council discussed the Five Presidents’ Report on the completion of the EU’s economic and monetary union and decided to return to the discussion about the setting up of a Eurozone ‘fiscal capacity’ in its December 2017 meeting, once, that is, the major electoral events of that year – the French presidential and the German general elections – will have taken place.

The report is structured in two parts. The first part looks at the evolution of the EU’s economic governance institutions before and after the Eurozone crisis. The second part looks first at the economic consequences of the institutional framework, again both before and after the crisis. It then goes on to outline the political consequences of the Eurozone crisis, both in terms of the EU’s constitutional settlement and in terms of mass politics in the Eurozone.

Table of Contents

1. The post-Maastricht evolution of the EU’s economic governance institutions

A) The EU’s economic governance architecture before the Eurozone crisis: the institutional imbalance of an incomplete EMU

B) The innovations introduced during the Eurozone crisis: tentative steps towards redressing the imbalance

2. The economic and political consequences of the EU’s economic governance architecture

A) Economic consequences

I. The lead-up to the Eurozone crisis: bubblenomics and growing wage divergence lead to macroeconomic imbalances and lay the ground for the 2010-12 speculative crisis

II. The Eurozone’s economic direction since the Eurozone crisis: asymmetric adjustment in a deflationary context and its recessionary consequences in 2011-13

B) Political consequences of the Eurozone crisis

I. The shift of further powers to the European level and the rise of asymmetric executive federalism on fiscal policy

II. The polarisation between Northern fiscal conservatives and Southern opponents of fiscal retrenchment and structural adjustment in the context of long-term structural shifts in mass politics


For the full ePaper, please refer to the PDF on the left.