4. European Monetary Union and the Challenge of Economic Integration

In this context, Shambaugh (2012) discusses how the Eurozone was confronted by three distinct yet connected crises: a banking crisis, a sovereign debt crisis, and a growth crisis.

Addressing the proposal, President Jean-Claude Juncker stated that ‘[a]fter years of crises, it is now time to take Europe’s future into our own hands. Today’s robust economic growth encourages us to move ahead to ensure that our Economic and Monetary Union is more united, efficient and democratic, and that it works for all of our citizens. There is no better time to fix the roof than when the sun is shining’ (cited by the European Commission 2017a).

Here, Feldstein (2012) has argued that political considerations and interests were a more central determinant of the EMU’s design and function than issues concerned with its economic merit. A similar point is also noted by Hall (2012), who discusses how the Euro is the outcome of a political will.

For a further discussion, please see Krugman (2013), Gibson et al. (2014), and Fagan and Gaspar (2007).

A further testament to accession being a political endeavour is the requirement that new members must adhere to more than just economic criteria. Here, Article 49 of the EU Treaty (2007) states that ‘any European State which respects the principles set out in Article 6(1) may apply to become a member of the Union’. The principles of Article 6(1) are ‘liberty, democracy, respect for human rights and fundamental freedoms, and the rule of law’.

Here, Feldstein (2012) notes the centrality that bolstering Europe’s role in world affairs has as a political motivator.

Economic integration is the process wherein countries design and develop a set of market conditions most conducive to cultivating successful trade relationships with other countries—often rooted in their desire to capitalise on preexisting trade incentives, for example, geographical proximity. The goal is that the determinants of cross-border trade will be stimulated, and in doing so productivity, competitiveness, and socioeconomic parity will be achieved. This process is demarcated by specific phases. In brief, these encompass the following:

A reversion to a trade association was, for example, one of the Five Options set out in the European Commission’s (2017c) White Paper on the Future of the EU.

For a further discussion on prevailing economic and political sentiments in the years after the instigation of the EMU, see Gibson et al. (2014) and Wihlborg et al. (2010). The European Commission (2008) was highly optimistic in its Report on the Euro, going so far as to note that the EMU had in fact improved the Eurozone’s resilience against adverse external developments—thanks to measures such as ‘renewed budgetary discipline’.

The nature and extent of these competitiveness gaps is discussed in greater detail by the European Commission (2017b). The World Economic Forum’s ‘Global Competitiveness Reports’ (2017) defines competitiveness as ‘the set of institutions, policies and factors that determine the level of productivity of a country’. This determines the returns obtained from investments in an economy and influences the country’s broader level of economic prosperity.

See De Grauwe (2011) for a further discussion on this design aspect to the Eurozone. Fischer (2011) notes that the outcome of this has been the creation of an (unworkable) dual identity of a confederation that is at once adamant to uphold both the wider monetary union and their own fiscal sovereignty.

Set out by the European Council in (1997), the Stability and Growth Pact is an agreement to facilitate and maintain the stability of the EMU. It draws its legal legitimacy from Articles 121 and 126 of the Treaty on the Functioning of the European Union. Members commit to being monitored by the European Commission and the Council of Ministers, and to abide by annual recommendations for policy actions. However, there was a lack of rigour to the metrics and mandates laid down in this Treaty which, as Busch et al. (2013) argue, were brought to the fore by the crisis.

For a further discussion on this point, see Lane (2012).

This issue is discussed by Tovias (2017).

From this, there were a set of so-called ‘Convergence Criteria’ (see European Central Bank 2018), among which are included the following:

The concept of ‘Optimal Currency Area’ made its stake in the sphere of economic debate in the 1960s, thanks to influential works by Mundell (1961), McKinnon (1963), and Kenen (1969). The largely theoretical debate concerning the criteria underpinning areas for which economic integration is deemed strongly viable came to the fore as the EU continued with its ongoing expansion into countries that appeared to be economically disparate. Prominent economists have argued that the Eurozone did not meet OCA conditions—see, for example, Krugman (2013), Pisani-Ferry (2013), and Gibson et al. (2014). Further to this, not only does the Eurozone not meet sufficient criteria for a currency union, but it has become increasingly dependent on political will as a means through which to compensate for a latent lack of economic strength. For a further discussion on this point, see Moravcsik (2012) (who notes that the inherent disequilibrium within the EMU makes the range of policy responses to date, e.g. budgetary austerity, the micromanagement of national budgets, fiscal federalism, and bailouts, insufficient to solve this problem alone) and Wihlborg et al. (2010). Dow (2016) also discusses the need for real convergence as a prerequisite for the success of the single currency.

The Treaty of Lisbon (13 December 2007) Article 125 states that ‘1. The Union shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. A Member State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of another Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project; 2. The Council, on a proposal from the Commission and after consulting the European Parliament, may, as required, specify definitions for the application of the prohibitions referred to in Articles 123 and 124 and in this Article’.

This point is also noted by Wihlborg et al. (2010) and Krugman (2013).

For further analysis, see, for example, Lane (2006), Feldstein (1997), Wyplosz (2006), Chryssogelos (2016), and Ash (2012).

It is worth noting that the argument by the then German finance minister Wolfgang Schäuble was precisely that, by pushing Greece into Grexit it would mitigate instability in the Eurozone. At the same time, it was clear to some observers that this would also lead to a devaluation of a new Greek currency which would facilitate Greece’s ultimate recovery.

For a more detailed discussion on how such interconnectivity is evident in a number of specific ways, see Shambaugh (2012) and Pisani-Ferry (2013). These factors provide a rationale behind differences in EU and US responsiveness to the crisis.

Lapavitsas et al. (2012) also make this argument concerning the primacy of the banking crisis.

Endowed with such a forgiving financial environment, both public and private entities responded by increasing their borrowing; in effect, they lost the run of themselves—as is noted by Ash (2012).

See Schwab (2012).

As the Compendium of the Social Doctrine of the Church (2005) notes, ‘[a] financial economy that is an end in itself, is destined to contradict its goal, since it is no longer in touch with its roots … it has abandoned its original and essential role of contributing to the development of people and the human community’.

See Menéndez (2014).

For further insight, see De Grauwe (2011).

On this point, see, for example, Cliffe et al. (2000), alongside numerous others.