The Proportionality of State Intervention

This chapter provides a brief history of the European Union (EU) from its origins after World War Two and the establishment of the European Economic Community (EEC) in 1958 to encourage increased trade between six founder countries. The EU was formed as a political body in 1993, based on two key principles: the Principle of Proportionality and the Principle of Subsidiarity. These principles are introduced because the purpose of this research was to critically appraise the proportionality of intervention in the market economies of EU Member States, in the context of global financial crises. The EU regarded the consequent public sector debt levels as excessive and damaging to its development as defined in EU Treaties. The main sub-sections provide a background to the research, the origins of the EU, the research objectives and overview, outline methodology and a brief description of state structures and EU institutions.

The methodologies applied to answer the research problem are presented, discussed and justified in this chapter. Mixed methodology was selected to gather and analyse data since quantitative and qualitative information was required. Secondary research was the main data collection method because a vast quantity of reliable data from multiple sources is available in the public domain. These comprised the conflicting arguments of academic experts, institutional reports and assessments by high-quality magazines and newspapers, including online sources. Three quantitative surveys were employed to collect the opinions of EU citizens in Germany, Italy and UK.

The main theories of state intervention and the Principles of Proportionality and Subsidiarity are critically appraised in this chapter. Neofunctionalism, intergovernmentalism and postfunctionalism are the three theories of state intervention discussed, followed by an overview of the nature of state intervention in planned and free market economies. The EU is described as a liberal free market based on neoliberalism principles, in which capitalism, democracy and liberalism are combined. Neoliberalism is then examined in terms of underlying theories of Public Choice and Rational Choice followed by the concept of proportionality, its theoretical origins, practical application and links to Justice Theory. An overview of EU intervention after the 2007–2008 financial crisis, and its impact on Member States, is presented at the end of this chapter.

The major events that occurred in the decades prior to the 2007–2008 crisis are appraised including the emergence of securitisation, substantial changes in regulation that created freer financial markets and high market liquidity. The impact of the crisis which resulted from these changes is evaluated in relation to its severe financial effects on the banking sector in US and EU countries, the social effect of public loss of trust and new EU legislation to prevent taxpayers being responsible for bailing out Member States’ failing banks. The last two sections of this chapter evaluate the severity of the crisis generally, and in relation to specific groups of EU Member States, Northern Europe, Portugal, Ireland, Italy, Greece and Spain (PIIGS), and Eastern Europe.

The opening part of this chapter identifies and discusses the main methods that governments employ to intervene in markets: monetary and fiscal policies and intervention in banks. The role of the Principles of Proportionality and Subsidiarity in the manner that EU intervenes in markets is appraised prior to a review of the details of its intervention by application of the three principal methods. Monetary and fiscal policies are discussed in respect to the 17 Member States comprising the Eurozone, which were the EU’s major concern after the 2007–2008 crisis, and monetary policy impacting on all 27 Member States, which relies on European Central Bank (ECB) coordination with national central banks. Fiscal discipline was regarded as more important in Eurozone countries that were subjected to introduction of a range of standard interventions in an attempt to meet specific debt-level criteria imposed by EU.

There are two parts to this chapter: the major EU responses to the 2007–2008 crisis and the diverse effects they had on major Eurozone Member States. The main EU responses appraised are financial reforms, financial stabilisation, enhancing economic governance, funding relating to these measures and interventions to generate economic growth. Identical responses were imposed on all Eurozone members with varying degrees of success, as illustrated by two severe crises in Greece and in Italy. Fundamental differences between the UK and the EU on some policies are discussed as these were instrumental in initiating a referendum on EU membership and the decision by the British electorate to exit.

The EU Recovery Plan and the drivers for growth in the EU Single Market for the period from 2008 onwards are the most important subjects appraised in this chapter. The EU Recovery Plan is critically evaluated in respect to regenerating economic growth, and especially related to job creation for under 25-year-olds, which was required owing to the high percentage of youth unemployment especially in the Southern European Member States. The monitoring plan is also evaluated including criticism of its perceived lack of effectiveness by independent experts. The EU Single Market is explored in terms of the stated drivers for growth, the investment plan to accomplish these goals and a specific strategy to enable economic growth in Greece as it received its third bailout, a reflection of the failure of previous EU intervention.

This final part of the original research summarises the main findings and draws conclusions regarding the proportionality of EU intervention in Member States after 2007–2008 including quantifying them from publicly available data. The effects of intervention on unemployment and economic growth are summarised, and found to have had a varied impact across the Members States, with Southern European countries being more negatively affected than northern nations. The influence of austerity measures is evaluated employing evidence from diverse sources, and the EU intervention of a single policy for the economic recovery of all Member States is found to be flawed. The reluctance of EU to consider advice from outside its own advisers, an inability to learn, is identified as a reason for its failure to implement suitable interventions to support reviving the economies of all Eurozone Member States, rather than just those with low initial deficits. The final section demonstrates that the Principle of Proportionality had not been applied appropriately during this period as demonstrated, for instance, by the substantial divergence in the social and economic consequences of EU interventions in Member States and the dominant influence of Germany on EU policy and changes to legislation. The major spillover effects on Eurozone and non-Eurozone members are also summarised.

This chapter compares the economic, social and political development in three of the original EEC Member States from their initial membership until mid-2020. Three case studies undertaken in Germany, Italy and the United Kingdom explore the history prior to 2008, the EU interventions in the post financial crisis period and their consequences on national social and economic trends. Since these three Member States were among the founding members of the EEC, but have experienced diverse experiences and outcomes from the same EU policies, the potential reasons for the difference are explored. The findings from surveys conducted in each of those countries are presented in terms of how aptly the Principles of Proportionality and Subsidiary have been applied in each case. A short epilogue outlines the current situation reinforcing Germany’s continued influence on EU policy and demonstrating the lack of solidarity among EU nations during the Coronavirus pandemic, and the EU response to it.