The Grexit Summer - The Unsustainability of the Euro Area’s Political System
While the Greek case bears many learnings for economic and fiscal policy and the timing and design of financial aid, it also provides insights into the malfunctioning of the current decisionmaking in the euro area. In particular, the political developments in Greece of the year 2014/15 have demonstrated that the political system of the euro area is not sustainable.
First of all, one can observe an alienation of voters with their government’s policy choices and with the European Union, both in donor and recipient countries. Critics in Greece blame the euro and the interference of European institutions or other governments for their suffering. Difficult economic and social conditions have generated resentment between EU countries and against the EU. Likewise, national tax payers in Germany struggle to understand why they should agree to new rescue packages and a debt relief if another country is not playing by the rules everyone agreed to. These perceptions are part of the reasons why right-wing populists and nationalist left-wing parties in several member states advocate an exit from the euro, and more broadly a repatriation of competencies from the European to the national level. The claim is also being made that national parliaments are the true sources of legitimacy and the best venue for democratic decision making.
If one believes that giving up the euro and dismembering the European Union is the right way forward, then renationalization and repatriation may be a good answer. If one thinks, however, that global interdependencies, global economic, financial and political power shifts, and limited resources mean that member states have lost the capacity to meaningfully determine their fate alone, then the EU actually needs to be stronger. In this case, democratic decision-making on the European level may need to be strengthened to stop the erosion of legitimacy in European policymaking.
The EU system was built on a system of negotiations between national democracies, leading to compromise, which is often the lowest common denominator. Only determined political leadership from national capitals and often supranational institutions can bring about more ambitious European decisions. For decades, this has worked. Today, there is growing evidence that this may no longer be the case – and one of the reasons is the euro and the constraints and needs for joint action which a single currency imposes, in particular in times of crises.
With the single market and the euro, decision-makers have created public goods that affect all European citizens. They go far beyond the four liberties of the single market and the single currency. Today, not only inflation, but also financial stability, growth, and, as a consequence, employment are public goods in the euro area. With a single currency and monetary policy, these public goods can best be provided by joint decisions on the EU level which are taken by policy-makers with a keen interest to improve overall euro area developments. If this is not the case and a number of national decisions, in addition to some European decision making, accumulate to a de facto policy stance, then the provision of European public goods is a side effect of national decisions that may follow logics that do not help optimize the situation for the euro area. There are strong arguments that, if public goods exist in a monetary union, European citizens together should be able to determine the large orientation of policies that affect them all.
One example is financial stability. The Greek liquidity or banking crisis destabilized other member states, as well as the euro area altogether. Under this pressure, a mechanism was designed that provides liquidity to governments and banks, based on national contributions and guarantees. National taxpayers’ money has been used to help other member states. Although this financial aid also considerably helped banks of the major donor countries, it has proven difficult to communicate to the public that this not only benefits the recipient country, but the euro area as a whole – and with it the donor country.
At various points in the crisis with Greece, it was not entirely sure which volume and timing of financial aid donor governments, and with them national Parliaments, would consent to. These moments, and the assessment that not extending financial aid could lead to a very serious destabilization of the whole currency zone, showed that it is no longer sustainable for national parliaments or referenda to act as veto players and endanger the existence of European public goods. The current system has encouraged political polarization and a loss of trust, and hurt overall economic prosperity. The existing rescue mechanisms require European resources and European decision-making on how to spend them.
Another example is a country in an internal market that also shares a single currency. For this government, it is hardly possible to implement an expansionist macro-economic policy. If such a policy is chosen, the costs (in terms of deficits and debt) lie with the government, while the effects spread across borders and stimulate demand in neighboring countries. At the same time, the introduction of the single currency and the integration of markets means that the externalities of one government’s irresponsible decision are felt by the others. This is why a complex system of rules and surveillance mechanisms has been devised. These are not only supposed to limit negative spill-over effects, but also to contain negative impact on public goods. While this part of the euro areas governance structure may need some adjustment in terms of objectives and process, the more fundamental issue is the lack of it being grounded in democratically legitimate structures.
But with the monitoring and controlling of decisions of national governments which affect citizens in other member states, the problem is question of the provision of public goods is still not solved. Whether and what more needs to be done is reflected in the intensifying academic and political debate on whether the euro area needs the capacity to actually provide the public goods that come with the creation of the single currency in a more efficient and democratic fashion. A euro area fiscal capacity with various possible functions is hence considered.
Today, budgetary policy remains under the control of national governments, but these only represent partial interests and can never speak on behalf of the whole euro area. If we were to move ahead with the creation of a fiscal capacity for the euro area, we would also need to install democratic decision-making structures on the European level.
But this does not equal the creation of a full European federation. Only where European public goods are affected would the geographical spread and the decision-making level need to be aligned. In other areas, compromising between national positions can continue to be the norm. In some areas, a repatriation of certain competencies may be an option. But either way, the Greek case has shown the limits of leaving the authority for European public goods to national governments alongside the European Central Bank.