Abstract
This chapter considers the role of economic and structural reform in EMU, starting with the uneven governance of EMU’s economic and monetary parts set out in the Maastricht blueprint. It examines how soft coordination under the heading of the Lisbon Strategy fared before the sovereign debt crisis. It proceeds with analysing the changes that the eruption of the sovereign debt crisis in 2010 brought about, looking into the Europe 2020 Strategy, the Euro Plus Pact, and the implications of the emergence of market pressure and conditionality. In this context the special case of Greece is considered. Adopting a forward-looking perspective, the chapter also sheds light on structural reform needs from the point of view of a durable crisis exit.
Paper prepared for the JMCE and JM Chair Conference ‘Europe in Crisis’, King’s College, London, June 2014. It also summarizes some of the topics discussed in our lectures at King’s College on the Political Economy of EMU and on Structural Reforms in the EU, in 2014 and 2015. We would like to thank, without implicating, seminar participants at earlier presentations in Oxford and London, and in particular Iain Begg, Paul De Grauwe, Erik Jones, Russell Kincaid, Kalypso Nicolaïdis, Simona Talani and Roberto Tamborini, for very valuable comments and discussions.
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Notes
- 1.
See Torres (2013) for an explanation of this ‘invasion of other policy domains’ by the ECB: it became a guardian of EMU given that the EU’s political system per se seemed incapable of providing timely and consistent solutions.
- 2.
According to Masciandaro and Romelli (2015), overall the increasing trend in central bank independence is somehow reversed after 2008, namely because of central bank involvement (notably the ECB’s) in banking supervision.
- 3.
The SGP’s legalistic approach failed when the European Commission faced national arguments of ‘special circumstances’ (Giavazzi and Wyplosz 2015). Also, as noted by Claeys et al. (2014), in order to be effective, institutions for fiscal discipline have to be well adapted to political institutions. In the case of the EU this applies also to national political institutions, given that fiscal policy has remained a ‘constrained’ decentralized competence. Eijffinger et al. (2015) argue that markets had behaved in a rational manner by taking the no bailout clause as unreliable from EMU’s inception. Risk weights on sovereign debts of euro members were also set at zero by the official sector.
- 4.
See Buti et al. (2010) for a collection of papers that present a comprehensive analysis of EMU’s first decade.
- 5.
There were no financial backstops for stressed sovereigns or strained banks, nor for countering sudden stops in financial flows (Mongelli et al. 2015).
- 6.
It featured three pillars: The economic pillar was to create the basis for the transition to a competitive, dynamic knowledge-based economy, with emphasis on the need to adapt constantly to changes in the information society and to increase research and development. The social pillar was to modernize the European social model, investing in human resources and combating social exclusion. The environmental pillar, added at the Gothenburg European Council meeting in June 2001, called attention to the need to decouple economic growth from natural resource utilization for sustainable development.
- 7.
In the sovereign debt crisis, markets started to look at countries’ growth potential (and thereby at individual member states’ Lisbon performance) for debt sustainability reasons, penalizing through high risk premiums those that had not sufficiently progressed on economic modernization.
- 8.
The large differences in sustainability performance between member states indicate different levels of environmental sustainability concerns and of national policy effectiveness.
- 9.
This was more the case after the crisis, when many economists and politicians proposed purely Keynesian expansions, which risked perpetuating unsustainable consumption and production patterns. In our view, the need to stimulate domestic demand in surplus countries—which is not irrespective of the composition of expenditure and taxation, rather the opposite—goes hand-in-hand with the need to implement structural reforms in order to reduce built-up disequilibria in deficit countries. Structural reforms that modernize the economy are a precondition for a shift to sustainable growth.
- 10.
As shown by Mongelli et al. (2015), with the preparatory work for the launch of the euro in the mid-1990s (more precisely with the launch of the EMU’s second phase in 1994), the nature of European integration changed, as developments in any member state could have a much greater impact on the others. The crises have been illustrative in this regard.
- 11.
See Torres (2015) for a detailed discussion and examples of various types of spillovers.
- 12.
A brief summary of measures taken since 2010 to strengthen the EMU’s resilience is presented in Juncker et al. (2015a). See also Mongelli et al. (2015) and the European Commission Fact Sheet on “The EU’s economic governance explained” 28 November 2014, http://europa.eu/rapid/press-release_MEMO-14-2180_en.htm.
- 13.
The proposal of such a legal base in the second phase suggests that the five presidents have little faith in the delivery of national structural reform through non-binding coordination (Begg et al. 2015).
- 14.
The link between fiscal policy and structural reforms is not irrelevant as the former is constrained by the need to ensure a proper adjustment of the budgetary imbalance and the latter can increase the credibility of the adjustment programme and thereby achieve a more gradual fiscal adjustment (Bini-Smaghi 2015).
- 15.
- 16.
The above-mentioned case of Puerto Rico in the USA bears many similarities with the case of Greece. Both delayed overdue reforms and arrived at the brink of bankruptcy. However, Puerto Rico, a member of a financially integrated monetary union, did not put the monetary union at risk. It did not receive any help from the USA either, and entered into default (see Gros 2015). In the case of Greece, Eurozone partners paid the country’s debts to the IMF (which were overdue) and to the ECB.
- 17.
Climate change is a case in point of environmental constraints to economic growth (UNEP 2014). For the economic case for combatting climate change, and for decarbonisation, and positive growth effects in the short and long run, see for instance Fay et al. (2015), Nordhaus (2006), Spence (2014) and Stern (2006, 2015).
- 18.
Environmental protection and combatting climate change reflect European citizens’ values and priorities, as Eurobarometer surveys have consistently indicated.
- 19.
Sustainable development has been an objective of the EU for about three decades (the concept goes back to the so-called Brundtland report, World Commission on Environment and Development 1987). The 2009 Lisbon Treaty goes further, committing the EU to a high level of protection and improvement of the quality of the environment in the management of the single market (Art.3 (3) TEU).
- 20.
See for instance the encyclical letter on the environment by Pope Francis (2015).
- 21.
Starting with the Lisbon (2000–2010) and Sustainable Development Strategies (2001, revised in 2006), which came together in the Europe 2020 (2011–2020) Strategy.
- 22.
- 23.
EU level fiscal instruments require unanimity in the Council of the EU. While member states can impose taxes or cut subsidies at the national level they will be reluctant to do so if that implies competitiveness disadvantages in the internal market.
- 24.
EU environmental regulation provides for minimum standards with a view to avoiding a race to the bottom in member state regulation standards. Conversely, demanding EU harmonized environmental regulation can be used as an instrument to foster EU green innovation and cost-efficiency.
- 25.
The circular economy package was aimed at making the European economy more resource-efficient by increasing recycling levels and tightening the rules on incineration and landfill. Drawn up by the Barroso Commission, it was withdrawn by the incoming Juncker Commission in December 2014 amidst wide-ranging protests, among which were EU environment ministers, Members of the European Parliament (MEPs), and Non-Governmental Organizations (NGOs). The Commission announced that it would table an improved package in 2015, more ambitious and aimed at cutting red tape. At the time of writing (August 2015) its fate was still unknown.
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Bongardt, A., Torres, F. (2016). EMU and Structural Reform. In: Talani, L. (eds) Europe in Crisis. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-137-57707-8_3
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