Lessons from the European Crisis

Two episodes in the recent past have caused crisis management in Europe to migrate to a new level. First, the establishment of a permanent funding instrument, the European Stability Mechanism (ESM), on October 9, 2012, to finance crisis and problem countries in the euro area. Second, the decision taken by the Governing Council of the European Central Bank at the beginning of September 2012 to purchase Italian and Spanish government bonds on the secondary market on an unlimited scale--the Outright Monetary Transactions (OMTs). These events have completed a paradigm shift in the European Economic and Monetary Union (EMU). The financial markets and political leaders 'alike welcomed and applauded dais sea change. So does dais mean Europeans have mastered or even resolved the crisis? There is evidence that the reform process at both the national and supranational level with positive results is under way, which should not be disregarded by market participants and external observers. At the same time, it is a fact that more and more eurozone countries (Cyprus and Slovenia) now require external financial assistance. It is also true that the undertaking of necessary economic adjustments, and strict conditionality on financial assistance to the crisis countries, are bumping against barriers. With groans of adjustment fatigue here and moans about bailout fatigue there, the democratic systems are struggling to cope. The costs of granting additional aid to fellow member states and of prolonging the timeline for economic reforms and fiscal consolidation is placing a growing strain on the donor economies. Crisis management, initially characterized by panicky, ad hoc decisions, has eventually contributed to calm down markets in the short run but is becoming increasingly expensive as well. The problems currently facing Europe necessitate fundamental decisions about the future of the euro area and of European integration. By definition, these fundamental decisions must transcend the piecemeal approach to crisis management and to the new institutional framework of EMU that we have seen so far. This article outlines the Maastricht concept of EMU as a stability union, considers the policy failures that led to the crisis, describes and analyses the paradigm shift in the context of the crisis resolution measures, and raises some questions concerning the future of European integration. The Maastricht Concept of a Stability Union The Economic and Monetary Union constitutes Europe's highest--and most visible-degree of integration. This applies especially to monetary integration and the introduction of a single currency: the euro. No comparable degree of integration has been reached in foreign mad security policy, or in justice and home affairs policy. Those policies remain largely intergovernmental despite repeated attempts to develop community-based elements. Economic and monetary union is undoubtedly a political project. But it is also the logical consequence of the European integration process, particularly the monetary completion of the Single European Market and the finalization of the monetary policy aspects that were already contained in the European Economic Community (EEC) Treaty of 1957. Yet economic and monetary union is an asymmetric construct. For one thing, economic union and monetary union represent differing degrees of integration and harmonization. For another, EMU lacks the dimension of a political union in the sense of deeper interstate integration. Consequently, the integration of economic policy and of general policy has lagged behind monetary integration. The parallel evolution of monetary union and political union, which the then German government advocated during the negotiations on the Maastricht Treaty, was opposed by some of its European partners. They were not prepared--for example, in fiscal policy matters--to accept further-going and more binding rules that would have impinged on national sovereignty. …