Abstract
The Greek crisis should not be considered an
unexpected phenomenon. On the contrary, it has been caused by, among other
things, rushed political decisions, incomplete EU institutions of governance
and hidden political and economic causes. We analyze the optimality and
effectiveness of the European monetary framework on two different levels, first
by applying the OCA criteria to the EMU. Second, by evaluating the main political
and economic institutions and their vulnerabilities within the European level.
We claim that many European countries, including Greece and other countries of
Southern Europe remain unable to afford the vulnerable and one-sided, weak
political and economic European monetary context. Additionally, we claim that
unless deep governance structures emerge, a possible enlargement of the
eurozone could create more costs than benefits for both the candidate members
and the Eurozone itself.
JEL Code: G01, F50
Key words: Political
Economy, Optimal Currency Areas, Greek crisis, EMU, European Governance
Introduction
In 1991, the Maastricht Treaty was signed by
all the European member states. The unique project marked the end of long road
efforts to establish the European Monetary Union (EMU). From its early
beginning the EMU was a result of intergovernmental bargaining by the most
powerful European countries in order to overcome global, regional and national
challenges (Moravcsik, 1998; Hosli 2000).
However, twenty years later, the Greek crisis revealed that the EMU’s
framework is a complex political and economic environment in which many
peripheral European economies remain vulnerable to the political and economic
shocks that can happen on a regular basis mainly because of conflicted national
interests and preferences at the European level. In this regard, De Grauwe (2010e,
p.172) argues that ‘large areas of economic policies remain in the hand of national
governments creating asymmetric shocks that undermine the sustainability of the
monetary union’. Thus,
the weak European politico-economic institutional context, in which the current
Greek crisis was developed, has also contributed to the current crisis.
The effectiveness of the European
monetary framework can be better analyzed through the application of the
optimal currency areas (OCA) criteria as it was first developed by Mundell
(1961) and later by McKinnon (1963), and Kennen (1969) together with the
evaluation of vulnerabilities of the main political and economic institutions.
The economic and political integration and convergence of Greece Maastricht Europe is not an OCA and yet
decides to create a common currency, there will be economic costs. If these
costs are high and the political criteria are not met, the undertaking will
fail’. As a result, in
order to assess the long-run sustainability of the Eurozone we need to focus on
both the political and economic conditions that led to its existence.
Thus, this paper intends to analyze
the European political and economic context in which the Greek crisis was
developed. As it will be argued many European countries, including Greece and other countries of Southern
Europe remain unable to afford the vulnerable and one-sided, weak
political and economic European monetary context within which they lose
important elements of their political and economic sovereignty. Thus, as long
as these countries remain unable to afford the economic competition within the
Eurozone and as no structural improvement can be observed within the whole
system of the European economic governance, then the European monetary
framework is potentially transformed to a political and economic trap. This
trap was developed because in fact the European area is not an optimal currency
area and many European countries joined the European Union politically. This
omission is also responsible for the current crisis together with the neglect
of the European political leaders to create a sustainable system of the
European economic governance because of their national interests. Moreover, unless
deep governance structures emerge, a possible enlargement of the Eurozone could
create more costs than benefits for both the candidate members and the Eurozone
itself. Under these conditions the EU will remain unstable in the long run.
First, we apply the first three OCA
economy-related criteria for the case of Greece
The Application of the OCA Criteria to the EMU.
The OCA theory is an adequate means for
assessment of the European monetary project. However, its significance affected
neither the Maastricht Treaty nor the formation of convergence criteria. The
Maastricht Treaty was affected only by a few and, as it proved later,
controversial publications like the Delors Report. The policy makers and
politicians omitted the fact that Europe is
not a perfect OCA, contrary to what many important studies for example
Eichengreen (1991) and Bayoumi and Eichengreen
(1992) had argued, and thus the creation of a solid European economic
and political architecture failed. Consequently, the whole European economic governance
was limited by some inefficient and insufficient economic and political
institutions and policy goals. Such failures and omissions are responsible for
today’s European governance problems.
For the application of the OCA
Baldwin and Wyplosz (2006) propose six criteria in order to answer the question
of whether one country is able or unable to participate in a monetary union.
These criteria can either be based on economic factors like labour mobility,
production diversification, and openness or on semi-economic semi-political
elements like the possibility of fiscal transfers, homogeneous preferences and
the solidarity criterion. According to them, European countries do not satisfy
either the labour mobility or the fiscal transfer criterion, they only partly
satisfy the homogeneity of preferences criterion and it is very unclear whether
there exists a common sense of solidarity. Instead, the European countries
satisfy the trade openness and the production diversification criteria.
However, a closer look at the data reminds us that Greece
However, one could ask if is it too
early to assess whether the Eurozone fails to determine the OCA (Wyplosz, 2006).
The European economic crisis which started in Greece
It is now obvious that many critical
elements of OCA theory was disregarded by many European political leaders. The
first critical issue which is related to Mundell’s OCA theory is the incidence
of asymmetric shocks which are directly related to labour mobility and wage
rigidities. According to the OCA framework many argued that the United States
(US) is in a much better position than the European Union to form a monetary
union because its regions can adapt to asymmetric shocks better than the EU’s
regions and, in fact, labour mobility at the European level is lower than that
in the US (Eichengreen, 1990; Bayoumi and Eichengreen, 1992). Barry Eichengreen
(1990b) also argued that within the U.S.
The current global financial and
economic crisis that started in the US in 2007 proved that peripheral European
countries are not only affected by very different economic shocks, but in
contrast to the core countries, they have less ability to surpass these
negative shocks because of major flaws in the European economic architecture.
Within the Eurozone there is no official and effective mechanism to compensate
the negative shocks. Thus, Greece
Applying the first OCA criterion to
the Greek case Table 1 shows the existence of substantial asymmetries in supply
and demand shocks. In conjunction with the fact that within the Eurozone labour
mobility and wage flexibility are not of an adequate level (Fink and Salvatore,
1999) the members cannot respond effectively to major economic disturbances. As
it had been argued ‘Greece
and Italy Greece
Table 1. Correlation Coefficients of Supply
and Demand Shocks in Germany
Supply Shocks
|
Demand Shocks
|
|
Germany
|
1
|
1
|
France
|
0,54
|
0,35
|
Belgium
|
0,61
|
0,33
|
Netherlands
|
0,59
|
0,17
|
Denmark
|
0,59
|
0,39
|
United Kingdom
|
0,11
|
0,16
|
Italy
|
0,23
|
0,17
|
Spain
|
0,31
|
-0,07
|
Ireland
|
-0,06
|
-0,08
|
Portugal
|
0,21
|
0,21
|
Greece
|
0,14
|
0,19
|
Source: Bayoumi and Eichengreen (1992).
In this regard, Greece is much less equipped to overcome these
asymmetric shocks than Germany US Greece
Second, following Kenen’s production
diversification criterion we assume that an OCA should be created only when the
member states have a well diversified level of production and exports. Does Greece Greece is second,
behind Norway Greece Greece
Third, what happened to the openness
within the Eurozone? Is Greece Greece Greece Italy ’s average is
27.9%, Portugal ’s average is
36.2%, Bulgaria ’s average is
65.9% and Turkey Greece Greece
The aforementioned discussion makes
it evident that within the EMU there are significant differences between the
countries as to what concerns the application of the first three OCA criteria
that directly affect each country’s ability to overcome external shocks. In the
case of Greece
Institutional, Political and
Economic Vulnerabilities
The OCA theory provides three more criteria for
the evaluation of each country’s ability to participate in a currency union.
However, the last three criteria namely, homogeneous preferences, fiscal
transfers and solidarity are not related only to the European economic
performance but also with political and institutional vulnerabilities that can
be observed at the European level. As it will also be stated the political and
institutional weaknesses at the European level affect the performance of the
EMU’s member states and mainly the performance of the peripheral countries. In
this regard, Greece
First, the homogeneity of
preferences criterion states that, any time a crisis arises, a monetary union
should propose common actions on how to solve the crisis. But, do the European
states share the same preferences or at least the same priorities in order to
solve the problems and shocks that frequently arise within the EMU? The current
crisis and especially the Greek case proved that within the EMU there is no
common consensus on how to deal with crises. For the last two years the
European countries have tried to compensate the negative effects of the global
financial crisis on an individual basis where national preferences and
interests prevail. Moreover, it is clear that Greece Greece Greece and Portugal
have very little in common with Germany
and France
The European context has also been
transformed into a trap because of the function of its main economic
institution. The ECB has been developed in order to serve as a monetary union
with a rather limited sense of solidarity. Furthermore, anytime the ECB’s
Executive Board follows the method of ‘one member, one vote’ and the economic
cycles among the countries are unequally allocated then severe conflicts and
crises can arise (Bindseil, 2001). For example, when a sudden economic shock occurs
within the Eurozone, the effectiveness of the ECB is decreased. In addition,
the “one-size-fits-all” monetary policy of the ECB could worsen the
macroeconomic performance of many European countries like Greece
On the other hand, the Stability and
Growth Pact (SGP) which was adopted as one of the main institutional projects
for stability and growth within the Eurozone in order to overcome the limits of
the fiscal autonomy of the member states and to stop the ‘free riders’(Horstmann
and Schneider, 1994) seems very weak.
First, its weak institutional foundation is related to the lack of
accountability of the Commission (De Grauwe, 2010e). As McNamara (2005, p.156)
argues ‘although the SGP has the word growth in its title, it is not likely to
promote growth, but rather to be excessively restrictive’. In this respect, not
only many countries like Greece Maastricht
Figure 1. Public Debt
within the EU
The most important weakness of the
SGP is derived from the political elements of the Excessive Deficit Procedure
which was first suspended from France
and Germany (Leblond, 2006;
Heipertz and Verdun Greece
Finally,
there is not only a lack of a mechanism for fiscal transfers but also a
coordination mechanism between fiscal and monetary policies. The EU needs an
economic institution that could organize not only the monetary but also the
budgetary and fiscal policies in the Eurozone. Jovanovic (2005, p.60) states
that the EU ‘unlike in the US Gillingham , 2003, p.269). According
to De Grauwe (2010c, p.3) ‘this imbalance leads to creeping divergencies
between member states and there is no mechanism to correct or to alleviate them’.
The
aforementioned deficiencies are important elements of the European
complexities. As long as Germany and other core European countries are able to
follow their own economic policies then not only will the economic divergencies
within the Euro area continue to exist but also that many peripheral countries
will remain, unable to resist, trapped within the euro area.
As Feldstein
(1997, p.41) argued ‘Political leaders in Europe seem prepared to ignore
these adverse consequences (…) though such a policy is often advocated as a way
to reduce conflict within Europe , it may well
have the opposite effect’. This behaviour can only be explained in the name of national preferences
and interests. Theoretically,
is explained through Moravcsik’s liberal intergovernmentalism (Moravcsik, 1993)
and more specifically through the revised embedded intergovernmentalism in
which the concerns of the stronger nation states within the Eurozone are
affected by their powerful socio-economic actors (Talani, 2005; Talani, 2007; Talani,
2008). As Talani (2007, p.299) argues ‘Intergovernmentalist would predict that
the interest of the most powerful member states prevail over the one of smaller
states’. Thus, it is not extreme to argue that conflicts of interest can be
observed among the most powerful European states the last two decades
(Tombazos, 2011). As a result, the weak member states seem to be trapped by
national business preferences that can modify policy decisions already agreed
at the European level (Crouch, 2002). .
Eventually, we can argue that:
2. Such countries did not initially fulfill the
set criteria for participation in the EMU. In this respect, it seems that Greece Greece
3. Within the EMU the political and economic
environment is more violent and conflicted than harmonious, although this is
very difficult to be observed. Weak economies such as Greece
4. The politico-economic European governance
framework is insufficient with many flaws and deficiencies.
5. No political-will, leadership can be
identified sufficient to overcome the governance deficiencies.
The Case of the New Member States
The Greek crisis has
been analysed as a phenomenon that was caused by rushed political decisions,
incomplete institutions of governance, and hidden political and economic causes
within the EMU. However, if this is the situation what does the case of the NMS
tell us? Several studies have been developed in order to assess
whether the NMS are able to participate in the EMU. The majority of these
studies have concluded that their performance is at best as good as the peripheral
countries (Fidrmuc and Korhonen, 2006) But, if this is the best and most
optimistic scenario then we should be very concerned.
Horvath
and Ratfai (2004) claim that the supply socks remain uncorrelated among
Germany, France, and Italy on the one side and Czech Republic, Slovakia,
Poland, Hungary, Slovenia, Estonia, Latvia and Lithuania. Moreover, Fidrmuc and
Korhonen (2003) argued that there are many prospective countries with great
asymmetries in business cycles. According to them only Hungary and Estonia
Under the
aforementioned analysis, one should be more critical in the question of whether
a prospect enlargement will have positive effects both for the prospect
countries and for the Eurozone. The Greek crisis and the majority of studies
the last 20 years show that participation within the EMU is not as simple as it
looks. The one-sided political decisions for membership should be avoided. The
theoretical studies should influence more of the European political and
economic decisions and policy making. The European context has been transformed
to a big and unseen trap for the majority of the European countries which has
to be taken into consideration for future enlargements. We have few reasons to
believe that the new member states, the candidates and potential candidates’
countries are really different than Greece Portugal ,
Spain and Greece
What needs to be done?
It is ironic but
true, that many scholars proposed solutions for the problems of the European
economic governance and it is even more ironic that none of these have been
transformed into policy measures. Even today, the recently agreed solution for
the Greek debt situation is not a solution at all. In contrast to the
optimistic public statements, the agreement does not provide an adequate
framework for solving the structural weaknesses of the Eurozone. This is
because of the calculated political and economic costs for the core European countries.
This means that the Eurozone will continue to trap its weaker members in a
shadow and unsustainable political and economic environment. This is because a) it is a solution only for
the Greek case, b) no improvements of the Eurozone’s structural economic and
political governance problems can be observed c) the European leaders also
failed to see that the European economic crisis calls for better coordination
within the structures of European economic governance at the political and
economic level. The Greek economic crisis is only a sign of how all these
hidden and non-hidden economic, political and institutional characteristics
affect the stability and development in Europe .
But, what needs to be done?
- Effective Institutions
In 1991,
Barry Eichengreen (1991, p.3) wrote:
‘the establishment of
a currency union in Europe will be associated with
non-negligible regional problems. This makes it all the more essential to
develop the political and economic institutions necessary for the smooth
operation of a currency union […] the absence of comparable institutions in
Europe is a serious challenge to the case for an OCA turns out to be a
complicated question’.
Unfortunately, none
of the established political and economic institutions contributed to the
overall stability of the Eurozone. As we have already analyzed even the ECB
with its “one size fits all” policy creates several problems because not all
the countries are able to follow their decisions especially because significant
asymmetries lie within the Eurozone. The creation of more effective political
and economic institutions in order to improve the European economic and
political governance is a necessity.
- Alternative Adjustment Mechanism
Moreover, Eichengreen
(1991) proposed a system of budgetary transfers, a possible injection of
liquidity from other countries. This calls for a system of redistributive
policies which also requires a central fiscal authority (Dibooglu and Horvath,
1997). There is a need
for an economic institution that could organize not only the monetary but also
the budgetary and fiscal policies in the Eurozone (Verdun
- The European Monetary Fund and the Common Euro-bond Market
The European Monetary Fund (EMF) and the Common
Euro-bond Market are two more important solutions for the problems within the Eurozone
(Gros and Mayer, 2010a; Gros and Mayer, 2010b; Gros and Micossi, 2008; De
Grauwe and Moesen, 2009). One more step could also be the creation of a ‘clear
framework to deal with the consequences of a member country’s failure to abide
by the fundamental rules’ (Gros, 2010, p. 2).
- Political
Under certain circumstances, a
political union as a final outcome within the EMU is the most highly desirable
outcome because the lack of a concurring political union is the most severe
deficiency within the Eurozone (De Grauwe, 2006; De Grauwe, 2008; De Grauwe,
2009b). The political union not only
makes the membership less costly but also reduces the asymmetries that emanate
from political conflicts (De Grauwe, 2009a). Thus, its absence is regarded as a
major failure. However, the EMU has few possibilities to construct an ever
closer political union. One of the main reasons for this is that the citizens of
the EU do not seem to share a feeling of mutual perspective that surpasses many
of the nationalist propensities. The other is the political unwillingness to do
it. As Dominguez (2006, p.68) observes
‘European economic integration is built on a group of countries each of which
wants to stay largely as it was before integration (…) many citizens in Europe
are still grappling with the question of how truly unified they care to
be’. As a result, it is clear that there
is an absence of the ‘deep variable’ (De Grauwe, 2009b) that is highly related
with the solidarity criterion. As De Grauwe (2006, p.723) states ‘A union in which member states show
zero solidarity for the plight of other states cannot hope to have a reasonable
chance of survival’.
Conclusion
According to the
analysis above it is not as obvious as to whether the rules and principles
within the EMU are concrete and can create a solid background for viable
economic and financial policies. The EMU from its early beginning was based not
on each country’s ability to participate but on political reasons. Political
and economic priorities have considerably overcome economic and fiscal
principles in the formation and function of the EMU. However, it is obvious
that the rules of the game are not viable anymore. Greece
More specifically, this paper argues
that the EMU’s
political, economic and institutional context seems to be a rather complicated
framework for certain member states of the EMU like Greece, Portugal, Spain and
Ireland, namely the “weak” or ‘‘peripheral’’ economies. In this regard, there
are some important observations:
1. The political
leaders omitted several theoretical and empirical studies related to some
shocking aspects of the European unification. A rushed system of political and
economic governance was created. This system cannot assist member states to address
asymmetric shocks.
2. The production factors remain immobile and
the wages rigid. This does not help with the appeasement of asymmetric shocks.
Certain member states, including Greece
3. The ECB is not as
efficient as it could be and its one size fits all monetary policy creates
several problems for the peripheral countries with special needs. SGP does not
provide an adequate mechanism for growth at all.
4. But the most
important of all is the lack of solidarity.
As Dyson and Featherstone (1999, p.796)
stated ‘EMU’s Achilles heel was the prospect of people being asked to make
sacrifices for others with whom there was a weak sense of solidarity’.
The above
observations create increased anxieties for prospective enlargements because
the Maastricht
It is now obvious that economically
weak European states remain trapped within the Eurozone both economically and
politically. The economic reasons create disastrous unseen conditions that
negatively affect the economic performance of the peripheral European
countries. On the other hand, the political and institutional context does not
help these countries to overcome their challenges at all and also no real
improvement of this framework can be observed even in the middle of the great
European economic crisis. Greece
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Figure 1. Public Debt
within the EU
Source: European Central Bank (2010).
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