Tag Archives: Lisbon Treaty

Why The Monetary Union Is A Failure

Over the last months it’s become quite clear that Europe‘s monetary union (EMU) is – more or less – a failure. So, what happened? And what do we do now? In this article professor Kevin O’Rourke provide a comprehensive explanation of the why’s and how’s, and put forward some suggestions for possible solutions of the greatest crisis in modern European history.

“Whether EMU can survive in the long run if the status quo persists is an open question.”

Kevin O’Rourke

“In order to understand why EMU happened, we often turn to the familiar Mundell-Fleming monetary policy trilemma. Given intra-European capital mobility, the decision by a subset of EC members to move to EMU was a logical, if radical response to the challenges posed by this trilemma. However, the institutional framework of EMU is seriously flawed,” Kevin O’Rourke writes.

Kevin O’Rourke is Professor of Economics at Trinity College Dublin, a co-organiser of the CEPR’s Economic History Initative, a Research Fellow of the National Bureau of Economic Research, and a Member of the Royal Irish Academy.

He received his PhD from Harvard in 1989, and has taught at Columbia University, UCD, Harvard, and Sciences Po (Paris).

He is currently serving as President of the European Historical Economics Society, and an Editorial Board member of World Politics.

Here is professor O’Rourke’s recent article, syndicated by www.eurointelligence.

A Tale of Two Trilemmas

For decades economists have argued that fiscal union was a desirable, and perhaps indispensable, complement to EMU.

What we now know is that a common euro zone framework for regulating financial institutions, and dealing with the consequences of their failure, is equally important.

We have a monetary union with neither of these complementary institutions, and it is clear that this architecture is not fit for purpose.

How did we end up here, and what happens now?


To answer these questions it is helpful to turn to what Dani Rodrik has labelled the “fundamental political trilemma of the world economy”. Rodrik argues that “we cannot simultaneously pursue democracy, national determination, and economic globalization.

“If we want to push globalization further, we have to give up the nation-state or democratic politics. If we want to maintain and deepen democracy, we have to choose between the nation-state and international economic integration.”

And if we want to keep the nation-state and self-determination, we have to choose between deepening democracy and deepening globalization” (Rodrik 2011, pp. xviii-xix).

The argument is that “deep globalization” involves a commitment to not just open commodity and capital markets, with the constraints that these imply, but also to a competition for mobile factors of production that makes it difficult for national governments to adopt regulatory standards or other interventionist policies, even when their populations want this.

The solutions are either to allow popular opinion to manifest itself through supra-national mechanisms, or to ignore it.


EMU solves the political trilemma by abandoning national monetary policy-making, and delegating it to a technocratic Central Bank.

The fact that this has occurred without fiscal union, or common banking policies, can be well understood within the trilemma framework.

Regarding fiscal policy, the combination of the nation-state and democracy has prevented deeper political union: German voters (among others) do not want a transfer union, while Irish voters (among others) do not want a common tax system.

When it comes to banking regulation, on the other hand, the combination of deep economic integration and national policy-making has made it very difficult to respond to the clear demands from citizens for far stricter banking regulation.


It seems that EMU is stuck between two trilemmas, one economic and the other political. Where do we go from here?

There are several features of EU politics which are relevant in thinking about this issue.

The first is the question of governance: how decisions should be made at a supranational level is a contentious issue, which can again be illustrated by means of the trilemma. For most people, ‘democracy’ involves direct elections to parliaments which legislate.

One could leave European decision-making to the European parliament, but the nation-state remains the basic focus of political identity and authority, and national governments remain centrally involved in the process.

One solution would be to prioritize national parliaments and the nation-state: one could then have intergovernmental cooperation, but this would involve national vetoes, and it is hard to see a particularly proactive EU emerging in such a scenario.

The other solution is what we have: an essentially intergovernmental mode of decision-making that gives rise to accusations of a ‘democratic deficit’. This has created a constituency in Europe that is hostile to further integration.


The second relevant feature of EU politics is the international cleavages that exist regarding EMU. In particular, German citizens were opposed to it at the time, and this has political implications today.

The third feature is the existence of sharp intra-national cleavages in opinion regarding the EU in general, and EMU in particular.

The unskilled and the poor tend to be opposed to both, while the skilled and the rich tend to be in favour. The potency of these divisions was illustrated in the 2005 and 2008 referenda in France and Ireland, where voters divided largely along class lines.

Superimposed upon these long-run political cleavages are the effects of the global crisis of 2008-9, and the present banking crisis.

In principle, the global financial crisis could have led people to view the EU as a port in the storm, and there is an element of this in the Irish referendum approving the Lisbon Treaty in 2009. On balance, however, Eurobarometer surveys indicate that attitudes towards the EU have become more negative during the crisis, while there has been a fairly dramatic deterioration in trust in the institutions of the Union.

The interaction between a sharp economic crisis in several countries, and underlying class-based or national hostility to EMU, could turn out to be a potent one.

Even more serious could be the mishandling of the banking cum debt crisis. The decision of the ECB to veto the new Irish government’s desire to impose burden sharing on private bank bondholders is extraordinary, and provides Irish eurosceptics with an extreme example of the democratic deficit in action.

Meanwhile, taxpayers in Finland and elsewhere are revolting against the notion that they should bail out their profligate partners – recognising that this is a European banking crisis that needs a European solution might help change perceptions.

So would recognise that an end to regulatory competition in the financial sector would be a more logical concession to be sought from the Irish, in return for cutting interest rates, than an increase in their corporate tax rate.

Whether EMU can survive in the long run if the status quo persists is an open question.

Governments have tended to muddle between the stark trade-offs implied by the political trilemmas, but this crisis may force them to confront those trade-offs head-on.

What happens then is anyone’s guess.

By Kevin O’Rourke

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Anger And Mystery Evolve Around French-German Economic Pact

Holy Bananas! These EU politicians are screwing things up faster than Duracell-rabbits on EPO: President of the European Council, Herman Van Rompuy, was (almost practically) nailed to the floor during today’s meeting at the EU parliament by angry MEPs who demanded answers and explanations of the alleged French-German economic pact, and the six-point plan that’s been drafted. Some of the EU politicians says that it’s not a French, nor German, document, wile others confirm that it is an official EU document – not an internal paper or part of some project. This is exactly the type of situation I’ve been worried about, and tried to warn you about.

“What we are up against now is the weakness of the German position and bullying of the Brits who threaten anyone with a referendum. If the European Commission and the parliament don’t stand up for themselves and the spirit of the treaty, then we’re in real trouble.”

Andrew Duff


MEPs vent fury today at the EU council‘s president Herman Van Rompuy over the French-German economic plan. Mr. Van Rompuy was confronted with an avalanche of criticism from MEPs for allegedly letting France and Germany run the show when it comes to economic governance of the euro zone, at the expense of other member states and EU institutions.

The heated discussions revolved around the “Pact for Competitiveness” drafted by France and Germany and circulated in an informal way a few days before an EU leaders meeting last Friday.

The six-point plan, seen by EUobserver, suggest, amongst other proposals, the abolition of the salary indexation systems, greater harmonization of member-state corporate tax rates and an overhaul of national pension systems.

Speaking in front of the parliament’s political-group leaders and committee chairs, Mr Van Rompuy denied that the document was the origin of a fresh drive to deliver further economic co-ordination in the euro zone.

Extracts

Let’s cut in at the point were the leader of the Socialist group, Martin Schulz, waved the document in front of him:

Van Rompuy: Although there have been some documents going around, there has not been any suggestion, any plan put on the table at the Council. Not at all. No proposal whatsoever. I’m speaking about the Council, I was there – you were not.

Schulz: (Pointing his finger at the document).

Van Rompuy: There were no proposals put on the table. Not by one country, two countries. Nothing.

Schulz: (Waving the document) I saw the document. But it’s not a Franco-German one, it was not presented to the Council, it was not discussed there. This is not a non-paper of the Council, (A Brussels jargon for a non-paper is an informal discussion document drafted by EU institutions on sensitive topics.)

Van Rompuy: I can only swear on the (EU) treaty, not the community matter. The concrete proposals will be drafted in close co-operation with the European Commission.

Joseph Daul: Economic governance has to be dealt with and debated in a community framework, and  member states should not impose anything on others.

Guy Verhofstad: I received the paper 24 hours before the summit and I heard there were prime ministers who didn’t get the chance to read it before the start of the session, so they didn’t even knew what they were discussing. We need to make decisions based on proposals by the European Commission. That is what the Lisbon Treaty is about, not an organization of national states.

Rebecca Harms: No matter how meager the results are, we always get reports of how smooth everything went. We need more honest declarations which pinpoint the problems. The Franco-German pact is the title used everywhere instead of what was actually discussed and I think this stands for the disaster brought about by Ms Merkel and Mr Sarkozy. There was not one single criticism from Mr. Van Rompuy or the European Commission. It seems like you’re playing hide and seek and it is difficult to believe that the Council understands the community matter.

Fury Still Raging

The side-lining of Mr. Van Rompuy is “unfair” and puts himself in an “embarrassing position”, but he is also “very clumsy,” British Liberal MEP Andrew Duff says in an interview with the EUobserver.

“Perhaps Mr Sarkozy and Ms Merkel are not as in tune with the EU as they may have been in the past. They are also under pressure from the UK to do everything in an inter-governmental way. But they should stand up to Mr Cameron. He also has to abide by the treaties, despite the fact his country is not in the euro-zone.”

Mr. Duff is arguing that Berlin – traditionally a staunch supporter of EU institutions and the “community matter” – has “succumbed” to French and British bullying.

He says he is disappointed by Ms. Merkel. Himself part of the parliamentary delegation that negotiated the Lisbon Treaty, and that he had hoped that the German chancellor, at that time in charge of chairing EU meetings, had grown to appreciate the “importance of the community method.”

“What we are up against now is the weakness of the German position and bullying of the Brits who threaten anyone with a referendum. If the European Commission and the parliament don’t stand up for themselves and the spirit of the treaty, then we’re in real trouble,” he warns.

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Barroso: EU Has Survived The Economic Crisis

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EU Budget Talks Collapse

A last attempt to reach an agreement for the 2011 EU budget failed Monday night, due to reluctance by member states to grant MEPs extra powers in future multi-annual budget negotiations. The EU commission will now have to draft a new proposal, while the first months of next year will be funded on the basis of the 2010 budget,

“There is no drama, the world won’t go under.”

EU diplomat

No Budget - No Drama

The final collapse was mainly due to disagreements over procedures and extra powers granted to MEPs under the Lisbon Treaty, the EU’s new rulebook, European media reports.

Jerzy Buzek

“It’s not good news not to have a budget for 2011, but we will follow procedures,” EU Parliament chief, Jerzy Buzek,  told reporters in a late-night press conference after talks with member states broke down, according to the EUobserver.com.

Junior ministers from Britain and the Netherlands insisted that the only issue on the table was the budget for 2011 and declined to discuss contentious issues for the long-term budgetary perspective, such as raising more EU “own resources” through supplementary taxes or the “flexibility” of the budget when unexpected expenses arise.

Shortly after announcing €95 billion in domestic budget cuts, Britain has demanded that next year’s EU budget stay frozen at the 2010 levels, or go up by a mere 2.9 percent, less than half of the original MEPs’ request.

Perverse Mechanism

“The Brits didn’t want to hear about ‘flexibility’ as they argued it could create a perverse mechanism by which governments are forced to pay more into the EU coffers,” one EU diplomat says.

Dutch officials were motivated both by similar spending cuts at home and a diplomatic defeat for the Netherlands when Albania and Bosnia were granted EU visa-freedom.

The Dutch EU affairs minister promised last week that budget talks will only relate to the 2011 figures and “nothing else.”

The chairman of the budget committee, French MEP Alain Lamassoure, lashed out at the national envoys, who had no mandate to negotiate anything else but the figure for next year and said that if they were not willing to discuss MEPs’ powers, he would “take it to the European Council in December.”

Bad Blood

For some diplomats, the strategy of the European Parliament was bound to fail, because it wrongly assumed that member states would agree to a budget out of fear of being labelled as “anti-European.”

“There will be a budget, based on 2010 figures. There is no drama, the world won’t go under,” one EU diplomat told the EUobserver.

However, EU budget commissioner Janusz Lewandowski is not of the same opinion.

During the lengthy hours of negotiations he reportedly warned member states that failure to reach an agreement will create “bad blood,” and even lead to higher borrowing costs for the euro zone’s most embattled economies in Ireland and Greece.

A last-ditch attempt by the Belgian EU presidency to separate figures from the “political agreement” on the MEPs’ powers was dismissed by the parliament’s negotiators as “completely unserious.”

The euro-deputies had previously indicated that they would back a 2.9 percent increase in the budget, as demanded by 12 member states led by Britain.

Anyway – now it’s back at square one; the EU commission will have to come up with a new draft budget, and another round of negotiations, at government leader level, are to take place in December.

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