Full Terms & Conditions of access and use can be found at
http://www.tandfonline.com/action/journalInformation?journalCode=geui20
Journal of European Integration
ISSN: 0703-6337 (Print) 1477-2280 (Online) Journal homepage: http://www.tandfonline.com/loi/geui20
EMU and Sustainable Integration
Iain Begg, Annette Bongardt, Kalypso Nicolaïdis & Francisco Torres
To cite this article: Iain Begg, Annette Bongardt, Kalypso Nicolaïdis & Francisco Torres
(2015) EMU and Sustainable Integration, Journal of European Integration, 37:7, 803-816, DOI:
10.1080/07036337.2015.1079375
To link to this article: https://doi.org/10.1080/07036337.2015.1079375
Published online: 27 Oct 2015.
Submit your article to this journal
Article views: 905
View related articles
View Crossmark data
Citing articles: 6 View citing articles
ARTICLE
EMU and Sustainable Integration
IAIN BEGG*, ANNETTE BONGARDT*,
**, KALYPSO
NICOLAI¨DIS*** & FRANCISCO TORRES*,
**
*European Institute, London School of Economics and Political Science, London, UK;
**European Studies Centre, St. Antony’s College, University of Oxford, Oxford, UK;
***Department of Politics and International Relations, University of Oxford, Oxford, UK
ABSTRACT This paper considers what will be required to make Economic and
Monetary Union (EMU) sustainable following the successive crises of recent years. It
starts by laying out the policy benchmark, namely the successive ‘President Reports’
produced by EU institutions. It then suggests three dimensions of sustainable integration
relevant to EMU, namely the pursuit of sustainable growth, the need to take into
account what we call ‘varieties of modernisation’ and the ‘ownership’ of democratically
sustainable reforms. It then evaluates the recasting of EMU governance against
the benchmark of sustainable integration.
KEY WORDS: EMU, sustainable integration, sustainable growth, varieties of
modernisation, ownership of reforms
1. Introduction
Managing the crises affecting Europe’s Economic and Monetary Union
(EMU) has been top of the policy agenda for the last five years. EU member
states have managed the fallout of the crisis and implemented reforms in
emergency mode while at the same time laying the foundations for a more
resilient system. Opinions differ on the effectiveness of these reforms in
addressing short-term challenges, but, the increasingly urgent question is
whether they offer a lasting solution to the well-known shortcomings of
the single currency.
Here, we argue that EMU reform must result in a more effective form of
integration, capable of assessing and reconciling short-term actions against
long-term goals (Nicolaı¨dis 2010). This is very simply a new governing idea
Correspondence Address: Francisco Torres, European Institute, London School of Economics
and Political Science, Houghton Street, WC2A 2AE London, UK. E-mail:
f.torres@lse.ac.uk
Ó 2015 Taylor & Francis
Journal of European Integration, 2015
Vol. 37, No. 7, 803–816, http://dx.doi.org/10.1080/07036337.2015.1079375
of integration calling for the reconfiguration of the integration process
away from the old remedies of ‘deeper and faster’. Instead, EU actors
should embed in institutions and procedures a systemic commitment to sustainable
integration, defined as something that is durable, resilient and
politically acceptable. Such an approach entails both an ethos and practice,
a state of mind and benchmarks for decisions by all actors involved in economic
and policy action in the EU. It also means changing the way change
occurs in the EU and recognizing that intergovernmental bargains need to
be sustained by inter-societal and inter-generational bargains.
Such an attitude chimes with principles underpinning the internet revolution,
with its emphasis on empowerment, resilience, robustness and adaptive
learning. Concretely, the EU should foster a sustainable integration
culture and take more account of long-term objectives in managing current
problems, thereby creating the preconditions for later action. Sustainable
integration is not about policy blueprints but about the negotiation of
guidelines for action, linking multiple agenda and actors around a set of
shared long-term goals.
To make EMU sustainable, the first imperative is to acknowledge that it
had been left incomplete at Maastricht due to divergent Member State preferences
(Torres 2009). Expectations that these preferences would converge
over time across all member states have been dashed and the consequences
exposed by the euro crisis. Before 2008, there was little felt urgency to
address the known frailties in EMU’s governance construct (see Giavazzi
and Wyplosz, 2015), yet as the crisis unfolded EMU’s very existence was
threatened. Major advances in economic governance were subsequently
adopted, mainly driven by the short-term imperatives of system survival.
The question now is whether they also put EMU on the path to a long-term
sustainable future, defined in terms not just of the basics of monetary economics,
but also of the viability of the underlying economic model and
public support.
EMU was set up as a political project in the knowledge that the EU was
not an optimum currency area. Nevertheless, monetary union was achieved
rapidly, with the smooth launch of the euro and the transition to the
European Central Bank (ECB) for the conduct of monetary policy. By contrast,
the economic union side — the ‘E’ in EMU, including provisions for
coordination of budgetary and structural policies — was left incomplete.
As a result, the many interdependencies between member states of a
currency union and higher coordination needs were neglected, while the
tentative attempts to enhance coordination processes for economic reform
(i.e. the Lisbon Strategy) did little to curb the large negative spillovers from
the unfinished economic into the monetary sphere.1
Subsequent efforts to
complete the economic union part of EMU have gone some way to
strengthen EMU’s resilience in the face of market pressures. However,
institutional innovation was conditioned by the needs and constraints of
the moment: sometimes within and sometimes outside the Community
framework; sometimes through variations on intergovernmental cooperation,
sometimes by reverting the Community method; sometimes restricted
to the Euro area level, sometimes extending to the EU as a whole. The
804 Iain Begg et al.
result has been the creation of new institutions and mechanisms, at an
extraordinary pace but not necessarily always with a view to long-term
sustainability.
This article goes beyond the proposals to counter the crisis by completing
EMU through ‘a coherent governance architecture’ or a ‘Genuine’ EMU.
The latter was adopted in various versions of the Presidents’ Reports (European
Commission 2012; Van Rompuy 2012; Juncker et al. 2015a, 2015b).
Its building blocks are an integrated financial framework (mostly a banking
union), an integrated budgetary framework (implicitly fiscal union), an
integrated economic policy framework (economic union) and enhanced
democratic legitimacy and accountability of EMU governance (closer
political union).
Although some of the reform proposals under these headings can be criticized
for going further than is needed, many are undeniably necessary and
some are quite bold, but they will arguably not be sufficient to render
EMU sustainable over the long term. In particular, despite the institutional
resilience on display, they have largely failed to mobilize support from governments
and citizens for sustainable European integration. The challenge
now is to promote growth in a form compatible with fiscal consolidation
and reduced indebtedness while at the same time ensuring long-term
sustainability.
In the end, restoring public support for EMU will depend on the delivery
of common goals that serve the broader purpose of sustainable integration.
The ECB (2015) recognizes that public support for the EU, especially in its
EMU incarnation, will rest on the prospects for sustainable growth as the
sine qua non for the smooth functioning of EMU. For that to happen, the
development of the integrated economic policy framework building block
will have to be embedded in a sustainable growth strategy, which pursues
structural reform in a logic of modernization of national economies with
ownership of reforms at the national level.
The next section examines the concept of sustainable integration more
closely, focusing on sustainable growth, approaches to modernizing national
economies and the issue of ownership of reforms. Section 3 evaluates the
progress made to date and the reform initiatives needed to render it sustainable.
Section 4 analyses EMU governance in the light of sustainable integration,
with reference to the above discussed properties. Section 5 concludes.
2. The Mainstream: EMU Reform and the Presidents’ Reports
The smooth functioning of a currency union, as compared to a less ambitious
economic union, makes additional demands on labour, product and
financial markets to become more flexible as a means of adjusting to shocks,
given that monetary policy is no longer available for this purpose and fiscal
policy has to be constrained. Coordination of national policies is, however,
vital to prevent damaging spillovers from actions in one member state to
others, weakening the overall coherence of the union’s economic policy.
Efforts to create a ‘genuine EMU’ (see also Mongelli et al., 2015), have
only led to limited progress in creating what the Four Presidents’ report
(Van Rompuy 2012) calls an ‘integrated economic policy framework’.
EMU and Sustainable Integration 805
Dealing with the legacy costs of the crisis, restoring growth and reducing
imbalances, although essential, is not enough. Underlying competitiveness
problems also need to be addressed, but moving the Euro area closer to an
optimal, or at least sustainable, currency area requires reforms in areas
where competencies have remained at the member state level.
The various Presidents’ reports on EMU governance provide orientations
for a policy framework that would not only correct many of the known
flaws in EMU, but also anticipate future problems. Actions in four areas
were set out, with a distinction made between short- and long-term ambitions,
providing for:
• An integrated financial framework to ensure a financially stable system;
a common interpretation of this pillar is banking union, and a
key objective is to break the so-called doom-loop (Gaspar, 2015) in
which problems for banks become problems for national public
finances and vice versa.
• An integrated budgetary framework with the dual aim of assuring
fiscal discipline and developing new, common fiscal policy instruments,
measures which would steer the Eurozone in the direction of
fiscal union, albeit one which falls well short of the extensive crossregional
fiscal flows found in most other monetary unions.
• An integrated economic policy framework able to reconcile growth,
employment and competitiveness with the sustainability of EMU,
while avoiding negative spillovers across national borders.
• Enhancement of democratic legitimation and channels of accountability
which is justified particularly by the loss of national autonomy
in budgetary and other economic matters of greater top-down
constraints on national autonomy in economic decision-making.
Proposals for developing each of these building blocks were presented in
a ‘blueprint’ by the European Commission (2012), but progress has been
mixed, with only banking union having been substantially advanced. Fiscal
union has made scant progress since 2011 and there is, as yet, no strong
sense of what will be done to improve legitimation, not least in relation to
the enhanced powers of oversight conferred on the EU institutions (Schmidt
2013). The spread of political protests and institutional conflicts, both
within and between Member States, highlights the challenges because the
economic governance model is one based increasingly on executive rather
than representative power.
In paving the way for further reforms, Juncker et al. (2015a) pose a series
of questions about the future governance framework and, implicitly, the
reform initiatives needed to render EMU sustainable. These questions fall
into three main categories. The first can be summarized as asking whether
the current rules and institutions are robust enough to prevent a recurrence
of problems, and whether the mechanisms in place will ensure sufficient
resilience against future shocks, including through structural reforms. A
second theme is whether risk pooling, both through private and public
interventions, can be enhanced and can forestall further episodes of
806 Iain Begg et al.
financial instability. Third, the paper returns to one of the original four
themes: the accountability and legitimacy of governance. Although many
proposed solutions had been canvassed in the 2012 contributions, that they
are still unresolved testifies to the difficulties of completing EMU’s governance
framework.
The follow-ups of the Four Presidents’ report (Juncker et al. 2015a,
2015b) advocate the need for an immediate strengthened commitment to
growth-enhancing structural reforms so as to create a virtuous triangle of
structural reforms, investment and fiscal responsibility, and a deepened single
market to improve adjustment capacity. While these are worthy aims,
they fall short of defining an economic development model that can guide
the long-term sustainability of EMU. While we do not pretend to provide
such a model, we aim to suggest the principles that might sustain it under
the broad heading of sustainable integration.
3. A Vision for EMU: The Three Pillars of Sustainable Integration
We believe that the notion of sustainable integration offers a more comprehensive
perspective on what is needed. We suggest that in the field of
EMU, it rests on three main pillars, namely the pursuit of sustainable
growth, reform strategies adapted to the modernization paths of national
economies and national ownership of reforms. Each of these pillars of
sustainable integration, in turn, requires new approaches to overcome the
shortcomings exposed by the crises.
3.1. Sustainable Growth
Sustainable growth is central to the EU’s economic narrative and is
enshrined in the treaties as a fundamental objective. Though most often
connected with environmental objectives, sustainable growth in the EU
lexicon encompasses social and economic dimensions, as set out, notably,
in the Europe 2020 Strategy (Bongardt and Torres 2013). It can provide
both a crisis exit strategy and a renewed long-term agenda for EU sustainable
integration, and requires long-term commitments and necessary public
investments (Lenschow 2010; Sachs 2012).
A sustainable polity is one that endures through time and changes in circumstances,
including shocks. The EU is future friendly, which is, somewhat
paradoxically, the silver lining of its so-called democratic deficit or lesser
direct accountability since institutions are less susceptible to short-term electoral
concerns and pressures than its Member States (Nicolaı¨dis 2010).
In this spirit, a durable economic recovery from the crisis starts with
action today (ECB 2015). However, economic growth will be neither
politically nor economically sustainable unless environmental damage,
excessive resource depletion and long-term, inter-generational effects are
internalized, while engendering greater resilience to natural hazards
(Hallegatte et al. 2011). Combatting climate change by accelerating
de-carbonization can, through well-designed policies, have positive growth
effects in the short and long run — see for instance Fay et al. (2015),
Nordhaus (2006), Spence (2014), Stern (2006, 2015). A call for ‘whatever
EMU and Sustainable Integration 807
kind of growth’ risks ignoring the economic case for environmentally and
socially sustainable solutions.
Critically, the environment sector has managed to create employment
since the outbreak of the crisis in 2009, notwithstanding the fact that in
the approach towards sustainable growth, soft coordination has so far
failed to realize the innovation, competitiveness and growth potential that
it promises (EEA 2015).2
A more systematic look at the transmission
mechanism between the completion of the single market and Europe 2020
strategy is warranted (European Commission 2010).
Progress towards sustainable growth therefore hinges on decision-making
for the long term and on an economy capable of flexible adjustment with
an innovation-friendly business environment, given that it involves both
structural change within the economy and in society and a long-termoriented
governance system (Pearce and Turner 1990, 24; Randers 2012).
Policies and instruments that are consistent with long-term objectives need
to provide the right incentives while minimizing possible short-term tradeoffs
between environmental protection and growth. However, the governance
of sustainable growth relevant areas is piecemeal and methods and
enforcement possibilities vary significantly and relies on soft coordination
processes (typically, characterized by sweeping ambitions, but a dearth of
disciplining tools). These included the Lisbon (2000–2010) and Sustainable
Development strategies (2001, revised in 2006), before coming together in
the Europe 2020 (2011–2020) strategy. Diverse governance methods are
not intrinsically a problem, but the EU still lacks a coherent strategy for
sustainable growth. As a result, and although the EU environmental sector
expanded and created employment since 2008 in the midst of the crisis, its
full potential remains to be exploited (EEA 2015).
3.2. Varieties of Modernization
Although monetary union enjoyed a benign first decade, the slow pace of
national reforms in some member states and the incapacity of financial
markets to distinguish between Eurozone sovereigns contributed to growing
intra-EMU macroeconomic imbalances. EMU’s governance institutions
were unable to encompass increasing policy interdependence, let alone capable
of dealing with the effects of the crises. Monetary union brought
about a qualitative change in the economic context, resulting, on the
economic side, in unsustainable tensions.
Different EU states have followed different paths to modernization in
terms of their socio-economic make-up, the attributes of their states, their
state-society relations, their social and institutional traditions as well as the
distribution of costs and benefits and the obstacles stemming from modernization
dynamics. These varieties in turn determine the fit between the
requirements of EMU and the country or countries in question.
Since the publication of the 1993 ‘Delors’ white paper on growth competitiveness
and employment, the EU has launched a series of initiatives
intended to bolster structural reforms within its member states. Their
common objective has been to strengthen the EU’s and individual countries’
competitiveness in a world characterized by new realities and challenges,
808 Iain Begg et al.
such as globalization, the information society, demographic ageing, climate
change or enlargement. For example, the Lisbon Strategy highlighted the
imperative of advancing the EU as a knowledge economy in tandem with
building a socially more cohesive society. Despite having wide-ranging
goals, the strategy lacked a specific EMU dimension and thus did not take
enough account of how different progress on structural change affected
other euro area members. Although the Europe 2020 strategy sought to be
more comprehensive, it has faded from view during the crisis years and has
been supplanted by the much more short-term semester process.
A possible explanation is that the instruments for policy coordination
were not always differentiated enough to take into account the varieties of
modernization faced across member states. On the fiscal side, the Stability
and Growth Pact (SGP) was flouted (most notoriously, by France and
Germany in 2002/2003), without a reckoning as to what its limitations
were and how to accommodate the evident need for flexibility in the governance
design itself. The resort to the open method of coordination (OMC)
to engineer domestic reform had very differentiated success across states,
suggesting that relying on tools such as benchmarking or best practice was
insufficiently reinforced by public and peer pressure (Bongardt and Torres
2012). Analysts can disagree as to whether the culprit was the absence of
binding and/or enforceable rules (in the Lisbon Strategy and in the SGP),
only limited financial market pressure or, alternatively, the insufficient
attention to the need for domestic institutions and habitus that would internalize
externalities (Nicolaı¨dis and Watson 2015). What is clear however is
that EMU was ill adapted to the kind of social, political and economic
heterogeneity prevalent among Eurozone countries.
The sovereign debt crisis highlighted the large negative spillovers from
economic divergences and the urgency of more systematic reform affecting
policy domains with divisive political and distributional effects, in and
between member states. The Euro Plus Pact (2011) subsequently introduced
an EMU dimension to economic reforms, but had little impact due
to its weak (intergovernmental, non-binding) method. Similarly, a Compact
for Growth and Jobs was established in 2012, but has had few visible
effects. Proposals to incentivize reforms in member states through contracts
were abandoned when nearly all member states rejected them at the
December 2013 European Council.
A new impetus has been given to reforms and their relevance has grown
in a context where fiscal policy is also constrained due to the need for an
enduring correction of budgetary imbalances (Bini-Smaghi, 2015). Taxation
instruments –including environment related– can once again supplement
tighter regulation as European countries slowly exit from crisis
management. There has been an acceleration of structural reforms in laggard
countries as a result of market and peer pressure and of formal and
informal conditionality (Schmieding and Schulz 2014; OECD 2015). Yet,
enforcing conditionality while at the same completing EMU’s governance
framework is a perilous exercise for political legitimacy (Nicolaı¨dis and
Watson 2015).
EMU and Sustainable Integration 809
3.3. Democratically Sustainable Reforms
The crisis has highlighted the need for citizens’ political ownership of both
reforms undertaken in their own countries and of the European integration
project as a whole, in response to questions such as ‘why (more) Europe?’
or ‘sacrifices in the name of what?’ To the extent that institutional limits to
integration come to constrain the capacity to resolve European common
concerns, without a democratization of reforms, the long-term political sustainability
of the European project is in doubt.
The choice of the OMC ostensibly reflected a perceived need for ownership
of reforms (as a process of slow-moving and bottom-up convergence
of preferences on institutions) and the notion of convergence as a gradual
learning process. The approach was intended to foster reforms tailored to
member states’ heterogeneous situations and preferences, yet the EMU process
largely failed to foster true ownership of reforms in line with the member
states’ own modernization goals. The fact that member states’ political
systems (governments, oppositions and even social partners) may have
agreed to EMU-sustaining reforms in the 1990s and committed to them
under the Lisbon Strategy (2000–2010) during EMU’s first decade did not
prevent many of them — to differing degrees — from backsliding and thus
putting at risk their respective welfare states and the quality of life.
In the process, the question of the collective acceptance of EMU’s redistributive
implications has become more politicized.3
This is in part due to
the increased resort to executive decisions in economic governance, leading
to significant divergences and political conflicts, both among and within
Member States, as well as between them and supranational EU institutions,
which have tended to be bypassed by intergovernmental or even bilateral
bargaining. Many old conflicts about the ideal configuration of EMU,
including within the European System of Central Banks and the ECB, have
resurfaced. Clearly, EMU reforms cannot be sustainable if what they
impose on individual member states is not democratically sustainable, both
in terms of the electorate and in terms of the political leadership. Formerly
vague references to European rules in national political debates have
become more explicit constraints, better understood by citizens, thereby
reducing the opacity of domestic political and policy processes and potentially
raising policy effectiveness. But the visibility of constraints also leads
to their contestation when they are perceived as sacrificing domestic democracy
and autonomy (Rodrik 2011). Ideally, ‘fiscal disciplines’ enforced from
Brussels will be progressively replaced by political ‘commitments’ in line
with shared rules and expectations — admittedly, a tall order.
4. Progress and Pitfalls: Towards a Sustainable EMU?
The flaws in EMU’s governance framework exposed by the sovereign debt
crisis have been examined in a growing number of critical papers which
exhibit a fair degree of consensus on the broad directions for reforms
needed to render EMU sustainable (see for example: De Grauwe 2013;
Eichengreen 2014, De Grauwe and Ji 2015, Giavazzi and Wyplosz, 2015;
Juncker et al. 2015a). In parallel, rapid (by EU standards) agreement since
810 Iain Begg et al.
2010 on a range of measures to strengthen fiscal discipline and economic
coordination has dealt with some of the acknowledged shortcomings.
These responses, together with the creation of the European Stability
Mechanism (ESM) as a permanent rescue fund, new arrangements for
financial regulation and supervision and better tools for macro-prudential
supervision, arguably reduce the risk of future crises and strengthen the
capacity for crisis management. But how do these measures fare against the
three pillars of sustainable integration for EMU suggested above?
First and most broadly, greater macroeconomic stability calls for the recasting
of EMU governance and its embedding within a broader set of instruments
meant to promote sustainable growth. Efforts to promote growth and jobs
through the Europe 2020 strategy and the Compact for Growth and Jobs have
had little obvious impact, while it remains to be seen how successful the
Juncker Commission’s flagship idea of a new European Fund for Strategic
Investment (EFSI), with its headline target of 315 billion of new investment,
will be (see Claeys 2015, for a sceptical view). Second, by disallowing either
Euro-exit or a credible threat of default, and in the absence of a common fiscal
stance, the functioning of EMU neglects the possible divergences resulting
from distinctive national pathways to and progress on modernization.
Nor does the Five Presidents’ report of June 2015 inspire confidence that
what is in the pipeline will be sufficiently transformative to address these
pitfalls. Although the report calls for a new ‘fiscal stabilisation function’, it
has apparently jettisoned the idea of a euro area budget for stabilization
purposes. Since 2012, little progress has been made on risk pooling as a
form of fiscal union. Unsurprisingly, creditor countries resist calls for
jointly and severally guaranteed Eurobonds; indeed, the very term Eurobond
has become unmentionable in some Member States (Matthijs and
McNamara 2015). There is still no easy means of arriving at an aggregate
Eurozone-wide fiscal stance, despite extensive debate on the matter, which
precludes agreeing an appropriate macroeconomic policy mix as a facet of
economic sustainability. As various contributors to this issue also argued, it
is necessary to tackle both the current need to stimulate domestic demand
in surplus countries and the implementation of structural reforms to reduce
built-up disequilibria in deficit countries. 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).
Moreover, perhaps for reasons of institutional and constitutional propriety,
the report fails to encompass developments in the governance of monetary
policy, such as the de facto recognition that the ECB has to be a
lender of last resort or intervene in sovereign bond market in ways that
have fiscal policy impacts potentially affecting growth prospects by lowering
debt servicing costs (De Grauwe and Ji 2015). While the establishment
of the ESM fills a gap in emergency funding for Member States in (temporary)
difficulty, it is less clear that there is adequate provision for the sort
of comprehensive crisis management of an adjustment programme
provided by the IMF.
EMU and Sustainable Integration 811
More positively, banking union is the area that has made the most progress,
and which can support all three of the pillars of sustainable integration.
But common deposit insurance rapidly fell off the agenda (then
restored by the Five Presidents), while the provisions on a single resolution
mechanism may be too limited to break the ‘doom-loop’ between banks
and sovereigns soon. It will take a decade for the new resolution fund to
reach its intended level, so that a new ‘bridging’ facility advocated by the
Five Presidents will be a useful reinforcement of banking union. Proposals
for a capital markets union are ambitious (Ve´ron 2014), but financial market
fragmentation and difficult credit conditions, which are deterring recovery
and growth prospects, are not adequately addressed as long run
challenges. Some imbalances other than of public finances cannot easily be
curbed. The macroeconomic imbalances procedure is, in principle, a means
of doing so, but appears to be unable to deal with excessive external surpluses
(Bini Smaghi 2015; De Grauwe and Ji 2015). The resulting asymmetry
between deficit and surplus countries further deepens the challenge of
political ownership of reform.
Although more extensive mechanisms for imposing discipline on member
states have been introduced, potentially improving the economic sustainability
of EMU, the strategic and political dimensions of sustainable integration
are still in doubt. More broadly, while there has been a heated
debate around austerity (Blyth 2012; Bini Smaghi 2013) and whether a disciplining
approach is misguided (Nicolaı¨dis and Watson 2015), too little
attention has been paid to the longer run determinants of growth and its
quality (sustainable growth) or the appropriateness of EU approaches.
While the Presidents are persuasive in their reports in arguing that excessive
debts constrain growth, EMU sustainability cannot be restricted to
budget responsibility but requires more, particularly through sustainable
growth. The question then is how to promote sustainable growth given
budgetary constraints and a one-fits-all monetary policy. A fiscal stimulus
is a crude instrument that does not necessarily result in ‘quality’ growth,
unless it deals with the causes of competitiveness problems. Incentives for
growth can be provided not only through the level, but also (perhaps more
importantly) the composition of expenditure and incentives on the revenue
side, notably taxation (Giavazzi and Wyplosz 2015). Monetary policy can
dampen cyclical shocks but cannot solve structural problems. Structural
reforms are therefore important not only for EMU resilience but also for
higher potential growth (Draghi 2015) and hence for dealing with the
legacy costs of the crisis, so that for EMU to be a sustainable form of integration,
new approaches to coordination will be needed. This is recognized
in general terms in the Five Presidents’ report, but its prescriptions are
disappointingly tame.
The dilemma is that growth-enhancing structural reforms are slow to act,
even if they are desirable in the long run (IMF 2015),and often impose
immediate budgetary costs, while causing frictions with a high political cost
when they collide with entrenched interest groups or affect vulnerable social
groups. Hence, sequencing matters in assessing the political sustainability of
structural reforms: those that are growth enhancing in the short run should
812 Iain Begg et al.
be prioritized, and private investment encouraged in ways compatible with
fiscal constraints and incentives (Pisani-Ferry 2014). However, if we are to
tinker with fiscal instruments we should create the right incentives for longterm
stability at the same time. The use of fiscal instruments opens up the
perspective of promoting sustainable growth by shifting taxation onto inefficiencies
(pollution), and away from taxing productive factors (labour). This
requires in turn enough coordination among states to forestall a race to the
bottom on corporate taxation, which in the last 20 years has hollowed out
the tax base across European states (Piketty 2014). Also, subsidies like the
ones on coal and other fossil fuels should be abolished as they encourage
their use, which is in conflict with trying to curb CO2 emissions besides
increasing budgetary expenditures and distorting incentives and competition
(IEA 2014). Moreover, astute regulation can foster private green investments
without incurring fiscal expenditure and provide a push for EU green innovation
and cost-efficiency. The circular economy package – an approach to
resource use that builds-in recovery, recycling and regeneration as fundamental
components of economic management – is a case in point where demanding
EU regulation can promote innovation and cost efficiency and hence
growth and employment creation rather than red tape (EEA 2015). Unfortunately,
it seems that the new Commission has scrapped this package at least
for the time being. Similarly, the EFSI’s results (and impact on EMU’s sustainability)
will depend on whether the projects are chosen for their contribution
to long-term sustainable growth.
As the integrated economic coordination framework has barely
advanced, the Five Presidents’ report (Juncker et al. 2015b) proposes to
underpin national reform efforts via competitiveness authorities at the
national level and, in a second phase, through a legal base for commitments.
While these could help, the Europe 2020 Strategy (not mentioned in
the report) ought also to be revived, especially in view of its prescription
for long-term competitiveness alongside long-term environmental and
social concerns. But much will depend, as so often, on the approach
adopted to competitiveness. The proposal by the Five Presidents that commitments
should become binding in the second phase suggests that they
have little faith in the delivery of national structural reform through nonbinding
coordination. It remains to be seen whether such a binding character
is compatible with the kind of democratically sustainable character of
reform discussed above.
The model of conditionality could be complemented with an integrated
economic policy framework (Sapir and Wolff 2015). Such an alternative is
not without risks because European institutions may be perceived as inflicting
austerity and discouraging growth, a narrative that has often been
heard in Greece, though also elsewhere. However, it would in turn
strengthen ownership of structural reforms and new institutions by the
public that reflect the need for ‘multiple but connected national politics’ to
manage more fruitfully the democratic interdependence stemming from
monetary union (Nicolaı¨dis 2013, 352). They can also increase the acceptance
of economic reforms against the background of wider benefits from
EU integration.
EMU and Sustainable Integration 813
5. Conclusion: Towards EU Sustainable Integration?
The sovereign debt crisis has exposed flaws in the governance framework
of EMU that were partially remedied, most emphatically in the area of
banking union, arguably reducing the risk of future crises and strengthening
the capacity for crisis management. The principal challenges now to
sustainable integration are, on the one hand, to strengthen economic coordination
of the structural reforms needed to render EMU more resilient
and to restore growth to the top of the political agenda; on the other, for
integration to be sustainable, citizens have to be convinced that EMU is
working for them.
A lack of national ownership and the conditionality of structural reforms
have led to greater politicization, putting into question the collective acceptance
hitherto of their redistributive implications. Political protests and
institutional conflicts have marked the Eurozone in the last five years.
Those frictions offer the EU an opportunity to address what we consider to
be its greater challenge: pursuing a path of sustainable integration,
grounded in enhanced societal capacity and propensity to act for the long
term.
The sustainable integration paradigm offers a long-term vision for the
EU integration project in the crisis context and beyond. To kick-start it,
sustainable growth can be the basis for an exit strategy from the crisis in
the shorter term (complementing the financial integration discussed by
Jones 2015), and a prerequisite for a smooth functioning of EMU in the
long term which would bring about wider benefits from EU integration for
EU citizens. But there is a long way to go. The EU approach to sustainable
growth is piecemeal and driven by the artificially separate realm of ‘climate
policy’, with a recent boost under the heading of the Energy Union. As yet,
it falls short of a coherent development strategy for sustainable growth.
Within such a sustainable integration logic, EU actors must engage in a
continuous discussion on the relationship between short-term actions and
long-term objectives. This process, if properly implemented, and aligned
with citizens’ priorities can contribute not only to the sustainability of
EMU per se, but to the wider political sustainability of the European
integration project as a whole.
Acknowledgements
We would like to thank an anonymous referee, seminar participants at earlier
presentations in Oxford and London, and, particularly, Paul De
Grauwe, Erik Jones, Russell Kinkaid, Benedicta Marzinotto, Waltraud
Schelkle and Max Watson, for very valuable comments and discussions. Of
course, the usual disclaimer applies.
Disclosure statement
No potential conflict of interest was reported by the authors.
814 Iain Begg et al.
Funding
Iain Begg is grateful for financial support under the Horizon 2020 research programme for the
FIRSTRUN project, grant agreement number 649261.
Notes
1. Negative spillovers were rooted in factors such as unsustainable debt paths, inadequate national
financial supervision, the feedback loop between weak banks and over-indebted sovereigns, and
lower growth potential associated with insufficient modernization of national economies.
2. The objective of sustainable development was not well integrated in the Lisbon Strategy on growth
and employment. The Europe 2020 strategy’s green growth objective is based on climate targets
(the 2007–2009 climate energy package), which have become insufficiently ambitious to promote
innovation and investment with the crisis-induced downturn in economic activity.
3. De Wilde and Zu¨rn (2012) suggest that crises have a strong bearing on the acceptability of greater
politicization in EU integration.
References
Bini Smaghi, Lorenzo. 2013. Austerity: European democracies against the wall. Brussels: Centre for
European Policy Studies.
Bini Smaghi, Lorenzo. 2015. Governance and Conditionality: Toward a Sustainable Framework? Journal
of European Integration 37, no. 7: 755–68.
Blyth, Mark. 2012. Austerity: the history of a dangerous idea. Oxford: Oxford University Press.
Bongardt, Annette, and Francisco Torres. 2012. The lisbon strategy. Chapter 33 in The handbook on
the European Union, eds. Erik Jones, Anand Menon, and Stephen Weatherill, 469–83. Oxford:
Oxford University Press.
Bongardt, Annette, and Francisco Torres. 2013. Economic governance and sustainability chapter 8. In
Mapping European Economic Integration, eds. V. Amy and T. Alfred, 146–67. Basingstoke: Palgrave
Macmillan.
Claeys, Gre´gory. 2015. Juncker plan: the EIB in the driver’s seat. Bruegel Blog. 1 July.
De Wilde, Peter, and Michael Zu¨rn. 2012. Can the politicization of European integration be reversed?
JCMS: Journal of Common Market Studies 50, no. 1: 137–53.
De Grauwe, Paul. 2013. Design failures in the Eurozone: can they be fixed? LSE ‘Europe in Question’
Discussion Paper Series no. 57/2013.
De Grauwe, Paul, and Yuemei Ji. 2015. Correcting for the Eurozone Design Failures: The Role of the
ECB. Journal of European Integration 37, no. 7: 739–54.
Draghi, Mario. 2015. Structural reforms, inflation and monetary policy. Introductory speech, ECB
Forum on Central Banking, Sintra. 22 May.
Eichengreen, Barry 2014. The Eurozone crisis: the theory of optimum currency area bites back. Notenstein
Academy White Paper Series.
European Central Bank. 2015. Progress with structural reforms across the Euro Area and their possible
impacts. Economic Bulletin 2. Frankfurt: ECB, 59–71.
European Commission. 2010. Towards a single market act. For a highly competitive social market
economy. Communication from the Commission to the European Parliament, the Council, the economic
and Social Committee and the Committee of Regions, Com (2010) 608 final. Brussels. 27
October.
European Commission. 2012. A blueprint for a deep and genuine economic and monetary union
launching a European debate. Commission Communication, COM(2012) 777 final, 28.11.2012.
Brussels.
European Environment Agency. 2015. European environment state and outlook. Copenhagen: EEA.
Fay, Marianne, Ste´phane Hallegatte, Adrien Vogt-Schilb, Julie Rozenberg, Ulf Narlock, and Tom Kerr.
2015. Decarbonizing development: three steps to a zero-carbon future. Washington, DC: World
Bank.
Giavazzi, Francesco, and Charles Wyplosz. 2015. EMU: Old Flaws Revisited. Journal of European Integration
37, no. 7: 723–37.
Gaspar, Vitor. 2015. The Making of a Continental Financial System: Lessons for Europe from Early
American History. Journal of European Integration 37, no. 7: 847–59.
EMU and Sustainable Integration 815
Hallegatte, Ste´phane, Geoffrey Heal, Marianne Fay, and David Tre´guer. 2011. From growth to green
growth: a framework. NBER Working Paper 17841. National Bureau of Economic Research.
IMF. 2015. Where are we headed? Perspectives on potential output. Chapter 3 in World economic outlook:
uneven growth — short- and long-term factors. Washington, DC: International Monetary
Fund (April), 69–110.
International Energy Agency. 2014. World energy outlook 2015. Paris: IEA.
Jones, Erik. 2015. Getting the Story Right: How You Should Choose between Different Interpretations
of the European Crisis (And Why You Should Care). Journal of European Integration 37, no. 7:
817–31.
Juncker, Jean-Claude, Donald Tusk, Jeroen Dijsselbloem, and Mario Draghi. 2015a. Preparing for next
steps on better economic governance in the euro area. Analytical Note prepared for the Informal
European Council, Brussels. 12 February.
Juncker, Jean-Claude, Donald Tusk, Jeroen Dijsselbloem, Mario Draghi, and Martin Schulz. 2015b.
completing Europe’s economic and monetary union. Brussels: European Commission. 22 June.
Lenschow, Andrea. 2010. Environmental policy. In Policy-making in the European Union, eds.
H. Wallace, M.A. Pollack, and A.R. Young, 6th ed., 305–30. Oxford: Oxford University Press.
Mongelli, Francesco Paolo, Ettore Dorrucci, Demosthenes Ioannou, and Alessio Terzi. 2015. Responses
to the Euro Area Crisis: Measuring the Path of European Institutional Integration. Journal of
European Integration 37, no. 7: 769–86.
Matthijs, Matthias, and Kathleen McNamara. 2015. The euro crisis’ theory effect: northern saints,
southern sinners, and the demise of the eurobond. Journal of European Integration 37, no. 2:
229–45.
Nicolaı¨dis, Kalypso. 2010. Sustainable integration: towards EU 2.0? The JCMS Annual Review Lecture,
Journal of Common Market Studies 48: 21–54.
Nicolaı¨dis, Kalypso. 2013. European demoicracy and its crisis. JCMS: Journal of Common Market
Studies 51, no. 2: 351–69.
Nicolaı¨dis, Kalypso, and Max Watson. 2015. Sharing the Eurocrat’s dream: a demoicratic approach to
EMU governance. In The post-crisis and era and the end of the EUrocrat’s dream, eds. Damian
Markus Jachtenfuchs Chalmers and Christian Joerges. Cambridge: CUP.
Nordhaus, William. 2006. The stern review on the economics of climate change. NBER Working Paper
12741. National Bureau of Economic Research.
OECD. 2015. Economic policy reforms 2015: going for growth. Paris: OECD.
Pearce, David, W., and R. Kerry Turner. 1990. Economics of natural resources and the environment.
Hemel Hampstead: Harvester Wheatsheaf.
Piketty, Thomas. 2014. Capital in the twenty-first century. Cambridge, MA: Harvard University Press.
Pisani-Ferry, Jean. 2014. How to climb a mountain with both hands tied. VoxEU.org. 7 November.
Randers, Jorgen. 2012. A global forecast for the next forty years. White River Junction, VT: Chelsea
Green.
Rodrik, Dani. 2011. The globalization paradox. Democracy and the future of the world economy. New
York: W.W. Norton.
Sachs, Jeffrey. 2012. The price of civilization. London: Vintage.
Sapir, Andre´, and Guntram Wolff. 2015. Euro-area governance: what to reform and how to do it. Bruegel
Policy Brief 2015/01, February.
Schmidt, Vivien. 2013. Democracy and legitimacy in the European Union revisited: input, output and
‘throughput’. Political Studies 61: 2–22.
Schmieding, Holger, and Christian Schulz. 2014. Euro Pact Plus monitor 2014. Leaders and laggards.
Brussels: The Lisbon Council.
Spence, Michael. 2014. Growth in the new climate economy. Project Syndicate. 31 October.
Stern, Nicholas. 2006. The economics of climate change, www.hu-treasure.gov.uk.
Stern, Nicholas. 2015. Why are we waiting? The logic, urgency, and promise of tackling climate
change. Cambridge, MA: MIT Press.
Torres, F. 2009. The Role of Preferences and the Sustainability of EMU Chapter 3. In The Future of
EMU, ed. Simona Talani, 54–74. Basingstoke: Palgrave Macmillan.
Van Rompuy, Herman. 2012. Towards a genuine economic and monetary union. Four Presidents’
Report. Brussels: Report by the Presidents of the European Council, European Commission, Eurogroup
and the ECB, EUCO120/12. 26 June.
Ve´ron, Nicolas. 2014. Defining Europe’s capital markets union. Bruegel Policy Contribution 2014/12.
November.
816 Iain Begg et al.