EUROPEAN ECONOMIC INTEGRATION
Jacob A. Jordaan
Utrecht University School of Economics
j.a.jordaan@uu.nl
Outline
• Introduction
• EMU: key characteristics and issues
• Post EMU: stagnating integration
• Discontent with treaty reforms
• Financial crisis & structural issues
• Ways forward
• Levels and types of integration
• Empirical evidence: integration versus governance
• Summary and discussion
Lecture 6 European Economic Integration 2
Literature
• Dinan, D. (2014) The limits of the European Union.
Chapter 9 in: Europe recast. Lynne Riener Publishers, p.
305-352
• Begg, I., Bongardt, A., Nicolaïs, K. and Torres, F. (2015)
EMU and sustainable integration. Journal of European
Integration, vol. 37.7, p. 803-816
• Kuhn, T. and Stoeckel, F. (2014) When European
integration becomes costly: The euro crisis and public
support for European economic governance. Journal of
European Public Policy, vol. 21.4, p. 624-641
Lecture 6 European Economic Integration 3
Introduction
• Focus on European Union
• Huge economic, social, institutional experiment!
• Throughout its development, focus on different issues
• European peace and stability
• Economic cooperation
• From pure trade flows to integrating capital and labour markets
• Higher levels of integration
• Social coherence
• Structural economic change
• Harmonisation of economic policies
• Varying levels of support among governments and
population
• Debates on what to do, goal making, etc.
• Last decade clear increase in scepticism towards European project
Lecture 6 European Economic Integration 4
Timeline
Lecture 6 European Economic Integration 5
Lecture 6 European Economic Integration 6
Economic and Monetary Union
• Creation of EMU is impressive achievement!
• Up until MU, process of economic integration
“natural” process
• Free Trade Area → Customs Union → Common
Market → Monetary Union
• Problem-solving fostered further integration
• Debate on tariffs and non-tariff barriers
• Relatively not too disruptive for economies
• Monetary Union
= Countries abandon independent monetary policy making
= Very strong commitment to EU project
Lecture 6 European Economic Integration 7
EMU key issues: ECB
• European Central Bank: common monetary policy
• Primary objective: maintain price stability
• But also:
• “Support the general economic policies in the Union
with a view to contributing to the achievement of the
objectives of the Union. These include inter alia full
employment and balanced economic growth”.
• As the role of central banks at country level is not
undisputed, the role and actions of the ECB are also
debated!
Lecture 6 European Economic Integration 8
EMU key issues: price and fiscal stability
• One common monetary policy requires degree of
homogeneity among member states’ economies
• Maastricht treaty’s criteria for monetary and fiscal
convergence
• Rules for price and fiscal stability
• Government debt not >60%
• Government deficit not > 3%
• Inflation not larger than the average inflation in 3 EU countries with
lowest rates by more than 1.5 % points
• Interest rates government bonds not higher than average rates in 3
EU countries with lowest inflation by more than 2% points
• Membership in ERM no less than 2 years without devaluation
Lecture 6 European Economic Integration 9
EMU: need for control of fiscal policy
• EMU: financial markets strongly linked
• Common Monetary Policy
• Heterogeneity of fiscal policy can generate
substantial international spillovers
• Say country A increases government expenditure
• Economy starts to grow, returns on financial investments increase
in comparison to other countries
• Investors will switch their investments from other countries to
country A
• Country A grows further, other countries negatively affected
• Needs to be addressed
Lecture 6 European Economic Integration 10
EMU key issues: restraining fiscal policy
• Need for restraining fiscal policy
• Stability and Growth Pact
= prevents members from running excessive budget deficits
- Government deficit up to 3% ok
- Can be larger than 3%, but only in case of serious economic
setback
What is serious setback?
- Decline of real GDP of at least 2%
- Decline of less than 0.75% not setback
- In between: Economic and Financial Affairs Council (ECOFIN)
Lecture 6 European Economic Integration 11
EMU key issues: restraining fiscal policy
• If budget deficit is excessive, ECOFIN calls for measures
• If not implemented within 4 months, sanctions possible
• 0.2 % GDP deposit
• 0.1 % GDP fine for each % point over 3%
• (∑ not larger than 0.5%)
• Deposit becomes fine after two years
• 2005 reforms
• Any decline of GDP is considered setback (possibly even low growth)
• Leeway for other factors
• 6 months to introduce measures
• Not only looking at short run effects
• Counter-intuitive? Fiscal policy should be facilitated when
economy is slowing down?
Lecture 6 European Economic Integration 12
Stagnating integration (1)
• Treaty establishing a Constitution for Europe
• Signed in October 2004
• Replacing existing European Treaties
• Charter of Fundamental Rights
• Expansion of Qualified Majority Voting
• Step too far?
• 18 countries ratified the treaty, but French and Dutch
voters rejected it
• Replaced by Treaty of Lisbon, signed in 2009
• Clear signs of discontent with integration
• Level of integration
• Coverage of integration
Lecture 6 European Economic Integration 13
Stagnating integration (2)
• Financial crisis 2007/2008
• Started in US with collapse of housing market
• Sub-prime mortgages
• Securitization, leverage, derivatives
• Initial EU reaction was that this was an American
crisis and would be confined to US economy
• EU banks also heavily involved
• ING good example
• Strength of globalisation under-estimated
• Loss of trust, sharp drop in investment
Lecture 6 European Economic Integration 14
Stagnating integration (3)
• Following economic crisis, markets started to have
less trust in certain countries
• Greek Sovereign debt crisis
• Growing divergence of bond yields in EU
• Relates to the presumed homogeneity of EMU
member countries
• Initial EU reaction was that it should not get involved
• Maastricht Treaty’s no bailout clause
• “The community shall not be liable for or assume the
commitments…of any Member state”
• Why?
Lecture 6 European Economic Integration 15
No bailout?
• “When a member is in difficulties……caused by
exceptional occurrence beyond its control, the
Council…may…grant…Community financial assistance to
the Member State concerned.”
• Greek bailout program was implemented
• Portugal, Ireland, Spain and Cyprus also received support
Lecture 6 European Economic Integration 16
Policy measures
• European Financial Stability Facility (2010)
• Bonds issued with support of German Debt Management Office
• European Financial Stabilisation Mechanism (2011)
• Emergency funding program
• Funds raised on financial markets, backed by European
Commission
• European Stability Mechanism (2012)
• Permanent rescue funding program
• Rescue bail-out mechanism spelled out
Lecture 6 European Economic Integration 17
ECB
• March 2015 start of large quantitative easing program
• ECB purchases bonds from banks
• Interest rates fall, loans become cheaper
• Increase borrowing and investments
• Increase economic growth and employment
Lecture 6 European Economic Integration 18
Mario Draghi
Reforms to Stability and Growth Pact
• Tightening of the rules and higher level of
macroeconomic surveillance
• 2011: “six-pack” of regulations concerning debt,
expenditure, macro-economic imbalances, etc.
• 2013 Fiscal Pact
• Automatic sanction when budget deficit is larger than 3%
• Country with deficit ratio > 60% must reduce this by 5% every year
• Member countries will adopt into national law a debt brake limiting
budget deficits to 0.5% of GDP
• Will take some time before these come into effect!
• Fiscal policy more restricted in times when demand /
need for such policies is increasing?
Lecture 6 European Economic Integration 19
Moving towards fiscal union?
• Problems that have become visible following crisis
• Large country-specific shocks with international spillover effects
• Government failures
• Market failures
• Supply side reforms not implemented?
• Role of banks
• Risk assessment errors?
• Fiscal union the solution?
• Fits into notion of ongoing integration
• Ex-ante framework for enforced fiscal discipline and temporary
transfers
• Promotion of marked discipline and structural reforms
• Stronger enforcement powers to Brussels required?
Lecture 6 European Economic Integration 20
Current situation
• EU is still trying to recover from latest crisis
• EU commission provides many statements on
common goals related to growth, productivity,
employment, social coherence, etc.
• But also pushing for deeper and wider integration
• Scope for individual country’s policy-making more
and more confined and restricted
• Quantitative easing by ECB cannot be the only
solution
• Growing discontent with integration
• Further additions to EU postponed / slowed down
Lecture 6 European Economic Integration 21
Heterogeneity in EU
Lecture 6 European Economic Integration 22
Lecture 6 European Economic Integration 23
Source: Based on World Bank
Lecture 6 European Economic Integration 24
Lecture 6 European Economic Integration 25
Labour market
reforms
for restoring
growth in EU
Lecture 6 European Economic Integration 26
Recovery of EU
should include
support for low
income
households
Lecture 6 European Economic Integration 27
Improving the EMU
• Begg et al. (2015)
• The Presidents’ reports on EMU governance
• Integrated financial framework to ensure a financially stable system
• Integrated budgetary framework with dual aim of assuring fiscal
discipline and developing new, common fiscal policy instruments
• Integrated economic policy framework that links growth
employment and competitiveness with the sustainability of EMU
• Enhancement of democratic legitimation and channels of
accountability
Lecture 6 European Economic Integration 28
Sustainable integration (1)
• Begg et al. (2015) argue for sustainable integration
Three components
1. Sustainable growth
• Economic, environmental, social
• This will take considerable time to be created + countries differ in
their valuation of different types of growth
• Requires long-term commitments and public investments
• Who will make the commitment? EU commission and national
governments; source of funding? International financing and
allocation?
• Institutional robustness to absorb shocks
• Democratic deficiency is an advantage here!
Lecture 6 European Economic Integration 29
Sustainable integration (2)
2. Varieties of modernisation
- Member states have followed different paths; socio-economic makeup,
state-society relations, social and institutional traditions
- EU needs to find a way to obtain institutional governance
improvement that allows for this variety
- Sovereign debt crisis shows negative spillovers related to economic
divergence within EMU
- This is a tricky issue, given the autonomy of countries in the EU
- Urgency of systematic reform affecting policy domains with divisive
political and distributional effects
- This is approaching areas where national governments and
populations are deciding national policies
- Good example: pension age
Lecture 6 European Economic Integration 30
Sustainable integration (3)
3. Democratically sustainable reforms
- Political processes in many member countries have hardened
- National governments find themselves defending EU policies to
increasingly dissatisfied voters
- National politicians do listen to voters; will want to show that they
are trying to defend national interests in EU
- Reforms at both the national and EU level need to be accepted by the
public, against the context that they are often perceived to lower
domestic democracy and autonomy
- Increasing shares of the EU population understand actions of EU
- EU needs to find a new way to get the public with the EU project?
Lecture 6 European Economic Integration 31
One of the underlying debates
• The aftermath of the financial crisis shows again that
we may be approaching the limits of “traditional”
integration
• Shared monetary policy
• Fiscal policy under the control of national
governments
• They want to act to deal with economic crisis
• But EU is limiting the level and scope of their actions
• (Which is perfectly in line with MU requirements)
• How can EU create the necessary level of shared
responsibility that will accept this?
Lecture 6 European Economic Integration 32
What do the people think? (2014)
Having heard about the priorities of the EU, do you think
that the EU is going in the right direction or in the wrong
direction to exit the crisis and face new global challenges?
Lecture 6 European Economic Integration 33
EB
81.4
EU28
UE28
TOTAL 28004
In the right
direction
45%
In the wrong
direction
25%
Neither the one or
the other
(SPONTANEOUS)
23%
DK 7%
The EU is responsible for austerity in Europe
Lecture 6 European Economic Integration 34
EB
81.4
EU28
UE28
TOTAL 28004
Totally agree
19%
Tend to agree
42%
Tend to
disagree
19%
Totally disagree
7%
DK 13%
Total 'Agree'
61%
Total 'Disagree'
26%
The EU will emerge fairer from the crisis
Lecture 6 European Economic Integration 35
EB
81.4
EU28
UE28
TOTAL 28004
Totally agree
5%
Tend to agree
30%
Tend to disagree
28%
Totally disagree
13%
DK 24%
Total 'Agree'
35%
Total 'Disagree'
41%
Do you see yourself as...?
Lecture 6 European Economic Integration 36
EB
81.4
EU28
UE28
(NATIONALITY) only
39%
(NATIONALITY) and
European
51%
European and
(NATIONALITY)
6%
European only
2%
None (SPONTANEOUS)
1%
Refusal (SPONTANEOUS)
DK
1%
Total 'More European than
National'
8%
Total 'More National than
European'
90%
Integration versus governance
• Kuhn and Stoeckel (2014)
• Ask very interesting and important questions
• To what extent do European citizens support European
economic governance in the crisis?
• Are the variables that explain support for integration the
same as for governance?
• Use of Eurobarometer survey data (from 2011) to get the
public’s opinion and also relate it to country level
characteristics
Lecture 6 European Economic Integration 37
Different processes?
1. Integration versus governance
• Up until crisis and aftermath, perception of EU as tradebased
organisation
• Now, the EU is talking about the need for deeper
integration in the form of regulation and increased
oversight on markets and banks
2. Increasing delegation of national sovereignty to the
EU level
• Creation of EMU and aftermath already showed growing
dissatisfaction with this tendency
Lecture 6 European Economic Integration 38
Factors influencing support for EU
Integration
Individual characteristics
• National identity (-)
• Socio-economic status (+)
• Education, skills
National economy
• Direct effect
• Indirect effect
= interacting with national identify
Governance
Individual characteristics
• National identify (-)
• Socio-economic status (-)
• Unemployed, retired, low-skilled
National economy
• Direct effect
• Indirect effect
= interacting with national identify
Smaller effect when low GDP
Lecture 6 European Economic Integration 39
Lecture 6 European Economic Integration 40
Information from these five questions used to obtain
common factor = “Economic governance index”
Support for EU and for EU growth
Lecture 6 European Economic Integration 41
Lecture 6 European Economic Integration 42
GDP and national identify
Lecture 6 European Economic Integration 43
Main points
• EMU big achievement!
• End of process of “classical” integration
• Marking point in integration process
• Stagnation of further integration
• Problems with harmonising economic policies
• Financial crisis and sovereign debt crisis
• European Commission’s new policy measures largely in line
with traditional thinking
• Control of government expenditure
• Move towards fiscal union
• Increasing belief that substantial change is required
• Heterogeneity of EU
• Concept of sustainable integration good example
• Clear that public opinion has changed (and politicians listen to their voters!)
• Integration versus economic governance
• Good example of changing perception of what EU stands for and what EU
needs to do
Lecture 6 European Economic Integration 44
How to proceed?
Lecture 6 European Economic Integration 45