Ever closer union

by Henry Farrell on August 20, 2003

“Dan Drezner”:http://www.danieldrezner.com/archives/000662.html points to this developing “story”:http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1059479073692&p=1012571727102 in the FT as an important test case for the EU. Under the “Growth and Stability Pact,” which lays down the rules for Economic and Monetary Union (EMU), all participating EU member states have to fulfil certain criteria in their national macroeconomic policies. Among other things, they’re not supposed to run a budget deficit over 3% of GDP, except in situations of dire emergency. It now appears that Germany is going to exceed this limit for the third year in a row. Ironically, it was Germany that pushed for tough rules on budget deficits in the first place – the German central bank was terrified that Italy and other ‘less responsible’ member states would go on spending sprees after they joined the EMU club.

The European Commission is making noises about keelhauling the Germans for their bad behavior, which Dan sees as a key test case for EU integration theory. International relations scholars who study the EU have traditionally been divided into two camps – those who believe that the EU is a standard international organization, with no independent power to do anything that its more powerful member states don’t want it to do, and ‘supranationalists’ who believe that it’s something more than the sum of its members. Dan is sympathetic to the former point of view; I tend to adhere to the latter. Dan thinks that the Commission is likely to back down on its threats, so that Germany, which is the most powerful member state, prevails – he believes that this will provide powerful evidence that the supranationalists are dead wrong. I think Dan’s prediction as to the likely empirical outcome is right – but I don’t think that this tells us very much about the bigger theoretical questions that Dan (and I) are interested in.

Why not? Simply, put, the Growth and Stability Pact is a botch. The Commission has been muttering for years that it has been put in an impossible position – under the Growth and Stability Pact, it acts as whistleblower when EMU participants behave badly, but doesn’t have much real power to sanction them (the final decisions on punishments rest with the member states themselves). Furthermore, the standards that the Commission is supposed to enforce make no sense at all in economic terms, and indeed are likely to have perverse, and sometimes quite nasty, economic consequences. And the Commission itself has argued this: Romano Prodi, the Commission’s President gave an “interview”:http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2002/10/18/cneuro18.xml last year in which he baldly said that the Growth and Stability Pact was ‘stupid.’ He was promptly howled down by various member state governments, all of whom tacitly agreed with his argument, but didn’t want it bruited around too much in public. Thus, what we’re seeing at the moment is less an effort by the Commission to bring Germany to heel, than a ritualistic exercise in face-saving. The Commission is embarrassing Germany a little, but knows quite well that there isn’t the scintilla of a possibility that Germany is going to be punished by the other member states. However, it still feels that it has to go through the motions of reproving Germany, in order to maintain some minimal level of credibility.

There is a lot of interesting stuff happening around EMU – but it’s not the kind of development that gets newspaper headlines. EMU participants are increasingly coordinating their economic policy with each other through various informal processes. Over time, this might lead to the kind of deep integration that would convince realist skeptics of the EU – but it’s not happening yet. Where there is strong evidence that the EU is more than the simple sum of its member states is in another area of the European integration process – legal integration. Andy Moravcsik, whom Dan rightly cites as a strong proponent of the EU-as-international-organization theory, admits that his theory doesn’t account for the actions of the European Court of Justice, which has been extraordinarily effective in independently creating a body of law and precedent to which member states are subject. European Union law has direct effect in member states, so that EU law overrules domestic law, even in cases where a member state legislature hasn’t actually passed a particular piece of EU law as domestic legislation. The EU is far from being a super-state in the making, but nor is it simply a membership organization like NATO or even the WTO. It’s likely to go on perplexing international relations theorists for a good while yet.



Neel Krishnaswami 08.20.03 at 8:38 pm

The link to the full article doesn’t work as of 15:36 EST (20:36 BST) 20 August 2003. Fix! Fix!


Neel Krishnaswami 08.20.03 at 8:40 pm

It works now. I must have caught you right between the time the front page and full article went up.


Erik 08.20.03 at 9:26 pm

“Why not? Simply, put, the Growth and Stability Pact is a botch.”

Sure, but wouldn’t an intergovernmentalist simply say: “aha, but I have an explanation for why it’s a botch.” Anyway, I have always thought that these theories talk past eachother. It strikes me as pretty obvious that there are important supranationalist elements to the EU (e.g. ECJ), but also clear that there are very important limitations to these (e.g. foreign policy, expansion by treaty, etcetera).


Jason McCullough 08.20.03 at 9:48 pm

“making noises about keelhauling the Germans for their bad behavior”

What would keelhauling an entire country look like? You’d need a huge friggin’ ship…..


Martin Wisse 08.20.03 at 10:28 pm

What I find annoying is that The Netherlands as usual have to play teacher’s pet and actually try to keep to those rules, which is fucking up our economy something fierce.

It seems self evidently obvious to me that in times of recession, trying to balance the budget is a stupid thing to do.


markus 08.20.03 at 10:36 pm

as a German I actually like the stability pact and am ready to pay whatever price necessary.
Sure, it has it’s flaws, but it also keeps us in line and it puts some pressure behind the need for reform. We didn’t do our homework and we rightly have to take some heath.
FWIW, I predict there will be “punishment” of some form or other, not as severe as possible, but hard enough to hurt.


pathos 08.21.03 at 3:20 am

Ooo. I bet we could come up with some good Euro-punishments for Germany. How about: “Must be the first to sign on to Bush’s next international endevour — whatever it may be — and agree provide full financial backing.” Or maybe, “Go to Turkey and don’t leave until their ready to be admitted to the EU.”


Doug 08.21.03 at 2:36 pm

Of course there isn´t anything magic about 3 percent, or the other conditions in and around Article 109(j) in the Maastricht Treaty. Nevertheless, the problems that the Growth and Stability Pact was created to address still need to be addressed.

In a currency union of sovereign states, free riding needs to be discouraged. Otherwise, one country could borrow profligately, weakening the currency, which also belongs to states that are not so spendthrift. Even the possibility that one or more states might get away with loose spending, with the costs carried by the others, increases the likelihood that someone will try it. Martin´s post above proves this point.

Differential bond spreads should introduce some discipline (as they do to some extent among US states), but spreads narrowed so much in the run-up to EMU that, coupled with the loss of currency risk, that they may not be a deterrent to a country determined to borrow.

The Pact was originally designed to keep Italy in line; the Italian government was seen as the likeliest among the big economies to spend money it didn´t have. (And we have to be honest, it´s the big economies that matter; Portuguese or Dutch borrowing is not likely to provoke a run on the Euro.) The Pact also had a chance of keeping French spending in line.

It was not designed to deal with a weak German economy and a government determined to spend. And given that there´s now a Franco-German tandem tendency to flout the rules, it´s likely to be a dead letter soon.

Maybe that means the Ecofins get together and say, well it´s not really appropriate to have a 3 percent threshold; we´re better off with 3.5 percent or 4 percent. Maybe that means more finger-wagging from the Commission and some penance from governments that promise to do better and not piss away the next boom.

Hard to say what the outcome is, but likely that the current strength of the Euro will wane by 10 percent or so over the fall, as the market assesses these developments.


Robert Schwartz 08.22.03 at 1:05 am

The Wall Street Journal ran a story about, France’s $3×10^9 bailout of the conglomerate Alstom. It seems that under EU rules, governments are not supposed to bailout private companies. The Alstom bailout is just the latest French violation of this rule.

I am short on the EU. I think the EU constitution is DoA. The Euro is 50/50.

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