Tag Archives: Fiscal Union

Diving into the European debt crisis – From economic collapse to greater cooperation

By Stefania-Felicia Pavel, Secretary of the Munich European Forum

A crisis that crossed the Ocean

In the recent history of the European project, few have been the upheavals of such magnitude as the sovereign debt crisis. Due to the highly interconnected global economy, the 2008 banking crisis in the United States [1] had a ripple effect that crossed the Atlantic Ocean and sent waves of shock through Europe. Nonetheless, the political echelons, economic sector and academia were all taken aback by the resilience of the Euro Area. Not only that it grew in membership − with Latvia adhering in 2014 [2], followed by Lithuania [3] − but it also witnessed deeper integration. Despite doomed predictions of the Euro being an “impossible dream” [4], the peculiar Economic and Monetary Union (EMU) withstood vicissitudes and rendered a relatively fertile environment for greater cooperation to take roots.

A sea change in troubled waters

Initially, upon the onset of the sovereign debt crisis, the European Union opted for a divisive approach. Withering fiscal contraction was imposed in Germany, Italy, Spain, Ireland, Portugal and Greece via austerity measures, in a last-ditch effort to re-adjust excessive deficit budgets. However, the German Ordoliberalism of a supply-side growth strategy based on wage restraint, productivity and competitiveness [5] clashed with the demand-led growth strategy based on fiscal expansion and wage inflation from the Southern rim of the Eurozone [6]. In addition, the conflictual economic zeitgeist was also deepened by the panic-driven markets and the desperate bids to restore confidence in governmental bonds [7]. Nonetheless, the high negative interdependence within the Euro Area, the unfathomable prospect of a country exit [8] and the massive sunk costs were compelling enough for the member states to steer in the same direction. Even though creditors were at the helm, whilst the insolvent countries rowed begrudgingly to prevent their economies from sinking in the apparently bottomless pit of sovereign debt, it was a common effort to keep the Eurozone afloat.

Afterwards, following the sluggish economic growth caused by the indiscriminate austerity, the European Union made an about-face and embraced a cohesive approach. Since the crisis unearthed the systemic shortcomings of the European economic governance model, “it became clear that the EMU lack of a unitary fiscal policy was a grave mistake” [9] that had to be addressed urgently. Consequently, new mechanisms of macroeconomic governance emerged. Firstly, there were the means of intergovernmental crisis management. Represented by the European Financial Stability Facility [10], which later matured into the European Stability Mechanism [11], both acted as much-needed bailout funds. Secondly, to hedge the Euro Area against future financial chaos, the supranational mechanisms for crisis prevention came into effect. In these respects, the Six-Pack, respectively the Two-Pack acted as legislative levers to harmonise the budgets. In brief, the incomplete European economic architecture called for either sudden total disintegration or gradual total integration, and these mechanisms prevented the Eurozone from imploding.

Sailing towards…a fiscal union?

After all, not only did the Brussels-based leadership and sovereigns’ statesmanship managed to fare well through the protracted negotiations, but they jointly created means that built wholly on the decades-old institutional record of the European project. Ranging from bailout resorts, an emergent banking union and going to a reinforced surveillance of deficits’ fluctuations, the budgets of the Euro Area countries ‒ but also of most member states of the European Union ‒ are now under a more critical eye, but simultaneously on more caring hands. Indeed, all the major changes brokered in the aftermath of the crisis might have led to countries merging their policies even more, but a fiscal union – formalized and institutionalized at a pan-European level – still seems far-fetched for the time being, if not even politically quixotic. Time will tell how the European Union will navigate these yet uncharted waters of fiscal unity.


Please note that the views expressed are those of the author and do not necessarily represent or reflect the views of Munich European Forum e.V.



[1] Havemann, Joel. “The Financial Crisis of 2008.” Encyclopædia Britannica. Published in February 2009. https://www.britannica.com/topic/Financial-Crisis-of-2008-The-1484264.

[2] European Commission. “Latvia and the Euro.” Ec.europa.eu. Published in 2014.  https://ec.europa.eu/info/business-economy-euro/euro-area/euro/eu-countries-and-euro/latvia-and-euro_en.

[3] European Central Bank. “Lithuania joins the Euro Area.” Ecb.europa.eu. Published in 2015. https://www.ecb.europa.eu/press/pr/date/2015/html/pr150101.en.html.

[4] Krugman, Paul. “Europe’s Impossible Dream.” The New York Times. Published on July 20, 2015. https://www.nytimes.com/2015/07/20/opinion/paul-krugman-europes-impossible-dream.html?partner=rss&emc=rss&_r=0.

[5] The Economist. “Of Rules and Order.” Published on May 9, 2015. www.economist.com/europe/2015/05/09/of-rules-and-order.

[6] Hall A. Peter. “The Economics and Politics of the Euro Crisis.” German Politics 21, no. 4 (2012): 358‒359. DOI:10.1080/09644008.2012.739614.

[7] De Grauwe, Paul, and Yuemei Ji. “From Panic-Driven Austerity to Symmetric Macroeconomic Policies in the Eurozone.” Journal of Common Market Studies, Annual Review 51 (2013): 31‒41. DOI: 10.1111/jcms.12042.

[8] Schimmelfennig, Frank. “Liberal Intergovernmentalism and the Euro Area Crisis.” Journal of European Public Policy 22, no. 2 (2015): 177‒195. DOI:10.1080/13501763.2014.994020.

[9] Simon, Poirier. “Explaining the institutional outcomes of the European financial and sovereign debt crisis. The case of Germany.” Paper presented at the ECPR General Conference Université de Montréal, Montréal, Canada, August 2015: 1.

[10] Verdun, Amy. “A historical institutionalist explanation of the EU’s responses to the euro area financial crisis.” Journal of European Public Policy 22, no. 2 (2015): 225. DOI: 10.1080/13501763.2014.994023.

[11] Council of the European Union. “European Council 16-17 December 2010 Conclusions,” published in January 2010, https://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/118578.pdf.

Macron’s Eurozone Reform

By Shad Joynal-Abedin, Participant in the G-20 at BEF 2016.

As the European Union experiences a robust economic recovery, with the unemployment rate at a 10-year low and job creation at a 10-year high, the election of Emmanuel Macron as President of the second largest economy of the Eurozone creates a de facto window of opportunities for a comprehensive institutional reform.

Mr. Macron delivered a speech at Sorbonne University on September 26, 2017 laying out his vision for “a sovereign, united and democratic Europe”. In his vision the Eurozone encapsulates the heart of Europe’s global economic power.

Why does the Eurozone need to be reformed?

The Eurozone is the monetary Union under which 19 out of the 28 member states of the EU agreed to adopt a common currency. The euro, nowadays used by 338 million consumers daily, is part of the European identity for many EU citizens. However, the 2009 sovereign debt crisis highlighted that the Eurozone was incomplete. The call for a strong fiscal Union to support the existing monetary Union could not be ignored any longer. Especially member states with the poorest fiscal discipline had to deal with an asymmetric economic shock. Even if steps have been taken to strengthen the governance of the Eurozone in terms of prudential regulation and banking union, the need to build stronger institutions to foster growth and to fund common investments has not disappeared.

What is currently being discussed?

To reshape a Eurozone seen as the backbone of a strong Europe, the French President advanced several proposals:

1. A common Eurozone budget.

Mr. Macron is pushing for more economic integration with the creation of a common Eurozone budget. It would have one main objective: financing investments and emergency assistance in case of economic shocks as well as responding to financial crisis. Access to this budget would be conditioned with respect to common fiscal and social standards.

2. A Eurozone Finance Minister.

The French President also called for more political integration through the creation of a Eurozone finance minister. This minister would permanently chair the Eurogroup and would oversee the common budget. This position would merge the existing jobs of president of the Eurogroup with the different EU commissioners in charge of the economy.

3. A Eurozone Parliament.

Additionally, Macron is in favour of creating a Eurozone Parliament (or a Eurozone subcommittee inside the European Parliament) to politically control the finance minister. He would also serve as vice-president in the European commission.

What are the challenges ahead?

In March 2017 the European Commission presented its White Paper on the future of Europe. It gives an overview of different scenarios to describe the possible state of the Union by 2025. Considering his manifesto, President Macron’s Eurozone proposals would undoubtedly enter into the most ambitious scenario drafted by the Commission. In this option, called “doing much more together”, member states are expected to “share more power, resources and decision-making across the board”.

However, Macron’s political willingness may be tested both at the national and European level. In France, he may enter a period of uncertainty as his government implements its reform agenda. The political cost of some of the upcoming structural changes, such as the housing or the fiscal reforms, is still unpredictable. At the same time the labour market overhaul is expected to be fruitful only on the long run. In a country that remains divided on the EU, following an election in which 33,90% of the voters supported Marine Le Pen and 25% did not cast any ballot, the question is whether the president will enjoy enough popular support on his European agenda.

In the EU, President Macron will have to convince his European partners. While France’s relationship has deteriorated with Poland on the issue of posted workers, countries such as Belgium, Luxembourg, Spain or Portugal have already welcomed the latest announcements. Moreover, by choosing as senior diplomatic advisor the former French Ambassador to Germany who also served as Ambassador to the EU, the French President expressed his eagerness to reengage with Germany on European affairs. The current political crisis in Germany is therefore closely followed by Paris as any unbalanced outcome could undermine the consequential German support that Macron is seeking for a successful Eurozone reform.

Please note that the views expressed are those of the author and do not necessarily represent or reflect the views of Munich European Forum e.V.