he Euro Crisis and uropean Integration ot Hodson and Uwe Puetter rapter Contents :-eduction 389 ;:ti global financial crisis to euro crisis 39 I E. institutions and the euro crisis 396 ■k crisis and the EU's problems of legitimacy 400 Conclusion 403 ader's Guide chapter discusses the European Union's (EU) response to the euro crisis that emerged in late - two years after the global financial crisis struck. It identifies the challenges this crisis has posed to existing institutional set-up of economic and monetary union (EMU) and shows that it had a last--pact on discussions over the EU's future well beyond its most dramatic moments. A timeline of euro crisis is provided and the main changes to the institutional framework of European economic lance at the time of writing are reviewed. The chapter considers whether the crisis was caused ; deficit of centralized decision-making and whether it has served, in turn, as a catalyst for deeper : -omic and political integration in the euro area and the Union more generally. The consequences of :risis for the EU's legitimacy are also explored from competing theoretical perspectives. introduction : iing back on the history of European integration, j difficult to remember a time when the EU or its -;iecessors were not facing a crisis of one sort or anther. The 1950s were marred by the political fallout from the failure of the European Defence Community Treaty, just as the 'empty chair' crisis came to dominate the 1960s (see Chapter 2). The 1970s saw initial plans for economic and monetary union (EMU) abandoned following the collapse of the Bret-ton Woods system and the first oil shock. The side 390 Dermot Hodson and Uwe Puetter effects of this economic turmoil lingered on in several member states in the 1980s, with the 1990s witnessing exchange rate crises, as well as a crisis of legitimacy for European integration after Denmark's 'no' vote against the Maastricht Treaty. Concerns over the EU's legitimacy merely intensified in the 2000s, with plans for a Constitutional Treaty rejected by voters in France and the Netherlands, and the Lisbon Treaty passed only after a second referendum in Ireland (see Chapters 3, 9, and 15). In spite of these successive crises, European integration has stumbled onwards. The EU of the Lisbon Treaty is an altogether different animal than the European Economic Community (EEC) of the Rome Treaty. Indeed, major advances in European integration have often followed periods of profound crisis. The Single Market programme came after the economic malaise of the 1970s and early 1980s and progress towards EMU in the 1990s intensified after I a series of crises in the functioning of the European '.Monetary System (EMS). Some politicians have even sought to portray crises as the principal opportunity for further cooperation between member states. Jean Monnet memorably wrote that 'Europe will be forged in crises, and will be the sum of the solutions adopted for those crises' (Monnet, 1976: 488). Scholars are more circumspect on the causal relationship between crises and European integration. Lindberg and Scheingold (1970)—two pioneers of the neo-functionalist school of European integration— saw crises as drivers of integration, but only under certain conditions. Large crises may be more conducive to integration than small ones, they conjectured, because the latter are more likely to disrupt some rather than all of the Community's decision-making structures (Lindberg and Scheingold, 1970: 217). Crises can also be blunt opportunities for supranational institutions to show leadership, they suggest, because of the tendency of national leaders to close ranks during periods of economic and political turmoil. Suprana-tionalism, which emerged in the 1990s as the intellectual successor to neo-functionalism (cf. Fligstein and McNichol, 1998), even views crises as symptoms of how integration has not gone far enough. Mattli and Stone Sweet (2012), for example, see the euro crisis as 'revealing the striking absence of what Europe needs most: strong political leadership capable of forging a more federal EU' (Mattli and Stone Sweet, 2012: 14). The euro crisis, which emerged in late 2009, was arguably the worst economic calamity to befall the EU to date. Following two years of chaos on inter-financial markets after the collapse of the "_"> prime mortgage market, the member states tha the single currency found themselves facing cessions and burgeoning budget deficits. No e_r member was immune from these developmt" Greece, Ireland, Portugal, Spain, and Cypru; : particularly vulnerable. That this crisis serve r . ger for institutional change in the EU in an a~ save the euro is also self-evident. The heads and government have never met so freque::: ing the crisis, with summits taking place or. every two months, and finance minister; often more than once per month. In addi:: reaching reform of the Stability and Growth (SGP) and other elements of euro area gc. EU leaders pledged up to 62 trillion to re-pean banks and around €1 trillion to conti." cal crisis in Cyprus, Greece, Ireland, Porr_^. and other euro area members. Financial s.. not offered lightly to these member states " little choice but to accept swingeing bud;;:_ and emergency revenue-raising measures : unprecedented surveillance of their econorr : by the EU and International Monetary Fund " The euro crisis also triggered changes : bon Treaty, which now contains a legal b permanent euro area assistance fund, the Efc Stability Mechanism (ESM). The 'Fiscal which provided for closer economic poli: tion and a binding commitment to fiscal national law, was concluded in the form or" governmental treaty because of the re United Kingdom (UK) to agree to these December 2011. The EU has also agreed tc ; Union, which includes a single superv and a single resolution mechanism for nancial institutions. A euro area-wide d ance scheme to protect savers is envisage; remains to be implemented as of early generally, the euro crisis has driven debars ■ ther EU reform. Even though the Union by a refugee and migration crisis, no orh; policy challenge triggered more discussi: r institutional matters, burden-sharing ar.r. the allocation of competences and resc M as EU legitimacy more generally. This chapter explores how the EU has i to the euro crisis and how the crisis has sbm and European integration. We argue zr.i The Euro Crisis and European Integration 391 :as served as a spur for integration, but it has done so in ways that rest uneasily with existing theoretical rproaches to the delegation of sovereignty in the Whereas integration scholars have traditionally -jught of integration in terms of the empower-: of the Community institutions, it is the heads of ute or government and de novo institutions—that is, :e>poke bodies that operate at one remove from the " rmmission and the Court of Justice—that are the -til institutional winners from this crisis. This new in-tcrgovernmentalism (Bickerton et al., 2015a, 2015b; see Chapter 5) did not begin with the euro crisis but •_:her characterizes European integration since the 'lastricht Treaty was signed in 1992. Yet, new inter-vernmentalism's grip on the EU has been reinforced a result of this crisis because of the determination member states to press ahead with collective so-:ions to shared policy problems but without being en to cede new powers to old Community institu-along traditional lines. The chapter begins by jssing why the euro crisis arose and how it un-".ded, followed by a discussion of its impact on EU r_;:itutions. The penultimate section explores cornering perspectives on what the crisis means for the "s legitimacy and, finally, the chapter concludes by lighting its main findings. :'om global financial crisis to euro risis 7"-.e global financial crisis, by some reckonings, struck ce EU on 9 August 2007. The first sign of trouble was . rress release from French financial institution BNP : i-bas, which suspended trading on three investment ds as a result of difficulties in the US subprime mort-CLge market. Trouble had been brewing in this market k months, with the second biggest provider of sub- ■ ■ me mortgages in the USA (that is, home loans of-■ ;d to individuals with poor credit ratings) filing for ir-kruptcy in February 2007. Such difficulties were : ited, in turn, to a sharp slowdown in the US hous- ■ market in 2006, leaving many subprime mortgage c .iers unable to make their loan repayments. This ■moil soon spread to the country's financial sector : irge, with the US investment bank Bear Stearns an-: .incing large subprime-related losses in July 2007. -".thin weeks of BNP Paribas's press release, it was : ir that several European banks were badly exposed to the subprime crisis. In Germany, in August 2007, Landesbank Sachsen was hastily bought by Landesbank Baden-Württemberg after an Irish-based subsidiary of the former had incurred large subprime-related losses. In the UK, Northern Rock fell victim to the first run on a bank in Britain for 150 years after struggling to meet its own borrowing needs in increasingly nervous financial markets. In March 2008, the US Federal Reserve negotiated the sale of Bear Sterns to another US investment bank, JP Morgan, after the former had incurred in excess of US$3 billion in subprime-related losses. No such solution could be found for Lehman Brothers, another troubled US investment bank, forcing this financial institution into bankruptcy in September 2008. The result of this decision was pandemonium in international markets, as speculation mounted about which large financial institutions would be next to fail. EU member states' initial response to this escalation of the global financial crisis was ineffective and uncoordinated (see Box 26.1). A case in point was Ireland's unexpected decision in September 2008 to guarantee Irish banks. This move seriously destabilized the UK financial system, as British savers switched to Irish bank accounts on the understanding that their savings would be safer. Fearful of such 'beggar thy neighbour' policies, several EU member states moved quickly to guarantee bank deposits, ignoring calls for a more coordinated approach. The Irish guarantee had fateful consequences and brought the country from a position of budget balance and low government debt after two decades of impressive economic growth to the brink of sovereign default in a matter of months. A centralized system of EU bank deposit insurance and a common system for dealing with troubled financial institutions would have helped to manage the crisis better and the realization of this fact was a key driver behind later plans for and EU Banking Union. The euro area entered a recession—a prolonged period of falling real gross domestic product (GDP)— in the first quarter of 2008 due to a dramatic downturn in global trade and a credit crunch at home, as euro area banks grew less willing and able to lend to consumers and businesses. In an attempt to counteract these developments, EU leaders agreed in December 2008 on a fiscal stimulus package under which national governments committed themselves to tax cuts and expenditure increases valued at 1.5% of GDP. This stimulus was relatively small compared to similar efforts in the USA and Japan, for example, with some 392 Dermot Hodson and Uwe Puetter BOX 26.1 EXPLAINING THE GLOBAL FINANCIAL AND EURO CRISES The euro crisis followed the global financial crisis, but the relationship between the two is complex. Economists are divided as to the precise causes of this global crisis, but most emphasize excessive risk-taking in financial markets in the early 2000s (see Financial Services Authority, 2009). Symptomatic of such risk-taking is the increasing importance of securitization since the mid-1980s. 'Securitization' refers to a financial practice that allows banks to sell on the risks associated with loans to other financial institutions, Initially, it was hoped that securitization would diversify risk should borrowers fail to meet repayments on these loans. In the event, it served only to amplify risk by imposing worldwide losses when US house prices started to fall in 2006. Globalization was the key driver of such financial innovation. In this regard, the EU's efforts to create a single financial market under the Financial Services Action Plan launched in 1999 arguably left member states more rather than [ess vulnerable to the events of 2007-08. The Capital Requirements Directives adopted in 2006, for example, failed to prevent some financial institutions in the EU from being woefully undercapitalized once the global financial crisis struck. Supervisory failures were a general feature of the global financial crisis rather than one that was specific to the euro area, as the failure of authorities in the UK and the USA to prevent financial institutions from taking excessive risks showed. Neither of the latter two countries had ready-made instruments to help distressed financial institutions once the crisis struck. The UK lacked a permanent resolution mechanism for taking control of insolvent banks until 2009. Many economists also see a link between the global financial crisis and the problem of global imbalances (Obstfeld and Rogoff, 2009). This problem refers to the accumulation of large current account surpluses in Asia and in oil-exporting countries since the mid-1990s, mirrored by the largest current account deficit in the history of the USA. The causes of these imbalances include high levels of savings in Asian countries, high oil prices, the reluctance of the USA to reduce domestic consumption, and the tendency of some surplus countries to peg their currencies to the dollar. The consequences of global imbalances are more straightforward; the savings g in the oil-exporting countries fuelled low interest USA and, by making it cheaper for homeowners tc ; contributed to the US housing bubble, which burst I spectacular effect in 2006. The euro area had a current account position of': n--balance' or 'in surplus' during the first decade of the currency and so was only indirectly exposed to the global imbalances. However, it faced its own pre: e i balances, in part, because the falling interest rates e by some member states upon joining the single ct," credit booms and housing bubbles. Portugal was an of these imbalances, experiencing an inflationär) fc :: between 1999 and 2002, followed by a prolongec growth. The Portuguese economy's failure to recoil prior shock is one reason why it proved so vulnerac e global financial crisis struck. Ireland, Spain, and Gree;e other hand, saw credit booms and housing bubb't; : the crisis—facts that might explain why the fiscal lithe crisis was so strong in these countries. Falling interest rates associated with joining a single : only one source of macroeconomic imbalances in -.- g another is the failure of these countries to monitor : risk-taking by banks through a robust system of finatl supervision. Such failures were acute in Ireland, whe-Central Bank of Ireland and the Financial Regulator sound the alarm over excessive risk-taking by bo lenders alike. Problematic too was the failure of sc~ euro area countries to prevent sustained losses of competitiveness during the first decade of EMU. T-: ■ was acute, for example, in Portugal, which saw its uri) costs relative to other euro area countries continue I: after economic conditions slowed in 2002. For some economists, this situation was simply the corollary of developments in Germany, which experienced a susti relative unit labour costs after 1999 in an effort to resn competitiveness and to shake off a decade of econoni underperformance following the country's unificati: - commentators suggesting that EMU paid a price for not having a common budget instrument (Henning and Kessler, 2012). The macroeconomic effects of fiscal federations are a matter of debate, however. On the one hand, such an instrument would have encouraged growth, especially in member states that had limited room for national stimulus packages. On the other hand, foreknowledge of such fiscal help may-have created a problem of moral hazard (Persson and Tabellini, 1996) by encouraging even risk;; choices from member states such as Grer. vance of the global financial crisis. The coordinated fiscal stimulus packac by EU member states in 2008 provided i I valuable lifeline to consumers and busines tributing towards a resumption of real GD) in the third quarter of 2009. Although the had by then exited recession, concerns ove: The Euro Crisis and European Integration 393 rrublic finances in the euro area intensified after all übers experienced a sharp increase in government rowing. Those countries that had witnessed an . to prolonged housing booms at the outset of the iomic crisis were particularly hard hit, with Spain Ireland posting budget deficits in excess of 10% GDP in 2009, as the stamp duties associated with rant housing sales evaporated and the effects of a ry steep recession hit. The rush to cut expenditure :hese and other member states has been criticized retrospect but national governments faced consid-ible pressure from financial markets at the time to : government borrowing under control. A common iget instrument would have helped to ease the bur-l of such austerity in the short run but it might have ide matters worse in the long run for the reasons jssed above. Whereas Ireland and Spain began the euro crisis ::h levels of government debt below 40% of GDP, vernment debt was in excess of 100% for Greece. debt level alone provided grounds for pessi-sm about the state of Greek public finances once recession hit. Matters were made considerably arse, however, when new Prime Minister George ipandreou announced in October 2009 that previ-administrations had concealed the true scale of 'vernment borrowing. As a result of this announce-ent, Greece's budget deficit was revised from 3.7% ' GDP to 12.5%, leading to a sudden loss of faith by -ancial markets in the country's ability to repay its irional debt without outside assistance. Had Greece not been a member of the euro area, :hen it would presumably have been offered assistance Ä-ithout delay; an EU-IMF financial support package was, after all, agreed with three non-euro area EU ".embers, Hungary, Latvia, and Romania, in late 2008 ir.d early 2009 with a minimum of fuss. That Greece was a member of the euro area complicated matters roth legally and politically. Legally, the EU could not : ffer the same type of financial assistance to Greece as :nat to Hungary, Latvia, and Romania, since the latter las carried out under Article 143 TFEU, which applies :nly to non-euro area members. Politically, member states were divided on the decision to involve the "MF in the affairs of a euro area country. After several Bng months of procrastination—a period in which Greece's fiscal problems went from bad to worse—the r.eads of state or government finally agreed, in May 2010, on a €110 billion financial support package. The •iU contribution to this package took place outside the Treaty, with individual member states putting up €80 billion in bilateral loans. In exchange for this financial support, Greece signed up to a detailed programme of economic policies designed to get its public finances under control. A troika of representatives from the Commission, ECB, and IMF assumed responsibility for negotiating this programme and monitoring its implementation, thus ensuring that key decisions over Greece's economy would, in principle, be jointly decided by the EU and IMF. Why member states were so slow to provide financial support for Greece is a key question for understanding the politics of the euro crisis. For some economists, politicians simply failed to understand the magnitude of the crisis and the complexity of the policy responses required (De Grauwe, 2013) but this answer is not satisfactory from a political science perspective. The euro crisis was undoubtedly complex but dealing with complexities is part of what politicians do on a daily basis. A more plausible explanation is that the policy options for dealing with the crisis were costly, that such costs were unevenly distributed across the EU, and that those member states that were disproportionately exposed to such costs withheld support until they secured concessions. Take EU member states' foot-dragging over involving the IMF in financial support for Greece. Some heads of state or government, including Spanish Prime Minister José Luis Rodriguez Zapatero, were wary of involving the Fund in the affairs of a euro area member, but others, including German Chancellor Angela Merkel, were in favour. These differences had little to do with these individuals' grasp of economics but instead reflected national interests over involving the Fund (see Hodson, 2015). For Zapatero, any deal over Greece would set a precedent in the event of financial support for Spain, which had become a distinct possibility by early 2010. Since Spain has more influence in the EU than it has in the Fund, Zapatero had a strong interest in pushing for an EU solution to the sovereign debt crisis. Angela Merkel had a different set of interests because Germany stood to contribute the most to any financial support package and so had a strong interest in ensuring credible oversight of the conditions attached to any loans. Involving the IMF alongside the EU in support for Greece came to be seen as a more credible course of action because of the Fund's track record in crisis management and perceived independence from EU member states. Given the urgency of the crisis and the impossibility of finding a solution 394 Dermot Hodson and Uwe Puetter without the EU's largest member states, Merkel eventually convinced other heads of state or government on a joint EU-IMF package for Greece. By May 2010, financial market concern about the sustainability of public finances in other euro area members had intensified. In response, euro area leaders pledged 660 billion via a newly created European Financial Stabilization Mechanism (EFSM) and €440 billion via a new European Financial Stability Facility (EFSF) to provide financial support to any euro area member state that might need it. Ireland became the first member state to access these funds in November 2010. Portugal was next in line, securing €78 billion in loans from the EU and IMF in May 2011. By this point, the nightmare scenario was that the sovereign debt crisis would spread to Spain, Italy, and other large euro area members and so require financial support that went well beyond the resources available via the EFSM, EFSF, and the European Stability Mechanism (ESM), a €500 billion permanent crisis resolution mechanism that started operating in September 2012 (see below). Although the combined weight of these funds was €1 trillion, some economists estimated that at least twice this amount might be required if large euro area members got sucked into the crisis (Buiter and Rahbari, 2010). In the end, the euro area rode its luck during this phase of the crisis. Spain negotiated a loan from the EU of just' €100 billion to recapitalize its financial institutions after its housing bubble burst. Italy, meanwhile, managed to restore confidence byjet-tisoning Prime Minister Silvio Berlusconi, a politician who had lost the confidence of financial markets, and installing Mario Monti, a former European Commissioner, as head of a caretaker government. Monti's 17 months as Prime Minister were not an unqualified success but he took decisions that his predecessor did not and brought Italy back from the brink in the process. Euro area members can claim credit for doing just enough before it was too late to survive this stage of the sovereign debt crisis, but it is doubtful that the policies pursued would have been sufficient without the intervention of the European Central Bank (ECB). The ECB was a reluctant hero, having responded with a combination of decisiveness and caution to the unfolding crisis. When it came to providing liquidity to European banks in the early stages of the global financial crisis, the ECB generally acted decisively. A case in point was the Bank's decision to allocate €94 billion in overnight loans on the day on which BNP Paribas sounded the alarm over problems in the US subprime market. The ECB was altogether h; about cutting interest rates, waiting until Noverrae 2008 to reduce the cost of borrowing in the euro sem The US Federal Reserve, in contrast, had embar-iez a a similar course of action in September 2008. Between November 2008 and May 2009, the E base rate fell from 3.75% to 1.0%. Fearful tha: historically low interest rates would be insuffk:: prevent the threat of deflation—sustained falls overall level of prices—the Bank launched a new ah ered bond scheme' in June 2009. This scheme czmi mitted the Bank to spend €60 billion on bonds "-53MI by private banks. With the launch of its Eur Securities Markets Programme (SMP) in May *.:1 the ECB finally agreed to purchase bonds issu. euro area governments, albeit from investors who M chased government bonds rather than direct'/-the governments themselves. The scale of bor.z r chases under the programme was modest, an; -failed to convince financial markets. In July 2012 President Mario Draghi finally bit the bullet b; licly announcing that he was prepared to do writ would take to save the euro. This move had ar.ir instantaneous impact on financial markets. I came to believe, rightly or wrongly, that the wc-the crisis was over now that unlimited bond pur ■" from the ECB was a possibility (see Box 26.2). In 2013, Cyprus became the fifth and also z:.-. euro area member to receive emergency financial ■ port from the EU. Most importantly, Ireland e— from its EU-IMF programme in December 201_-Spain and Portugal following suit soon after. C-~j too was able to exit its support programme ahei; -schedule in March 2016. If reliance on emerge— nancial support is considered to be a key feature j: euro crisis, these developments are certainly sigr the crisis is drawing to an end. It was around the saM time that a series of crisis-driven institutional re: were adopted and implemented. EMU's rights framework for economic policy coordinat::: came fully operational by mid-2013 and key elerr1 of Banking Union were implemented by the er.; a 2014 (see section on 'EU institutions and the euro< sis' and Box 26.3). Moreover, progress was rep:r with regard to the overall stability of the financ; i tern. An ECB stress test of the euro area's 130 laraa banks in October 2014 suggested that just 13 finan institutions required further recapitalization. Fira^| after recession and a period of only sluggish g:: — the euro area rebounded in 2013. Employment. The Euro Crisis and European Integration 395 BOX 26.2 THE ECB AND THE CRISIS : * n our mandate, the ECB is ready to do whatever it takes : rserve the euro. And believe me, it will be enough' (Draghi, .!. With these 23 carefully crafted words, delivered in a fern in London in July 2012, ECB President Mario Draghi ra .. gave financial markets what they had been looking for x the euro crisis began in 2009. Draghis intervention meant, sffect, that the ECB was ready to play the role of lender of ec resort vis-a-vis member states to save the single currency. - e rommrtment gave rise to the so-called Outright Monetary nnsactions (OMT), under which the ECB agreed, in principle, : the unlimited purchase of government bonds on secondary ■ " nomic calm—2008 was the first time since the sir-, currency had been launched that the euro area e perienced a recession—but it was just the latest r series of political shocks to hit the EU over the two decades. Others terms in this series include ~ mark's rejection of the Maastricht Treaty in 1992. resignation of the Santer Commission in 1999. L land's 'no' votes against the Nice Treaty in 2001 i the Lisbon Treaty in 2008, and the abandonmen: the European Constitution after failed referend1" in France and the Netherlands. Together, these other events mark the end of what Lfndberg Scheingold (1970) called 'the permissive consensu*" over European integration. One manifestation or trend is rising public scepticism about the benef.:; EU membership. In 1991, 71% of EU citizens agr that membership was a good thing. By the time the global financial crisis struck in 2007, this figur; fallen to 56%, and by the end of 2013, it had read 50% (see Eurobarometer, at http://ec.europ = public_opinion/cf/index_en.cfm). The meaning of the euro crisis for the EU's 1 macy is the subject of an ongoing and lively d in the academic literature. For Moravcsik (2012 . tional governments acted with 'remarkable flexib to stabilize the single currency even if doubts re over its long-term viability. Challenging the idea Germany did too little too late to prevent the from escalating, he praises Angela Merkel's go\ ment for showing leadership over the euro crisis bearing significant costs in dealing with it. In . ing with his liberal intergovernmentalist appr~ he sees Germany and other member states as a: not for reasons of ideology or altruism but beca' the economic costs of seeing the euro dissolve w: _ have been catastrophic. While acknowledging EMU's problems are far from over, Moravcsik 1'. concludes that 'Europeans should trust in the e: tiafly democratic nature of the EU, which will engage them to distribute the costs of convergence fairly within and among countries'. Scharpf (2011) offers an altogether darker rea of the euro crisis, which he sees as fuelling a 'crij:: democratic legitimacy' in the EU. He reserves h criticism for the troika, which he describes as a | KEY POINTS • The euro crisis triggered a number of major institutional reforms and EMU economic governance is now wider in scope and cuts deeper into domestic politics than it has done ever before. • Integration has been deepened but without major new transfers of powers to the supranational level; instead intergovernmental policy coordination has been intensified substantially. • The European Council and the Euro Summit assisted by the Eurogroup have played a lead role in the EU's response to the euro crisis and this role has been further institutionalized by the Fiscal Compact. • The Commission has been given new responsibilities under reforms agreed in the light of the euro crisis, but the Eurogroup and the European Council remain in the driving seat. The Euro Crisis and European Integration economic receivership' that has foisted painful lomic policy adjustment on Greece and other iber states rather than allowing national politi-and voters to reach a consensus on what had to zone. For Majone (2014), concerns over legitimacy : eyond the terms of emergency financial support the reforms to euro area governance enacted in the it of the crisis. The crux of his argument is that crisis has taken the EU yet further away from its Dts as a regulatory regime. The new powers of eco-ic surveillance entrusted to the European Com-sion under the 'six pack' and other reforms, he :es, go well beyond the kinds of functions that are i. more importantly, should be delegated to non-| oritarian institutions. Majone (2014) points the ;er at both the European Commission and a subset Germany and other member states, which he sees ; ?eing driven by a liberalizing zeal and which insist reforms as a quid pro quo for providing financial pport. !mplicit in the debate between these authors is the e-old question of whether the EU answers to its ember states. It does for Moravcsik, who thus sees icerns over the EU's legitimacy as overblown, but ; not for Scharpf (2011) and Majone (2014), who cry foul over how the euro crisis has been han-ed. Bickerton et al. (2015a, 2015b) offer a different : on this issue and argue that member states were le driving seat of the European integration process ile questioning the legitimacy of the choices they ade. This new intergovernmentalist approach sees ! EU's response to the euro crisis as symptomatic of itional governments commitment to cooperative so-:ions but reluctance to delegate new powers to old pranational institutions along traditional lines. This : plains the dominance of the Eurogroup and European Council in dealing with the crisis and member rates' preference for empowering de novo institutions Ipch as the ESM rather than the Commission. Yet -.itional governments themselves cannot be sure of ■ipresenting societal interests when acting at the EU .evel as their ability and willingness to accommodate End represent these interests has become increasingly rontested. The result is a dangerous discord between ;iite and popular preferences which has taken hold in :he EU since the early 1990s, but which has intensified ii a result of the euro crisis. The euro crisis has not only shaped the general direction of European integration (see Box 26.4). It can be also seen as a specific test case as to whether and to what extent closer euro area integration is compatible with the EU's original pledge to operate a broad socio-economic governance agenda for all its member states. The euro crisis was a test for the integration of economic governance with the EU's social and employment policy coordination portfolios in the sense that the latter dimension was almost absent from crisis management. Attempts by the European Council to reinstate this link through new initiatives in 2012 and 2013 speak to this point but came very late in the crisis management cycle. There is little doubt that the euro crisis has strained relations between the euro area and non-euro member states. This became plain as the European Council started to meet in the configuration of the Euro Summit, but it was also revealed by fundamental opposition from UK Prime Minister David Cameron, who not only rejected more comprehensive treaty change but also openly questioned whether the UK can remain part of a more closely integrated EU in which politics revolve around a closely integrated euro area. Moreover, member states which are eager to join the euro area in the future, or are in favour of closer EU-wide socio-economic policy coordination, have criticized crisis management procedures for excluding them from far-reaching decisions on institutional reform. The appointment of Donald Tusk, a former Prime Minister from a non-euro area country, as president of both the European Council and the Euro Summit, can be seen as an attempt to mitigate these tensions. Moreover, euro area member states have not used the Euro Summit meeting format as frequently as at the height of the sovereign debt crisis. KEY POINTS • EU scholars are engaged in a debate on what the euro crisis means for the EU's perceived problems of legitimacy. • Opinion is divided over whether the EU's response to the euro crisis reflects the collective will of the member states and what this means for the Union's legitimacy. • National governments cannot be sure of representing societal interests when acting at the EU-level. The crisis raises fundamental questions about the relationship between the euro area and other EU member states. 402 Dermot Hodson and Uwe Puetter BOX 26.4 THE EURO CRISIS AND THE FUTURE OF THE EU The euro crisis had a profound and lasting impact on European integration. This impact has reached well beyond questions of immediate crisis management such as emergency financial assistance and institutional adjustment, Most importantly, it showed how closely the fate of the Union has become intertwined with that of the single currency and how the fate of the euro rests on the ability of national governments to achieve consensus on difficult and unpopular choices under considerable time pressure. An indicator for this is how citizens think about EU integration. In 2007, before the global financial crisis was fully felt in the EU, the Eurobarometer recorded that 6296 of the citizens of the newly enlarged Union felt very or fairly attached to the EU. During the crisis this support dropped markedly. By 2012 when several financial aid packages had been adopted and the conditionally of the adjustment programmes was felt in the euro area's most affected member states, the Eurobarometer recorded a post-enlargement record low of 45% of citizens who felt attached to the EU. By 2017 levels of positive attachment to the EU had again increased to 5496. While support in countries like France, Germany, and Spain had come back strongly and was partially even above the 2007 levels, it had stagnated at the 2012 low in Italy where it remained well under 50% and had even further deteriorated in Greece, compared with 2012. Another issue intertwined with the euro crisis is Brexit. Even though it would be wrong to identify the euro crisis as the cause of long-standing and deep-rooted euro scepticism among large parts of the British political elite, the euro crisis undoubtedly provided ammunition to the anti-EU rhetoric of the Leave campaign. At the level of EU politics the euro crisis hindered efforts by British Prime Minister David Cameron to renegotiate the terms of the UK's EU membership ahead of a referendum which he had planned to win on the basis of a new settlement with Brussels. Cameron failed to win over other EU leaders. Rather, the latter had aligned over the question of euro area reforms, agreeing that this was their top priority. This led to the adoption by most member states of the Fiscal Compact (see Box 26.3) against the explicit desire of the UK. Cameron's attempted veto of this agreement lost him credit with other leaders. As the UK's former European Council Sherpa and Permanent Representative in Brussels Ivan Rogers recalled in a lecture at Oxford in November 2017, other EU leaders did not even notify Downing Street about their intention to press ahead with an intergovernmental treaty outside the EU treaty framework (see https://www, politico.eu/artide/ivan-rogers-david-cameron-speech-transcript-brexit-referendum/(accessed 14 December 2017)). Political differences of this magnitude would have been highly unlikely within the consensus-based European Council environment prior to the euro crisis. Whatever influence the euro crisis had on the outcome of the UK's referendum, it undoubtedly revealed British elites' frustn with the way in which the EU's future had become fused that of EMU. The euro's status as a bellwether for the Union can also be in domestic developments in some of the euro area's most important member states. In France, Marine Le Pen saw h electoral prospects increase in advance of the 2017 presic election as the euro crisis deepened and she campaigned f< 'orderly' exit from the single currency. In Germany, it is nc coincidence that Alternative für Deutschland, with its nev. brand of German euroscepticism, was founded at the he:; the euro crisis in 2012. Next to its anti-migration policy sta opposition to the ESM has been a crucial element in its campaigns. In Italy, the 2018 general election saw two part that had been highly critical of euro area membership wir power. The Five Star Movement and the League softenec rhetoric on the euro but they insisted that Italy be given le under the EU's fiscal rules to increase government expenc and cut taxes. The country's poor growth performance ar: against further austerity but its high debt levels triggered financial market concerns about further borrowing, Negotiations with the EU continued at the time of writirg mounting fears that Italy might trigger a new phase of the = crisis. Negotiations of this sort are not unknown in Italic-politics, with former Prime Minister Matteo Renzi puttin: pressure on the Eurogroup in 2016 and 2017 to soften enforcement of the Stability and Growth Pact while the ta government implemented economic reforms. Meanwhi'e wealthier member states, led by Germany, refuse to mc ; full implementation of Banking Union, and most notably --launch of a European deposit insurance scheme (see Ekr- 1 and the enlargement of the ESM as long as problems in thi banking sector persist in some countries. The stand-off re fundamental legitimacy dilemma which has emerged in the aftermath of the euro crisis. Politicians in mainly norther-European member states are eager to reassure their constituencies that additional financial resources for resc= mechanisms, which are designed to address future crises." not transferred to financially weaker member states. Yet. politicians within the latter group of countries are at pairs explain that euro area fiscal policy rules are a constraint c -domestic democracy. The euro area's inabilrcy to put a definite end to the euro : experience was laid bare in 2017 when elections in the e. area's biggest economies—France and Germany—led to a period of prolonged disengagement with euro area refo rrr (con; - The Euro Crisis and European Integration BOX 26.4 THE EURO CRISIS AND THE FUTURE OF THE EU {continued) äxice became the scene of a dramatic electoral campaign in ■ :h Marine Le Pen campaigned for leaving the euro and : ::ing a referendum on EU membership. She was defeated " ■' in the second round of the presidential elections, as well as ■ "he subsequent parliamentary elections to the National -j;embly, by Emmanuel Macron and his new political movement, Marche. Macron had campaigned on an explicitly EU-friendly ' :-,et He took office when Germany went into election mode i ■ i wasted no time in mapping out his ideas for EU reform -ile outlining a markedly euro area-centric vision of the EU's _*;jre. Yet, instead of setting the scene for a new German r; .ernment, as Macron had hoped, Germany's leading politicians the first time in the Federal Republic's history failed to form a : z=lrtion government in the immediate aftermath of elections, •.hich saw Angela Merkel's CDU/CSU party and Martin Schuiz's 5PD haemorrhaging votes to Alternative fur Deutschland. Whereas Macron, on a European round-trip advocating his EU reform proposals, did not visit Hungary and Poland, which had witnessed a pronounced downward revision of core rule of law and democracy standards, he received a more positive response from the only euro area member among the so-called Visegrad countries, Slovakia. In reaction to Macron's proposals to make the euro area the core of a multi-speed EU, Slovak Prime Minister Robert Fico asserted his ambition to be part of this core and referred to his country as a 'pro-EU island in this region' (Euractiv, 24 October 2017). While the euro area still struggles to heal its divisions in the aftermath of the euro crisis, and engages in further institutional reforms, which are aimed at enhancing solidarity and burden-sharing, the EU's further institutional development is increasingly seen to be dependent on whether the EU might be able to leave some of its more reluctant members behind, Conclusion ■ 2008, the euro area celebrated the tenth anniversary ::' EU member states' decision to press ahead with the triid and final stage of EMU These celebrations were v key but infused with a sense of relief that EMU's ■st decade was not the disaster that some of its critics pd predicted. Fireworks of a different sort were to ;:me, however, when the global financial crisis that - id begun the previous year led to a sovereign debt :risis that came close to tearing the single currency isunder. This scenario would have been a major ca-^trophe for the EU and, indeed, the world economy, ľne fact that it was avoided was due to good fortune má a set of policy responses that did just enough before it was too late to regain the confidence of financií markets. The euro area members at the epicentre :: this crisis—Cyprus, Greece, Ireland, Portugal, and i^ain—received emergency financial support from ne EU and IMF, but paid a devastating price in view of :ae austerity measures that they had to endure. This rombination of financial support and fiscal austerity flowed these member states to weather the storm— -Ithough some would argue that there were better r'aces to take shelter—but in the end it was the ECB's :ommitment to do whatever it takes to preserve the angle currency that prevented the sovereign debt crisis from spreading further in 2012. This commitment was a balm rather than a cure and serious concerns remained over the economic outlook for the euro area several years later. Opinion is divided on whether a lack of European integration is to blame for the euro crisis and whether deeper integration is likely to be its legacy. The answer to these questions depends, of course, on how integration is defined. Scholars have traditionally equated integration with supranationalization, with some suggesting that a centralization of powers would have helped to mitigate the euro crisis and others seeing centralization to come. This chapter has challenged these views. A more centralized approach to fiscal policy and financial supervision would not have inoculated the euro area against the global financial crisis, it was argued, and may even have made matters worse. The ECB's belated decision to commit to unlimited bond purchases, moreover, relied on the belated use of an existing policy competence rather than the acquisition of a new one. Turning from cause to consequence, this chapter sees the EU as tending not towards a supranational system of policymaking following the euro crisis, but as reinforcing the new intergovernmentalism which prevails within the field of EMU economic governance. This trend can be seen most clearly in member states' reluctance to empower the Commission in the light of the crisis, in their preferences for deliberation through bodies 404 Dermot Hodson and Uwe Puetter such as the Eurogroup and European Council and delegation to de novo bodies such as the ESM, and in the worrying disconnect between politicians and the people as European integration intensifies in unfamiliar ways. The political controversy surrounding the conditions of financial assistance to Greece in 2015 provided a dramatic illustration of this disconnect between elites and citizens. Difficulties on the part of Italian political elites in putting the country's financial sector on a safer path and stimulating the econc r the aftermath of the crisis' most dramatic raor.: -still represent a major risk that the euro crisis ~ return. Moreover, the finalization of Banking L has stalled as Germany and other wealthier eur: ; member states insist that they will only corn-new financial instruments and rescue mechir. after ongoing local problems have been res:." domestically. QUESTIONS 1. What are the key characteristics of the EU's response to the euro crisis? 2. Why and how are ihe heads of state and government seeking closer control over EU economic governance « of the euro crisis? 3. Did the Commission acquire new powers as a result of the euro crisis? 4. Can closer integration be achieved through intergovernmental policy coordination within the euro area =": how does it happen? 5. To what extent does the EU develop through crises? 6. Why did the euro crisis affect euro area member states differently? 7. How has the euro crisis affected the relationship between euro area members and other EU member sir.; 8. In what way does the Fiscal Compact change EU economic governance? Why was it concluded outs;c; t Treaty? GUIDE TO FURTHER READING Bickerton, C. J., Hodson, D, and Puetter U. (2015a) 'The new intergovernmentalism: European integration in ; : Maastricht era,' Journal of Common Market Studies, 53/4 : 703-22 This article identifies six broad hypotheses fc ■ . standing European integration in the post-Maastricht era. It is a helpful background reading to the explanation : impact the euro crisis had on integration as outlined in this chapter Hodson, D. (201 I a) Governing the Euro Area in Good Times and Bod (Oxford: Oxford University Press) This book ;:: the evolution of euro area governance, from the launch of the single currency in 1999 to the beginning of the 5; : debt crisis in 2010. Hooghe, L, Laffan, B., and Marks, G. (eds) (2018) 'Special Issue: Theory Meets Crisis', Journal of European Public (I) This special issue offers competing perspectives on the EU's crises from some of the leading theorists of E.':: politics. Matthijs, M. and Blyth, M. (eds) (2015) The Future of the Euro (Oxford: Oxford University Press). This edited cc e: contains essays on the euro crisis from leading scholars in the field of international political economy. Puetter, U. (2012) 'Europe's deliberative intergovernmentalism: the role of the Council and European Cour: economic governance', Journal of European Public Policy, 19/2: 161-78 This article explores intergovernmental re;:: to the euro crisis and the emerging role of euro area heads of state and government in the governance of EML. The Euro Crisis and European Integration 405 Schelkle, W (2017) The Political Economy of Monetary Solidarity: Understanding the Euro Experiment (Oxford: Oxford University Press) This important book challenges the idea that economic differences between euro area members is necessarily a problem for the smooth functioning of EMU, viewing the single currency instead as a clever but contested form of risk sharing, WEBLINKS http://blogs.ft.com/brusselsblog/ The Financial Times Brussels Blog provides up-to-date news on the unfolding economic crisis and other EU issues. http://ec.europa.eu/economy_finance/economic_governance/index_en.htm The European Commission's DG ECOFIN offers online access to key legal and political documents on the new economic governance framework, https://www.ecb.europa.eu/home/html/index.en.html The website of the European Central Bank (ECB). http://www.voxeu.org VOXEU provides a commentary on the economic crisis and other issues from leading economists.