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By Jane Watkinson
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The Eurozone Crisis: The Causes and Democratic Deficit

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The Eurozone crisis represents a fundamental contradiction and conflict within liberal democracy, the dominant version of democracy promoted throughout European institutions. Essentially, European institutions and international institutions, in general, often have the ideology that the market knows best at the centre of their actions/practice. However, with the recent election of Hollande in France and the rise of Syriza in Greece – alongside Obama’s support for more growth orientated policies within the Eurozone – things may be starting to change. This is not only important for the potential change in economic policies, it is also essential in fending off a furthering of the crisis of democratic legitimacy re national and international organisations, as macroeconomic management tools are increasingly removed from national government’s control.

As Dorothee Bohle, in The Crisis of the Eurozone (2010), argues given the crisis there has been a ‘return to the spirit of Maastricht’. The Maastricht Treaty (1992) and the Stability and Growth Pact (1997) set tight fiscal conditions for countries within Europe, but only the Eurozone countries are liable for penalties, of having a deficit no more than 3% of GDP and a debt of no more than 60% of GDP. Despite Germany being so adamant to reaffirm these commitments given the crisis, they breached the restrictions rooted in the Stability and Growth pact in 1994; 1996; 2003-2006; 2009 and onwards; alongside breaking the debt limit since 2003. There’s irony for you.

In Monetary Union, Fiscal Crisis and the Preemption of Democracy, Scharpf (2011) refers to the problems of underlying structural and institutional differences of countries creating issues with European economic convergence alongside the problem of monetary policies not being tailored to specific national contexts. This is key when understanding what has happened to the so-called GIPS economies (Greece, Ireland, Portugal, Spain), as:

There are important questions regarding whether Greece should have ever been allowed in the Euro with historical debt levels, when being expected to meet debt and deficit restrictions. There is evidence that Greece, in trying to meet these restrictions, actually lied about their true debt and deficit levels – not on their own either, as explored by Manolopoulos in Greece’s ‘Odious’ Debt: The Looting of the Hellenic Republic by the Euro, the Political Elite and the Investment Community:

Essentially, it was an open secret that Greece had exploited loopholes to pretend they were meeting criteria of the Eurozone in 2001, with Goldman Sachs amongst those helping Greece cover up their real economic status:

These types of deals occurred elsewhere between banks and countries such as Italy. Despite this, with “the income of the 20% of wealthiest people is consistently around six times higher than the income of the 20% of least wealthy persons”, Eurofound have a great analysis of the long-terms problems poorer people in Greek society have had despite the increase of credit.

Essentially, as it stands, the Euro is “entirely separated from broad political accountability and popular-democratic processes” (Bohle 2010), with Friedrich Hayek being one of the earlier promoters of a monetary union in order to undermine protection from the effects of the market. With the tightening up of fiscal discipline even more within Europe, the disjuncture between international obligations and a responsive, democratic government is getting bigger.  Given that fiscal restraint will not work – for instance, in 2007 Spain had 36% debt, Ireland had 25% but Germany had 65% – there needs to be a consideration of factors that will change things for the better. These include, a rebalancing where creditors are given more consideration, alongside less focus on debt and deficit levels placing pressure on governments to undertake devastating policies, with more regulation and limitation of the private sector.

Importantly, there is also a need for popular democracy to become respected within Europe. This seems to have become more of the case with the Eurozone moving towards a greater focus on growth and employment measures after Hollande and Obama’s intervention. However, it is unlikely the fiscal restraints will be lifted. In fact, Hollande has a deficit reduction plan similar to Sarkozy attempting to reduce it to 0% by 2017. But, Hollande and other leaders within the Eurozone may push for delays to the deficit reduction targets. Hollande is also moving for eurobonds, something Merkel is rejecting. Nevertheless, with Merkel’s party losing the key state North Rhine-Westphalia, alongside Schleswig-Holstein – with many saying that this is due to the electorate’s rejection of the austerity measures – things may be beginning to change in Europe.

Another example of this disjuncture between democracy and fiscal restraint is the rise of technocrats becoming leaders of Eurozone countries. For instance, Lucas Papademos in Greece used to be Vice President of the European Central Bank and was brought in to oversee an interim government to pass the bailout from the IMF/Eurozone – replacing Socialist Prime Minister George Papandreou. There is also Mario Monti in Italy, another technocrat who used to be a former EU commissioner.

Despite facts showing that fiscal restraint is not the answer, and that there are more underlying deeper problems to the way the Eurozone is structured, the Eurozone has brought in stricter, more invasive, non-democratic tools to further push for fiscal restraint of Eurozone countries. They have introduced an Excessive Imbalance Procedure which:

Whilst being a recognition of the problems of imbalance within the Eurozone, Scharph warns that:

Alongside this, there has been a further tightening up of the fiscal limits, now also including the structural deficit too, effecting the Excessive Deficit Procedure which implements the Stability and Growth Pact!:

Furthermore, there are other important changes including:

This information is key for understanding the increasing neoliberal austerity promoting nature of the Eurozone and the dangers of the problems likely continuing until potential meltdown of an economic system unable to achieve economic integration given the political and democratic obstacles and problems caused by such a task without taking into account context and diversity. These measures are not being voted on by the people directly affected by it, when Greece, France, Germany and Italy amongst many speak out they are often ignored by the European actors who are ignorant to the fact that the lack of fiscal discipline did not cause the recession – imbalances in credit and regulation were rather key reasons for such a crisis. Nevertheless, there are changes in the right (left) direction re Hollande and Obama. However, until the Eurozone, as a whole, realise this is the correct way, and stops taking away key democratic decisions from Eurozone leaders through its supranational institutions and macroeconomic constraints, the problems of the Eurozone are likely to continue until they become fatal.

Read more at Jane’s Political Ramblings


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