The EU’s Battle With Its Member States

On a good day, the European Union’s institutions in Brussels can be said to function properly. The Commission fulfills its many obligations; the Council holds fruitful meetings where decisions do not take hours to make; and the MEP’s aid the legislative process constructively. Yet, that is not always the case. In times of crisis, these institutions are often found to be in disagreement with each other but most of the time the end result is one of consensual cooperation.

In the case with Greece’s financial crisis, the question has been raised whether the EU can really impose its control mechanisms on the member states, therefore creating another line of conflict. This time, the future of the Euro hangs in the balance. In most books on the history of the EU, there is a lot of criticism of the way the single currency was created and adopted and how the rules for it are enforced. In the near-future, these disapprovals will come back again, citing the Greek example of 2009-2010.

One requirement for every country in the Euro zone is that they should have a budget deficit of less than 3% of GDP. In 1997, when the three year transition period for adopting the currency began, most of the member states did not fulfill this condition. The only year that Greece managed to bring its deficit below the mark was in 2006. Every other year since the adoption of the single currency, the Greeks have had to revise their preliminary budget figures, sometimes with a 400% increase. Why has no one ever used the enforcement mechanisms to make the Mediterranean country stay in line?

There can be much speculation on this question, but a few things are worth mentioning. First, Willem Buiter, chief economist at Citigroup and a former member of the Monetary Policy Committee of the Bank of England, describes the 1996 agreement aimed at enforcing the debt and deficit rules as “a paper tiger” (Forelle & Fidler, 2010). This created the illusion that there were measures which can be taken to enforce the budget rule while, in fact, there were none.

Second, it is a fact that within the EU institutions there has been a lax attitude towards rule-enforcement from the very beginning. Governments often attempt to maneuver around the regulations for their own purposes instead of applying them strictly. Between 2002 and 2004, France and Germany breached the deficit limit and therefore set an example that the rules didn’t have to be played by. This behavior was copied by some of the other states, and in 2005 the norm was set that in times of economic downturn, the regulations could be suspended. From a cynical point of view, it seems that the Greeks are constantly in a state of economic downturn.

One might wonder why the Greeks are taking so much heat at the moment, since we are in one of the worst economic crises of the last century. The answer lies in the fact that the country is about to go bankrupt because of the lack of internal rules. The logic of the Eurozone is one of fiscal discipline and that is absent from the state’s policy. Greece’s President Papandreou recently stated that his country will not be the “Lehman Brothers of states”, reminding us of the bank that fell victim to the financial crisis in 2008. Whether reforms and good behavior can fix the problem so late in the game remains unclear, but actions have to be taken and that will require hard choices and a strict policy.

The last interesting point to make is that it is the fellow states in the Eurozone who are the ones that can save the Greeks from their predicament. In the media, the Germans and the French have been linked to bail-outs for the Mediterranean state, but nothing has been confirmed yet. A recent headline in the Financial Times reads “Europe needs to make up its mind” (Financial Times, 2010). Will it be the EU as a whole or the biggest countries which will do something to help their fellow member state will be interesting because we will be able to determine whether the Union can intervene in certain national policies or if it will be the old-style Westphalian interaction between sovereign states that solves the problem.

In my view, the main reason that the EU allowed the problem to grow without punishment of Greece’s lax corruption and taxation practices can be found in the politics of enlargement. In the eyes of Brussels’ politicians, the new member states were very corrupt and their economic situation was below any norms. Focusing on helping them, they ‘forgot’ or ‘enabled’ the Greeks to do play their own game unnoticed. Yet, in the contemporary scene, new members like Bulgaria have a tighter fiscal policy than some of the old member states and can achieve the Euro entrance criteria within a few years, following Slovenia and Slovakia who have already achieved it.

Whether Greece can fix its internal problems will be the focus of the future. Whether they will lose the image of the ‘bad boy of Europe’ is also an interesting question. What the EU has to remember is that while their focus is on Greece, there might be another member state out there which is hiding in the shadows and brewing some small mischief that could explode in everyone’s faces at any moment.


1. Financial Times. (2010, March 5). Europe Needs to Make Up its Mind. Retrieved March 5, 2010, from Financial Times: http://www.ft.com/cms/s/0/3286388c-288d-11df-a0b1-00144feabdc0.html

 

2. Forelle, C., & Fidler, S. (2010, March 3). Greek Budget-Busting Outweighed Effect of Swaps Such as Goldman’s. Retrieved March 3, 2010, from Wall Street Journal: http://online.wsj.com/article/SB10001424052748704548604575097800234925746.html

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