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EU & Democracy

Democratic Impact of EU Measures

The Political Economy of Democracy in the Eurozone during the Crisis

If Europe’s economic and monetary union is to be completed and become true to its purpose in a democratic manner, many more steps are needed towards establishing proper democratic processes at the EU level. This will have to include true convergence and the elimination of disequilibria between Member States, an actual mechanism for fiscal transfers to Member States that are in financial difficulties, and, primarily, a forum where different paradigms for the direction of the Eurozone could be heard and materialize.

The Eurozone crisis has brought to the surface the structural weaknesses of the Economic and Monetary Union (EMU) and its ‘crowning jewel’: the Eurozone. The measures that have been marshaled to respond to the crisis can be separated across two main categories: those aimed at providing conditional financial assistance to Eurozone Member States through a variety of mechanisms (EFSM, EFSF SA, ESM) and through an initially ad-hoc and now permanent cooperation with the IMF, and those aimed at improving economic coordination between Member States through an overhaul of the EU modus operandi in financial governance (Two-Pack, Six-Pack, Fiscal Compact, etc.) What has been the impact of these measures on the democratic process of the Eurozone?

The analysis of democracy at the EU level has become known as the EU Democratic Deficit. In essence, the Deficit can be seen either “as an absence of public accountability or as a crisis of legitimacy”. Based on these two aspects, the Deficit scholarship is divided across three main approaches: Input, Throughput, and Output. The main subject of the analysis is whether the EU has the ability to influence key national policies with redistributive effects or not, and if so, whether there exists citizen input through appropriate processes with relevant safeguards in order to ensure proper democratic representation.

In the EMU, Member States had a lot to gain from joining, primarily in relation to a reduction of transaction costs and the promotion of stable financial relations. Concordantly, participation unavoidably resulted in the restriction of national fiscal and monetary sovereignty, and thus the legitimacy of the respective economic programs of each Eurozone members lost considerable ground. The political structure of the Eurozone should, ideally, compensate for the above through adequate provisions that ensure equal representation, emergency fiscal transfers in case of asymmetric shocks, and efficient convergence of economic policies. However, this has not been the case.

The deficit in the democratic process within the Euro area is not owed to mere participation in it, but to its structural weaknesses, which have allowed for considerable influence by and expression of interests of specific Member States vis-à-vis others, the latter also suffering from the resulting imbalances without any capability to address them. The crisis measures seem to have exacerbated, rather than addressed, this phenomenon. The intergovernmental nature of the ESM and the Fiscal Compact allowed for political weight to play a major role in their structure and underlying ideological foundation of ordoliberalism. Consider the introduction of even stricter budgetary policy, with specific limits for when a budget is to be considered balanced (maximum 0.5 percent GDP structural deficit) and for a 1/20 rate per year reduction of the debt if it is in excess of 60 percent GDP. Here, competition between rivaling ideas over budgetary restrictions within the Euro area was absent, harming legitimacy.

Another case is the lack of any meaningful representative input or oversight by the European Parliament in the arguably innovative Macroeconomic Imbalance Procedure, and in the breakthrough capacity of the Commission and the Council to scrutinize the budgets of Eurozone Member States before they become binding, and in the Troika (Commission, ECB, IMF). This constitutes a democratic deficiency, as there is no forum within which common economic matters could enjoy direct representative input and competing ideas could be presented and chosen by citizens, and it also harms accountability, as the participating actors are not scrutinized by representative institutions.

Yet, under these adverse conditions in relation to proper democratic process, Eurozone Member States once again relinquish even more authority over key national policies to actors at the supranational level, based on a reinforced ordoliberal paradigm. The authority of the Commission and the ECB has been considerably augmented vis-à-vis the national level in relation to key national policies of Member States, especially the periphery/Southern ones. For example, the wide-ranging introduction of Reverse Qualified Majority Voting across the Six-Pack (e.g. Regulations 1173/2011, 1174/2011, 1176/2011) not only makes it much harder to abolish Commission-proposed acts, but makes a blocking majority virtually impossible without any of the first five most populous countries (Germany, France, UK, Italy, Spain, Poland).

Even in the case of financial assistance, which could be considered a form of fiscal transfer to Member States with financial difficulties, the policies implemented, heavy on liberalization, privatisation, etc., were clearly ordo(neo)liberal (e.g. for Greece). In fact, the very narrative employed during the crisis was heavy on the ordoliberal notion thateconomic problems only emerge from budgetary indiscipline and not from risky and unsustainable economic behaviour in the private market,” without any regard for the potential balancing effect fiscal transfers may have. The economic problems of periphery/Southern Member States were blamed on profligacy, reinforcing the belief that the financial assistance programs were about German or Austrian or French taxpayers are bailing out Greek or Irish citizens. However, economic booms to periphery Member States were financed by excessive and cheap capital inflows from the core/North Member States leading to a loss of competitiveness with little ability of restoration without access to monetary policy instruments. The implementation of predatory lending practices in the pre-crisis period because of the moral hazard resulting from the absence of a Eurozone-wide  banking union (leaving bailouts as the only option), was kept mostly silent. In the case of Greece for example, the largest portion of financial assistance went towards repaying the financial sector that irresponsibly lent to Greece the amounts it irresponsibly borrowed.

Throughout the crisis measures, EU-level actors have acquired even more authority to influence key national policies, but being restricted to implementing the same ordoliberal paradigm without any challenge or alternative offered, or even without any platform where such an alternative could be offered. While it may seem that certain advances towards completing the Euro area’s true character as an Economic, along with Monetary, Union have been introduced, in reality there is a reinforcement of the application of the ordoliberal model that has constituted a primary reason for its structural weaknesses. Consider the fact that the ECB President mandated specific reforms, including retirement provisions, wage reforms, privatizations, etc., to be assumed in Italy through a letter sent to the Italian Prime Minister. Even more importantly, consider the inability of successive Greek governments from 2010 onwards to implement their electoral platform if and where it clashed with commitments included in the EU-IMF financial assistance programs, reaching a true crescendo during 2015, with the then government being elected on an anti-austerity platform and then, eventually, entering yet another program.

All the above create an absence of citizen input in the direction that economic and fiscal policies take. They also result in an absence of competition of different perspectives. If Europe’s economic and monetary union is to be completed and become true to its purpose in a democratic manner, many more steps are needed towards establishing proper democratic processes at the EU level. This will have to include true convergence and the elimination of disequilibria between Member States, an actual mechanism for fiscal transfers to Member States that are in financial difficulties, and, primarily, a forum where different paradigms for the direction of the Eurozone could be heard and materialize.

Based on the research article published in EuropeNow, Issue 12 (November 2, 2017).

 



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