Reforming EU governance: political problems of the Greek financial crisis

Secondly, the lack of fiscal control has meant Greece will now faces a recession that will probably last longer and be deeper than needed. It is seeing austerity measures (pension cuts, pay cuts and tax rises, selling government assets and infrastructure, deep public spending cuts and wholesale privatisation, for example) introduced that will be harsh on Greek citizen. And this is the problem of the austerity measures themselves. As Yanis Varoufakis, Professor of Economics at Athens University argues:

Greece must swallow austerity's bitter medicine again and again both because it is the only way back to health and because it is right that the Greeks learn a lesson the hard way. There is a snag, however, that undermines both motives behind the current austerity drive: the prescribed medicine neither cures the disease (which now threatens to engulf the whole of the eurozone) nor punishes the over-reachers.

Austerity measures also have negative economic ripple effects for EU members as they share the burden of recession, trade and earn wages with a weakened Euro, and face widening social unrest. There are also political effects. States most affected by the Greek crisis, France, Germany and the U.K, face hostility from domestic constituencies who are opposed to their taxes bailing out other states.

From the introduction of the Euro in the early 2000s to the onset of the global financial crisis (GFC) in the late 2000s, calls for reform in EU economic governance have been present. While there is a centralised monetary policy, the lack of authority on sovereign budgets and policies have seen disparities in wage policies emerge across the eurozone; this is a factor not unrelated to the Greek crisis. The EU advocates a cost-neutral wage policy that theoretically does not affect the mutual competitive positions of the member states. The idea is that as long as national wage rates move in line with productivity, labour costs should remain constant.

However with the weakening of trade unions across the EU wages have generally declined. States like Greece for economic or politically pragmatic reasons have increased wages – albeit in forms of subsidised incomes in industries like agriculture. Unregulated by EMU oversight, wage increases and wage subsidisations are then considered (by the EMU) as a core cause of the fiscal crisis and the first thing to go in austerity measures. The lack of uniformed wage policy is a key argument of those that advocated EU monetary and fiscal management of EU member states.

Highlighting the impact of a lack of an EMU voice on fiscal policy was the uneven fiscal benefits that occurred in some member states between the same period (the Euro's introduction in the early 2000s and the GFC in the late 2000's). Currency booms in Ireland and Spain and stagnation in Germany and Italy – exposed the lack of EMU fiscal policy and authority in areas like interest rates.

Had the EMU been empowered on domestic fiscal policy it is likely that a more interventionist fiscal policy would have seen Germany and Italy adopt a less restrictive interest rate policy, which could have freed the domestic economy enough to avoid economic stagnation. Conversely, there would have been more restrictive measures placed on Spain and Ireland to slow down their domestic economies. The latter may have also dampened the effects of the global financial crisis on Ireland in particular as it was hard hit by a sub-prime mortgage crisis.

Because the EMU lacks the authority to make fiscal policy means that there is no European institution that can prescribe changes in national fiscal policies: policies that introduced early in the currency booms and even early in the GFC and Greek crisis might have averted the harshness now being experienced because of austerity measures, regional toxicity, a weakened Euro, and social and political unrest.

The larger concern here of course is that giving fiscal and well as monetary control to the EU, means giving control of member states national economies, including domestic budgets to the EU The rejected 1970 Werner Proposal advocated that very thing: arguing for a three-stage integration of national currency, regional economic policy and domestic fiscal policy. Opposition, mainly from France, Belgium and Luxemburg came in the view that the Werner Proposal would lead to the installation of a European government. The question is assuming it would lead to a European government, would have helped or hindered the fiscal crises recently facing Italy, Portugal, Spain, Ireland and now Greece?

It is almost past determining who is responsible for the Greek crisis. There is growing consensus that the austerity measures will harshly affect Greek citizens and will only deepen and prolong the recession (as it did in Portugal). The larger issue the EU will now face is what if the measures don't work? Will then the EU consider reform of its economic governance? If not, with the EU be faced with this type of crisis again or does it signal the beginning of the end of the EU?

While not users of the Euro, there is significant political concern in Britain about the likely impact of the crisis on the British economy. The fear is palatable as British MP's now openly talk about the end of the Euro and are floating alternatives to a European single currency.

The Greek crisis highlights again the need for reform within the EU, and particularly of the EMU. Ideally it is governance reform that would empower a single EU fiscal voice in order to avoid the crisis situation that has enveloped Greece. Crisis prevention likely requires one instrument to regulate both monetary and fiscal policy. Moreover, this instrument could integrate economic and fiscal policy with wage and social welfare policy thus bringing about a more genuine and balanced EU