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Reforming EU governance: political problems of the Greek financial crisis

By Jo Coghlan - posted Wednesday, 27 July 2011

In 2009 the American government, reacting to the sub prime crisis, unconditionally agreed that no bank central to the stability of the U.S. economy would be allowed to fail. The decision was political as much as it was economic: it was fiscal stabilisation and confidence building all rolled into one. Events currently occurring in Europe are not dissimilar. Greece's solvency problems mean a financial bailout is required from European Union (EU) members in order to rebuild confidence in the Euro as well as eurozone regulators, the EU itself and the European Economic and Monetary Union (EMU).

The current financial crisis in Greece – that is, Greece can not pay its debts, hence it is broke - exposes structural weaknesses within the EU and strengthens the legitimacy of those calling for structural reform: specifically in relation to the need for a single EU voice on fiscal, wage and social welfare policy. What the current Greek crisis has exposed is deficiencies in the ability of EU fiscal governance.

While EU members have sovereign control over domestic economic matters including their budgets and responsibility for their own debts, the EU is only able to intervene in sovereign economies when they have defaulted on their debts. Only then can EU intervention occur and when it does so the mechanism for returning them to a balanced budget is austerity measures. This requires states to commit to "solemnly reaffirm their inflexible determination to honor fully their own individual sovereign signatures", so they are still responsible for standing behind all of the debt". This is what has occurred recently in relation to the fiscal crises in Ireland and Portugal.


Measures in Greece are more complicated. Having voluntarily defaulted on private debts the state - without intervention - may default on official debts, which would see it forced out of the EU. The possibility of a broke, rogue Greece operating in the Eurozone outside of EU trade and monetary regulations is not a situation the EU wants to see emerge. The even larger crisis facing the EU (and the IMF) is the need to prevent the contagion from spreading.

Rather than examine how Greece became an economic and political problem for the EU, it is worth considering how the Greek crisis exposes governance issues within the EU and the EMU. Most commentators are examining the actions of the Greek government's irresponsibility as the cause of the crisis. Few are asking what the Greek crisis says about the need for EU reform.

What the Greek crisis has done is to expose (again) the EU's lack of power in relation to fiscal, wage and social welfare policy. While the EU and the EMU conduct monetary policy in the eurozone, it is unable to regulate domestic economic policies. Allowing states to retain sovereignty over domestic policy while regulating regional monetary policy exposes the weakness of EU economic governance. This weakens it economic authority in the region and globally.

Moreover, as the Greek crisis demonstrates that the EU (much like the American government's response to the sub prime crisis) will intervene in domestic policy when conditions dictate. A contradictory set of governance policies are in place. The EU can't intervene in a member states domestic economy, unless that domestic economy is on the verge of failure and only then it can and will intervene if there is a threat to other eurozone members. When the intervention occurs it is likely very invasive, will introduce harsh austerity measures likely to last decades, and will de-legitimise the authority of the sovereign state to control domestic affairs.

While positioning itself as the benefactor of the troubled states, the reality is that driving the intervention – as in the case of the Greek bailout – is to protect the overall economic and political system regardless of the cost and for as long as it takes. As the Council of the European Union statement of 21 July said: "We reaffirm our commitment to the euro and to do whatever is needed to ensure the financial stability of the euro…" Without a single currency, there is no EU

Unlike sovereign states, the EU and specifically the EMU, is not a single government that conducts fiscal policy at a federal level. Rather the EU, and more directly the EMU, is supposed to be a mechanism for addressing fiscal imbalances between rich and poor member states. EMU measures to achieve this are: the development and advancement of preferential trading areas (including tariff reductions); free trade areas (with no tariffs on some tariffs on all goods); common trade and customs policy; single market economy with free movement of goods, capital, labour and services; a single common currency and monetary policy; and complete economic integration.


Even though there is a common currency in the eurozone there is no common labour, wage or social welfare provisions. While the EMU conducts monetary policies centrally, fiscal policies remain the responsibility of individual member states. Any recession experienced by a member state has always been likely to uncover weaknesses in the EU and threaten the legitimacy of the EMU to stabililse Eurozone economies. The lack of authority over sovereign economies questions the strength of the EU as a regional and global economic power. Even the International Monetary Fund (IMF) concede that the EU needs to take "decision action" and turn themselves into a "full integrated monetary union" if only to prevent the types of fiscal crises facing state like Greece, Ireland and Portugal becoming global.

To have an organisation such as the EU which has monetary but not fiscal authority over sovereign economies – especially in a state like Greece when there are high levels of domestic debt but also high levels of unemployment, low wages and a weak social welfare net – weakens not only the EU but the economic and ideological foundations upon which it was built. This asymmetry (supranational monetary policy versus national fiscal policies) has however been evident since the 1980s. This is when Keynesian economic policy was supplanted by the neo-liberal demands for balanced budgets and running down public spending while withdrawing the state from active fiscal stabilisation in the market. This shift, coupled with the current Greek crisis has exposed two related issues.

Firstly, the EU and EMU under the influence of neo-liberalism has allowed Greece to supervise their own fiscal policy. Without EMU supervision over fiscal policy (although the EU retains authority over monetary policy) it exposes weaknesses in EU governance. Distinctions in control over monetary and fiscal policy undermines the Maastricht Treaty and its aim to: "promote economic and social progress which is balanced and sustainable, in particular through the creation of an area without internal frontiers, through the strengthening of economic and social cohesion."

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About the Author

Jo Coghlan is a lecturer in the School of Arts and Social Sciences at Southern Cross University.

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