The original design of EMU was characterized by an uneven integration of macroeconomic policies. It combined centralized monetary policy with decentralized fiscal policy and negative financial market integration. Monetary policy was supranationally centralized. The Eurozone countries transferred monetary policy completely to the European System of Central Banks with the European Central Bank (ECB) at its head. The ECB is independent both from the member states and the institutions of the EU and has the exclusive competence to decide and implement the monetary policy of the Eurozone.
In contrast, the member states did not create a fiscal or financial union alongside monetary union (see Groenleer et al., this issue). The EU has no right to tax and to get into debt. As the EU budget runs on contributions by the member states limited to around one per cent of GDP, the EU’s fiscal room of manoeuvre is extremely limited. The EU does not have a fiscal equalization scheme across member states either. According to the no-bailout-clause of Article 125 TFEU, the Union and the member states ‘shall not be liable for or assume the commitments’ of other member states. Article 123 TFEU further prohibits the ECB from allocating credit to the EU or the member states.
The original design of EMU did, however, introduce regulation and supervision of national fiscal policy based on the ‘excessive deficit procedure’ (Article 126 TFEU) and the Stability and Growth Pact. The provisions uphold the deficit limits laid down in the convergence criteria for admission to the Eurozone: the ceilings of 3 per cent of GDP for new debt and 60 per cent of GDP for overall sovereign debt. If a state exceeds these ceilings, the Commission initiates a multi-stage procedure at the end of which the finance ministers of the Euro group may impose sanctions by qualified majority. These rules were softened in 2005, however, and sanctions have never been imposed.
In the area of financial market regulation, the focus has been on negative integration based on mutual recognition and home country control. In 1999, the European Commission issued the Financial Services Action Plan (FSAP), approved by the member states in 2000. In 2002, the Lamfalussy Process was introduced to accelerate legislation implementing the FSAP. The goal was to complete the internal market of financial services while leaving banking supervision at the national level. Centralization was minimal, limited to the Committee of European Banking Supervisors established in 2004 as an independent advisory body. Its role was slightly strengthened in 2009 but still limited to issuing ‘non-binding guidelines, recommendations, and standards’ (Article 3 of Commission Decision 2009/78/EC).
The Eurozone reforms agreed and implemented during the crisis have strengthened both fiscal and financial integration. First, the strict no-bailout policy has been replaced with institutions and practices providing highly indebted Eurozone countries with public credit. A first emergency credit to Greece in April 2010 was followed by the European Financial Stability Facility in May 2010, a private company that issues bonds guaranteed by the highly solvent Euro countries and offers the proceeds to indebted countries under the condition of fiscal and financial consolidation measures. The EFSF was superseded in September 2012 by the European Stability Mechanism, a permanent international financing institution with a capital stock from the Eurozone countries and a lending capacity of 500 million euro.
In addition to these formal steps, the ECB has intervened on several occasions to provide relief to highly indebted countries and banks. In the context of its Securities Markets Programme, the ECB has bought more than 200 billion Euro worth of bonds of highly indebted Euro countries since May 2010. In December 2010, it doubled its capital stock to hedge the risks of its bond-buying operations. In December 2011 and February 2012, it provided banks with long-term cheap credit of more than 1 trillion euro, which they could use to buy government bonds as well. In July 2012, ECB President Mario Draghi pledged to ‘do whatever it takes to preserve the euro’, implying that it would provide unlimited liquidity to keep Eurozone government afloat.3Under its Outright Monetary Transactions program, the ECB is ready to buy bonds without limits from countries receiving EFSF or ESM assistance and complying with financial consolidation conditions. Whereas the mandate of the ECB has not been formally revised and the ECB claims to remain within the confines of its statutes, these commitments and measures effectively supersede the no bail-out provisions of the treaties.
Second, fiscal regulation and supervision have been strengthened in a series of legislative acts (most notably the ‘Six-Pack’ of December 2011 and the ‘Two-Pack’ of March 2013) and in the Treaty on Stability, Coordination and Governance in the EMU (aka the Fiscal Compact). Fiscal surveillance now starts with ex-ante control of national budgets. Member states are obliged to establish a national balanced budget rule and procedure in addition to EU-level rules and monitoring. The ESM and the ECB only assist countries financially that have introduced such a procedure. In case member states exceed the deficit limits, sanctions enter into force faster: fines are paid at the beginning of the procedure – and reimbursed in case of compliance. And sanctions are quasi-automatic: they now require a qualified majority of governments to be stopped rather than imposed.
Finally, the EU has taken steps towards a ‘banking union’. As a response to the financial crisis, the EU created a European System of Financial Supervisors including the European Banking Authority in 2010 to establish harmonized standards, create a level playing field, and – as a last resort – address decisions to national authorities. This was clearly a move from negative to positive integration in banking regulation and supervision (Regulation (EU) 1093/2010 of the European Parliament and the Council), but it still relied on national authorities. In March 2013, however, the Council and the Parliament agreed on the Single Supervisory Mechanism that assigns supervision of ‘significant’ banks to the ECB. In December 2013, the Council agreed on a Single Resolution Mechanism based on the progressive mutualisation of national bank resolution funds over a ten-year period.
In sum, the Eurozone has reacted to the crisis by introducing unprecedented collective liabilities, significantly reducing state autonomy in budgetary policy, a core area of sovereignty, and by centralizing financial market supervision. Even though the creditor countries have not incurred losses so far, and the new fiscal sanctioning regime has not been applied yet, these reforms constitute a step change in EMU. These reforms have been predominantly technocratic. They have boosted the role of the ECB as a lender of last resort and supervisor of the European financial system; they have strengthened the Commission in fiscal supervision (Bauer et al., this issue), and put in place new, predominantly intergovernmental organizations such as the ESM. In the next section, I argue that we can explain this result without recourse to mass-level politics, on the basis of neofunctionalism instead of postfunctionalism.