林宜亭：The European Integration and the Euro Crisis

Christine I. Lin

The Euro Crisis shocked the world in 2009 after the 2007 global subprime mortgage crisis, but the Euro Crisis seem to be even more severe with its outcome and complicated with its roots out of the single market and common monetary policy of the Eurozone.  The article aims on analysing the main causes of the Euro crisis and the solution to it; in addition, it provides an alternative insight to the solution via the judicial channel of the European Union.

Five Main Points Causing the Current Euro Crisis
Firstly, the differences in competitiveness among Eurozone states, and their inability to conduct adequate adjustment in their national economy[1] assist the development of the crisis.   As a common monetary union, 1999 Eurozone didn’t meet the criteria for forming such coalition under the theory of optimum currency areas at its establishment[2], nor did the following five EU states[3], rather, their participation further enlarged the differences within the Eurozone.  The rooted systematic economic problems in the Eurozone were not better with the introduction of the common currency; contrarily, those problems were eventually worsened with time.  On top of the differences in economic competitiveness, without a sovereign currency as an adjustment means to the domestic economy, the economy in Euro states started to polarise.  Another reason that fosters the polarisation of competitiveness of Euro states is the adoption of Euro also causes the lost in relative external value[4]

 

Secondly, the public debt in the Eurozone is beyond what those states can manage.  The skyrocketing high public debt in Europe is also another leading factor of the current Euro crisis, as the common monetary policy binds the Eurozone states together with the common currency, the ability of state to control their domestic economy by monitoring their sovereign currency no longer exists.  As Frangakis points out, after such right was surrendered to the ECB, taxation and loans become the main means of Eurozone states to finance themselves[5].  The public debt kept growing even faster without a strict monitoring system, and ten years after the introduction of Euro, many Eurozone states have public debts that are way higher than the maximum amount regulated in the Maastricht Treaty[6].

Thirdly, the function of the European Central Bank is to secure the stability of the common monetary[7], but it limits itself within that task and was barely able spare any attention on securing the financial stability within Eurozone.  Although some considered the response of the ECB prompt at the outbreak of the current crisis[8], but the measures adopted was not considered sufficient to safeguard the common currency after all, and the restriction of the ECB indirectly put national governments in financial market that makes them  even more vulnerable in the crisis[9]

Fourthly, the lack of an effective crisis managing mechanism within the Eurozone leads to the absence of early alert.  Before the establishment of the European Financial Stability Mechanism[10] in May 2010, there was no transnational financial liquidity channel within the Eurozone, nor does there exist a common regulation on the bankruptcy clause of banks and financial institutes, and sovereign debt restructuring mechanism.  Under such condition, the Treaty of Lisbon serves as the primary guideline to it, in which EU member states bears no responsibility in providing liquidity to another member state.

Lastly, the long bureaucratic decision making process in the EU water down the effectiveness of policies.  With all the member states’ political and economic competences differ from one another, letting alone the variances in legal and control systems, reaching an agreement among the Euro countries is a long and difficult process.  What’s more, whether to provide liquidity within the Eurozone is difficult to conclude in both giving and receiving states, as the former would face strong opposition from its taxpayer and the latter under the stress of its nationals of concerning foreign interference in their domestic policies.  The long decision making process jeopardise the early timing of helping those countries in need, and directly contributes to a factor of the current Euro crisis.

 

Solutions to the Crisis: The Changing Role of the ECB and a Fiscal Union
In solving the current Euro crisis, there should be different goals with the time span, the short-term goal is to stabilise the current crisis and the long-term goal is to establish a more complete and healthier European economic and financial system.  This section will focus on two solutions in EU level, the changing role of the ECB as a temporary solution and the establishment of EU fiscal union as a long-term measure.

 

As a supranational organisation, the ECS has a mix role; it is not the central bank of a sovereign state, but a central bank that comprises all Eurozone central banks.  The share of the member states is according to their population and GDP, the profit and lost are commonly shared by the Euro states.  The new role of the ECB is that by launching its Security Market Programme, the ECB buys the government bonds of the fiscally more fragile Eurozone member state[11] to make sure that those Eurozone states will not go bankrupt.  This is similar to the role of national sovereign bank as the lender of last resort to make sure that the institution, generally financial institute in domestic situations, will not collapse out of the shortage of liquidity despite it does possess the ability to pay back eventually.  Despite the short-term nature of the programme, it still serves to make up a major missing link in the euro system[12].

 

Previously, the fiscal union was not in the priority of the European Integration agenda, though it’s been urged by scholars of its importance[13], the political considerations of EU states barred the realistion of such union.  The current Euro crisis, however, put a spotlight on the necessity of forming a fiscal union because “the unified monetary and separated financial policy” is a leading factor to the crisis.  A fiscal union will involve in a more detailed and accurate monitoring system within the Eurozone as well as the EU, this is targeting on resolving the long existing control issue in the EU of the lack of transparency and manipulation of accounts.  The formation of a fiscal union is the first completes the missing piece towards better economic governance[14] in EU, and will naturally trigger further deepening of the regional integration.    Furthermore, the fiscal union will more possibly improve the systematic issues that contribute to the crisis, while other plans might only serve as short-term stickling-plaster solutions.

A Union that Functions Better: an Alternative of Judicial Means through the Italian Taxation Situation
In addition to the monetary and public debt deficits that contribute the current Euro Crisis, with the Union’s spirit of “diversity in unity”, implementation and enforcement of the EU regulations are upon national government and could sometimes create problems.  Taxation issues in the EU states serve as plain and outspoken examples of such deficit, the following section aims on giving an alternative to the current Euro Crisis through the scope of the Italian taxation problem and from what aspect can the Union involve to improve these situations.  Most articles on the Euro crisis point out the different implementation and regulations of the Euro member states with no sufficient monitoring mechanism to be the main cause of the crisis; however, it should not be neglected that the existence of different national legislation implementing EU rules should serve in accordance with the principle of loyalty of the Union according to Art. 4(3) of the Treaty of the European Union[15].

 

Art. 4 (3) of the TEU ensure the appropriate measures taken to secure the fulfillment of the treaty obligations originated from the Union’s objective[16], this in particular regulates the states’ conduct in which they have the competence under the TEU, and taxation falls under this domain.  The member states’ conduct and omission should be both held accountable under the principle of loyalty, in other words, states should not actively pursue goals that are contradict to the Union’s goals nor passively tolerate the happening of wrongdoings.  In 2009, Italy adopted a new legislation in tax amnesty[17], which opens doors for tax evasion and granting such act amnesty and can potentially meet the infringes of the EU principle of law[18].  What’s more, the enforcement of taxation in Italy has long been criticised, the tax evasion by transporting cash to its none-EU neighbour country Switzerland is not foreign to the general Italian population or the authority[19].  Considering the importance of national taxation in the Eurozone mentioned by Eichengreen and Frangakis[20], the enforcement of regulations serving the Union, including taxation should be effectively enforced.

 

As precedence show that the omission in enforcing implementation of EU regulations can also contribute infringements[21], and the remedy to this is to evoke the infringement procedure by the Commission based on the principle of loyalty of the Union.  EU states will face legal consequences if not effectively enforcing the EU regulations, which will be more effective in deterring EU states in wrongdoing and omission.  This gives lights to the enforcement and implementation of the upcoming fiscal compact, as the more transparent monitoring mechanism can actually be realised with the cooperation of the EU judicial channel, giving legal effect and more credibility to the solution plan by ensuring its enforcement.

 

Insofar, the discussion on possible solutions to the Euro crisis focuses on the executive branch of the Union; the function of the judicial organ of the EU is often overlooked here, but it does not reduce its eligibility of providing an alternative insight to the current crisis.

 

Conclusion
As the slogan of the EU “diversity in unity”, the causes of the current Euro crisis is also under the shadow of this once beautiful Union spirit; nonetheless, different implementations and regulations under a common monetary policy turn out to be lethal to the economy in the Eurozone rather than an aid.  It is clear that the ongoing negotiation among the EU leaders aims on providing a fundamental improvement to the European economic and financial structure, and this was learned through a hard way.  Still, the question of the anticipated upcoming fiscal compact remains the same as most EU problems, that is, how well can the policies be carried out by EU states?  But the most certain thing is that the EU, in particular the Eurozone, has very slight chance in surviving another crisis like this.

 

The challenges of the Eurozone will still continue even after the signature from most EU leaders to the fiscal compact[22], the forthcoming tasks including the challenge from Spain and Netherlands stating they will miss target goals of reducing the deficit, diverse opinions on the enlargement of rescue found via both EMS and IMF, and maybe most decisively, ensuring the loan-receiving states fulfill their promise of paying back the loans.