Connect with us


The European Monetary Union in Late Modernity

 6 min read / 

The European Monetary Union (EMU) is the largest and most ambitious monetary union attempted so far. It is a continuous process, whose value derives from the ever-changing, dynamic and often polarising relationships between member states that sustain the circulation of the euro. The EMU presaged a new form of monetary cosmopolitanism in which states and nations were increasingly irrelevant. If the Eurozone resembled a monetary and financial union during its first few years, it turned out to be an illusion. Some Eurozone governments such as Germany with a stronger reputation have enjoyed a lowering of rates, whereas other countries considered weaker – Portugal, Ireland, Italy and Greece (PIIG) – could not draw the same benefits.

Complexity and Uncertainty

eurozone 1

Figure 1 – Economic Growth in the Eurozone and the UK (Source: World Bank 2014)

Since the beginning of the euro circulation in 2002, trust played an integral part in the maintenance of the social relationships between the Eurozone countries, in the face of two particular conditions: uncertainty and complexity. Trust in the Eurozone fluctuates. This is not only because member states and investors’ expectations regarding the future re-exchangeability of the euro are likely to rise and fall, but also because such expectations cannot always be accurately characterised during periods of high uncertainty. The euro proponents thought that they could solve a host of societal and economic problems, however following Greece’s sizeable budget cuts and tax increases as of 2010, enacted after deep and sustained pressure from the ECB and other Eurozone countries, there are clearly issues with the European Monetary Union.

A Massive Blow Between 2007-2009

Following the outbreak of the recent financial crisis, it became apparent that there is a significant absence of coordination between the monetary and the fiscal spheres. In contrast to the USA and the UK, the European Monetary Union has revealed an underlying weakness, namely the absence of a unitary or federal state in Europe. Given the absence of a real political union, the stability and growth pact have acted as anchors for the euro in the world market. Contrary to the USA, which has been able to relax fiscal policy, the euro has required fiscal tightening as the crisis has unfolded. The implication has been to push member states towards policies that further squeezed workers in peripheral countries, while defending the interests of the European financial system. Thus, monetary union has meant an asymmetric adjustment between banks and states in the financial sphere after the crisis: banks have been protected, while the onus of adjustment has fallen on weaker peripheral countries.


Figure 2- Yields on ten-year government bonds (Source: FactSet 2010)

Also, sovereign debt rose rapidly once the crisis had set in. The drop in output led to falling revenue, while expenditure rose chiefly to rescue the financial system. The immediate cause of the sovereign debt crisis is now clear: The Eurozone countries have had to issue enormous amounts of debt at the ‘worse time,’ thus facing increases in yield. Not only banks reduced their lending in 2009 and switched to holding short-term securities, but also avoided bonds in 2009, acutely aware of the rising pressure in financial markets, hence opting to issue equities. Germany has benefited at the expense of peripheral countries, mostly through entrenched current account surpluses that have been translated into capital flows to the rest of the Eurozone. The sovereign debt crisis is the outcome of, first, precarious integration of peripheral countries in the Eurozone and second, the crisis of 2007-9. The public sector in peripheral countries has confronted an increased need for borrowing because it has rescued finance while attempting to forestall deep recession. The problem with the IMF dealing with Greece – and potentially others- is that the Eurozone issues with purports to be an alternative to the dollar as world money. The damage to the standing of the euro as a result of IMF intervention would be palpable.

Reform of the Eurozone

The treaties establishing the euro, for one thing, have expressly forbid providing rescue loans. In this context, the government of peripheral countries have begun to introduce austerity policies in the hope of bringing down borrowing costs in the open markets. The strategy was first adopted by Ireland, but then also by Portugal and Spain, and with increasing alacrity by Greece in early 2010. In effect, peripheral countries were forced to adopt IMF conditionality, without the IMF loan, to persuade bond markets that public finances could be brought under control through the actions of peripheral governments.

  • There has been a disjuncture between unitary monetary policy and fragmented fiscal policy. The rules under which the ECB operates have been unnecessarily restrictive, including an exclusive focus on inflation targeting and forbidding the acquisition of public debt. Furthermore, there has been no provision for centralised fiscal transfers that could alleviate some of the tensions created by the single monetary policy.
  • There has also been a lack of an established mechanism of fiscal intervention in crises, as it became abundantly clear in 2007-9 when each nation state was left to fend for itself and its domestic economy. The absence of such mechanism became glaring as Greece neared default in 2010.
  • There is no prospect of a single European state, hence no prospect of unified fiscal policy. The member states have no power to monetise directly; they have no power to do this independently. The fiction of the euro as homogenous money is at the heart of the current (EMU) crisis. The real answer to the common currency area would be to have a European budget across the Eurozone to support a common currency. But for that to happen, the present institutional and political arrangements of the Eurozone would have to be overturned.
  • Radical reforms in the fiscal sphere would probably lead to the failure of the monetary union altogether, as the international role of the euro would come under pressure. However, radical reforms could also lead to the collapse of the European Monetary Union.

The real difficulty of the Eurozone would not be formal arrangements but political relations within the Eurozone. Germany, which would probably bear the primary burden, has gone through sustained austerity for almost two decades. It also has expressly and repeatedly opposed the notion of bailing out states within the Eurozone. There would be significant political costs for any German government in making money available to other states. Furthermore, lending to Greece might open the gates to other peripheral countries. The underlying structural problem of the Eurozone is that German competitiveness has surged ahead during the last decade. Greece and other peripheral countries have not succeeded in raising productivity sufficiently to overcome the pressure that Germany has applied on its workers. Thus, regulation of external capital flow would be required to marshal national resources. Managing capital flows is also necessary to avoid importing instability from abroad, as even the IMF appears to have recognised of late.

Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *


Progress and Economic Realism in UK-EU Relations

 5 min read / 

The architects of the Leave vote in 2016’s Brexit referendum will no doubt have been encouraged when EU leaders agreed to move to phase two of the ongoing transitional period on December 15th. The EU 27 summit will review the conduct of UK-EU negotiations expressed satisfaction that sufficient progress has been made in each of the priority areas.

This consists of the protection of EU citizens’ rights, the divorce bill,  and the Northern Irish/Ireland border issue – although the latter may still prove problematic in future phase three talks on trade. It was always assumed that phase one was the least difficult hurdle and EU Council President Donald Tusk warns that tough negotiations lie ahead.

The UK is unravelling 43 years of EU membership, effectively making it ‘EU accession in reverse’. Westminster has to state what kind of relationship it wants and this remains unclear, except that Parliament wants more say in any future trade relationship. This is acting as a break on the aspirations of more ardent Brexiteers.

Future Trade

Eurosceptics on both sides of the political spectrum have failed to judge the impact of Brexit on future trade with the EU27, the UK’s biggest partner. There is still an amateurish belief that the outside world is itching to get into cosy trade arrangements with a new-look ‘global Britain’. Many old trading partners such as Australia and New Zealand previously felt their special trade links with the ‘mother’ country were unceremoniously ditched 43 years ago when the UK joined the European Economic Community (the forerunner of the EU), leaving them scrambling for new markets nearer home.

But having successfully opened up trade in Asia and the Americas, these nations are now in a stronger position for any future bilateral negotiations with Britain and will no doubt have a menu of tough conditions for renewing increased trade. The difficult quid-pro-quo discussions in November between Theresa May and the Indian Prime Minister, Narendra Modi, also provide a taste of what’s to come. While keen to expand commercial links, Modi used the meetings with May in New Delhi to trigger demands for more immigration visa quotas and for Britain to re-introduce the right of Indian students to work in the UK after graduation.

Other potential trading partners such as the United States have more relaxed regulations than in the UK in the sale of agricultural products. Indications are that they will raise objections to any deal with Britain if UK trade authorities boycott any American produce. The Cabinet Minister for the Environment, Michael Gove has already made it clear that Britain is not about to reduce its foods standards policy to accept US chlorinated chicken products and GM crops that are banned under EU regulations.

The UK farming sector has been the beneficiary of vast EU subsidies for many years and has deep concerns that these will not be replaced despite government promises to the contrary. This belief is compounded by fear their industry will be decimated by cheaper US and South American imports when ‘global Britain‘ takes off.

Post-Brexit Regulations

Getting a ‘bespoke’ trade deal with the EU is paramount for the UK and its success decides the future of the Tory party. The EU is toughening its stand on both transition and trade talks and is anxious not to convey any expectations of special treatment so a Canadian Comprehensive Economic and Trade Agreement (CETA) or “Canada plus” trade deal will not be a model they would likely agree for the UK.

This is unless the UK recognizes it will lose access to the Single Market for its Financial Services industries – a vital export driver contributing £71.4bn in revenue in 2016. There are some EU members, in particular, Italian Prime Minister Paolo Gentiloni, who are more disposed to granting Britain a ‘bespoke deal’.

This view, however, is not broadly not shared by other EU leaders who are waiting to see how the British government intends to move negotiations forward. This cannot be done without reference to many sectors of British industry. Manufacturers in the car industry with complex product supply lines have been prominent in voicing their anxieties about the difficulties of trading outside the Single Market. This led to some ‘private’ assurances by Theresa May that their interests will be protected. Other sectors are joining a chorus of pressure on the government to bend towards a softer Brexit – to stay under EU rules – to obtain the best possible trade deal.

Final Thoughts

As the world’s largest consumer market, the EU effectively exports its regulatory standards through its economic weight. The UK ‘Reform Bill’ will transfer EU regulations into UK statute recognising the ever-present ‘Brussels effect’, which dominates trade regulations throughout the world. How far this influences future upcoming transition and trade talks remains the subject of a separate detailed discussion.

Keep reading |  5 min read


Uber Eats to Offer Europe Couriers Insurance

 1 min read / 

Uber Eats insurance

Uber has announced that it will be offering a free insurance package to its food couriers in nine European countries.

The company has teamed with AXA Corporate Solutions for the insurance product, which will be introduced from January 8 next year. It will cover personal accidents, cash benefits for hospitalisation, property damage and cover for third-party liability of up to a maximum of $1m. Uber eats operates in Austria, Belgium, Poland, Italy, the Netherlands, Portugal, Spain, Sweden and the UK.

If a driver is involved in an accident, they will simply need to fill in an online claim form available on the Uber Eats app.

Previously, both Uber Eats and Deliveroo have come under scrutiny over how workers are treated. In the UK, Deliveroo riders went to court to seek employment rights, including the minimum wage. The UK government has looked at whether the employment law needs to be changed to take account of modern working practices, such as the gig economy.

Keep reading |  1 min read


Brexit Deal Gives Trade Talks the Go-ahead

 2 min read / 

Brexit Deal

The Story

The UK has reached a deal on three contentious issues which have prevented negotiations moving on to trade. The deal ensures no “hard border” between Northern Ireland and the Republic of Ireland, that the rights of EU and UK citizens be protected irrespective of whether they live in the UK or EU post-Brexit and commits the UK to a divorce bill settlement estimated to cost between £35bn and £39bn. EU Commission President Jean-Claude Juncker called the deal “the breakthrough we needed.”

Why It’s Important

“Theresa May has achieved what she wanted – the green light to move on,” said the BBC’s Political Editor Laura Kuenssberg. Britain plans to leave the EU at the end of March 2019, yet trade has not been discussed. May will now be able to negotiate on trade and a transition deal, providing businesses with greater clarity over the regulation. However, the entire basis for UK-EU relations is still to be discussed.

“We all know that breaking up is hard but breaking up and building a new relation is much harder.”

European Council President Donald Tusk

The EU plan to offer Britain a Canada-style trade deal, which would impose new tariffs on trade, a document leaked last month revealed. Trade negotiations are expected to be tough and could take several years. The importance of reaching a clear transitionary framework will be vital for businesses, and a lack of clarity may deter businesses from investing in the UK.

Keep reading |  2 min read