Is the Future of the EMU Threatened by Recent Events - Essay Example

Is the future of the EMU threatened by recent events? Discuss Introduction The free movement of goods is a fundamental cornerstone of the EU defined under the Treaty of Amsterdam as an important pillar of the internal market in Article 14 (www.eur-lex.euroa.eu). However, the inherently complex and individual nature of member states within the EU framework has created a system facilitating conflict with the EU monetary agenda in light of national political interests (Ronmar, 2008:199). Moreover, whilst the initial goal of the EU was to provide mutual security and co-operation amongst member states in the aftermath of the Second World War; the legal, economic and political framework of the EU is rooted in the Franco-German tradition, which has lent itself to EU tensions with the political agendas of certain other member states such as Britain (Lippert, 2001, p.114). This intrinsic conflict at the heart of the European Monetary Union (EMU) has been further underlined by the recent European Union and International Monetary Fund’s Irish and Greek bailout. Additionally, some analytical forecasts suggest that Spain and Portugal bailouts are on the horizon, which not only questions the future of the Euro but also brings renewed attention to the long term sustainability of the EMU. The fragmentation of the single monetary union and the EU agenda with national political agendas has become increasingly prominent in relation to the EU enlargement programme (Lahav, 2004, p.113). Indeed, Artis & Nixon suggest that the EU’s economic objectives in the last decade have reached crisis (Artis & Nixon, 2007, p.1). They further argue that the EU relies on co-ordination and mutual co-operation of states and that the enlargement of the EU and free movement has led to many member states opting out, derogating or suspending certain obligations to address national political agendas (2007). With regard to the latter, the continuation of the sensitivity over Turkey and reality of corruption and political agenda in EU friendly Ukraine clearly fuels the debate as to how far national objectives can successfully operate in conjunction with EU economic policy (Wesley Scott, 2006, p.99). As such, Artis and Nixon argue that the root of the Union and mutual objectives are becoming secondary to national political interests, which in turn risks negating the Union’s objectives of a monetary union (2007). The focus of this paper is to critically evaluate the extent to which the EMU is threatened by recent events and it is submitted that a central consideration in this issue is the extent to which the efficacy of EMU and EU economic objectives are being subordinated to the achievement of political objectives. To this end, it is firstly submitted that the efficacy of EU economic objectives are inherently dependent on its legislative policy and arguably this is the crux of the imbalance in pursuing EU economic agenda vis-à-vis national political objectives (Artis and Nixon, 2007, p.1). For example, the EU objective of free trade, economic integration and a nation wide single monetary policy has additionally heightened EU involvement in regulation of EU competition policy, which often fails to address national agendas. Furthermore, it is submitted that central to sustainability of the EMU objectives going forward is reform and that such reform should be based on finding the appropriate compromise between autonomy of collective economy policy on the one hand and centralised objectives on the other. This is further reiterated by Friedrich Ebert Stiftung’s International Policy report September 2010 on “The Future of the European Economic and Monetary Union”, where it was asserted that the key to the future of the EMU should be to: “moderate the tensions between heterogeneous macroeconomic development and increasing economic interdependence” (2010, p.3). Accordingly, it is submitted as a central proposition in this paper that fundamental to the long term stability and sustainability of the EMU is the balance between national versus supranational EU economic supremacy particularly in crisis situations. This is reinforced by the recent economic crisis and bailouts of Greece and Ireland. For example, with Greece it is arguable that political delays in the decision making process fuelled interest rate hikes on government bonds (Friedrich, Ebert Stiftung, 2010). 2. Economic Integration & Competition Policy It is submitted that economic integration and the policy making of the EU is inherently dependent on legislation and therefore a central issue of importance is the ability of the EU institutional framework to effectively implement and regulate EU economic objectives at national level (Artis & Nixson, 2007). As an initial observation, Baimbridge and Whyman posit that the organisational model of the EU with the roles of the Commission, European Parliament and the European Court of Justice is its inherent weakness in achieving EU harmonisation (2008, p.8). In supporting this argument, they refer to the EU regulatory model as the democratic deficit of the EU framework “in terms of direct influence afforded to European citizens over the decision making process of the principle institutions” (2008, p.8). As such, the institutional framework clearly lends itself to conflict with the national political framework of member states (Craig & Burca, 2008). For example, the primacy of EU objectives and the enforcement role of the Commission clearly set up the organisational model of the EU for conflict between EU agendas and national interests, which will inherently influence member state incentives to implement EU policy oriented legislation (Artis & Nixson, 2007). This problem is further highlighted by the fact that the Commission and the ECJ appear to be taking a more proactive role in using enforcement actions to implement policy objectives, thereby perpetuating the tension between EU and national agendas (Vig & Axelrod, 1999 p.76). This not only undermines EU economic objectives but also highlights the flaws in the current institutional structure of the EMU (Friedrich Herbert Stiftung, 2010). 3. Changing Dynamic of Relationship between EU and Member States. As highlighted above, Artis and Nixson suggest that the cracks in the relationship between the EU organisational model and its members points towards an EU heading for crisis particularly with regard to the furtherance of the monetary union (2007). They refer to failure of the Stability and Growth pact as a prime example to underline the argument that the stability of the EU inherently relies on co-ordination and mutual co-operation between member states (Artis & Nixson, 2007, p.1). Artis and Nixson further comment that notwithstanding the role of organisational model in regulating member state compliance with policy motivated EU legislation; ultimately the EU framework is influenced by the political clout of certain members (2007, p.2). As such, the practical impact of EU economic objectives through legislative initiatives is not so straightforward. For example, Artis & Nixson highlight the fact that many member states opted out or suspended certain obligations to address national political agendas such Italy’s derogation from the free movement of workers provisions (p.1). As such, Artis and Nixon argue that the root of the Union and mutual objectives are becoming secondary to national political interests, which in turn risks negating the Union’s objectives of a monetary union (Artis and Nixon 2007, p.1). Additionally, arguably the crux of the problem is that EU agendas are dependent no mutual co-operation. However the EU economic objectives are single minded in addressing policies geared towards “the europeanization of states” and can ignore the national interest and in certain sectors the impact of globalisation in business as evidenced by the rigidity of the EU competition policy (Budzinski, 2008, p.124) Alternatively, Artis and Nixson suggest that it is completely dogmatic to suggest that the EU economic objectives have not been at all useful in economic EU progress and suggest that “there are powerful basic reasons why the Member States should want to co-operate and why they should want to improve their cooperation and individually obtain better results” (p.8). Nevertheless, the future of the EU particularly in relation to economic policy suggests a deeper fragmentation of the EU, which further questions the current role of the EMU. With regard to the UK position, Artis and Nixon further suggest that UK’s position within the EU agenda may become uncertain particularly in light of the apathy towards the Euro issue (Artis & Nixson, 2007 p.2). In supporting their proposition that achievement of the EU economic policy has become increasingly tenuous, Artis and Nixson highlight the central areas of the dichotomy between EU economic objectives on the one hand and political objectives as follows: 1) Economic integration and policy making; 2) Emerging markets and competition policy; and 3) EMU (2007, p.5). As highlighted above, effective integration is intrinsically intertwined with effective legislative implementation and regulation of compliance. Additionally, Artis and Nixson suggest that the EU economic integration is inherently influenced by political agendas, which again pits the more powerful member states and their agendas against the less powerful member states (Artis & Nixson, 2007, p.5). These political divisions have become more of an issue as a result of a continued EU enlargement programme, with member states all trying to further their own objectives. In highlighting this fundamental point, Artis & Nixson observe that the “EU has become a much larger organisation than it was when founded... Its policy remit has extended …to most areas of domestic and foreign policy as well as home affairs. The EU is no longer a one size fits all” organisation. Some states are absent from EMU others from defence co-operation. However, the core remains around the single market, of which all states are full members” (2007, p.33). This important observation of the current framework of the EU further supports Friedrich Erbert and Stiftung’s argument that the key to long term sustainability in the future of the EMU is in finding a balance between autonomous economic policy and centralisation in enforcing EU economic objectives (2010, p.5). If we consider the UK’s position within this complex framework, Baimbridge and Whyman (2008) argue that the EU’s relationship with Britain has been difficult particularly in light of the EU as a distinct entity in comparison to the Britain’s alignment with other international organisations such as the IMF, NATO and the UN (p.8). Additionally, Baimbridge and Whyman assert that from the beginning the overall objectives of the EU were rooted in furtherance of economic objectives, however the differences in political frameworks of certain states have fuelled problems in achieving stability and unanimity on important issues such as tax harmonisation, border controls and foreign policy (2008, p.8) Additionally, Baimbridge and Whyman comment that essentially from a British perspective, the EU “project” is rooted in a continental cultural heritage which is contrary to Britain’s historical links to the US and its empire, and the individualistic nature of British culture (2008, p.23). This in turn has created problems for a UK that has distinct economic structures to its mainland European counterparts. For example, Baimbridge and Whyman highlight the point that the British economy is rooted in the financial sector and smaller and capital intensive agricultural sector and trades with many non-EU countries and that “its liberal competitive instincts align it much more closely with the United States than with the corporatist traditions of Western Europe”. (2008, p.23) Additionally, Britain’s financial system is clearly at odds with the regulated labour markets and corporal management structures of mainland Europe as evidenced by the distinction between the civil law systems of the Franco-German tradition member states in contrast to the common law system of the UK. It is submitted that this inherently impacts the financial environment within which businesses operate and clearly fuels tension between EU economic objectives and the national agenda. Indeed, Vermeulen highlights that in terms of the legal framework within which businesses operate, the judiciary would appear to have a more proactive role in formulating the law in contrast to the limitations of civil law codes (Vermeulen, 2003, p.43). On this basis, it would appear that the flexibility of the common law system enables the legal system to continuously develop to address commercial realities facing businesses. Furthermore, in the civil law tradition, the legal codes are inherently narrow to economic development in contrast to judicial discretion in law making in the common law system. This argument is further supported by the proposition of Vermeulen that comparative empirical studies in common law and civil law jurisdictions suggest that legal principles addressing corporate shareholders and creditors in common law jurisdictions are more effective than in civil law jurisdictions (2003, p.44). Furthermore, in considering the distinction between the common law and civil law tradition with regard to the legal framework for businesses, Graff refers to the “law and finance theory” which suggests that a country’s legal system is instrumental in either facilitating or hampering financial development and that “the major conclusion from the literature is that the common law system generally provided the more favourable basis for financial development and economic growth, and on the other hand the French branch of the civil law tradition is the least favourable” (Graff, 2005). In terms of the differences these systems have posed for the environmental framework for business development, it is submitted that the central differentiating factors are the increased recognition of individual rights and jurisprudential flexibility under the common law system. To this end, Vermeulen posits that the common law systems of the United States and UK have fuelled massive equity markets in comparison to the civil law traditions of Germany and France; where “in response to poor investor protection, insider coalitions of shareholders or wealthy families control the firm” (2003:44). Additionally, in the civil law jurisdiction, there is less flexibility, which lends itself to an entrenched legal code that fails to address continuously evolving business realities (Singh et al, 2001). This highlights the inherent problem of attempting to implement EU economic harmonisation in member states with national political and economic agendas under the EMU umbrella in its current form. This intrinsic flaw in the dependence of mutual member state co-operation clearly undermines the stability of achieving EU economic objectives, which is further compounded by the debate as to whether such competition regulation facilitates EU economic integration or whether the EU competition regulatory regime is out of touch with business reality. 4. Conclusion The above analysis highlights the point that the single minded nature of EU economic policy not only ignores the lateral perspective necessary to address business realities, it is currently risking the stability of the EU economic agenda. Moreover, as the enlargement agenda continues to increase the range of different interests vying to be furthered by individual states; the political objectives of member states are increasingly likely to influence national agendas, thereby undermining the furtherance of EU economic policy and the future role of the EMU. Accordingly, in order to maintain the relevance of the EMU it is proposed that consideration should be given to institutional reform of the EMU, with a particular consideration given to implementing a compromise between centralisation and the national political agenda. Additionally, the examples of the European approach to the Greek bailout and influence of political factors would suggest that the EMUY needs to move towards a governmental role that incorporates both preventative and reactive departments in order to prevent reliance on false macroeconomic assumptions that clearly played a significant role in the current global economic crisis. Bibliography Artis M and Nixson F, (2007). The Economics of the European Union. Fourth Edition, Oxford University Press Baimbridge M, Harrop J, Philippidis G, (2004). Current Economic Issues in EU Integration. Palgrave Macmillan Baimbridge, M. & P. Whyman (2008). Britain, the Euro and Beyond. Ashgate Publishing Budzinski, O. (2008). 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