The European Monetary Union the Challenges It Faces - Essay Example

THE EUROPEAN UNION – CHALLENGES IT FACES Introduction The European Union is undoubtedly one of the greatest public sector arrangements wherein the fanfare and glory of the European – regional as well as national administrative cultures can be seen amalgamating in perfect harmony and co-ordination to form a unique regulatory space. However, recently, such an assimilation has been brought into question, debated and discussed widely, on account of various reasons such as the enlargement of the EU, its likely consequences and impact in the long term, and the economic crisis to name a few. This paper strives to examine, assess and highlight the financial crisis against the backdrop of two key theories i.e. neo-functionalism and inter-governmentalism which are regarded as the core theories which have helped shape the integration of the European Union. The discussion of these two theoretical perspectives substantiated with historical facts will help in tracking the evolution of the two theories and its impact on the development of the European project. It will further provide a sound basis / analytical tools which can then be used to interpret and unravel the framework of the EU policy-making strategies in diverse areas. Since decades the analysis of the European Community was often interlinked with the study of the European integration process. The analysis presented in this paper, is mainly centered on the debate between the two key theories of European integration namely – neofunctionalism and intergovernmentalism, in the process including observations derived from each approach, as well as the implications of the same with respect to the EU’s policy process (Wallace, Wallace & Pollack, 2005). According to Pollack: “The EU is without question the most densely institutionalized international organization in the world, with a welter of intergovernmental and supranational institutions and a rapidly growing body of primary and secondary legislation, the acquis communautaire” (Pp. 137 ) Neo-functionalism as well as inter-governmentalism are both macro-level theories of international relations, which are especially developed with a view to illustrate, elucidate and envisage the European integration as a process. According to Peterson (1995) such macro-economic frameworks help in better understanding of certain ‘history making’ decisions. David Mitrany in his famous work ‘A Working Peace System – An Argument for the Functional Development of International Organization’ illustrated a collective or a regional explanation to the problem of – what he referred to as ‘our generation’ i.e. assimilating and coordinating common interests of all the member states without unjustifiably impeding the interest of the others (Richardson, 2001). Functionalism is frequently considered to embody the theoretical inclination which paved the way to European integration. (Rhodes, Mazey, 1995) The community method of functional integration which was established by Robert Schuman and Jean Monnet, in April 1950, suggested that the French and German coal and steel production be substituted by a common supra-national authority which would be accountable for instituting a common market for the said products among the member states (Laffan, Mazey 2005, 38). The concept of neo-functionalism which emerged from functionalism was first explained in detail by Ernst Haas in his book titled ‘The Uniting of Europe’. According to Haas (1958): “Political integration is the process whereby political actors in several distinct national settings are persuaded to shift their loyalties, expectations and political activities toward a new centre, whose institutions possess or demand jurisdiction over the pre-existing national states” (Pp. 16). By dealing with the concerns such as the significance of supranational institutions and by offering an all-inclusive perspective of the manner in which parts assimilate together, the theory of neo-functionalism attempted to offer a theory of politics which was largely centered on the concept of regional integration. (Rhodes, Mazey, 1995). Chryssochoou distinctly suggests that, neofunctionalism is quite commonly compared with Monnet’s concept of functional fedederalism, a term which is used to elucidate the complex nature of Monnet’s gradualist view point: an assorted fusion of elements of functionalism and federalism, without being entirely in concurrence with either of them (Carr, Massey, 1999). Caporaso affirms that a transnational society would be immobile and unproductive in the absence of some form of leadership and that the entrustment of decision-making power to a supranational agency is imperative. (Caporoso 1998,). However, the attribute which can be most strongly associated with the neofunctionalist approach with regard to the study of European integration and which symbolized the most noteworthy advance upon Mitrany’s perspective is the process of spill over. This process can be divided into two major parts – sectoral or functional spill-over which is associated with the growth of assimilative activities spanning from one sector to another. For instance, the expansion of policies related to coal and steel to agriculture and transport. The other attribute of the political spill-over entails politicization of sectoral activities whereby the harmonization of monetary policies is substituted by a more centralized system of governance (Rhodes, Mazey 1995). Moreover, the neo-functionalists envisaged a sectoral amalgamation which would become self supporting thereby translating into a new political entity headquartered in Brussels (Wallace, Wallace & Pollack 2005). The entire process of spillover is aptly described in the Merger Treaty which was signed in 1965 and which was primarily aimed at merging of the three treaties of Rome namely the ECSC, the EURATOM (European Atomic Community) and the EEC (European Economic Community). The treaty aimed for a single commission and a single council of the three European communities. Furthermore, the snowball effect which was brought to the fore by the neo-functionalists was not only restricted to the political or regional areas, but also took into consideration the geographical spillover as well. Hass stressed on the fact that the mutual collaboration amongst the group members would most probably lead to some sort of effect upon the other states influencing them to join the community in the process. Hence by the early 1960s various members of the EFTA (European Free Trade Association) including UK, Denmark, Norway, Portugal, Sweden and Austria applied for membership (Rosamond, 2000). Neo-functionalism reached its peak which coincided with the early years of integration in the EC which was marked major events such as the Treaty of Rome in 1958 and the conclusion of the customs union in 1968 ((Rhodes, Mazey 1995). However despite such positive signals, the theory of neo-functionalism was often criticized widely and its credibility questioned on account of a series of events such as the rejection of UK’s application for membership which was vetoed twice (once in 1963 and then again in 1967) by the then French President Charles de Gaulle and in the process, hindering the process of geographical spillover. Another setback was observed during the French empty chair crisis of 1965 which played a major role in obstructing the political spillover. However, the deadlock was soon resolved through the Luxemburg Compromise in January 1966. Despite the incessant support for the neofunctionalist tenet, frequent predicaments within the EC’s summits, brought the meetings held by the Council of Ministers to a standstill, and the inharmonious relationships between the UK and the rest of the Community had strongly upset the neofunctionalist arguments (Laffan, Mazey 2006). The intergovernmentalist critique of the neo-functionalist approach presented by Hoffman, highlighted the significance of the role played by the national governments in shaping the EC’s structure. He stressed on the fact that national governments would undoubtedly support their own national interests and promote them within a broader framework. In order to explore and explain the limits of this method, he further argued that the logic inherent in the concept of diversity restricted the spillover effects of the neo-functionalist approach (Smouts, 2001; Richardson, 2006; Verdun, 2002). It would be good to mention also the multilevelgovernence, suprationalism, new instutionalism, constructivism approach but just presentation that shows that we are aware that they existed . Multi-level Governance This approach assumes that there is a lack of control among the member states and that there is a high level of interdependence of governments functioning at various territorial levels. Initially, the states were key players and assumed prominent roles in terms of functioning, however with the advent of globalization new actors surfaced. Now, the EU as well as the national states share authority in virtually all aspects and are influenced by the regional level in decision making. The theory associated with the multi-level governance approach symbolizes a remarkable effort to characterize the intricacy of the EU. However it is merely a metaphor rather than an actual theory although it correctly emphasizes the fact that there exists various decision center regardless of the fact that the manner in which they function and the manner in which they can be identified are still, to a certain extent, unclear (Hooghe, Marks, 2001; Bache, 2008). Supranationalism According to J. H. H. Weiler supranationalism is surprisingly enmeshed in the value system of the European culturally national liberalism deriving from the 19th century which can be a source of reassurance for the skeptics who doubt the preservation of national values and virtues. Supranationalism can be achieved by the community through two distinct concepts which includes adoption of the concept of ‘unity’ or statehood and the restrained and relatively understated yet extremely vital concept of ‘community’. Such a structure boasts of a relaxed framework of rules and regulations and which does not confine, in any manner, the existence and development of other cultures or attempt to influence them by imposing strict limitations on nationality or citizenship (Weiler, 1995). Constructivism The basic assumption made by the constructivists is that human beings are highly dependent on each other and cannot develop independently in solitude. They have certain socially created i.e. constructivist roles to play within a larger society. When viewed in terms of the EMU the integration of member states in the union, as one single community, can be seen as a process of integration of human beings for greater accomplishment of their individual needs. Where the inter-governmentalists are more interested in studying the phenomenon of bargaining the constructivists on the other hand are more interested in analyzing the process which lead to bargaining in a political scenario (Rosamond, 2007). The primary objective of this approach is examining the “origin and reconstruction of identities, the impact of rules and norms, the role of language and political discourse (Christiansen et al, 2001, Pp. 12). They strive to assess the EU decision making framework with a view to explicate the reasons behind a certain step. This approach however, has been criticized by Moravcsik, who states that constructivism fails to construct discrete falsifiable propositions (Pollack, 2005). The constructivists on the other hand object to such a hypothesis stating that construction of a valid hypothesis is not imperative in this case since the EU studies are not scientific in nature. However experiential data indicates that EU- level socialization plays a very insignificant role and hence strongly deteriorates the constructivist argument. History of EMU: The need for reconstructing a more stable world economy was felt by world leaders after witnessing one of the greatest stock exchange crisis in 1929 and the largely distressing Second World War. However such integration is only possible through collective cooperation of diverse nations. The monetary union is one such example whereby the integration of European member states was sought in the Hague Summit in 1969. In the subsequent year the Werner report was published which described the stages in which the formation of EMU, although the stages mentioned could not be completed owing to the breakdown in the ‘snake in the tunnel’ system which was devised to restrict the instability of the European currencies against each other. A new currency was ultimately introduced in 1979 by the European Monetary System called the ECU. After certain European states assimilated in 1985 to form a common market it was quite apparent that there is an urgent need for a common currency in order to reach the common economic goals of the union. Another plan was made in 1988 by Delors which also comprised of three stages and which was strikingly similar to the previous plan, with similar objective of creating a strong and stable EMU. In order to accomplish this goal the member states were required to strengthen the synchronization of their individual economic policies, fulfill certain macroeconomic criteria to congregate their economies and delegate the decisions related to their monetary policies to an self-governing ECB (European Central Bank). Pros & Cons Doubts about the feasibility of the EMU have persisted since long. While some skeptics raised serious questions regarding the political desirability of the union, others - including economists and researchers, questioned its economic feasibility. According to Buxbaum (1996) the advantages of unification of European states are fourfold. Firstly, with a common currency the EMU will be able to lower the transaction costs of doing business in the EU, although such a gain is not significant in both volume and impact, but is one of the most vital aspects of trade. Secondly, it can help in achieving a greater and overall price stability in all the European member countries. The third and one of the most significant benefits is the market integration. EMU can enhance trade ties among the member states and help in empowering the overall economy; and lastly a common currency in the EU will help stabilize exchange rates, increase capital formation, reduce currency exchange risks, and encourage capital mobility, consequently leading to an increase in overall productivity in all the member states. According to Dent, the benefits offered by EMU are manifold. These include: improved factor mobility, wider scope for scale economies and productivity gains, higher levels of intra-regional trade and more efficiency policy co-ordination. Other benefits include lower business costs, a relatively more favorable environment for economic growth, dynamic gains from further economic integration, lower inflation and lower interest rates. The disadvantages of EMU include loss of nominal sovereignty of most EU member states over the price of money and the exchange rate, the introduction of budgetary constraints on EU member states that may adversely affect the ability of the state to make good on the social contract, and the necessity of meeting the convergence criteria, which may temporarily raise the level of unemployment and depress the level of output in individual EU countries. Vision of EMU after the financial crisis The latest economic crisis experienced in Asia and its spillovers which were felt as far away as South America, the Russian Federation as well as South Africa, offers a vital cue regarding the soundness of the popular view that through unobstructed international mobility of financial capital, a single currency can become the only means of exchange rate regime which is practical and which allows the impending benefits likely to arise from capital market integration. Although freely floating exchange rates or the rates which are determined by the markets are viable in the technical sense of the term, their survival largely depends on the unwarranted unpredictability which is innate to the juxtaposition of a technically sound financial market with lethargic price and wage alteration in certain vital aspects of the actual economy. The EMU is highly likely to survive in the long run and can hardly be brought down by random and speculative views of the skeptics which exists widely among member countries. History of UK joining the EMU, Problems Faced Debates over UK’s role in Europe have persisted since long. The UK government decided against joining the common market in 1957 when it was initially established and its subsequent attempts to join the union were twice thwarted on various grounds by the then French president de Guille. De Guille’s successor, Georges Prompidou, was on the contrary relatively less antagonistic toward the UK and owing to his liberal approach the UK was finally accepted as a member state in 1972 amidst vehement protests against its decision to join, by a majority of the UK citizens, particularly by the Labour Party activists. The first referendum in the countrys history, which was held in 1975, decided that the UK would stay in the Common Market, and almost all politicians gave in to such a decision and accepted UK’s position (Hauss, 2008). Changes after the financial crisis After over a decade, the public debate over the likelihood of Britain joining the EMU still remains undecided. The British public opinion still largely remains unchanged regarding UKs joining the EMU with as many as 71% of Britons voting in the negative i.e. against joining the EMU, according to a popular BBC poll. Greece History – why it joined EMU? Greek joined the EC in 1981 and was one of the signatories of the Maastricht Treaty. Greece at that time was among the least developed economies in the union, which is why several of its attempts to join the EU were ignored. However, the government of Greece launched several reform programs and introduced various developmental policies in order to enrich its economy and prepare itself to be admitted as one of the member states of the EMU. Its attempts were successful and the country was finally accepted as a member on January 1, 2001, and it launched its official currency on January 1, 2002. References: Bache, I., (2008). Europeanization and Multi-level Governance, Rowman and Littlefield Publcation Buxbaum, R. M., (1996). European Economic and Business Law: Legal and Economic Analyses on Integration and Harmonization, Walter de Gruyter Publication, Pp. 104 Carr, F., Massey, A., (eds.). 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