Abstract
EU leaders have repeatedly congratulated themselves that crises—often caused by differences among EU members facing new challenges—have led to collective creativity and greater integration. In recent years this has not been the case, however. The European Union muddled through a decade of damaging debate about the institutional reforms needed to enlarge postcommunist Central and Eastern European countries, failed at establishing the ambitious foreign policy it had solemnly pledged to create, faced problems of low economic growth and high unemployment, and faced a drop in public support. Nothing has been as dramatic as the early-21st-century’s eurozone crisis, however. European Monetary Union (EMU), meant as a great leap forward in integration, brought a new single currency and a new European Central Bank (ECB) designed to prevent inflation and promote economic convergence among members (to date, nineteen of twenty-eight EU member countries). The experiment ran into stormy weather with the collapse of the global financial sector in 2008. Like the United States, eurozone countries, many having already indulged in unwise debt-fueled development strategies, then pursued expensive bailouts and stimulus plans to stave off the worst. Crisis induced lower growth, higher unemployment, and greater government spending, and then exposed them to further indebtedness. In 2009, after Greece confessed to lying about its deficits and debts, financial markets raised the country’s interest rates, pointing Greece toward national default and indirectly threatening the entire eurozone. After considerable confusion, richer EMU countries granted conditional loans to Greece (which to date has received over €320 billion), Ireland, Portugal, and Cyprus, and supported Spain’s faltering banks. Much was done by a hastily improvised European Financial Stability Fund (EFSF), succeeded by a permanent European Stability Mechanism (ESM), plus help from the International Monetary Fund (IMF). The loans obliged recipients to harsh austerity and structural reforms that further reduced growth, raised unemployment, and cut budgets. In the crisis years, the ECB has also stretched its legal prerogatives toward serving as the eurozone’s lender of last resort. EMU economic governance has been changed to address some of its founding flaws. Originally a single-currency area with few controls over its members beyond rules, there are now serious constraints on national budgetary practices, a new Banking Union, and a considerably reregulated financial sector. The eurozone crisis will eventually end, leaving a legacy of lower growth, higher unemployment, and other unpleasantness. In retrospect, however, crisis decision making has been slow and prone to mistakes, with outcomes most often dominated by economically more-powerful member states, and with Germany in the lead. Such things, plus the harshness of crisis loans, have hurt the European Union’s legitimacy, particularly in poorer, more peripheral, countries. Tighter economic governance systems have also accentuated differences between EMU “ins” and “outs.”