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How the euro divides the union: economic adjustment and support for democracy in Europe

When the heads of European governments signed the Treaty of Maastricht in 1992, they laid the ground for Europe’s economic and monetary union (EMU) and, eventually, the introduction of the euro. Far from being merely an economic project, the common currency, so they hoped, would help pave the way towards a shared European identity. Today—almost a quarter century after Maastricht—that goal remains a distant prospect. On the contrary, during the economic crisis, European citizens in many respects seemed to have drifted apart.

In several Eurozone countries, the share of the population that is becoming ‘detached’ from its democratic political system (which we define as being unsatisfied with the way democracy works both domestically and in the European Union at large) has increased considerably between 2007 and 2013: from 27 to 74% in Greece, from 14 to 64% in Spain, and from 39 to 58% in Italy (according to Eurobarometer survey data). By contrast, the degree of democratic detachment has remained relatively stable in core Eurozone countries such as Germany.

Is there some causal connection between this cross-country divergence in support for democracy and the crisis of the common currency? To get to the bottom of this question, we need to study the causes of the crisis as well as the remaining policy options EMU governments have at their disposal when it comes to crisis response and resolution.

While the financial crisis of 2007/2008 had its epicentre in the United States, it soon affected Europe under the label of a “sovereign debt crisis.” Several analysts argue, however, that structural characteristics of the EMU provide a more accurate explanation of the crisis in Europe than a narrow focus on banking crises or public debt (pre-crisis debt ratios were low in Spain and Ireland, among others). They interpret the euro crisis as the outcome of national economies that were institutionally too heterogeneous, with very different wage and price dynamics, joined together in a monetary union that was clearly not an optimal currency area. In particular, monetary and fiscal policy instruments at the European level were insufficient to prevent and correct the sizeable competitiveness, and thus the balance-of-payments imbalances that had gradually accumulated during the first decade of the euro and now lay at the heart of the crisis.

Which options, then, remain for Eurozone countries struggling with recession, mass unemployment, and balance-of-payments deficits? Historically, the most common response to such situations has been currency devaluation. For the members of the Eurozone now sharing a common currency, however, this solution is no longer feasible. Additionally, traditional macroeconomic policy instruments, such as an accommodative fiscal or monetary policy, or an outright monetization of public debt, are either prohibited by the restrictive criteria enshrined in the Stability and Growth Pact – highly ineffective given the Eurozone’s fragmented capital markets – or simply lack political support.

The only remaining option for the crisis countries in the Eurozone’s periphery is to engineer an internal devaluation, i.e. to reduce sticky domestic wages and prices in order to re-gain international competitiveness and rekindle more export-led economic growth. This recessionary policy package, however, combining sizable fiscal consolidation programs with harsh welfare cutbacks and ambitious neoliberal reforms, carries considerable social costs (in the short- to medium-term at least). The acceptance of economic adjustment programmes among the general public is reduced further as a result of these policies being externally imposed on countries without leaving them a choice of feasible alternatives. The policies of internal devaluation therefore not only lack output legitimacy (in the sense of Lincoln’s government for the people), but input legitimacy (as government by and through the people) as well.

Arguably, this simultaneous loss of output and input legitimacy triggers the considerable rise in democratic detachment that we have seen. This explains why, in response to the imposition of economic adjustment programmes, satisfaction with democracy virtually collapsed in deficit countries such as Greece, Portugal, Spain, Ireland, Cyprus, and Italy, but remained relatively stable in the UK (which could resort to currency devaluation) or, despite some of the harshest consolidation measures seen in the crisis, Latvia (which abstained from currency devaluation and implemented an internal devaluation program voluntarily). Likewise, democratic support barely budged in countries such as Germany, Sweden, or Poland, where the economic crisis did not have any lasting negative impact.

The euro has not only driven the Eurozone apart economically during the first decade since its inception, but, more crucially, it also deprives countries of their most potent policy instruments for crisis response and resolution. Instead, it forces upon them a common response: the countries hit hardest by the crisis have no choice but to implement an extremely painful policy package of internal devaluation, combined with rigid austerity measures and far-reaching supply-side reforms. This has severe political consequences. Support for democracy has literally collapsed in the countries of the Eurozone periphery. It is the euro itself that divides the peoples of Europe in terms of their support for democratic politics.

 A version of this article originally appeared on DeFacto

Headline image credit: Euro sign frankfurt hesse germany by ArcCan CC-BY-3.0 via Wikimedia Commons

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