Financial Crisis,Orthodoxy and Heterodoxy in the Production of Knowledge about the EU

Introduction

The global financial crisis is a test case for European integration scholarship that poses anomalies that are too heavy for it to bear. As such it raises serious foundational questions about this subfield. The crisis started in 2007 as the contagion-effect of a subprime mortgage crisis in the United States. Given the highly complex packaging of financial products through ‘securitisation’, it became impossible for buyers and sellers to sort out good debt from bad. Revelations about the balance sheets of the most iconic ‘blue-chip’ financial corporations generated such uncertainty and fear in markets that it caused a massive seizing up of economic activity. The destruction of values was such that even the most ardent neoliberal policymakers had to embark on massive nationalisations and state bailouts. The alternative would have been nothing less than the collapse of global capitalism.

It was at first commonplace to contrast European prudence with American profligacy and to speculate about a European ‘decoupling’ from the American economy. ¹ Such wishful thinking was quickly abandoned after the collapse of Lehmann Brothers. The exposure of European finance to ‘toxic’ assets became all too evident, not the least in the form of real estate loans in Southern Europe. Attendant crisis measures required to keep the European economy afloat unceremoniously abandoned norms pertaining to state aids, the Growth and Stability Pact (GSP) and European Central Bank (ECB) lending. Following the G20 London Summit in 2009, large injections of liquidity primarily from the US Federal Reserve, massive government deficits and exports to emerging markets that used their accumulated foreign reserves to maintain growth, the recession abated and financial markets were temporarily stabilised. Yet, difficulties of forging EU stability on an uneven recovery and a fragile financial system soon re-emerged as the costs of socialising the losses of ‘too big to fail’ banks transformed the banking crisis into one of public solvency and debt. Eager to return to ‘stability culture’, the EU soon commenced an ‘exit strategy’ from crisis management. Thus, growth rates remained too anaemic to keep fiscal balances in the EU’s periphery within parameters required to maintain confidence in the recently rescued financial sector. As bond yields spread between Germany and the so-called PIIGS (Portugal, Italy, Ireland, Greece and Spain), the very being of the euro was suddenly in question. In a bid to avert regional and global contagion, this prompted further departures from Maastricht norms and understandings. Only after 11th-hour prodding from the International Monetary Fund (IMF) and the United States, a ‘Special Purpose Vehicle’ – that is, an embryonic ‘euro-bond’ – backed up by €750 billion collateral, was established in May 2010: a temporary European Financial Stability Facility (EFSF), to be replaced in 2013 by the European Stabilisation Mechanism (ESM). ²

None of this stopped the bleeding because of, as widely reported in the financial press, doubts that the measures add up: the conditionality for access to the EFSF and ESM premise a PIIGS export-led recovery. But short of devaluations – that is Eurozone exit – it is unclear how this could be achieved. It implies a huge reduction of unit labour costs relative to Germany, which has virtually no inflation at all. Absent a Eurozone surplus of a magnitude that is unlikely when the US badly needs to consolidate, only counterproductive deflation that will exacerbate fiscal crisis seems to be on the cards. Hence, a succession of inter alia unravelling speculative attacks and EU summits has progressively increased the stakes and costs of crisis management far beyond the capacity of the EFSF. On 26 October 2011, following increased spreads of Italian and – even more ominously, French – bonds, Angela Merkel declared that Europe’s half a century of peace was at risk as it faced ‘the worst crisis since the Second World War’. ³ In November 2011, the situation was becoming so acute that it threatened the basic functioning of European inter-bank markets. The title feature of the 26 November 2011 issue of The Economist on the Eurozone read ‘Is This Really the End?’. To Financial Times columnist Wolfgang Münchau, the euro only had ‘days’ before collapse. ⁴ Only the ECB’s injection of €489 billion into European banks averted meltdown, conducted against the backdrop of ECB President Mario Draghi’s extravagantly bullish spin on the 9 December Summit agreement on a fiscal pact that may not even have resort to EU law and institutions. Yet, at the time of writing, the underlying imbalances remain. In short, together with three decades of anaemic growth, ⁵ growing divergence within the Eurozone and a legitimation crisis expressing itself in increasingly parochial nationalism and the rise of xenophobic politics, misallocation and destruction of values as represented by the financial crisis continue to cast a long shadow over the future of the EU.

What did established European integration scholarship have to say about these developments? What warnings were issued by its most prominent representatives and organs? The answers are: not much, and virtually none. A survey of the discipline-leading Journal of Common Market Studies from the time of the inception of the Single Market in 1993 to mid-2009 revealed that, at a generous interpretation, only five of 732 articles (0.7%) had anything of pertinence to say on the topic. The verdict is somewhat qualified by a number of studies conducted by economists affiliated to the ECB itself. But as has been said about the last Bourbon King of France: they have forgotten nothing and learnt nothing. It is no exaggeration, then, to assert that the situation is reminiscent to that faced by International Relations (IR) at the end of the Cold War, which took the discipline almost entirely by surprise.

The aim of this article is, firstly, to offer an explanation for this failure of European integration scholarship to even identify, let alone predict, the developments in question that have such profound implications for the essence of its very object of analysis. The second aim is to propose a recasting, not unlike that of post-Cold War IR, of the production of knowledge about the EU that faces the full implication of the anomaly that the financial crisis represents for integration scholarship.

Concerning the first aim, I argue that European integration scholarship is symptomatic of the dangers of producing the ‘worst of two possible worlds’ that are entailed in interweaving theory and practice. ⁶ Significantly, I cut through variations in the complex ecosystem of integration theory to identify their common code that is ‘prior to any theoretical rule’, ⁷ and which owes its success primarily to instrumental reasons. Instrumentality is not in and of itself a problem, and the capacity of European integration scholarship to address certain particular questions is not in doubt. Anxious to shroud itself in the aura of science, however, European integration scholarship conflates the particularity of its instrumentalism with general knowledge about the EU. It thereby constitutes itself as an orthodoxy that is unduly intolerant towards forms of research on the EU that do not conform. Hence, there are important questions and issues pertaining to the EU that fall outside the borders of admissibility as defined by the code of European integration orthodoxy, and which it cannot address. These could be called ‘blind-spots’. It is the argument of this article that the generative mechanisms and emergent forces of the financial crisis are located exactly at such a blind-spot of European integration orthodoxy. To invoke Puchala’s oft-cited metaphor about the blind and elephants, ⁸ one could say that the financial crisis points to a central part of the proverbial beast – perhaps the trunk – that European integration orthodoxy does not touch at all.

Concerning the second aim of the article, I suggest that a more productive heterodoxy can be discerned from post-Keynesian, post-Marxist and neo-Weberian political economy. These approaches have the distinct advantage over the European integration orthodoxy that they conceive production, power and hence a significant element of arbitrariness as co-constitutive of ‘integration’ itself. Hence, they are better placed to discern the arbitrary elements that generated the financial crisis, with attendant implications for the Eurozone. It should be stressed that my intent is not to replace one orthodoxy with another. A focus on the financial crisis, which is the special remit of this article, leads one rather naturally to a focus on political economy. That is not to suggest that the heterodox recasting of EU scholarship should be confined to political economy if it is to capture the complexities of power and subjectivity that are entailed in the dynamics of the EU. ⁹ Indeed, the ‘broad church’ of heterodox IR that developed after the end of the Cold War would be no bad role model to follow. Nor is it to suggest that current European integration scholarship should be generally abandoned. As stated, European integration adequately addresses some pertinent questions about the EU. Furthermore, a heterodox sensibility opens the prospects for recasting aspects of European integration scholarship. I will conclude this article by indicating how this might be done with respect to the understanding of the financial crisis. The institutionalist turn ¹⁰ provides opportunities for such recasting; it is a turn that contemporary integration theory shares with post-Keynesian, neo-Weberian and post-Marxist political economy. ¹¹

After specifying my understanding of European integration orthodoxy, the article critiques orthodox treatments of the Economic and Monetary Union (EMU) and the Single Market in financial services and points to the aforementioned blind-spots. The final section presents openings to a heterodox recasting.

Orthodoxy, Heterodoxy and European Integration

The terms orthodoxy and heterodoxy are derived from the concept of doxa. Doxa refers to unconscious, taken-for-granted and habitual assumptions of the world that define the universe of possible discourse in a social meaning system. Related to the concept of habitus, doxa determines what resonates and what is recognisable or ‘sensible’. Orthodoxy arises when these assumptions are questioned by heterodox challenges to this universality and taken-for-grantedness (heterodoxy is defined simply by way of these terms of negation). In such situations, orthodoxy defends doxa by postulating the taken-for-granted assumptions as ‘reified abstractions’, which deem heterodox challenges as inadmissible and nonsensical. As such, doxa and orthodoxy are intimately wound up in the tendency of social orders to naturalise their own arbitrariness. ¹²

Thomas Kuhn can be invoked to defend the proposition that orthodoxy does not only exist in traditional societies or in religious world views, but also – as Bourdieu insisted – in the social-scientific field. ¹³ While, according to the scientific method, all hypothetical proposition should in principle be subject to falsification, as Kuhn’s work on paradigms suggest, this is not the case. The tension between the scientific postulate of general invariance and the principle of verification through observation is well known: all cases of an instance cannot be observed. Science can respond to this tension in three ways. ¹⁴ It can give up on the pretension of general science and seek to produce more local knowledge for certain purposes (instrumentalism). Inductivism – the slow development towards generalisation from the building blocks of observed relations – offers an alternative route towards scientific generalisation. But it is liable to empiricist traps, especially the difficulty of establishing correlations as causation. As such it is vulnerable to the charge of relying on assumptions that never are explicated. ¹⁵ Hence, the hypothetico-deductive method has become the preferred ‘solution’. It departs from axiomatic postulations of general cause–effect relations at the level of abstract theory from which one generates falsifiable hypotheses and infers general causality from observations. The falsification principle is supposed to correct for the obviously problematic starting point of a priori assumptions. But it is this, then, that it never entirely does according to Kuhn, especially since it is not even possible to describe the world scientifically without resort to certain concepts. As a result, the structure of scientific reasoning remains trapped in certain foundational a priori assumptions – or reified abstractions – that mediate between empirical research and causal claims in a complex reality.

For Kuhn, these foundational a priori assumptions operate at a deeper level than any particular theory. Invoking Wittgenstein, he argues that they are basic and central codes that are prior to any theoretical rule, and they set the terms, or ‘language game’, of acceptable scientific debate between competing theories. These codes can be traced to foundational works. But in the phase of scientific refinement (or normalisation), the codes are internalised by scientists at the level of the unconscious and are no longer subject to conscious reflection. ¹⁶

While it might be one step too far to suggest that EU scholarship constitutes a Kuhnian scientific paradigm, it is justified to suggest that EU scholarship has orthodox codes. As Rosamond’s sociology of knowledge of the field suggests, social-scientific knowledge production on the EU has not developed simply as a natural-rational response to external events. While not denying that European integration scholarship constitutes a progressive research programme that has developed in response to such events, Rosamond shows that the particularity of these responses is due to a ‘disciplinary politics’ internal to European integration scholarship itself. This disciplinary politics is power-laden and determines what counts as legitimate research and how it should be conducted. ¹⁷ Taking this cue from Rosamond, and relating Kuhn to Bourdieu, it can be argued that the orthodox codes of this disciplinary politics shape the habitus of the scientific field and set the terms for what is considered to be serious debate. As such, they prescribe the rules of performance in institutions through which one may project symbolic power of scientific knowledge. ¹⁸ Crucially, Kuhn suggests that these central codes become successful because they answer questions that are considered ‘acute’. ¹⁹ Acute for whom, one might ask.

In this vein, Alan Milward and Viebeke Sørensen trace the origins of the success of European integration orthodoxy to its appeal to American Atlanticist grand strategy after World War II. ²⁰ It was concerned with consolidating the transatlantic alliance by rendering it organic and enduring through the reconstruction of Europe in the image of America’s particular variant of modernisation. This Atlanticist concept permeated the European Commission, where it has remained ideologically central in no little measure because of the importance assigned to this bureaucracy in the process. Foundational works such as those of Karl Deutsch and Ernst Haas on the politics of integration ²¹ and Jacob Viner and Bela Balassa on the economics of integration, ²² themselves based respectively on pluralist systems theory ²³ and the neoclassical synthesis, ²⁴ addressed acute questions for this grand strategy and lent it intellectual credibility.

It is worthwhile to reflect on the particular meaning of ‘integration’ in this context, wound up with this modernisation project of ‘modified liberalism’. It rested on a particular managerial-administrative conception of rationality, defined as ‘conscious and systematic application of legitimate controls on conduct’ aimed not at supplanting the market, but at complementing it in complex industrial society by addressing externalities that had become too salient to ignore in the 1930s. Questions are raised about whether a ‘visible hand’ of management can be maintained within the strict confines of administration understood as ‘formal adaptation of means to ends’ without degenerating into the arbitrary exercise of state power. ²⁵ For modified liberalism, the solution lies in the very social differentiation and integration studied by sociologists: a rationally organised economy and society generates a complex set of checks and balances that prevents particular ideologies, special interests and protracted social conflicts from dominating in public life. This conception resonates with neoclassical economics and Haas’s neo-functionalist vision of a European state-system that is dissolving through spillover into an overarching polity or multi-level entity: social and political integration has to follow economic integration to maintain order (social equilibrium as opposed to merely economic equilibrium) in a process whereby politics is simultaneously functionally differentiated, integrated and ‘supranationalised’.

Two closely interrelated attributes of the basic and enduring code of European integration orthodoxy can be discerned from the foundational works. The first may be referred to as the disciplinary split, which, in contrast to IR in general, has made European integration scholarship reticent towards political economy. Classical political economy, which enjoyed a century-long golden age following the publication of Adam Smith’s The Wealth of Nations, had rested on a unified conception of social science where production and power were seen as co-constitutive in and by social relations. Classical liberal, mercantilist and Marxist political economists had in different ways adopted such a unified conception to explore the foundations of production and distribution of surplus, required to make civilisation materially possible. However, with the disciplinary split in the late 19th century into sociology and economics, the social sciences fragmented. Neoclassical economics severed the link between production and power by summarily abandoning conundrums of value theory and their attendant concerns with classes and surplus. Identifying its concern rather with opportunity costs of ‘individuals’ and the allocation of scarce resources, economics restricted its view to exchange relations between ‘households’ and ‘firms’ abstracted from social structure. Sociology, by contrast, abstracted social relations from both production and power. It came to refer to something that existed in the interaction between individuals whose social existence as such was taken for granted, in contradistinction to economic and political relations. The density of these interactions determined the degree of orderliness, that is, ‘integration’, of society and the potential for ‘social consensus’. Political science was defined in narrow terms as ‘power in government’ – an abstraction that displaced social and economic relations to ‘the environment’ without asking how the ‘environment’ constrains ‘government’. ²⁶

Continuing to hold on to this disciplinary split, European integration orthodoxy is based on a division of labour between the ‘economics’ of integration and the ‘political sociology’ of integration. Drawing in particular on international trade theory, the first postulates a priori that free-market price formation results in Pareto-optimal integration (equilibrium) between supply and demand. Taking this at face value, political sociology reduces the question of integration to one of the density of interaction required to ensure the prevalence of administrative-managerial rationality, as required to ensure social and political equilibrium.

This was a central thread of thought to Robert Cox, who in his critique of neo-functionalism came very close to the mark indeed in specifying the second attribute of the orthodox code, intimately related to the first. It is the product of an amalgam of what he calls the ‘natural-rational’ approach of liberal idealism and the ‘positivist evolutionary’ approach of functionalist systems theory. This amalgam postulates a reified-abstract telos, where it is assumed a priori that ‘economic integration’ (the realm of economics) and ‘social and political integration’ (the realm of political sociology) are expressions of the ‘rational’ and ‘general’ potentials that inhere in human nature. These can be distinguished from the arbitrary irrational special interests and the realm of power politics that were associated with the old European (inter-)state system, and which pose the external constraint to the realisation of this potential. ²⁷ The central question shared by all theories of the European integration orthodoxy becomes one of whether it is warranted to be ‘optimistic’ or ‘pessimistic’ about the prospects of the integration process transcending such old-European (inter-)state politics. Hence, Stanley Hoffman’s emblematic ‘realist’ and ‘pessimistic’ critique of neo-functionalism did not challenge the terms of the question as he gloomily observed the resurgence of nationalism in Gaullist guise after the Empty Chair Crisis. ²⁸ It is not difficult to see how subsequent debates between ‘supranationalists’ ²⁹ and ‘intergovernmentalists’ ³⁰ on the causes and consequences of the Single Market plot onto the register of this debate, framed as they are by the regime theory of ‘complex interdependence’, which itself sought a middle position. ³¹ ‘Political science’ theories of ‘multilevel governance’ that are supposed to break the mould of IR are strikingly caught up in the same terms of debate, based as they are on the aforementioned conventional systems theory, and as such only bring the idea of a ‘middle position’ between the ‘pessimists’ and ‘optimists’ to its ultimate conclusion. ³² Indeed, for Hix, the extent to which the EU can be considered a fully fledged liberal democratic polity hinges on a conception of social cleavages that resonates extremely well with Cox’s characterisation of the natural-rational/positivist evolutionary amalgam. ³³ European social cleavages are reduced to one between ‘utilitarian-rational’ transnationalists supporting European integration and ‘emotional-affective’ nationalists constraining it. ³⁴ Similarly, contrary to what one might suppose, most constructivist scholarship does not challenge this basic code either, as questions of subjectivity tend to be reduced to more or less dense socialisation phenomena that were present in Haas’s original work. These are engrenege that pertains to the cementing of transnational elite consensus and politicisation that pertains to the transfer of mass loyalty and legitimate representative politics to the EU level. ³⁵

Money and Finance in European Integration Orthodoxy

It is with reference to this code, then, that the European integration orthodoxy has made sense of money and finance in Europe, such as the formation and implication of the EMU and the creation of a single market in financial services. ³⁶ Consequently, this orthodoxy has departed from a priori assumptions that made it unable to see the signs of the developing crisis at the outset.

Following the intellectual division of labour of the disciplinary split and the neoclassical synthesis, the economics of integration has made excessive a priori assumptions about the stability of monetary and financial integration, departing as it does from equilibrium models. As such, the economics of integration offers in large measure highly specialised elaborations on one aspect or the other of the two key neoclassical theories of money and finance, namely the efficient market hypothesis and the theory of sound money. Both of these see integration of financial and money markets as no different from, and as a logical extension of, the Pareto-optimal case for free trade.

This line of reasoning is clear in the Cecchini, Padoa-Schioppa and Sapir Expert Reports, which the European Commission established to provide the intellectual point of reference for, respectively, the ‘Europe 1992’ Single Market, monetary integration based on ‘sound money’ (ultimately leading to the Maastricht design of the EMU), and the Financial Services Action Plan (FSAP) of the Lisbon Agenda. ³⁷

These depart from the analytical model initially developed by Bela Balassa to justify the elimination of tariff and non-tariff barriers (based on the principle of ‘mutual recognition’) to create an integrated European market. According to these, the economies promised by the Single Market – to be realised inter alia through optimal allocation of factors of production, economies of scale, technological development, competition and learning – would be facilitated by the sturdy macroeconomic framework of a monetary union. The common currency would reduce exchange rate uncertainties and transaction costs. A macroeconomic framework based on maintaining price stability and fiscal balance – as institutionalised by an independent ECB and the GSP – would increase credibility in free and therefore efficient financial markets. Such markets would minimise costs of capital and allocate resources according to their optimal utilisation, especially clearing up lock-in effects in existing industries and providing resources for high-tech investments. ³⁸ Lower rates of interest and transaction costs, in a context of increased competition, would provide higher rates of welfare-generating investments and innovation. These would be further induced by the liberalisation of labour markets, welfare systems and taxation regimes that in part would be the result of the discipline exerted by the strict macroeconomic regime and in part induced by Lisbon Process Best Practice (the Open Method of Coordination). The outcome, as stated in the Lisbon Agenda, would be a more flexible and mobile labour force, which can be better deployed with the new investments. The overall result would be faster growth, better profitability, more employment and in time higher wages. The United States is explicitly seen as the role model with its flexible labour markets and highly capitalised and sophisticated ‘deep’ and liquid financial markets, which are seen as explaining the growing ‘productivity gap’ between the US and Europe.

Of course, the economics of integration currently insists that it is possible and desirable to accommodate the financial crisis in a much more parsimonious way within its framework rather than through the wholesale heterodox recasting that I suggest here. Indeed, while it may be conceded that their attention was primarily elsewhere, it may even be claimed that the relevant warnings were there all along. ³⁹ Such analysis departs from a neoclassical macroeconomic (neo-Keynesian) workhorse model, where the assumption of spontaneous compulsion of the market towards balance and equilibrium is relaxed because of ‘sticky’ prices in rigid oligopolistic markets and imperfect information in the short run. It focuses its attention on the influx of monetary and financial resources that followed when the monetary union eliminated exchange rate risks, especially into member states in the European periphery, where stability culture was less entrenched than in the Eurozone core and most notably Germany. The attendant reduction of domestic savings and widening of indebtedness and current account deficits should have been, according to this school of thought, countered with much more stringent and precautionary fiscal policy and possibly ECB monetary policy. A prominent advocate of this view is the former Research Director of the ECB and current Minister of Finance of Portugal, Vitor Gaspar, and it provides intellectual context to the emphasis of current crisis management on the reassertion of fiscal austerity norms. ⁴⁰

But the extent to which such arguments are compelling is very limited, and indeed disturbingly symptomatic of paradigm-paralysis in light of potentially catastrophic developments. Firstly, it does not account for the marginal status of these elements in the overall analysis. Even in 2008, the Pareto-optimal macroeconomic effects of EMU are stressed. ⁴¹ Secondly, indebtedness and current account deficits are seen exclusively as short-term adjustment problems caused by the regime shift to monetary union. Thirdly, the fact that the financial resources are going to consumption rather than high-tech investments in supposedly more efficient financial services markets is noted but no attempt is made to explain it. The two latter points do not address the fact that the financial crisis started as a massive misallocation of investments in the highly developed monetary and financial market systems of the United States, which, qua the Sapir Report, was the role model to be emulated. Of course, it could be argued that the root of the problem resided in overly expansionary macroeconomic policies in the US as well as in the PIIGS. But then one must entertain the possibility that it was this much more expansionary policy that explains the output and productivity gap between the US and the EU in the first place, and not the supply-side institutional differences of labour and capital markets that the Sapir Report sought to eliminate. ⁴² Finally, Eurozone economic growth would have been even more anaemic without US expansionary policies and with a tighter fiscal policy stance in the PIIGS prior to the financial crisis. ⁴³

Optimal currency area theory offers a more promising contribution from neoclassical macroeconomics to understanding aspects of the dynamics of the financial and Eurozone crisis. Optimal currency area theory points to a trade-off between reduced transactions costs in a monetary union and the capacity of states to respond differently to market signals. Factors that may warrant such differential responses include variable composition of key commodities that trigger different macroeconomic effects from world markets, different growth rates and unsynchronised business cycles, different labour market institutions, and lack of mobility of labour and capital. Indeed, only if such signals do not affect countries differently can we talk about an optimal currency area where a monetary union would not be problematic. Optimum currency areas are rarer than one might think. Indeed, the pioneer of the theory found that the United States was not an optimal currency area. ⁴⁴ However, the US has fiscal federalism and most states have transfer payments that ensure macroeconomic stability. For that reason, some assert that the EMU can only be stable in the long run if it is accompanied with a sturdy fiscal federalism, including transfer payments through a sizeable common European budget. ⁴⁵ Paul de Grauwe is one of the few eminent voices who issued warnings about the stability of the Eurozone from such a perspective. ⁴⁶ Indeed, the differential growth rates between northern and southern members of the Eurozone, driven by the financial bubble, could be seen as an optimal currency area problem par excellence as it eventually caused a huge ‘asymmetric shock’. However, the vast majority of economists drew on trade, sound money and efficient market theory to dismiss such fears because it was argued, as per the a priori equilibrium theory discussed above, that financial integration and monetary union were ‘endogenously’ making the Eurozone an optimal currency area. ⁴⁷ Furthermore, as the term asymmetric shock suggests, the determinants of the financial crisis as such is not part of optimal currency area theory. It can only treat it as an exogenous deus ex machina.

Political sociology of monetary and financial integration in Europe defers to the economics of integration with regard to economic growth and stability, and then abstracts its object of analysis altogether from economic dynamics to concern itself with the density of socio-political relations at different levels of the Euro-polity. Unremarkably then, there is little evidence of ability or interest in addressing questions that pertain to the build-up, breakout and development of the financial crisis. Moravcsik, for instance, argued that the credible commitments of Maastricht agreements had made the EU ‘institutionally stable’. ⁴⁸

The few knowledgeable analyses on the matter at hand subscribe to a very thin ‘states and markets’ conception of political economy. Rather than seeking an integral analysis of production and power, this variant of political economy maintains the disciplinary split and then simply treats economics and politics as externally interactive realms. As such the market equilibrium bias is retained, leading to complacent conclusions. The states and markets approach departs from a workhorse neo-Keynesian macroeconomic model to derive political implications from wedges created by sticky oligopolistic prices and imperfect short-run information. These create spaces in which interest-maximising political actors, such as states and interest groups, can act and affect outcomes. Just as in the case of the political sociology approach in general, the question becomes one of whether it is warranted to be optimistic that the density of the webs of interdependence are sufficiently strong to credibly maintain Pareto-optimal commitments and hence political harmony.

The conclusions remained affirmative even after the outbreak of the financial crisis. Enderlein and Verdun have drawn on endogenous optimum currency area theory and an old favourite concept from neo-functionalism – spillover – to remarkably conclude that ‘negative scenarios of the future of the EMU [did not] predict … what really happened’. ⁴⁹ In stark contrast to developments at the time of publication, they continued to assert that bond markets integration was reducing debt-servicing costs, and they suggested that ‘actual empirical studies’ showed that welfare state expenditure was increasing in the Eurozone engendering social cohesion. ⁵⁰ In the midst of escalating crisis, Enderlein and Verdun viewed the EMU as a success. The only threats they find on the horizon are the usual suspects of integration orthodoxy, namely ‘opportunistic domestic motives’. But ultimately the Franco-German commitment to the EMU is seen as too sturdy to allow any derailing. ⁵¹ According to Erik Jones, there was little need to worry about such domestic groups either, because of the strength of the ‘hyper-pluralist’ diversity of the Maastricht EMU design. Because of the opacity of costs and benefits, which would be understood through the institutional logic of the EMU in any case, it would be hard to pin distributive conflicts on the common currency and hence, for the good, it would become depoliticised. One must surely consider the protests in Greece at the time of writing as only the most vivid piece of evidence that this argument was wrong in its conclusion that ‘the likelihood that groups within Europe will either recognise EMU as the source of their economic difficulties or will mobilise against EMU as a first-best means of redress is very small.’ ⁵²

To be fair, these authors at least acknowledge that the EMU is wound up in a force-field of transnational power and we can at least begin to discern moves away from a priori assumptions that integration as such inherently expresses rationality-in-general. Jones recognises that the EMU was motivated in part to minimise constraints on European policymakers in global financial markets, where the US dollar is the key currency. ⁵³ While he does not take this argument far, it is the starting point of one of the few international political economy pieces in mainstream European integration outlets that begins to identify the problems wound up with the financial crisis. Like Jones, Benjamin Cohen sees the EMU as a mechanism to adjust to the vagaries of US policy priorities and to mitigate European sensitivity and vulnerability. ⁵⁴ Cohen’s argument also rests on an analytical framework derived from the aforementioned wedges identified by the workhorse neo-Keynesian macroeconomic model, and argues that states are endowed with differential power resources to delay and deflect balance of payment adjustments. ⁵⁵ He argues that EMU has made the EU as a whole less vulnerable to the US deflection of adjustment externalities. But in the absence of a fully integrated bond market, the lack of anything equivalent to the US Treasury Bill, political fragmentation in the fiscal policy field and an ‘anti-growth bias’ in its institutional set-up, the euro is no serious contender to US hegemony in the monetary and financial field. ⁵⁶ The question is, though, whether the euro offers enough of an alternative vehicle for investment to deprive the US of power to delay and deflect. Invoking hegemonic stability theory with its root in the work of Kindleberger, Cohen’s argument suggests that this could be a profound source of instability in the world economy. This is a potentially appropriate context in which to consider the weak regime of international financial and monetary management, characterised by US passivity and unilateralism, in which the financial crisis emerged. It is also a potentially appropriate context in which to consider the inability of the US to avoid the contagion of the financial crisis and the difficulties of managing it, especially considering that the surplus pools now reside in potential geopolitical rivals to the US, such as China. ⁵⁷

On the other hand, also, Cohen’s analysis ultimately rests on a neoclassical economic conception. Consequently, he is sanguine about the merits and stability of the international monetary regime. ⁵⁸ He has very little to say about the generative mechanisms and destabilising dynamics behind the crisis, including those within Europe itself. More can be discerned from two of the other exceptions in mainstream integration sources, namely a piece of Jean Dermine on bank mergers that followed in the wake of the FSAP ⁵⁹ and one by Antoine Rebérioux on corporate governance. ⁶⁰ Dermine issued warnings that the mergers could be a source of financial instability, raising questions about bank supervision and regulation. Rebérioux raised questions about the complementarity of the reforms behind these mergers and the institutions of corporate governance in Europe.

Heterodox Openings

It may not be a coincidence that both of these authors are active in France, since, according to Milward and Sørensen, this is the centre of an intellectual alternative to European integration orthodoxy. ⁶¹ According to them, there was a distinctive European policy concept in the post-World War II period, which coexisted with Atlanticist grand strategy but which also offered an alternative to it. From this perspective, European ‘integration’ was not about dissolving nation states through the supposedly equilibrating force of markets and managerial pluralism. It was rather about ‘rescuing’ the state and recasting it towards new social purposes after a war where the very being of European states as functional units were in question. US assistance and the transferring of certain functions to the Community level played an important and even enduring role in this regard. However, such transfers were also circumscribed and were pursued only to the extent that it was possible to maintain the priority of the national interest. This was a successful enterprise, since West European states in many respects became more powerful than they had ever been. They embarked on ‘unprecedented programmes of intervention in economic and social life with the express purpose of shaping and controlling their national destinies. Concepts such as “the mixed economy” and “the welfare state” reflect the recognition of this historical reality’. ⁶² This conjures up the image of ‘social settlement’ between different classes and social groups, which is quite different from the image of equilibrium that besets the European integration orthodoxy.

Heterodox tendencies emerged against this backdrop, and have formed a liminal realm where works of relevance to the EU have been produced for some time. Two French industrialist-intellectuals, writing in the social-mercantilist tradition, have been important catalysts in this regard. Being convinced that the common and single market was necessary for economies of scale, they were nevertheless concerned with the design of the common and single market and its effects on the capacity of Europe being able to extract relative gains in the form of high value added products and production processes as required to maintain positive-sum social bargains between labour and capital. ⁶³ They gave impetus to the literature on ‘models’ or ‘varieties’ of capitalism, which contra neoclassical equilibrium asserts a distinct economic rationale of European (or ‘Rhenish’) economic institutions based on corporatist coordination, monopolistic ‘voice-based’ financial relationships between banks and firms, producing social stability in the context of a long-term time horizon in the service of technological change, which creates ‘fruits of progress’ that can be distributed. This in turn provoked an alter-ego literature by neo-Marxists, who engaged with Albert and above all Servan-Shreiber. ⁶⁴

Conclusions

This article has used the financial crisis as a test case of the European integration orthodoxy to argue that it poses anomalies that are too heavy for it to bear. This does not necessarily imply that the theories of European integration orthodoxy should be abandoned in general, since most likely remain appropriate for the addressing of certain questions. However, my argument does entail a severe indictment of the orthodox stance. It implies that if EU scholarship is to credibly address what surely must currently be the most salient issue of EU politics and economics, how to deal with the crisis of the euro, a more open heterodox stance must be adopted that abandons reified-abstract orthodox assumption and allows consideration of approaches such as synthesis of regulation theory, post-Marxism and neo-Weberian scholarship, as proposed in this article. However, as stressed in the introduction, this plea for heterodoxy does not necessarily imply the assertion of a counter-orthodoxy.

This raises the question: does a richly textured ecosystem of European integration scholarship really have nothing to offer to this heterodoxy? After all, the turn to institutions represented by regulation-theoretical and neo-Weberian scholarship has also been a central feature of EU scholarship. The turn to institutional scholarship in EU studies has been paradoxical. On the one hand, it has facilitated a synthesis of previously ontologically diverse positions, such as realism and liberalism, and rationalism and constructivism, to such an extent that issues have been reduced to mere empirical quibbles. ⁹⁹ While this might have been beneficial for the particular problematic that the integration orthodoxy seeks to address, it has also furthered the tendency towards normalisation and hence made it more difficult to avoid the blind-spot discussed here.

Nevertheless, there are some promising and notable exceptions. An optimal currency area theory which sobers up in terms of the assumptions it makes about the endogenous effects of financial markets and monetary union clearly has something to offer. Seabrooke’s neo-Weberian and therefore statist work offers a frame in which to recast the International Political Economy (IPE) of finance that draws on the neo-Keynesian macroeconomic model. In 1997, Philippe Schmitter made a remarkable contribution to a volume co-edited by regulation theorist Robert Boyer, which suggested how neo- functionalism can be used to inform the varieties of capitalism literature. His conclusion was far from sanguine, as he suggested that in the unlikely event of political spillover, the Rhenish variety of capitalism would corrode. ¹⁰⁰

There are also constructivists that have not narrowed their concerns to engrenege dynamics and politicisation and that have something to offer. Hay and Rosamond have rightfully critiqued the central role played by globalisation and neoliberalism as a discourse in the forging of EU political economy institutions. ¹⁰¹ Bringing such attention to a certain absence of ‘rationality’ – or, in Paul Krugman’s words, ‘magical thinking’ ¹⁰² – certainly contributes to understanding the arbitrariness of the neoliberal underpinning of the EU’s political economy. Similarly, Kenneth Dyson cautiously issued warnings about the ideologically contingent Maastricht design of the EMU, and if this argument had been based on a more sustained reference to regulation theory than a cursory mention, no doubt those warnings could have been formulated more robustly and in that case indeed presciently. ¹⁰³ All this would be with the caveat, of course, that the financial crisis reveals how such discourses are overdetermined with material interests and how pragmatically these interests can deal with norms when thus compelled.

Perhaps, though, a recast version of Fritz Scharpf’s rational choice institutionalism would be the most powerful contribution. True, its utility is limited in terms of understanding why the EU was constructed the way it was with the Single Market project. Also, it may be that, given its role in warning Germany of ‘social dumping’ from Southern European member states, it added impetus to the Agenda 2010 internal devaluation policies, and made the current compulsion to welfare state retrenchment a self-fulfilling prophecy. ¹⁰⁴ Nevertheless, Scharpf draws out all the strengths of rational choice in terms of austere parsimony to capture Europe’s basic dilemma through the ‘game’ of the ‘battle of the sexes’. The aftermath of the financial crisis has given additional salience, indeed urgency, to the problem of the joint decision-making trap. Integration on the basis of mutual recognition in the context of finance-led capitalism has now led to a situation where everyone agrees that something needs to be done about ‘economic government’. However, neither the game-theoretical model, nor concrete events, give cause for optimism. Recast in neo-Poulantzasian terms, state managers representing a capitalist class imbricated in transatlantic circuits have limited capacities to forge consent through a broader social hegemony or, in neo-Weberian terms, to adequately project infrastructural power.