From one crisis to another: changes in the governance of the Economic and Monetary Union (EMU)

Abstract

German

French

The article examines the evolution of the Economic and Monetary Union (EMU) in the aftermath of COVID-19 and compares the current crisis with the previous one (the financial crisis of 2008–2013). It does so by looking at the way interests, ideas and institutions have evolved over the last decade. It looks at the possible changes in European economic governance in the light of three different models of European integration. The goal is not only to describe the differences between the two periods of crisis but also to understand the amplitude of those changes. In the actor-centred ‘institutionalism’ approach of this article, particular attention is paid to conflicts and tensions including inside the EU institutions. This allow for the elements of continuity and rupture to be highlighted and for speculation on the possibility of a new paradigm emerging.

Keywords

EMU economic governance COVID-19 Great Recession financial crisis social policies politics

Introduction

At the time of writing (beginning of 2022) it is still difficult to evaluate the effects of the COVID-19 pandemic crisis on the Economic and Monetary Union (EMU); that is, whether the former is ushering in structural changes in the latter and how. In view of the difficulties involved in explaining the recent evolution of the EU, this article has two main objectives. First, it seeks to monitor the EMU’s evolution in the wake of COVID-19. It does so by looking at how interests, ideas and institutions have evolved over the past 15 years. It then compares the COVID-19 pandemic evidence with the changes that occurred after the Great Recession and the transition between these two major crises. Second, the article looks at possible changes in European economic governance in light of the three different models of European integration that have marked the intellectual and political debate in recent decades. We refer to the model in which monetary union is conceived as a result of political union; the model in which monetary union is a trigger for political union; and the model (implemented through the Maastricht Treaty) in which monetary union is conceived without reference to political union. The analysis of the EU during the pandemic aims at assessing the potential shift from one model to another.

For many analysts, the existence of an unstable monetary union without a solidarity mechanism is at the heart of the imbalances in the eurozone and, more broadly, in the process of European integration over the past three decades. The two crises (the Great Recession and COVID-19) were major shocks, little more than 10 years apart. A systematic comparison reveals striking differences on various dimensions, notably regarding the key actors, the dominant narratives, the notion of solidarity, the institutional innovations and the pace of change (Buti, 2020).

This article aims not only to describe the differences between the two periods but also to understand the amplitude of the changes. While there is no debate about the novelties of the COVID-19 period, interpretations differ considerably, ranging from a Hamiltonian moment or a paradigm shift to a limited evolution that is nevertheless important in terms of path dependency.

To organise this systematic comparison, the analysis will be structured around three ‘I’s: interests, ideas and institutions. The latter represent key parts of the heuristic device we use to monitor the EMU’s recent evolution and to assess whether the same evolution is close to one of the alternative models proposed by the academic literature to frame EU integration. This article uses the three ‘I’s for a systematic mapping and analysis of three separate periods: the financial crisis (2008–2013), the ongoing COVID-19, but also the intermediate period of 2014–2019, in which some continuity and discontinuity can explain the evolution during the COVID-19 period.

The EU level is particularly interesting in relation to ‘institutions’, as, more than at the national level, their creation, stabilisation or termination can be witnessed throughout the unfinished and unstable process of EU integration. If we take the European level over a long period, we note the creation but also the fading away of institutions (the Cologne process or the OMC on pensions, for example) as they were still fragile or in construction. New institutions are the outcome of struggles. We can reconstruct how institutions emerged, stabilised and perpetuated themselves. They emerge only when there are windows of opportunity: when there is a crisis, when treaties are changed, or when political power relations shift (Pochet, 2019: 223–256). As Emmenegger (2021) reminds us, there is a state of tension within different institutions, subject to interpretation by different groups. As institutions at EU level are more contested due to the multiplicity of national interests, they have less impact on structuring behaviour and preferences of the actors .

The author has in previous work highlighted the opposition between two groups of actors: the ‘socially oriented’ and the ‘economically oriented’. While these two broad categories can be useful for explaining struggles within institutions, they tend to ignore the broader picture of who is shaping the institutions. Greer and Brooks, in an article entitled ‘Termites of solidarity in the House of Austerity’ (Greer and Brooks, 2021), found three different techniques used by the pro-‘social’ group: (i) broadening the goals; (ii) expanding the scope of conflict; and (iii) disputing and nuancing the indicators. The image of termites is particularly interesting as it evokes uncoordinated action that can nevertheless lead to a weakening of the whole structure. Nothing is said, however, about what a new structure or paradigm will look like. The challenge is to reconnect with the theory of European integration and in particular the role and preferences of the Member States.

It is in this context that interests – actors’ subjective and/or objective preferences concerning economic policy – come into our descriptive framework. As Vanheuverzwijn and Crespy (2018: 593) rightly underline: ‘Finally, if we admit that the Semester is mostly a bureaucratic process for administrative steering and coordination of reforms, this raises the questions as to where the “real” political power is located in the architecture of the EU and where proper confrontations, if any, over the nature of policies take place.’

This is the missing aspect of the political dimension that is ignored too often in EU analysis (Hix et al., 2007 are an exception, having already shown the relative politicisation of the EU Parliament – see also Lindberg et al., 2008). It is true that the classic left/right dimension has to be analysed carefully when it comes to dealing with European integration, and that this dimension has to be complemented by tensions between countries/political parties in favour of more or less EU integration.

Concerning ideas, the last issue in our framework, in the particular domain of economic and monetary integration they are fairly stable, as they have been in the public debate for decades. The ideas we have in mind include both cognitive and normative (Schmidt, 2008). Cognitive ideas – also sometimes called ‘causal’ ideas – provide the recipes, guidelines and maps for political action and serve to justify policies and programmes by speaking to their interest-based logic and necessity. Normative ideas, by contrast, attach values to political action and serve to legitimise the policies in a programme through reference to their appropriateness. Normative ideas have to do with the aspirations and ideals of the general public and how policies may align with principles and norms of public life.

In the actor-centred ‘institutionalist’ approach of this article (for a recent review, see Emmenegger, 2021), particular attention is paid to conflicts and tensions, including inside institutions. This allows for elements of continuity and rupture to be highlighted and for speculation on the possibility of a new paradigm emerging.

To begin with, however, this article recalls the three models of the Economic and Monetary Union (EMU) (Degryse et al., 2013), as the coherence of the policies adopted depends on a distinct, comprehensive model of economic and monetary union.

Three models of EMU

When EMU was first conceived at the end of the 1980s, its design was incomplete. It was the result of a struggle of ideas and models that often boiled down to a fight between a German and a French approach (Brunnermeier et al., 2016). As a still contested institution its imbalances were supposed to lead to a dynamic of change. According to the French preference, the monetary union should act as a trigger for political union (Dyson and Featherstone, 1999). This approach broke with the previously dominant one, which supported the monetary union project planned in the 1970s (due for completion in 1980), namely, monetary union as an outcome of political union. Finally, the crisis of 2008–2013 – arising from monetary union without political union – led to the implementation of national policies such as devaluation and social deregulation. In what follows we briefly summarise the main elements of the different models. These three models (here simplified) were a source of tension, in particular between France and Germany. The two countries had different views on how this political and monetary architecture should evolve, based on two different sets of ideas and institutions (Schild, 2020). France favoured the first model, while Germany was more supportive of the third. Actors and ideas not only tried to shape EMU as an institution, but also the interlinkage between political, economic and monetary institutions.

The first model (‘Monetary union as the natural outcome of political union’) sees economic integration as a first step in the progress of the EU. The aim of this model was to achieve real convergence of production structures among those Member States wishing to take part in monetary union; this entailed deeper economic integration. Once adequate convergence of policies – including wage and social policies – has been achieved, it is time to create a political union as a means of achieving a greater degree of solidarity among states. Finally, this integration of real economies, sealed by the decision to form a political union, enables the last stage of the construction to be completed in the form of a monetary union. Such a model will be federal in nature because it requires a form of integration that is simultaneously political, economic and social.

In the second model (‘Monetary union as the trigger for political union’), political, economic and social integration are also linked to monetary union, but in this case they will be one of their gradual consequences, not a precondition. In this scenario, the monetary union is constructed on the basis of formal criteria – in particular, the well-known public deficit and public debt criteria – which allow for selection only of those countries that are in a position to put up with the constraints inherent in the process. Governance by indicators is regarded as a means of ‘forcing’ real convergence of economies. This is a form of convergence that also requires solidarity mechanisms (use of structural funds, creation of a convergence fund, increased community budget, and so on) and political integration (adoption of a European constitution).

The third model (‘Monetary union without political union’) also takes as its starting point the fact that monetary union needs to force economic union, but it regards as impossible the creation, in the medium term, of a true political union. Monetary policy therefore has to be immunised against political decision-making and entrusted to independent experts. In the absence of adjustment instruments, achieved through political integration and solidarity, this approach is focused on adjustment via a flexibilisation of social policies at the national level (decentralisation of wage bargaining, flexibilisation of hire-and-fire arrangements, reduction of replacement income, and so on), increased mobility of labour at intra-European level and governance through the observance of procedures and formal rules devised by experts (‘European Semester’, budgetary discipline, and so on), which countries must follow under threat of automatic sanctions. This model of monetary union, governed by rules and procedures, requires a decentralisation and ‘flexibilisation’ of the social model, which becomes an adjustment variable in the event of a shock.

Financial crisis of 2008–2013

While the Maastricht Treaty set the terms for the progress of EMU according to the third model, various crises hit the integration process. This section focuses on the financial crisis of 2008–2013 as a stress test for EU economic governance.

The financial crisis, which morphed into a sovereign debt management crisis in Europe, actually began with a period of green stimulus before an abrupt change of tack led to a period of extreme austerity. This was a shift from version two of monetary union to version three, whose main challenge is not building federal institutions but rather strengthening control over national budgets and eliminating national institutions of solidarity (the minimum wage, collective bargaining and trade unions) (Pochet, 2019: 257–311). The financial crisis was managed in an essentially intergovernmental manner, but what power the Commission lost in agenda-setting, it regained in implementation (Bauer and Becker, 2014).

Interests

The financial crisis occurred at a particular moment in the European integration process at which there was a significant majority of right-wing or centre-right governments. The austerity policies that were pursued are in large part the result of a classic political game. There was a massive right and centre-right dominance at all levels, both national and European, including in the Council of Ministers and the European Council, the European Parliament (EP) and the Commission. The window of opportunity that opened up between 2010 and 2013 came at a time when social democratic/socialist governments were in complete disarray, governing in only six out of 27 countries in 2011, three of which were countries in crisis – Greece, Spain and Portugal – and two (Cyprus and Slovenia) that would soon join them. By 2012, in the middle of the crisis, only four countries were still governed by socialists or social democrats, including Belgium, which had a centrist coalition government led by socialist Prime Minister Di Rupo. The others were Austria, Cyprus and Denmark, countries with only marginal political weight at the European level.

The European Commission, led by José Manuel Barroso (2004–2009), was largely controlled by Commissioners from right-wing or centre-right parties, with only six Commissioners from the centre-left. The situation was similar in the Barroso II Commission (2009–2014). There was thus an opportunity for conservative or (economic) liberal commissioners, such as Rehn (DG ECFIN) and De Gucht (DG Trade) to dominate in a European Commission centralised around its President.

In the 2009 elections, the European Parliament was dominated by the People's Party (EPP), which had the possibility of allying with either the Progressive Alliance of Socialists and Democrats (S&D group) or the right, thus weakening the centre-left's ability to influence the texts adopted (as can be seen, for example, in the weak influence of the S&D group on the ‘Six-Pack’ and the ‘Two-Pack’, adopted in 2011 and 2013, respectively). There was no or little alignment between Member States and the alliance between French President Nicolas Sarkozy and German Chancellor Angela Merkel was fragile. Germany controlled the game, and its internal (political) struggles counted more than European alliances (Schild, 2020).

In this context, the European Central Bank (ECB) played an increasingly central role and came to take on responsibilities beyond the strict definition of its mandate to ensure the stabilisation of the eurozone and, more broadly, of European integration. Trade unions, meanwhile, were marginalised and seen as part of the problem rather than possible solutions.

Ideas

A short phase of green Keynesianism during the first stage of the crisis (2008–2010) soon shifted to a period of radical austerity (2010–2013). This surprised most observers, who thought the crisis had opened up the possibility of radically challenging the dominant neoliberal paradigm. Many of them then focused their analysis on the reasons for this continuity of ideas (and interests) (Crouch, 2011; Schmidt and Thatcher, 2014), but rapidly the German ordoliberal approach again became dominant.

In the public discourse, it began to be considered not that there were too many radical structural reforms, but rather that there were not enough, with the crisis providing an opportunity to rectify this. This led to strong recommendations to deregulate national institutions, especially those related to collective bargaining, and to increase the pensionable age (linking it to life expectancy). As the author has analysed in detail elsewhere (Pochet, 2019), this was the result of certain actors (namely the ECB and DG ECFIN) strategically imposing their vision of an EMU without solidarity. These changes corresponded exactly to what the European Commission (at least DG ECFIN) considered to be the right structural reforms.

There was a lack of trust, especially towards the Greek government, which was accentuated by press campaigns trading on stereotypes. Solidarity was undermined by debates on the question of ‘moral hazard’. There was a refusal to listen to alternative ideas.

Institutions

Although the process was slow and complex, there was a growing institutional creativity that aimed to strengthen (or even ‘constitutionalise’) the obligations of fiscal balance and debt reduction.

In terms of new institutions, the European Semester procedure (which begins with the publication of the Annual Growth Survey [AGS]) was adopted, with the purpose of fostering ‘structural reforms’ through Country Specific Recommendations (CSRs). The goal of the first CSRs was deregulation (Degryse et al., 2013). The European Semester was supplemented by a ‘Euro Plus Pact’, then a ‘Six-Pack’, followed by a ‘Two-Pack’, then the European Stability Mechanism (ESM, replacing the European Financial Stability Facility, EFSF), and then finally the ‘Fiscal Compact’, which was supposed to complete the architecture of the eurozone’s new economic governance.

Last but not least, there was the establishment of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, an intergovernmental treaty signed by 25 EU Member States. It complemented the EU fiscal framework, including the Stability and Growth Pact (SGP), in an attempt to ‘constitutionalise’ the EMU criteria at the national level.

In-between days: 2014–2019

Any window of opportunity eventually closes. While a series of changes had already taken place before 2015, the arrival of a new Commission with a more social vision marked the definitive end of the radical questioning of national social models. With the stabilisation of the euro and the slow and painful adoption of new institutions and mechanisms (the ESM and banking union), the prospect of a total collapse in Greece was receding, and a more progressive agenda was emerging.

The Commission during this period, chaired by Jean-Claude Juncker (2014–2019), attempted to rebalance the economic and social aspects of its remit and began to question the austerity doctrine, albeit very slowly. In the social domain, this relaunch involved the adoption of a European Pillar of Social Rights (2017), which unified a set of rights and principles in one instrument. Several proposals (reconciliation of family life and work, employment contracts, access to social protection, creation of a European Labour Authority) constituted the outline of a work programme.

From 2015 onward, the tone of the AGS also evolved, and the European Semester procedure was revised. It now focused more on investment than on reforms (Crespy and Vanheuverzwijn, 2019).

The effects of austerity, intra-European regional divergences and growing inequalities, and EU migration (in particular by Central and Eastern European citizens), were most often cited to explain the Brexit outcome. As had been the case with other institutional crises or tensions (such as the referendum on the Maastricht Treaty or the rejection of the Constitutional Treaty), the social dimension, or lack thereof, was back at the centre of EU discourse.

Interests

In political terms, there was an unprecedented collapse of social democratic parties at the national level. Delwit (2021) has gathered data since the end of the 19th century and regrouped the social democrats in six regions (see Table 1). The radical losses in most of them from 2010 to 2019 is very clear. It changes little if the extreme-left is taken into consideration.

Table 1.

Evolution of social democratic parties’ electoral results in Europe (10-year average).

	Alemannic	Benelux	Nordic countries	Anglo-Saxon	Southern	CEE
2000–2009	29.1	23.5	29.3	23.6	33.0	23.9
2010–2019	22.1	18.3	22.5	23.2	24.6	21.8
Difference	−7.0	−5.2	−6.8	−0.4	−8.4	−2.1

Source: Based on Delwit (2021: 19).

The European Commission was still politically unbalanced, with only eight social democrats out of (then) 28 members. Following the 2014 European Parliament elections, the S&D was at a historic low (185). The EPP won the elections (216) and remained the largest political group, but lost many seats. It could no longer find a majority on the right (with the ‘liberals’ [69] and the British Conservatives). The anti-European parties, meanwhile, were making progress but remained in a minority.

In a fairly stable political context (still with a right-wing majority), there were increasing doubts and fears about the future of European integration. This led the Commission President to launch the idea of a ‘triple A’ Social Europe and to multiply his efforts to show that the Barroso era and ‘blind austerity’ were truly over.

The long and difficult Brexit episode is a chapter in itself, but its impact has actually been relatively limited on the EU side because it was achieved with a high degree of coherence in the negotiations between all the remaining EU Member States. Brexit terminated the situation in which the British government played the role of ‘chief obstructor’, although in the meantime other countries have come to the fore to block or limit certain decisions (in particular, the Netherlands, the Nordic countries, and Poland and Hungary). This important realignment will continue to have substantial consequences in the medium and long term.

The ECB was no longer at the centre of the action but was in fact pursuing the same policy aimed at ensuring low short-term interest rates and reassuring the markets, which affect long-term interest rates. As a result, interest payments on debt as a percentage of GDP declined and ceased to be a strong constraint on national fiscal policy.

Despite continuing to lose members in the 2010s, the trade unions were ‘back in the game’, notably thanks to the European Commission's revitalisation of the European Social Dialogue.

Ideas

The EU's austerity strategy began to be questioned in view of its poor results, particularly in comparison with the US recovery. International institutions started to revise their positions and became increasingly critical. There was critical reflection on the limits of austerity and an opening up towards the possibility of taking different approaches (Ladi and Tsarouhas, 2020). The role of unions in collective bargaining began to be re-evaluated by international organisations in a debate that has gradually shifted from a focus on economic efficiency to one on growing inequalities (OECD, 2019). Various groups of scholars were also challenging the dominance of austerity and bringing new perspectives, with some pushing the notion of ‘social investment’ (de la Porte and Natali, 2018). Although Piketty (2014) was not the first to highlight the growing inequalities in Europe, his book and the various studies that followed helped to accelerate the debate in the EU. The same can be said of Mazzucato’s work on the importance of the state and public investment for innovation (Mazzucato, 2013). Finally, more provocatively, a new macroeconomic school of thought spearheaded by Tcherneva (2020) challenged traditional monetary approaches and employment policy. The Commission's 2017 report on the future of the EMU also helped to open up the debate (European Commission, 2017).

The climate issue was also gradually returning to the centre of debate (with the Paris Agreement on climate change in 2015) and the notion of a ‘just transition’ was starting to be picked up.

Institutions

In the absence of instruments to stabilise the EMU, a banking union began to be seen as a possible alternative. During this period, no new institution was created; any change that took place was within the existing institutions. Once the window of opportunity for radical reforms had closed in 2013, there was a progressive rebalancing between social and economic goals. The CSRs become more sensitive to local contexts and less uniform than in previous years. Another important factor, however, was that the recommendations were progressively having less impact (Efstathiou and Wolff, 2018).

In a fairly stable institutional framework, important and visible changes were implemented within the institutions.

This is the argument of Zeitlin and Vanhercke (2015), who consider that a certain ‘socialisation’ of the European Semester occurred. By this, they mean that the ‘socially oriented’ bodies – and particularly the Employment Committee (and to a lesser extent the Social Protection Committee) – came to have more influence in the final formulation of recommendations. Crespy and Vanheuverzwijn (2019) find that there was an increase in social investment–related recommendations, from 50 per cent in 2011 to 65 per cent in 2016. The ‘social group’ had more influence on the reformulation of certain recommendations related to labour market participation than on those concerning pensions or wages and wage systems (Pochet, 2019). As a result, there was no paradigm shift: a more social approach (quantitatively and qualitatively) was emerging in some areas, but overall the social dimension remained subordinated to the economy. As Vesan and Pansardi (2021: 365) point out, ‘the recalibration of [the] EC's speeches on social policy has not been abrupt but has instead been incremental’.

COVID-19 crisis

The 2019 Commission declared that its two major objectives were to be the climate transition and the digital transformation. Its agenda on the green transition is ambitious (with the adoption of around 50 documents covering all aspects), for example, its goal of reducing emissions by 55 per cent by 2030.

The COVID-19 crisis has upset the timetable, however. The effects of the pandemic have been unprecedented and have not followed the same evolution as previous crises. Furthermore, the sectors that have been most affected (such as tourism, restaurants and trade) are very different than those most affected during the financial crisis. It is no longer a question of saving just the financial system and the banks, but the entire European economy. A completely new, value-based narrative has emerged about ‘essential workers’ (‘who is more important to society, a nurse or a banker?’). Public services and, in particular, health care have been provided with more financial support (De Beer and Keune, 2022), while the inadequate level of spending in previous decades has been condemned.

The crisis happened when the European multiannual budget was to be renewed. As usual, this had given rise to tensions about its size and what individual countries should receive and contribute. But it also eased a German shift towards greater solidarity, putting it in a broader context (Bulmer, forthcoming). In some ways, things moved very fast. On 18 May 2020 a Franco-German proposal was announced for a €500bn support package for the Member States. On 27 May 2020 the Commission proposed a recovery instrument of €750m named ‘Next Generation EU’ (NGEU), which included the Recovery and Resilience Facility (RRF). This instrument was adopted after complex negotiations in the European Council in July 2020 and fully adopted by the two co-legislators in February 2021 and ratified by all national parliaments by the end of May 2021 (de la Porte and Jensen, 2021). The RRF also helps to reinforce the Commission’s transformative agenda, imposing investments in the environment (37 per cent) and the digital sphere (20 per cent).

The Pillar was revived by an Action Plan (2021) and received further (albeit weak) political support at the Porto meeting in May 2021.

Interests

The COVID-19 crisis has unfurled in a relatively stable political environment, a little more rebalanced towards the political left. The governing coalition in Germany (until end 2021) is the same as during the previous crisis, but it seems to have a more open attitude to alternative solutions. There is an overwhelming majority of centre-right/populist governments in Central and Eastern Europe and in the Baltic countries.

The political left now participates in government or is the dominant party in at least 11 of the 27 Member States. Southern Europe – Portugal, Spain and to a lesser extent Italy – leans left, as do the Nordic countries (Denmark, Finland and Sweden). Nevertheless, this has not prevented the latter from rejecting any ‘solidarity’ tax/transfer (although this was much less the case for Finland), in line with the governments of the Netherlands (right-wing) and Austria (Conservative-Green coalition). The Greens participate as junior partners in the governments of four of the five so-called ‘frugal’ Member States, but they have no influence and are not game-changers.

While the previous crisis could be clearly linked to the left/right imbalance, the political map in 2020–2021 is much more complex. The left-right divide is no longer relevant when it comes to the COVID-19 crisis, however, which has unfolded rather in vertical terms, between national responsibility and European solidarity. The populist vote (and in some cases the far-right populist vote), however, is growing in importance.

Another important aspect is the departure of the United Kingdom, which at least removes the danger of a series of possible vetoes, even if the fiscal and monetary policy pursued in the United Kingdom is currently not fundamentally different from that of the EU.

The Commission, despite being under the presidency of the conservative Ursula von der Leyen, is slightly more left-leaning, with nine centre-left commissioners out of 27, on a par with the EPP (six for the Renew Europe group). But above all, the positions held are more central to the debate. Vice-President Timmermans is in charge of climate change; Gentiloni is Commissioner for the Economy; Schmit for Jobs and Social Rights; Dalli for Equality; Terereira for Cohesion and Reforms; and Šefčovič vice-president for Interinstitutional Affairs and Foresight.

What has emerged, in terms of interests and political power, is that, while there have been changes, they are neither numerous nor significant (Armingeon et al., forthcoming). The main difference in comparison with the financial crisis concerns Germany, which has undergone an internal change. The country has redefined its interests, first in terms of safeguarding Europe, and second in terms of closer, albeit still imperfect, alignment with France and the Commission. Four competing (or perhaps complementary) hypotheses may be posited. The first is personal: 2021 was the last year of Angela Merkel’s government and she wanted to secure her place in the history books (see Kohl). The second is that lessons have been learned from the disastrous management of the previous crisis. The third is that there are economic interests at play with regard to the perturbation of global markets, making exports within the single market more strategic again. Finally, this may also be due to the Karlsruhe court ruling (May 2020) that limited the ECB's action and may have forced the German government to take a step forward (Bulmer, forthcoming; Celi et al., 2020).

France, under President Macron, is in the paradoxical position of being (economic) liberal at national level, while taking more of a social stance and exhibiting a willingness to reform economic governance at the EU level (Clegg, forthcoming). Since 2018, Macron has been arguing – with little success – for a specific budget for the eurozone.

Italy has also played an important role in managing the COVID-19 crisis. It bore the brunt of the early stages of the pandemic and has an extremely complex political landscape, with three different coalitions during this period. Public opinion is also less and less pro-European, with some political parties, such as the Fratelli d'Italia and Lega Nord, explicitly anti-European. Finally, Italy’s veto on the use of ESM funds, even without conditionality, has blocked the possibility of any solution based on the institutions created during the previous crisis. This has reinforced the need to find a different, more creative solution.

The 2019 European Parliament elections offered a more fragmented landscape in which the two traditionally dominant groups – the EPP (177 members) and the S&D (145) – cannot achieve a majority (353 out of 705). This forces them to seek an alliance with the new (economic liberal) Renew group (102), sometimes with the support of the Greens (72). The GUE (extreme left) has 39 members. This makes a left-wing alliance impossible (256 votes out of 705). Since the departure of the United Kingdom, those hostile to Europe (self-styled ‘eurosceptics’) have diminished in number: 74 members for the far right and 62 for the European Conservatives and Reformists (ECR).

The ‘Frugal Four’ (Austria, Denmark, Sweden and the Netherlands, plus Finland on occasion) have continued to argue for more national responsibilities and a strict control of funds (conditionality). After opposing grants, they imposed complex ways of controlling them, giving a prominent role to the Economic and Financial Committee (EFC), which is not interested in the social and employment dimensions.

If most of the attention has been on the Member States, the ECB has again played a crucial role in launching a new pandemic emergency purchase programme (PEPP) worth €1.859trn. This provides more flexibility to target the hardest hit Member States than the previous programme (Fabbrini, 2022).

Ideas

The narratives on public health and on green recovery have helped to marginalise the narrative on ‘sound’ public finance. The change of discourse has been radical and swift, occurring in the course of only a few weeks. To date, however, it has amounted mainly to a challenge to mainstream ideas rather than a real consolidation of a new dominant paradigm.

There was an immediate consensus that the solution lies at the European, not the national level. The question of ‘moral hazard’, which had impaired the debate during the previous crisis, is now no longer relevant; the lack of empathy on the part of the Dutch government and its finance minister in March 2020, for example, was now considered completely inappropriate. The standard arguments of those who are opposed to any form of European solidarity have been undermined.

The relaxation of state aid restrictions (March 2020) and the rescue of companies in distress are reconfiguring what is considered possible and legitimate as regards the right of the state to intervene in economic life.

Similarly, the SGP was suspended in March 2020, allowing governments the freedom to spend as much as they needed to. Debt is no longer an issue. The focus is instead on stabilising the system and finding replacement income for workers and businesses. There is no real debate on this point. The very low or even negative interest rates completely remove this question from controversy, at least for the moment.

It is interesting to contrast the ideas on structural reform in the European Union during the previous crisis (see above) with the objectives of the proposed Directive on Adequate Minimum Wages. These objectives include: increasing minimum wages, ensuring contractual coverage for at least 70 per cent of workers, supporting the extension of collective agreements erga omnes (especially important for Central and Eastern European countries with very low unionisation rates), and reducing the decentralisation of collective bargaining. These objectives are the exact opposite of ECFIN’s aims 10 years ago (see above). The proposal was included in the programme presented by the Commission in December 2019, showing that changes were already under way even before the COVID-19 crisis hit.

Some changes are clearly linked to the emergence of a new framing narrative, however, which valorises certain groups of workers (particularly those deemed ‘essential’ during the crisis). This has also opened the door for new solutions to old problems, such as the scandal of working conditions and wages in Germany’s slaughterhouses (see Ban et al., 2022).

Institutions

It is striking that the existing institutions have all been put on hold. This applies to the SGP but also the recommendations of the European Semester (Rainone, 2020) and the decision not to use the ESM. New institutions have been created, the main innovation being SURE (Support to mitigate Unemployment Risks in an Emergency) and NGEU.

In the area of unemployment insurance, the systematisation of short-time work schemes (STW) has been at the core of the European response to avoid an explosion of unemployment and to maintain stability in labour markets (Ebbinghaus and Lehner, 2022). This innovation is an interesting subject of analysis in itself: a national institution that was activated in just a few countries (Germany in particular) during the previous crisis has now become a generalised response. But it can also be linked to another debate, that of the stabilisation function in a monetary union. In the absence of a substantial federal budget, economists quickly reached agreement on the idea of a form of European unemployment (re)insurance that would complement the national systems. Numerous studies have been carried out on this topic since the mid-1990s. One of the key aspects discussed is that of moral hazard (Vandenbroucke and Luigjes, 2016). At the political level, this idea was supported by Commissioner László Andor. European financing consists of loans (with interest rates supposed to be below market levels for many Member States) of up to €400bn, and limited in time. This is also an opportunity to perpetuate a mechanism that is essential to a well-functioning monetary zone.

Another aspect that is particularly innovative is the form of its financing (which will be replicated in NGEU): Member States offer irrevocable and callable guarantees, calculated on the basis of their respective share of EU gross national income, worth €25bn towards the EU budget to back the lending scheme. Such a system ensures a high credit rating, enabling the European Commission to borrow on the financial markets under favourable conditions on behalf of the Member States requesting financial assistance.

The Commission has also proposed a package of €750bn over the period 2021–2024, to be financed by issuing common debt. NGEU has complemented the measures agreed upon by the Eurogroup in support of health-care spending, mitigating unemployment and short-time work, and offering support to the private sector (a total of €540bn). The centrepiece of the Commission package is the Recovery and Resilience Facility (RRF), which amounts to €560bn of grants and loans to support investment and reforms, with an emphasis on favouring the green and digital transitions. The European Semester has been completely redesigned and is now coordinated with the European budget and national recovery and resilience plans.

All this represents a gamechanger regarding the links between investment and structural reform. It is not yet clear what the interaction will be between the Semester (and the CSRs) and the RRF (Moschella, 2020). It will also emerge as the outcome of the struggles between the different groups of actors. Vanhercke and Verdun (2022), for instance, found that social actors have been surprisingly marginalised in these debates (although they noted a slight improvement in early 2021).

Another important development concerns the EU’s ‘own resources’. This has strong symbolic value because autonomous resources would mean raising taxes, a central characteristic of a state. New resources are yet to be agreed upon (except for a tax on plastic, that was due to be adopted in 2021).

Conclusion

Having systematically tracked the role of interests, ideas and institutions in the COVID-19 crisis and the financial (and then the so-called ‘sovereign debt’) crisis, the main general trends we have highlighted are changes in the three I’s: interests (the rise of populists and the slight move to the left within the EU and national institutions); ideas (mounting criticism of neoliberalism and the rediscovery of public services and workers’ rights); and institutions (the active role of the ‘termites’ [see Introduction], which have yet to stabilise).

In terms of interests, the overwhelming political majority of the centre-right or right-wing governments in most Member States during the financial crisis explains a large part of the national policy choices then made. This variable is far less significant for an analysis of the years that followed, however. No significant left/right political rebalancing has taken place at the national level. Quite the contrary: the political bloc (the left and the trade unions) who were motivated to formulate and articulate a paradigm shift lost ground between the two crises and nothing has indicated that they are recovering in the 2020s. To better understand the new political landscape, we should also take account of the preferences of populist radical right parties (Busemeyer et al., 2021), an issue that needs further research.

The tensions between states opposed to debt mutualisation and those in favour of solidarity remain. The most important change concerns one Member State, namely Germany. It shifted position from rejecting a collective and solidarity-based approach during the previous crisis to a much more open position in 2020/2021. The reason for this evolution is not clear-cut and it is uncertain whether it will last (Howarth and Schild, 2021).

At the EU level, there were there no significant changes in the Commission (other than a few more centre-left commissioners) or in the European Parliament (the S&D continued to decline). There were no radical changes in the policies pursued either, but rather a rebalancing of priorities between the economically oriented and the socially oriented institutions.

The latter, after being pushed aside during the financial crisis, have returned to try to undermine the dominance of the economic group, with some, albeit limited, success. The paradox is that the ‘economic’ group has gained the upper hand in the management of the COVID-19 crisis and seems to control the central instrument, the budget (Vanhercke and Verdun, 2022).

Within the framework of national and EU politics, the lack of a growing left-oriented political bloc clearly limits the possible emergence and stabilisation of a new paradigm (Bulmer and Joseph, 2016).

At the level of ideas, the neoliberal mantra about debt and the role of the state and market dominated during the previous crisis and even persisted beyond it, but has been increasingly challenged and criticised. The COVID-19 crisis has opened up several new possibilities concerning approaches to debt, inequality, frontline jobs and the wage question, among other issues.

The question of inequality (in its various dimensions, including the environment) currently seems to be structuring discursive space in the EU, alongside the issues of the environmental and digital transitions (in which the question of ‘fairness’ is central). However, this was also the case during the first two years of the financial crisis (2008–2010). While the Green Transition is now a priority and could lead to important changes, the existing development model has not been called into question because the programme is centred mainly on the idea of green growth, major investments and new technologies.

The other process is well described by the so-called ‘termites’ that, in an uncoordinated manner, are trying to weaken the dominant paradigm. What emerges from most studies on the Semester is a series of micro-level bureaucratic tensions. While these are of course interesting, they will have a real impact only if the dominant paradigm is challenged. Otherwise it is only a matter of a partial rebalancing between economic and social goals, not the building of an alternative architecture.

As far as institutions are concerned, this article has shown their volatility. The COVID-19 crisis has temporarily suspended the Stability and Growth Pact and the rules on state aid, but the possibility of a return to pre-COVID normality in these two areas cannot be excluded. This kind of action (suspension) does not yet tell us anything about possible, more fundamental changes.

SURE and NGEU are the two new institutions that signal a significant departure from the previous consensus. The new instruments are not embedded in the Treaty and are therefore extremely fragile. They are vulnerable to fluctuations in the EU political balance.

This article has shown that the previous crisis had as its general framework the transformation of the EMU, as adopted at Maastricht, into a new form that did not include political union, and in relation to which national deregulation and stricter rules had to compensate for this absence. The current crisis is changing objectives towards favouring a more solidarity-based approach, with a renewed focus on strengthening European integration. But political union is still a long way off and there is no identifiable political bloc that might guarantee that the new ideas will be, if not hegemonic, at least dominant, and that the new institutions will be stabilised in the future.

Footnotes

Acknowledgements

I would like to thank David Natali and the two anonymous referees for their very useful comments and suggestions.

Funding

This research received no specific grant from any funding agency in the public, commercial, or not-for-profit sectors.

References

Armingeon

de la Porte

Heins

, et al. (forthcoming) Next generation EU: Voice of the past. Comparative European Politics.

Ban

Bohle

Naczyk

(2022) A perfect storm: COVID-19 and the reorganisation of the German meat industry. Transfer: European Review of Labour and Research 28(1): 101–118.

Bauer

Becker

(2014) The unexpected winner of the crisis: The European Commission’s strengthened role in economic governance. Journal of European Integration 36(3): 213–229.

Brunnermeier

James

Landau

(2016) The Euro and the Battle of Ideas. Princeton, NJ: Princeton University Press.

Bulmer

(forthcoming) Germany, the Eurozone crisis and the corona-virus pandemic: Failing forward or moving on? Comparative European Politics.

Bulmer

Joseph

(2016) European integration in crisis? Of supranational integration, hegemonic projects and domestic politics. European Journal of International Relations 22(4): 725–748.

Busemeyer

Rathgeb

Sahm

(2021) Authoritarian values and the welfare state: The social policy preference of radical right votes. West European Politics 45(1): 77–101.

Buti

(2020) A tale of two crises: Lessons from the financial crisis to prevent the Great Fragmentation. VoxEU, 13 July 2020.

Celi

Guarascio

Simonazzi

(2020) A fragile and divided European Union meets Covid-19: Further disintegration or ‘Hamiltonian moment’? Journal of Industrial and Business Economics 47: 411–424.

10.

Clegg

(forthcoming) A more liberal France, a more social Europe? Macron’s reform tightrope and the Covid-19. Comparative European Politics.

11.

Crespy

Vanheuverzwijn

(2019) What ‘Brussels’ means by structural reforms. Comparative European Politics 17(1): 92–111.

12.

Crouch

(2011) The Strange Non-Death of Neoliberalism. Cambridge: Polity Press.

13.

De Beer

Keune

(2022) COVID-19: A prelude to a revaluation of the public sector? Transfer: European Review of Labour and Research 28(1): 135–140.

14.

De la Porte

Jensen

(2021) The next generation EU: An analysis of the dimensions of conflict behind the deal. Social Policy and Administration 55(2): 388–402.

15.

De la Porte

Natali

(2018) Agents of institutional change in the EU policy: The social investment moment. Journal of European Public Policy 25(6): 828–843.

16.

Degryse

Jepsen

Pochet

(2013) The Euro Crisis and its Impact on National and European Social Policies. Brussels: ETUI.

17.

Delwit

(2021) ‘This is the final fall’: An electoral history of the European social democracy (1870–2019). Cevipol Working Papers 1. Brussels: ULB.

18.

Dyson

Featherstone

(1999) The Road to Maastricht. Oxford: Oxford University Press.

19.

Ebbinghaus

Lehner

(2022) Cui bono – business or labour? Job retention policies during the Covid-19 pandemic in Europe. Transfer: European Review of Labour and Research 28(1): 47–64.

20.

Efstathiou

Wolff

(2018) Is the European Semester effective and useful? Bruegel, Policy Contribution, Issue 9. Brussels: Bruegel.

21.

Emmenegger

(2021) Agency in historical institutionalism: Coalitional work in the creation, maintenance, and change of institutions. Theory and Society 50(4): 607–626.

22.

European Commission (2017) Reflection paper on the deepening of the Economic and Monetary Union. COM (2017) 291 final, 31 May 2017, Brussels.

23.

Fabbrini

(2022) The legal architecture of the economic responses to COVID-19: EMU beyond the pandemic. Journal of Common Market Studies 60(1): 186–203.

24.

Greer

Brooks

(2021) Termites of solidarity in the house of austerity: Undermining fiscal governance in the European Union. Journal of Health Politics, Policy and Law 46(1): 71–92.

25.

Hix

Noury

Roland

(2007) Democratic Politics in the European Parliament. Cambridge: Cambridge University Press.

26.

Howarth

Schild

(2021) Nein to ‘Transfer Union’: The German brake on the construction of a European Union fiscal capacity. Journal of European Integration 43(2): 209–226.

27.

Ladi

Tsarouhas

(2020) EU economic governance and Covid-19: Policy learning and windows of opportunity. Journal of European Integration 42(8): 1041–1056.

28.

Lindberg

Rasmussen

Warntjen

(2008) Party politics as usual? The role of political parties in EU legislative decision-making. Journal of European Public Policy 15(8): 1107–1126.

29.

Mazzucato

(2013) The Entrepreneurial State: Debunking Public vs Private Sector Myths. London: Anthem Press.

30.

Moschella

(2020) What Role for the European Semester in the Recovery Plan? Brussels: European Parliament.

31.

OECD (2019) Negotiating Our Way up: Collective Bargaining in a Changing World of Work. Paris: OECD Publishing.

32.

Piketty

(2014) Capital in the Twenty-First Century. Cambridge, MA: Belknap Press of Harvard University Press.

33.

Pochet

(2019) A la recherche de l’Europe sociale. Paris: PUF.

34.

Rainone

(2020) An Overview of the 2020–2021 Country-Specific Recommendations (CSRs) in the Social Field: The Impact of Covid-19. Background Analysis 2020.01. Brussels: ETUI.

35.

Schild

(2020) EMU’s asymmetries and asymmetries in German and French influence on EMU governance reforms. Journal of European Integration 42(3): 449–464.

36.

Schmidt

(2008) Discursive institutionalism: The explanatory power of ideas and discourse. Annual Review of Political Science 11: 303–326.

37.

Schmidt

Thatcher

(eds) (2014) Resilient Liberalism in Europe’s Political Economy. Cambridge: Cambridge University Press.

38.

Tcherneva

(2020) The Case for the Job Guarantee. Cambridge: Polity Press.

39.

Vandenbroucke

Luigjes

(2016) Institutional moral hazard in the multi-tiered regulation of unemployment and social assistance benefits and activation. CEPS Special Report 137. Brussels: European Centre for Political Studies.

40.

Vanhercke

Verdun

(2022) From the European Semester to the Recovery and Resilience Facility: some social actors are (not) resurfacing. ETUI Working Paper 2021.13. Brussels: ETUI.

41.

Vanheuverzwijn

Crespy

(2018) Macro-economic coordination and elusive ownership in the European Union. Public Administration 96(3): 578–593.

42.

Vesan

Pansardi

(2021) Speaking social Europe: A paradigmatic shift in the European Commission Presidents’ social policy discourse? Journal of European Social Policy 31(4): 365–379.

43.

Zeitlin

Vanhercke

(2015) Economic governance in Europe 2020: Socialising the European Semester against the odds? In: Natali

Vanhercke

(eds) Social Policy in the European Union: State of Play. Brussels: ETUI, pp. 65–95.