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A crisis that crossed the Ocean
In the recent history of the European project, few have been the upheavals of such magnitude as the sovereign debt crisis. Due to the highly interconnected global economy, the 2008 banking crisis in the United States  had a ripple effect that crossed the Atlantic Ocean and sent waves of shock through Europe. Nonetheless, the political echelons, economic sector and academia were all taken aback by the resilience of the Euro Area. Not only that it grew in membership − with Latvia adhering in 2014 , followed by Lithuania  − but it also witnessed deeper integration. Despite doomed predictions of the Euro being an “impossible dream” , the peculiar Economic and Monetary Union (EMU) withstood vicissitudes and rendered a relatively fertile environment for greater cooperation to take roots.
A sea change in troubled waters
Initially, upon the onset of the sovereign debt crisis, the European Union opted for a divisive approach. Withering fiscal contraction was imposed in Germany, Italy, Spain, Ireland, Portugal and Greece via austerity measures, in a last-ditch effort to re-adjust excessive deficit budgets. However, the German Ordoliberalism of a supply-side growth strategy based on wage restraint, productivity and competitiveness  clashed with the demand-led growth strategy based on fiscal expansion and wage inflation from the Southern rim of the Eurozone . In addition, the conflictual economic zeitgeist was also deepened by the panic-driven markets and the desperate bids to restore confidence in governmental bonds . Nonetheless, the high negative interdependence within the Euro Area, the unfathomable prospect of a country exit  and the massive sunk costs were compelling enough for the member states to steer in the same direction. Even though creditors were at the helm, whilst the insolvent countries rowed begrudgingly to prevent their economies from sinking in the apparently bottomless pit of sovereign debt, it was a common effort to keep the Eurozone afloat.
Afterwards, following the sluggish economic growth caused by the indiscriminate austerity, the European Union made an about-face and embraced a cohesive approach. Since the crisis unearthed the systemic shortcomings of the European economic governance model, “it became clear that the EMU lack of a unitary fiscal policy was a grave mistake”  that had to be addressed urgently. Consequently, new mechanisms of macroeconomic governance emerged. Firstly, there were the means of intergovernmental crisis management. Represented by the European Financial Stability Facility , which later matured into the European Stability Mechanism , both acted as much-needed bailout funds. Secondly, to hedge the Euro Area against future financial chaos, the supranational mechanisms for crisis prevention came into effect. In these respects, the Six-Pack, respectively the Two-Pack acted as legislative levers to harmonise the budgets. In brief, the incomplete European economic architecture called for either sudden total disintegration or gradual total integration, and these mechanisms prevented the Eurozone from imploding.
Sailing towards…a fiscal union?
After all, not only did the Brussels-based leadership and sovereigns’ statesmanship managed to fare well through the protracted negotiations, but they jointly created means that built wholly on the decades-old institutional record of the European project. Ranging from bailout resorts, an emergent banking union and going to a reinforced surveillance of deficits’ fluctuations, the budgets of the Euro Area countries ‒ but also of most member states of the European Union ‒ are now under a more critical eye, but simultaneously on more caring hands. Indeed, all the major changes brokered in the aftermath of the crisis might have led to countries merging their policies even more, but a fiscal union – formalized and institutionalized at a pan-European level – still seems far-fetched for the time being, if not even politically quixotic. Time will tell how the European Union will navigate these yet uncharted waters of fiscal unity.
Please note that the views expressed are those of the author and do not necessarily represent or reflect the views of Munich European Forum e.V.
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