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The European Financial Crisis and the Future of the European Union

10/10/2013, 6:30 PM to 8:30 PM | German House New York

The European Financial Crisis and the Future of the European Union

Co-Sponsors:
• Social Science Research Center Berlin (WZB)
• German Center for Research and Innovation (GCRI)

Prof. Daniel Kelemen, Professor of Political Science at Rutgers University and Fellow in the Program in Law and Public Affairs at Princeton University, investigated the root causes of the European Financial Crisis. He noted that it was not the debt crisis in Greece that triggered the recession, but rather gradual macroeconomic changes and imbalances, such as growing labor costs and current account deficits, which accumulated over the last decade following the creation of a new euro currency. The primary culprit, however, was the “birth defect” of Eurozone governance. In all free markets, one must have control over the debts of individual system members; a banking union must also exist. As Prof. Kelemen noted, one weak link within the chain has the potential to lure all others into destruction.

The Maastricht Treaty contained such regulations; Germany, which originally wanted to impose these regulations, however, was also the first to violate them back in 2003 without consequence. Hence, these banking regulations became null and void. In order to prevent a similar situation from occurring again in the future, the following steps should be taken, according to analysts: developing a fiscal union with stronger surveillance of the states’ financial behavior, a regulatory banking union to provide a common deposit insurance and to prevent excessive risk, a debt union for various forms of bailouts, and a political union that is stronger than the current E.U. In Prof. Kelemen’s opinion, “rapid progress” is already taking place in these areas. Still, he admits, the risk remains that as the E.U. increases collaboration to overcome the crisis, not all member states, such as the UK, will be willing to go down this road. One result thereof could be the potential fragmentation into a “two-speed Europe.”

Prof. Mattias Kumm, Inge Rennert Professor of Law at New York University and Managing Head of the Rule of Law Center at the Social Science Research Center Berlin (WZB), did not directly contradict these statements, but set off to paint an even darker picture of the situation. In many European countries, such as Spain and Greece, youth unemployment rates vacillate between 20% and 30%, economic growth has been less than one percent on average over the past decade, basic social services are not currently being provided, debts and liabilities are on the rise, and a feeling of “unease” towards the E.U. and Eurozone is spreading among many of the countries’ citizens.

Like Prof. Kelemen, Prof. Kumm also examined the underlying causes of the Euro Crisis. He stressed that the general debt problem was not necessarily connected to issues with the E.U. structure, but was rather a consequence of lower inflation rates that led to rising debts – something that can be observed within every Western democracy. So why was there a surge in debts in 2008? “This is the result of massive transfers from the public to private sector in terms of bank bailouts,” Prof. Kumm stated. “It’s a banking crisis.”

The European Commission has authorized 4.5 trillion euros for bank bailouts (which equals 30% of the European GDP), of which almost two trillion euros were eventually used. Prof. Kumm noted that some of the countries now in trouble had been doing fine by Maastricht criteria. Spain, for example, had a better overall debt ratio than Germany. In all these cases, except for Greece, the national banks now have a debt problem because they had to bail out their national banks, not because the individual countries “did not get their act together,” as Prof. Kumm put it. What can and should be done? According to Prof. Kumm, general banking regulations need to be established and the possibility for a bank to go bankrupt must also exist.

Looking ahead to the future of the E.U. and Eurozone, Prof. Kumm outlined possible scenarios for the upcoming European parliamentary election. The individual parties nominate candidates to run for the presidency, which allows European citizens the chance to select which direction they want to go: continue the path of austerity, or invest and spend more, or decentralize some policies and loosen the union altogether. This is an important step, in his view, because at the moment, Europeans feel that they must accept the decisions made by the European parliament no matter what; if they do not, they are considered to be “against Europe.”

Moderator Prof. Mary Nolan, Professor of History at New York University, continued the dialogue, questioning whether Germany poses an obstacle to alternative institutions as outlined by the two speakers, what the hurdles within the E.U. are to increasing banking regulation, and what is likely to happen to the E.U., should the U.S. default on its debt. Here, Prof. Kumm stressed again that German politicians do not have a real moral mandate in this situation because Europe, on a whole, did not emerge as a major discussion point during the most recent election campaign. Nonetheless, he believes that the German public should urge politicians make it a priority. Concerning banking regulation, Prof. Kelemen also highlighted the issues of risk sharing and deposit insurance.

An engaged audience debated the necessity of a fiscal union if a monetary union already exists, as well as the effects of the current situation in Europe to the rest of the world (e.g. China or the Middle East). They also inquired about the potential benefits Germany derives from having the euro as a currency rather than the Deutschmark, whether austerity is the right solution, the impact of the ratio of retirees to the working population, and the prospects of a U.S.-E.U. free trade agreement.

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  • Featured Speakers

    • Prof. Daniel Kelemen

      Professor of Political Science, Rutgers University; Fellow, Program in Law and Public Affairs, Princeton University

    • Prof. Mattias Kumm

      Inge Rennert Professor of Law, New York University; Managing Head of the Rule of Law Center, Social Science Research Center Berlin (WZB)

    • Prof. Mary Nolan (Moderator)

      Professor of History, New York University