Whatever it Takes: The Battle for Post-Crisis Europe

By George Papaconstantinou

For generations, Europeans have become accustomed to rising prosperity, an increasingly supportive social safety net and the expectation that each generation will fare better than the last. Europe has built a social model that is second to none, and fashioned a continent of disparate nations into a community that shares common values with democratic institutions that are the envy of the world.

Yet, Europe, as a common project is increasingly questioned by its citizens. The emphasis on solidarity, the driving force behind the social and economic integration, has given way to suspicion and nationalism. Openness and tolerance are strained by xenophobic, anti-immigrant sentiments, while populists and extremists set the agenda and dominate the policy debate.

European countries have borne the brunt of the global economic forces that have strained its institutions and capacity to respond appropriately. Characterised by uncertainty and delay both in handling the Euro crisis, Greece’s ongoing economic woes, Brexit and now a migrant crisis, Europe is at a crossroads in its development: a restructuring at the very least, if not a new settlement of power within the union, is on the cards. This book will attempt to understand what "post-crisis Europe" will look like, and what the opportunities are to rethink its economic, social and institutional architecture as well as to address the nagging democratic deficit that undermines its legitimacy as a democratic entity.

George Papaconstantinou is uniquely placed to offer commentary on the machinations of the union and its internal behaviour. Appointed Greek Finance Minister by Papandreou in the newly formed government in 2009, he played a key role in the Greek crisis, negotiating the first bail-out with the Troika.

• Language: English
• Publisher: Agenda Publishing
• Release date: Oct 24, 2019
• ISBN: 9781788212878

George Papaconstantinou

George Papaconstantinou studied economics in the UK and the US, obtaining a PhD from the London School of Economics. After working for ten years at the OECD in Paris, he returned to Greece to serve in a policy advisory role for the Greek government. In 2007, he was elected to the Greek Parliament, and in 2009 to the European Parliament. In October 2009 he was appointed Finance Minister in the newly formed government of George Papandreou and in that position he played a key role in the Greek debt crisis, negotiating the first bailout with the EU and the IMF.

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Whatever It Takes

Comparative Political Economy

Series Editor: Erik Jones

A major new series exploring contemporary issues in comparative political economy. Pluralistic in approach, the books offer original, theoretically informed analyses of the interaction between politics and economics, and explore the implications for policy at the regional, national and supranational level.

Published

Central Bank Independence and the Future of the Euro

Panicos Demetriades

Europe and Northern Ireland’s Future

Mary C. Murphy

The New Politics of Trade

Alasdair R. Young

The Political Economy of Housing Financialization

Gregory W. Fuller

Populocracy

Catherine Fieschi

Whatever It Takes

George Papaconstantinou

Whatever It Takes

The Battle for Post-Crisis Europe

George Papaconstantinou

© George Papaconstantinou 2020

This book is copyright under the Berne Convention.

No reproduction without permission.

All rights reserved.

First published in 2020 by Agenda Publishing

Agenda Publishing Limited

The Core

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Newcastle Helix

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www.agendapub.com

ISBN 978-1-911116-97-4 (hardcover)

ISBN 978-1-911116-98-1 (paperback)

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A catalogue record for this book is available from the British Library

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Contents

Preface

Acknowledgements

Foreword by Erik Jones

Abbreviations

Part I Forged in crisis

1 How we got here

2 It seemed like a good idea at the time

3 Caught in the headlights

4 The firefighters

5 Fixing the bicycle while riding it

6 A dysfunctional family

Part II Post-crisis

7 We are not in Kansas anymore

8 And then there were …

9 Safeguarding the currency

10 Squaring the institutional circle

11 The new geopolitics

12 Twenty-first-century democracy

Epilogue: the way ahead

Chronology 1: from inception to the eurozone crisis

Chronology 2: crisis milestones and policy responses

Bibliography

Index

Preface

Only a few years ago, to suggest Europe was post-crisis would have been to border on hubris. Yet Europe today finds itself in a surprising place: after weathering an economic crisis that challenged its core tenets and almost brought down its crowning achievement – the common currency – it now believes that the worst is behind it and looks more confidently again to the future. Guarded optimism seems to be the order of the day. This caution is understandable and even justified, to an extent; after all, it was not that long ago that pundits predicted the end of Europe as we know it. However, the problems that were at the root of the crisis in the first place – in addition to others, which have emerged since – remain largely unresolved and still need to be tackled. The job is by no means done.

It has been more than a decade since the onset of the US financial subprime crisis and its impact on the European continent, and almost ten years since Greece triggered the fully fledged economic and financial eurozone crisis that rattled the whole world. During that time, Europe’s common currency area experienced a rude awakening to the reality of its incomplete, if not deeply flawed, construction.

The EU – in both its political and institutional manifestations – initially delayed and dithered in its response, hoping the matter would resolve itself, or at the very least that it could be contained. It was then forced by events to tear up its own rule book and bail out Greece. Eventually it embarked on a grimly determined, but to-date unfinished, effort to rewrite the rules of the Union’s economic and financial institutional architecture. Financial firewalls were erected, new institutions were put in place and decisions on creating a banking union and a true fiscal union were advanced, all in an effort to safeguard economic and financial stability and avoid a repeat of the kind of problems that threatened the very existence of the euro.

These decisions were taken in an increasingly toxic political environment, with citizens dissatisfied with the inability of governments to deliver prosperity and jobs, and with popular referenda in a number of countries loudly rejecting business-as-usual politics. To some observers, this was a startling turn of events; in reality, however, it was an expression of discontent that accumulated over time. Europeans had become accustomed to rising prosperity, an ever-more-supportive social safety net and the expectation that each new generation would fare better than the last. Over the past 40 years, Europe had built a social model that was second to none, and fashioned a continent of disparate nations into a community with common values, with a social contract that for a long time seemed to function well and democratic institutions that were the envy of the world.

However, since the financial crisis and the fiscal policies imposed to deal with it, Europe, as a common project, has become increasingly questioned by its citizens. In an environment characterized by a downturn in public spending and tightening of the public purse strings, solidarity – a driving force for European economic and social integration – has given way to suspicion, nativism and concern about one’s own nation rather than the collective European destiny. Openness and tolerance have been strained by xenophobic, anti-immigrant sentiments, with populists and extremists tapping into this mood to their electoral advantage, increasingly setting the public agenda and dominating the policy debate.

Despite the popular narrative, the source of this discontent is not necessarily to be found in the project of the European construction itself. It can instead be traced to the broader forces that are fundamentally reshaping the global geopolitical and economic environment. Hyper-globalization, fuelled by global finance and accelerated by pervasive digital technologies, has given birth to incredible opportunities on a worldwide scale. At the same time, however, it has widened the gulf between society’s winners and losers, increased inequalities both within and across countries and has consequently challenged political elites and even strained democracy in Western countries.

The dislocations that are occurring on a massive scale as a result of these global structural shifts and the economic and social difficulties accompanying them are problems in their own right, which every society needs to contend with. They are, however, exacerbated by the power of the internet and the new media. Social media have often helped distort the real causes of the problems, amplified the voices of dissent and given a platform to populists and extremists, eager to blame Europe for what are, in fact, the effects of broader socio-economic forces whose sources, reach and impact stretch far beyond Europe and the EU.

In combination, new media and the global economic transformation under way have laid bare the weaknesses and deficiencies of the European economic and social model as well as that of the existing political consensus that has fashioned and supported it. They have also made for an increasingly shrill political dialogue between countries in the north and in the south of Europe, between old and new Europe, between project Europe and nationalist forces, between establishment and anti-establishment voices. Nothing is as it used to be; everything is questioned – most of all a European destiny based on common values that we have all until now considered as a given.

In this new environment, a battle is raging for post-crisis Europe: its direction, content, its very survival in a recognizable form. As the EU is continuously blamed for everything that is wrong in member states and becomes the easy scapegoat for the economic and social dislocation that accompanies global transformation, political leaders find it increasingly difficult to defend the values on which Europe was founded. This stymies attempts to push for the difficult decisions that are needed to move the European project forwards. Citizens are often lost between appreciation of the real problems facing societies, which require new solutions, and pure propaganda, which obscures reality and blurs the difference between fact and fiction.

This book attempts to chart and understand the developments of the past few years against the backdrop of Europe’s slow but inexorable progress as it marches forwards, together with an analysis of the possibilities and dangers that exist as we move ahead. With the continent’s political and economic institutions seemingly turning a corner, the fight is on to define and ultimately shape post-crisis Europe. In this context, I try to contribute to the discussion of the different options open to us for a re-think of Europe’s economic, political and institutional approach and architecture, in what is turning out to be the most important policy debate of a generation.

This is a debate that is too often framed by policy practitioners simply in terms of excessive deficits, the sustainability of debt levels and the stability of banking systems in a new European institutional architecture. These are certainly all central elements in providing a convincing and workable answer to the questions we face today; but in the new European architecture, governance issues and new decision-making processes that address the core of the problem – the EU’s legitimacy and usefulness to its citizens – will be crucial. Ultimately, it is all about being able to deliver prosperity, jobs, security of income and rising standards of living; however, increasingly it is also about democracy and the future of the open society.

Acknowledgements

I have lived two professional lives. The first has been that of an academically trained economist, interested in policy analysis more than in economic theory. The second has been in active politics, in one of the worst periods for my country, ending up in a front-and-centre position at the start of the eurozone crisis.

This book is an attempt to reconcile these two lives. European decision-making has always been at the intersection of what is economically and socially desirable with what is politically feasible – more so at a time of crisis. It has therefore felt natural to me to draw on these two traditions – policy analysis and active politics – in order to recount what happened, how we got there, and more importantly how we could move forwards in a post-crisis Europe.

My debts of gratitude go to people I met or read in those two lives. First, for the life lessons from my many impressive colleagues during my time in politics. The vast majority strived to find imaginative but workable solutions to seemingly intractable problems, while pursuing both the national and European interest. Second, in my writing, I stand humbly on the shoulders of giants: those academics and policy specialists that have painstakingly analyzed the crisis and have offered their best advice on how to overcome it.

I owe a particular debt of gratitude to my colleagues at the European University Institute who have provided a unique environment and intellectual stimulus to help me put my ideas on paper. Many of them will recognize their own thinking in these pages, although they may not necessarily share all of my conclusions.

Big thanks are due to the Comparative Political Economy series editor, Erik Jones, and my ever-so-patient editor at Agenda, Alison Howson. This is a better book because of their comments and editing – it would have been even better had I taken all their suggestions on board.

I would like to dedicate this book to my family: Jacoline, Nicolas and Stefanos; they have truly lived through most of this story with me.

Foreword

Erik Jones

Europe needs a new narrative if it is going to move forward rather than falling back into crisis. That narrative cannot be a collection of policy initiatives or institutional reforms. New policies are important; so are new institutional arrangements. But politics and institutions do not by themselves speak to a democratic electorate – and particularly not to an electorate that has focused its attention on legitimate grievances of its own. Only politicians with a clear vision of the future can wield influence with voters in such a context. If the politicians with the best ideas are too afraid to forge a vision, they should not be surprised when voters attach themselves to politicians who run off in the wrong direction. Europeans deserve better political leadership; so does Europe.

But what would such a vision look like? George Papaconstantinou argues that Mario Draghi’s whatever it takes moment is a good model for European leadership. This is not an argument for pure boldness or audacity; it is also not a celebration of improvization, although clearly some of that was involved. Instead Papaconstantinou makes it clear that Draghi’s pledge only had the effect on the markets and on the popular imagination that it did because it was well-flanked by sound policies and solid institutional arrangements. Draghi offered a vision alongside his commitment. And that combination of planning and determination is what political leadership is all about.

Drawing on his own experience in politics during the crisis, Papaconstantinou shows how Draghi effectively pushed back against a mistaken diagnosis of Europe’s economic problems. He also shows how these actions fed into creative thinking inside a number of different parts of the Europe Union about how European institutions can be made more resilient. Finally, Papaconstantinou underscores how the agenda for strengthening Europe remains controversial and incomplete. There was no inevitability to the events as they unfolded; instead political leadership helped to shape the new environment – with positive results that could nevertheless come unbound.

The challenge now is to round out the vision of Europe that the resolution of the euro crisis set in motion, building on contributions from both European institutions and the member states. Moreover, the need is great. Although the worst of the economic crisis has passed, Europe confronts a host of other problems. Papaconstantinou shows how Europe’s political leaders could make progress on dimensions ranging from migration to foreign policy to democratic engagement.

Success, Papaconstantinou argues, will take more than just determination; it will require a narrative that is compelling enough for Europeans to embrace. Without such popular engagement, Europe’s politicians are unlikely to make lasting progress. Whatever It Takes is not only a model for leadership, but also an essential warning that the success of muddling through should not be taken for granted. Papaconstantinou’s book is required reading for anyone who wants their optimism for the European project to be well-grounded.

Abbreviations

PART I

FORGED IN CRISIS

1

How we got here

It is often disparagingly said that the process of European construction is the result of negotiation and compromise. There is nothing wrong with that. Negotiation and compromise are at the heart of democracies; they guide the evolution of any social and economic process and have characterized all the stages of European integration, from the Treaty of Rome to those of Maastricht and Lisbon. They have been there at the enlargement of the Union and in the myriad of large and small decisions reached by EU heads of government at European Councils. Indeed, in most stages of this process, the dominant force driving forwards difficult decisions has been the political will of participants; economic considerations, although the raison d’être behind many of the initiatives, have generally been of secondary concern.

In the current environment of collective self-doubt about the future of the European project, a recurrent criticism is that Europe is a project of the elites. Frequently vocalized by populist politicians looking to capitalize on public discontent, this characterization pits Europe against the average person and has propelled populist parties to high polling numbers and even to electoral triumph. It is, however, also an accusation made by people who do believe in Europe, but feel it has forgotten its citizens in the process – people who feel that to move forwards, Europe needs to pause, correct its course of action and regain the confidence and trust of the Europeans it has lost, presumably because it has strayed from its original purpose and ideals.¹

So there it is. An elitist construction, the result of negotiations and compromises made in dark rooms, behind closed doors – today’s Europe in a nutshell, according to many of its critics. As reductionist as it may be to describe the EU in this way, it has to be acknowledged that there is some truth to it. Despite the signs of economic growth and the general sense that Europe has emerged from the economic and financial crisis, there is a general EU malaise. It is a sense that the Union is no longer delivering, that too many people are being left behind, that social protection systems are no longer able to cope, that democracy within Europe is not functioning as it should, that the ideals on which Europe was built have somehow been betrayed. As economic results fall behind expectations, and as cultural identities are threatened by real or imaginary external enemies, people have begun to turn on the project itself, and on its perceived inability to answer their everyday problems.

The original aims of the European project were breathtaking in their audacity and scope. At a time when the continent was recovering from a catastrophic war, the idea was to bring together the former enemy nations in a community of shared ideals, to unite peoples with different histories and identities and to bind them for ever, economically and politically. Nothing like it had been attempted before – at least, not through peaceful means. Understanding the difficulties that the EU faces today requires getting to grips with how it has evolved since, both in terms of its politics and its institutional machinery. Although this book does not in any way pretend to contribute to the various scholarly attempts to analyze the complex and rich tapestry that is the construction of the European project, some remarks are needed in order to set the stage and offer some context for what follows.²

This modern history and its main milestones – institutional, economic as well as political – is an essential part of any attempt to understand where we are today and, even more, to get a sense of where we could be headed. In turn, it requires identifying those actors, personalities, institutions and in particular the modus operandi that have enabled the progress Europe has exhibited over the past decades. Progress that has nevertheless proved inadequate – perhaps limited by the very design of European construction – to deal with the large external and internal shocks of recent years.

The early years: first steps for peace and prosperity

It is striking that at the root of the European project one finds simultaneously two elements. The first is the overarching moral imperative of ensuring that the continent never again experiences the horrors of war; the second is the practical understanding that the best way to achieve a lasting peace is through deeper economic connections between nations and through political integration. The first is famously foreshadowed in Winston Churchill’s 1946 speech at the University of Zurich calling for a United States of Europe.³ The second can be found in the other historic declaration of the time – that of French Foreign Minister Robert Schuman in May 1950, proposing a community to integrate the coal and steel industries of Europe – which were themselves of course the industries of war – and by reverse implication safeguard peace.⁴

At that very early stage of the process, almost 70 years ago, before the first treaty was signed in Paris in 1951 to create the European Coal and Steel Community, it is evident that the founding fathers were already looking far into the future – actually attempting to design it. The precursors of today’s institutions were established, and the two largest continental European countries (France and Germany) and their political elites were in charge of the process. Ideas that would not take shape for decades, such as the creation of the single currency, were initially debated behind closed doors at that time. Other ideas that are yet to be fully realized, such as a fully fledged political union and a defence community, were first mooted at that point. Equally importantly, that was also the time when today’s ideological divisions between