Political Economy and the Constitution of Europe's Polity: Pathways for the common currency beyond ordo-liberal and neo-functionalist models

The Eurozone crisis has been variously described in financial or in fiscal terms, caused either by an over-leveraged banking system or by unsustainable budget deficits and national debt – or indeed both at once. But perhaps with the exception of Greece, neither holds true for individual euro-members or for the common currency area as a whole. The combined banking and sovereign debt crisis is symptomatic of a more fundamental set of structural problems such as trade imbalances, productivity differentials and the disconnection between financial flows and investment in productive activities that require a systemic analysis. By contrast with much of modern economics and political science that rest on rational choice and methodological individualism, this chapter seeks to develop an alternative political economy that can conceptualise the constitution of Europe’s polity – the complex economic, political and social space in which the Eurozone is inscribed.

From this political economy perspective, I argue that the euro-area is characterised by the primacy of harmonisation over mutualisation – a legacy of the neo-functional model of integration and the ordo-liberal model of coordination, which privilege joint procedures and common rules rather than the sharing of risks, rewards and resources. Mutualisation – the search for cooperative arrangements based on a balance of interests – offers an as yet unrealised potential to transform the Eurozone in line with the constitution of Europe’s polity. The chapter charts a path beyond the current debate that portrays the European Monetary Union (EMU) either as a misconceived experiment which should be abandoned in favour of national currencies (e.g. Pissarides 2013; Flassbeck and Lapavitsas 2015a and 2015b), or as a project beset by design failures which require centralisation (e.g. Marsh 2013; Sinn 2014), or as an arrangement which can work better with a different policy mix (e.g. Sandbu 2015).

My chapter runs as follows. First of all, the current crisis of the Eurozone can only be understood as part of a particular economic, political and social domain in which EMU is embedded. The domain in question is not limited to a set of institutions and rules within which markets, states and individuals interact (Buchanan 1990) but extends to political and social structures that embed both cooperation and conflict at – as well as across – different levels (Ornaghi 1990; Pabst and Scazzieri 2012). As an analytical framework, the approach to the political economy of constitution followed in this essay explores the multi-level dependencies that characterise economic integration within and between national states and transnational markets (Pabst 2014; Pabst and Scazzieri 2016; cf. Polanyi 2001).

Second, ordo-liberalism shares with the proposed ‘political economy of constitution’ the idea that the economic field is not self-standing but rather part of the overarching social field, which encompasses society and the state. However, ordo-liberal thinkers view the social domain as grounded in the constitutional-legal order that subordinates social ties to state laws and market contract. By bracketing social relationships out of the picture, the effect of ordo-liberal policies – creating the ‘framework conditions’ (Rahmenbedingungen) for perfect competition – is to disembed the economy from society and to re-embed political and social ties in predominantly contractual relations, which ignores the Eurozone’s structural problems.

Third, the dominant logic of European integration since the 1957 Rome Treaties has been neo-functionalism, which posits spill-over effects from economic interdependence to political unity (e.g. Haas 1961; Sandholtz and Stone Sweet 1997). Analogous to the concept of path dependency, neo-functionalism explains why European integration has privileged monetary integration over both a fiscal and a political union. Coupled with the influence of ordo-liberalism, this has constrained EMU crisis management and official proposals for reform.

Fourth, the European polity within which EMU is inscribed is neither a federal super-state nor a free-trade area but rather a political system sui generis (e.g. Hix 2005; Zielonka 2006 and 2008). This system consists in hybrid institutions, overlapping jurisdictions, multiple membership, polycentric authority and multi-level governance. As a unique polity, Europe contains a certain set of opportunities and constraints for political and economic cooperation. These opportunities and constrains provide the resources for a different exit from the Eurozone crisis and they can embed EMU in the political and social relations which provide the trust and cooperation on which a viable common currency depends.

Section 2 provides a brief outline of the wider causes of the Eurozone crisis. Section 3 develops a political economy of constitution as an analytical architecture to describe and explain the wider domain in which the Eurozone is inscribed. Section 4 examines ordo-liberal principles and policy prescriptions that underpin the creation of EMU and the Eurozone crisis management/resolution since early 2010. Section 5 provides an account of the (neo-)functional logic that has shaped the process of integration and the building of the European polity. Section 6 suggests a number of alternative pathways for the Eurozone. The final section provides some concluding reflections.