European Union Essay, Research Paper

Dilemmas, asymmetries and equilibria of European integration

The European Union has been vacillating between a Federation and a Common- wealth approach. An unpleasant situation has evolved, where all participants feel they are cheated: large States think their smaller partners wield disproportionate clout, small States fear their marginalisation. No system of checks-and-balances seems to exist e.g. in the field of Monetary Union. Moreover, no real solution has been proposed for the difference in development levels within the ever-closer Union and no credible equilibrium has been sought between the competitivity race on one hand and a ?social profile? for the Union on the other. A series of re-equilibrations has to occur in Europe for the future to happen without shocks.

Whatever shines is not made of gold

The long-winded negotiations of the IGC ad the much-hailed Amsterdam Treaty have brought little change to the European Parliament. One technical point, though, may lead to an important future shift in priorities. The maximum number of EuroMPs has been fixed at 700; thus if enlargement takes place as expected, the number of sitting EuroMPs of present EU members will have to shrink. For a country like Greece, this would give 21-22 members instead of the present 25. This should lead to a more rational choise of postings on the part of EuroMPs, who have been neglecting useful and even powerful Committees so as to sit on more decorative functions.

EU: Greece Admitted As Member Of Euro Common Currency

Greece thus becomes the 12th member of the currency union, and the first to join since the project was launched just 18 months ago. Greeks are jubilant, saying the move represents a recognition of the economic maturity achieved by their country.

Athens-based media commentator Andreas Papageorgopoulos, who was at the summit site in Porto, put it this way: “For Greece it’s a big day, it proves that the Greek people through their government in the last few years have achieved an enormous task. They have overcome a number of obstacles, and now we are not at the door of Europe, but virtually inside.”

But not everybody views the Greek accession as positive. The infant euro has had a hard time since its inception, losing almost a quarter of its value against the U.S. dollar because of lack of investor confidence. German bankers and financiers, in particular, have been outspoken in their belief that including in the euro Greece, a country traditionally plagued by economic problems, would send the wrong signal to the markets.

It is true that in the past Greece has had high inflation and interest rates, and a public debt reaching 114 percent of gross domestic product. In the last two years, however, Athens has made monumental efforts to get its economic house in order, and the figures speak for themselves. Inflation is down to 5 percent, interest to 9 percent, and public debt is 104 percent of GNP and falling. If Greece can stay on course and improve further in the coming years, there appears no reason to fear that its presence inside the eurozone will further weaken the common currency.

Ironically, the biggest psychological impact of Greece’s accession may be on a country that is not even inside the eurozone, namely Britain. Britain is a major holdout against the common currency, with opinion polls showing that 60 percent of the tradition-minded British public favor keeping the national currency the pound.

In any event, Greek accession to the eurozone is likely to re-awaken debate on joining the euro within the British government

Macroeconomic stability

While no EU member state experienced comparable restrictions on their civil and property rights, Greece, Portugal and Spain had to change their economic regime through a series of structural reforms where the pressure of qualifying for Economic and Monetary Union (EMU) played a crucial role. The fulfillment of the convergence criteria for the euro is not part of the enlargement negotiations but the needed change in the economic regime of the CEAS is already monitored by world financial markets, in the attempt to anticipate whether stability will be sustained after membership – and at what cost in terms of social cohesion.

In an environment of global policy convergence, the main effect of EU enlargement on growth and investment will depend on the progress of transition rather than on geographical proximity, or even on any order of entry into the EU. The progress depends, in turn, on macroeconomic stability and structural reforms. Accordingly, macroeconomic policy sustainability serves as a guide for the timing of a convergence program to macroeconomic stability including a catalog of structural measures capable of improving corporate governance, fighting corruption and promoting national cohesion. The structural dimension is specified in the form of principles of good government at the public and corporate levels which reflect the standards found in all mature democracies and currently promoted by international organizations such as the EBRD, the World Bank or the OECD.

Some of the CEAS are in the middle of the current EU group in terms of the budgetary institutions, suggesting that they are better fit for fiscal consolidation and, hence, for EU membership than Greece, Portugal or Spain might have been in the 1970s. While there is still much room for improvement, some of the CEAS are close to policy sustainability and to EU procedures and performances, on both macroeconomic, structural and institutional grounds. The fact that CEFTA gathers six of the ten states and that others may join before EU membership also helps set them apart from other transition economies and indeed from previous applicants who had not been members of EFTA – such as Greece or Spain.

“where is the gap now Mr’s of EU member-states?”

In the early 1990s, it became fashionable to portray Greece as an awkward partner or indeed a black sheep in the European Union (EU): an economic laggard, falling behind in the European income league, with large budget deficits and double-digit inflation, who also acted in a particularly uncooperative fashion in the attempts made by its Western allies to stabilize the Balkan region. This followed a decade of economic mismanagement and rhetorical outbursts in the area of foreign policy, coupled with the habit of adding dissenting footnotes to joint communiquιs issued by the European Community (as it was still called at the time) and NATO.

For those who use the term Balkans in a pejorative fashion, Greece was behaving like a Balkan country in the EU, adding to the problem instead of trying to be part of the solution in a notoriously unstable and conflict-ridden region. And then came Samuel Huntington, who argued that the clash of civilizations was bound to replace the struggle between liberal democracy and communist totalitarianism, and who then proceeded to identify the major fault lines cutting across the European continent. Greece found itself on the wrong side of Huntington’s map, because of its Orthodox tradition, not to mention several centuries spent under the Ottoman rule. It all made sense, of course; and it was therefore utterly predictable.

The situation has, however, changed substantially in recent years. Greece is now receiving praise from European and American political leaders and journalists for its moderation in the foreign policy field and the stabilizing role it has increasingly assumed in the Balkans. On the other hand, the improvement registered since 1993 in the main macroeconomic indicators has been impressive; and it has also been confirmed by the vote of confidence cast in financial markets. The Athens stock exchange has reached unprecedented heights, while the drachma has been trading at several percentage points above its central rate since it was admitted to the European Exchange Rate mechanism in March 1998. At long last, Greece seems to be making a successful transition from the status of an emerging market to that of a mature economy, and the bets are heavily on Greece’s admission to the European monetary union by the year 2001.

Even domestic politics has become less polarized and personalized; and perhaps verging on the boring for the taste of some Greeks used to charismatic leaders and interminable fights between the good and the evil.

Slow Adjustment to EU Membership

The European Union is now much more than the incomplete common market it had been for many years. Yet, European construction is still very much about economics in the wider sense – low politics being arguably a misnomer for what constitutes the bread and butter of political life in contemporary democratic societies. European economic integration can be in turn divided into three main areas: the opening (and regulation) of the internal market for goods, services, persons and capital; the redistribution of resources, mainly through structural policies; and now, economic and monetary union (EMU).

Accession to the EC/EU has meant for Greece a radical change in the relationship between the state and the market. Greece had a long history of high external protection and extensive state intervention in the economy, usually arbitrary and non-transparent and directly linked to the operation of the clientele system. As a member of the Union, Greece has been forced to adjust to open and highly competitive markets and also to the requirements of joint rule-setting in Brussels. With the deepening and widening of the process of European integration, the scope of joint rules and externally imposed constraints has been greatly extended, now covering not only different barriers to entry to the domestic market but also inflation, budget deficits and interest rates. In other words, economic sovereignty in the context of the EU has become a very relative concept.

Greece experienced considerable difficulties in adjusting to this new economic reality; much more so than the two Iberian countries which joined a few years later. Its maladjustment, which lasted for several years, at least partly explains the tensions created with European institutions and partner countries. Greece often asked for exceptions in order to protect its domestic producers; either deliberately or because of administrative inefficiency it was slow in implementing European directives and regulations; and it was sometimes accused of wasting the money spent through EU structural policies. In the meantime, trade deficits kept on growing, financed in part through EU transfers.

Macroeconomic instability continued for many years. Tracking the process of compliance with the so-called convergence criteria set out in the Maastricht treaty, the admission ticket to the final stage of EMU, statisticians of the Union had to add little inserts to their graphs on inflation rates, budget deficits and interest rates in order to accommodate Greece, whose figures were for several years way above those of any other EU country.

This difficulty in adjusting to EU membership – and international competition as well -requires some explanation. Of course, the challenge facing Greece was a formidable one, given the relatively low level of its economic development compared to that of its new partners and the long history of protection of domestic producers. Adjustment to EU membership was bound to create winners and losers inside the country; and the experience until now suggests that losers (or potential losers) were numerous – and that some of them were politically powerful.

An incomplete list of losers from adjustment to EU membership would include a significant part of Greek business, accustomed to external protection and heavily dependent on state favouritism, especially through public procurement contracts. Who said that businessmen always believe in free competition? This list would also include most of organized labour to be found mainly in the large state-controlled sector of the economy characterized by over-employment, relatively high pay and low productivity. And it would certainly include many politicians whose survival depends on the clientele system which flourishes in protected markets and under non-transparent rules.The list of losers would also include other, less well-organized groups of society, such as many small businesses and the lesser skilled. Unable to adjust to a very competitive environment, but also unable to offer effective political resistance, they are, unavoidably, being sacrificed on the altar of economic restructuring.

Faced with such a situation, Greek governments tried for more than ten years to avoid or simply postpone adjustment. At the same time, they showed great readiness to throw money at any group of society able to make enough noise around it. In the process, they did, however, create another category of losers who conveniently happened to be disenfranchised because of age. By that I mean the younger generations in the country, who will have to bear the full burden of delayed adjustment, not to mention the burden of servicing the large public debt accumulated during the 1980s.

The turning point came around 1993, when Greece entered a phase of economic stabilization and convergence with the rest of the EU, coupled with a more determined and much delayed effort at privatization and restructuring. Previous attempts in this direction had proved short-lived; but the margin of manoeuvre has become progressively narrower with time. The prospect of economic marginalization in the context of the EU, the rapidly rising cost of the servicing of the accumulated debt, and the increasing difficulties in the financing of deficits left Greek governments with very limited options. In the meantime, Greek society (or at least a substantial part of it) had learned a lesson in economics the hard way.

This new phase has been characterized until now by a substantial improvement in terms of economic growth. Inflation and budget deficits have registered a sharp decline, thus rapidly converging towards the EU average. This convergence finally led to Greece’s admission to the European Exchange Rate Mechanism in March 1998, combined with a modest devaluation of the drachma. By the time of writing, the drachma had recovered more than half of its earlier devaluation. Despite the remarkable progress achieved in terms of macroeconomic stabilization, Greece failed to be admitted to EMU on the basis of the 1997 figures. It now appears almost certain that the country will be able to satisfy the criteria for admission by the end of this year, which would allow Greece to enter the euro-zone in 2001; and the financial markets are apparently betting heavily on its success.

The popularity of Greece’s membership of EMU has been repeatedly confirmed by large majorities in opinion polls, even though every Greek in favour of EMU would not necessarily be prepared to pay the price associated with membership. Such support is easy to explain. The search for a collective shield against the enormous instability of exchange markets is coupled with the fear of political marginalization that would follow should Greece be left out for long of the most important part of the European construction. And experience suggests that monetary stability can be more effectively guaranteed, if responsibility for decisions in the area of monetary policy were to be transferred to the European Central Bank in Frankfurt.

If accomplished, membership of EMU will serve as a psychological boost as well as a sure sign that, having erred for several years in the economic wilderness, Greece is coming back into the fold.

One thing will be to secure membership of EMU, and another to ensure that the Greek economy performs well in this new environment. Greece has entered a long and difficult phase of structural reforms, including cutting the state-controlled sector of the economy down to size, overhauling of the social security system, and adjusting Greek public administration to the rapidly shifting reality of European integration and globalization. There is still a long distance to travel in this direction.

Many people, including most notably Mr Simitis, refer to the task of modernization of Greece. This term is open to many different definitions. If by modernization -or simply reform, as a less heavily loaded term- we understand the process through which Greece can adjust to a rapidly changing European and international environment, it is interesting to observe that the dividing line between reformists/modernizers on the one hand and conservatives/populists on the other cuts right across the two main political parties in Greece. The Socialists, under the leadership of Mr Simitis have taken the lead in this process; but he faces strong opposition both inside his own party and from various organized interest groups.

“Better late than ever”

Greece has travelled a long distance since the fall of the colonels’ dictatorship in 1974. Democracy has been consolidated, and this has been achieved in an extremely peaceful manner. Greek democracy has had its share of demagogues, and public opinion fell sometimes prey to populist rhetoric. This is, of course, not totally unknown in other democracies. It could be argued that, for several years, economic stabilization and much needed structural reforms were sacrificed on the altar of democratic consolidation.

Membership of the European Union has acted as a powerful catalyst for domestic reform/modernization. Adjustment to the requirements of membership of this very unusual club, in which the most advanced democracies and mixed economies of Europe experiment in new forms of pooling of sovereignty, has been difficult and rather painful for Greece. Resistance to change from organized groups proved powerful enough to delay the process of adjustment for many years. The forces of reform/modernization have now taken the upper hand, although there is still much that needs to be done.

Greece does not have the luxury enjoyed by many Western European countries for whom external threat has become a rather abstract notion since the disintegration of the Soviet empire. Developments in the Balkans, coupled with tension in relations with Turkey, reaching sometimes dangerous peaks, tended to create a siege mentality in Greek society. In the early 1990s, and to a much lesser extent now, this was cultivated by a group of politicians across the political spectrum, who apparently decided to invest in nationalist shares. They were strongly encouraged by a large section of the media. Again, this is, undoubtedly, no Greek monopoly.

In general, Greek diplomacy has experienced difficulties in finding the right combination of the language of might, right and common interests. It has often placed almost exclusive emphasis on what it perceives as right on issues of foreign policy, while not paying enough attention to the need for building coalitions and identifying common interests with other countries. It has failed to appreciate that moralizing in international relations is mostly the privilege of the strong.

For Greece, membership of the EU certainly constitutes the most important element of its domestic and foreign policy. But the country happens to exist in an unstable neighbourhood; and no kind of foreign policy can transport it away from that location. Moreover, it will, unfortunately, remain on the frontier of the Union for many years to come, because none of its neighbours is likely to be able to fulfil the criteria for membership for some time. Guarding frontier posts requires continuous vigilance and sang-froid. It also requires skillful diplomacy. Greece needs to act as a stabilizing force in the region.

Greece will need to combine domestic reforms with careful diplomacy abroad. Structural reforms can only succeed if social cohesion is preserved. This will be a difficult task for reformers/modernizers. On the other hand, national interests can only be defended successfully through alliances, formal or ad hoc. It is to be hoped that Greeks have learned a valuable lesson from sometimes bitter experience.