The Eurozone crisis is fuelling further integration between European states, with significantly more powers likely to be transferred to the European level as part of any solution. Fabian Zuleeg assesses the nature of this emerging governance system and the implications for states outside of the Eurozone. He argues that those countries who are not part of the new arrangements may find themselves pushed to the margins of decision-making, with the UK in particular facing a stark choice over its future within the EU.

The Euro continues to be in crisis, with the repercussions being felt throughout the whole European integration process. There continues to be an ongoing need to assist countries and banks which are requiring increasing amounts of resources from the better performing countries. At the same time, there is an attempt to steer the Eurozone towards a long term ‘more Europe’ solution, which will mean significantly more powers at the European level in areas such as fiscal policy, financial sector regulation and oversight and structural reform policy, including in sensitive areas of social policy.

Credit: Samuel Rönnqvist (Creative Commons BY NC SA)

The success of this strategy is far from assured: many risks remain, be it in the German domestic legal and political system, which might decide against further support, or in countries with rising Euroscepticism, which might no longer be willing to support further integration. In the crisis countries themselves, support for Euro membership will continue to be challenged by a poor growth performance, leading many to question the underlying motivation behind the reform programmes.

But even if the move towards integration is sustained, this raises a critical question of ins and outs. Who will be part of this deeper integration and what will happen to those who choose to stay outside? What would happen if a Eurosceptic government came to power in a Euro-zone country or if a referendum would vote ‘no’ to a further transfer of power? Within the Eurozone, the ability to accommodate fundamental objectors is very limited indeed. While certain compromises can be made to accommodate individual countries – see, for example, the Finnish receiving ‘collateral’ for their guarantees – when it comes to a fundamental objection the impact would be very different.

One key determinant of this impact is the question of size. Arguably, the Eurozone can live without the contribution or support of a small country as long as this country does not veto action by the others. These countries would then have a special status: not contributing but also unable to access any support, not dissimilar to the countries completely outside the Eurozone. This, of course, could not work for large countries, such as Italy, France or Germany.

But even for small countries, this is problematic. If they get into trouble, they will have to be rescued to contain contagion. And having them outside creates a precedent, which could easily lead to the overall solution becoming unworkable. So, while there will always be a certain level of accommodation for dissenters, the general line must be that all Eurozone countries have to be in the new governance arrangements.

By extension, this argument also holds for the countries which are pre-committed to entry into the Eurozone: i.e. the remaining EU countries such as Poland, but not Denmark and the UK which have an opt-out, as well as Sweden which is choosing to stay outside. But here there is a larger element of choice. Given that these countries are not yet in the Euro, and they also tend to be economically rather small, the economic impact of their decisions does not tend to influence the Eurozone. In essence, they can choose to stay outside any further governance deepening but there is a price to pay: eventual Euro membership might become a more distant prospect.

Many would argue that in the current situation that is a price well worth paying. After all, retaining the exchange rate as a policy instrument is helping a number of countries through the crisis and also the troubles in the Eurozone make it a dubious honour to be a member. For some countries, such as potentially the Czech Republic, the long term desire to be part of the Eurozone might not be particularly high in any case.

But this is a short-sighted argument. The economic governance reforms will have a profound impact on the rest of Europe. What these countries are looking at is akin to the developments in the European Economic Area: if you are outside but economically dependent on the countries inside, you simply have to accept the rules without being able to shape them. For the countries which are due to join the Eurozone eventually, being in from the beginning in any new governance arrangements is the only way to shape them.

This argument also applies to the opt-outs. This explains why both Sweden and Denmark were part of the Fiscal Compact despite there being little chance of Euro membership any time soon. As small, open economies with a high trade dependency on the Eurozone, economically they cannot afford to have any distance between themselves and the Eurozone member states. When the Eurozone governance changes start to affect the Single Market, which they will inevitably do, in areas such as financial/banking regulation, taxation or labour mobility and rights, the opt-outs cannot afford to be completely out.

But that leaves the big question of the UK. The situation here is very different. The UK is a large economy with a lower degree of Eurozone dependence. Politically, rather than having a debate over what new integration measures are needed, the UK is talking about taking back powers from Brussels. But even the UK is not unaffected by the governance changes; hence the insistence that no changes should possibly affect the Single Market.

This will become increasingly difficult to uphold. While the UK can yield a veto where Treaty changes are concerned, what if changes to, for example banking regulation, are brought in by the Eurozone countries through Qualified Majority Voting? The UK would be committed to a referendum, which would put the whole membership in question.

Paradoxically, the move towards more integration could thus lead to a situation where deeper integration leads to less of a multi-speed Europe but a stark choice for some countries: do they want to be in such a Europe or do they leave?

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Note:  This article gives the views of the author, and not the position of EUROPP – European Politics and Policy, nor of the London School of Economics.

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About the author 

Fabian Zuleeg – European Policy Centre
Fabian Zuleeg is Chief Economist at the European Policy Centre (EPC), in charge of the Europe’s Political Economy Programme. He leads the EPC’s work in the Economic Policy Forum, working closely with decision makers in the European institutions. He is responsible for the EPC’s work on the Economic and Monetary Union, the European Single Market (in particular the Digital Single Market), European labour markets, the EU budget and PPPs, health and well-being, and environment and energy issues. His current work focuses on the economic and Euro crises, Europe’s economic future and the future sustainability of Europe’s economic and social models in light of challenges such as demographics. He is particularly interested in how European policy and economic governance can address Europe’s dual growth crisis: a low aggregate growth rate and growth divergence, increasing disparities between countries.

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