ABSTRACT
Few events over the past few decades have given rise to an amount of debate and speculation concerning the state of the European Union (EU) and the future of European integration as the financial and economic crisis that began in 2007. In spite of substantial media, policy-making and academic attention, the fundamental questions of why and how the euro area (EA) has remained not only intact but also expanded and integrated further during the crisis require deeper theoretical investigation. One needs to understand not only the economics but also the politics and institutions of the crisis. A lack of such an understanding is the reason why a number of observers, at least initially, had a hard time making sense of policy-makers’ decisions (and pace thereof), including why the EA did not implode as some predicted.1 Economic theories provide a certain perspective for why the crisis occurred and what economic policies were and are needed to resolve it (e.g., Pisani-Ferry [2014]); however, they fail to capture the crisis’s deeper roots and management (see Leblond [2012]). In order to improve our understanding of a discussion that has oscillated
between fears of EA disintegration on the one hand and the concrete advancement of integration during the crisis on the other, this special collection brings together leading scholars of European integration who apply key theoretical approaches – from liberal intergovernmentalism and neofunctionalism to
the collapse of Lehman Brothers in September 2008. The collapse of a systemic financial intermediary at the heart of the US financial system led to a confidence crisis and a rapid and widespread repricing of risk and retrenchment in international capital markets, which quickly led to sharp drops in economic activity. In such a situation, illiquidity may quickly lead to insolvency and the collapse of the financial system (Rajan 2011). Nevertheless, in the European context, the support of illiquid banks to ensure financial stability became difficult for over-indebted national governments, especially given the absence of a clear crisis management framework that included a lender of last resort and a fiscal backstop (de Grauwe 2011). A number of EA member states proved too weak, not only in defending
their banking systems but also in allowing automatic fiscal stabilizers to fully absorb the impact of the resulting economic recession, let alone considering fiscal and financial policy activism in an environment where imbalances had been building up for a number of years. Against this background, the shortcomings in the EMU’s architecture came to the fore, as did the political economy spanning 17 EA members sharing the single currency. The crisis uncovered among other things the lack of appropriate firewalls that could ensure shock absorption and the prevention of contagion, while at the same time avoiding moral hazard in public and private actors and across the borders of member states. For the sake of brevity, Figure 1 illustrates the key decisions taken since 2007
against the background of one measure of financial tension and of sovereign bond yields, which are used as a simplified barometer of the intensity of the financial and sovereign debt crisis in various EA member states. The details of the institutional reforms that took place in the same period are described below.
