Introduction
The coronavirus pandemic and its consequences have undoubtedly altered the lives of many worldwide in a brief but impactful timeframe, and it continues to pose immense challenges to multiple actors. In the European Union (EU) it quickly turned out that the economic fallout of the crisis would be massive, as businesses were forced to close and either fired or reduced the working hours of their employees. But, while the International Monetary Fund predicts 2020 to feature the biggest European recession since the great depression,[1] governments are boosting their fiscal spending and indebting themselves to guarantee the survival of businesses and mitigate job losses.
In response to the situation, EU institutions decided to provide loans to small and medium enterprises as well as member states in order to protect jobs.[2] Additionally, new fiscal flexibility of the national budgets and European Stability Mechanism (ESM) credits for health-related government spending were approved.[3] Meanwhile, the details of the new grant and loan-based EU budget-channelled recovery fund are still being drafted, but using the ESM or corona-bonds has already been precluded.[4]
By letting the EU give out loans to companies and lending money to member states via the EU budget, ESM, and recovery fund, European states shift more of their power to the European Union. Thus, these steps reveal increased European integration, which was famously defined by Ernst Haas as the process of national actors shifting their political activities and loyalties toward another actor, “whose institutions possess or demand jurisdiction over national states”.[5] When looking at these developments, the question emerges why and how exactly these and not other or no measures of further integration have been decided upon. Hence, this research paper aims to answer the question: What theory of European integration explains the European Union’s response to the economic fallout of the Covid-19 Pandemic?
The research attempts to enhance the existing academic literature on European integration and crises. Focusing on crises is especially relevant as the recent euro crisis and refugee crisis both marked what some call a European “decade of crises.”[6] Moreover, a thorough application and comparison of the two furthest developed integration theories, namely neo-functionalism and liberal intergovernmentalism, yields some insights regarding the functioning of the EU. Finally, understanding the processes of the current actions allows scholars and policymakers alike to see how the next European economic crisis might be dealt with.
Theory
Neo-functionalism. The neo-functionalist theory of European integration was first developed by Ernst Haas and is marked by a focus on spillovers, elite socialisation, and supranational interest groups, which together explain political integration.[7] According to neo-functionalists, states sometimes cooperate on specific issues, which they cannot solve themselves, and then realize that to solve the original issue, intensified collaboration and or cooperation in another area is required.[8] This process of integration, called spillover, can occur as either a merely functional spillover done by the institutions themselves, as a political spillover decided upon by national politicians, or as a cultivated spillover in which supranational actors push the integration.[9] Hence, neo-functionalism predicts that initial integration steps are frequently incomplete and in times of crisis integrative spillovers occur when there is some transnational interdependence and supranational capacity to solve the issue.[10]
Additionally, the theory contends that European integration leads to the establishment of elite groups, which are loyal to the supranational institutions, and hence try to convince national leaders of the advantages of supranational cooperation.[11] Interest groups are also important for integration outcomes and become more European over time, which together with the impact of the supranational elites means that international negotiations become less politicized.[12] Hence, if neo-functionalism explains the EU’s response to the current economic crisis then one needs to confirm the following hypothesis:
Hypothesis 1: The EU’s response to the COVID-19 Pandemic’s economic fallout is shaped by spillover effects from existing integration measures and by European elite and supranational interest group preferences, which together lead to further supranational integration.
Liberal intergovernmentalism. This alternative theory of European integration takes a state-centric approach to integration processes and claims that states do not transfer their sovereignty to supranational institutions but instead pool or delegate it.[13] Liberal intergovernmentalism (LI) sees the EU as an intergovernmental regime, whose actions follow the preferences of its member states. According to Andrew Moravcsik, domestic pressures, and interactions shape state interests, which then rationally and strategically bargain with other states.[14] In this bargaining process, state power plays a crucial role, while supranational institutions play a negligible role. Finally, the actors delegate or pool part of their sovereignty to European institutions to make sure that the agreed outcomes will be committed to.[15]
LI claims that in crises, just as in normal times, national preferences and relative power positions determine the outcome. The national preferences of a country depend on how hard it is hit by the crisis, by how much certain integration solutions would help it, and by domestic pressures.[16] The power position of a state, however, depends on its economic and political importance for the bargaining partners and by how hard the country is both hit by the crisis and dependent on integration measures.[17] Hence, a small country, which is deeply hit by a crisis and can gain a lot from integration is in the weakest bargaining position. If LI best explains the EU’s response to the coronavirus recession, then the following hypothesis needs to be confirmed:
Hypothesis 2: National interests and relative power positions shape intergovernmental bargaining on the EU’s response to the COVID-19 economic fallout and lead to an institutional mandate reflecting the bargaining outcome.
Literature review. Due to the ongoing character of the economic fallout of the coronavirus crisis, so far, no academic research on its integration aspect has been published. Recently the academic debate on European integration and crises has focused on explaining why the euro crisis led to more integrative measures, while there was no coherent response to the refugee crisis. Biermann et al. explain the different outcomes by pointing out that all states were affected by the threat of a eurozone break-up, whereas in the refugee crisis, certain states were non-affected.[18] Contrarily, Schimmelfennig claims that the interest in preventing an eurozone break-up was an endogenous spillover result of former integration processes and that thus neo-functionalism has superior explanatory power.[19] Far from being resolved, these ongoing debates form the background of the following inquiry.
Analysis
In the next section, the validity of the mentioned neo-functional hypothesis regarding the EU’s response to the coronavirus recession will be assessed based on a qualitative analysis of the official measures taken by the EU and statements by leading politicians and actors. Thereafter, the LI hypothesis will be tested.
The neo-functional explanation and its limitations. The neo-functional explanation for the background to the 2020 economic crisis starts with the increased transnational trade in the EU’s predecessor, the Economic Community (EC). For neo-functionalists, the exchange rate fluctuations between EC members made the Economic and Monetary Union (EMU) a necessary functional spillover.[20] The 2009 financial crisis then showed that the monetary union without fiscal inter-state coordination is problematic because eurozone countries cannot devalue their currency nor count on fiscal transfers. Following the euro crisis, the intergovernmental European Stability Mechanism (ESM) had been set up to provide lending to eurozone member states in financial distress. Hence, neo-functionalism explains the institutional background to the external coronavirus shock as a series of spillovers.
The coronavirus recession was caused by the spread of the virus in early 2020, which led governments to enforce rigid social distancing rules and heavily decreased demand. As many people lost their jobs and companies went bankrupt or needed loans, European governments received lower tax returns while indebting themselves to support the health sector, the unemployed, and businesses alike. Neo-functionalism hypothesizes that in such a crisis based on existing mechanisms such as the ESM, further integration occurs via spillovers. And indeed, eurozone countries have decided to use the ESM and allow for loans of 2% of a member state’s GDP for COVID-19 health-related spending.[21] Because the states have pushed the plan, the ESM usage can be dubbed a political spillover, which was supported by the European elite while most interest groups remained silent.[22]
The European Investment Bank’s (EIB) provision of 200 billion euros for small and medium-sized enterprises can be seen as a cultivated spillover, as the supranational institution itself promoted the idea of giving out loans Europe-wide.[23] EU elites and some of the EU’s biggest interest groups have supported these plans, but crucially the business support became public only after the EIB decision.[24]. Remarkably, the EU has also installed a temporary loan-based mechanism, the so-called SURE, with which it lends member states up to 100 billion euros to protect workers’ jobs during the pandemic.[25] SURE was proposed by the EU Commission and despite being temporally limited, is a further cultivated spillover regarding counter unemployment measures.
So far, neo-functionalism can explain all adopted measures but crucially it must also be able to predict how member states are to finance the recovery of their economies. Neo-functionalists expect that such a recovery programme is a spillover and shaped by elite and interest group interests. Following the neo-functional logic, the existing institutions determine what exact spillover occurs. As such, using the existing ESM, which was installed to tackle dire situations in which eurozone governments face high interest rates, is the most likely spillover, because it merely would have to be extended. However, the European elites were extremely divided on the form of the recovery measures, with nine Southern governments arguing for corona bonds and Germany and the Netherlands favouring the ESM.[26]
Instead of extending the ESM or issuing corona bonds, the eurozone governments finally agreed to let the Commission finance the recovery package for governments through borrowing on the capital markets with the EU budget.[27] Ex-post, neo-functionalists would describe this as yet another spillover. But ex-ante, the theory would predict the ESM and not a budget channelled instrument to be used, because the ESM, unlike the budget lending mechanism, already existed and fulfils the same purpose. Neo-functionalism cannot explain why EU leaders decided to opt for a new and untested borrowing mechanism if the ESM would merely have to be intensified. Hence, the neo-functional Hypothesis 1 is rejected, because the EU’s response to the economic fallout was not a predictable spillover from the existing integration measures, nor were European interest groups or elites unified and clear in shaping their response.
In sum, neo-functionalism explains the lead-up to the need for a common fiscal response and a few of the measures taken but does not predict that the new EU budget fund, instead of the existing ESM, would be employed to finance member state debts.
The liberal intergovernmentalist approach. LI explains the build-up of the EU and EMU as resulting from domestic interests and inter-state bargaining, which led to a monetary but not a fiscal union. The coronavirus recession is seen as an exogenous shock, by which EU governments were hit asymmetrically and with different pre-shock situations, which means that they had divergent state interests and bargaining positions on a few of the concrete measures.
But in general, all European states had a domestic interest in a joint European response to the coronavirus crisis, because they are dependent on strong demand, trade, and tourism between countries. Furthermore, within the eurozone, countries had an interest to ensure that no member state would be hit by overtly high interest rates, as a sovereign default of one member might lead to less trust and even higher interest rates for the others. Additionally, any country’s exit costs of leaving the eurozone were previously estimated to be 20-50 % of GDP per year.[28] As all member states had an interest in quick and cheap ESM loans for health-related spending, as well as loans for their businesses from the EIB, these measures were adopted without much bargaining.[29] Compared to the recovery fund, the amount of these two measures was relatively small, needed quickly, and not attached to conditionalities, which is why none of the states bothered to bargain much.
The third response pillar, SURE can equally be explained by all member states having an interest in getting cheap loans to protect the jobs of those workers, who would otherwise be laid off because of the crisis. Without unemployment reinsurance, some member states would be hit by high unemployment, which would decrease the inter-European demand, and additionally such a scheme is supported by most people in all member states.[30] Thus, LI explains these steps by pointing out that all member states had an interest in the measures and therefore no hard bargaining was needed. The theory does not ignore that the EIB and Commission played a role in planning these steps but asserts that finally state interests determined the actual outcome.
The national interests mostly differed regarding the financing of the large European recovery plan. Italy, Greece, and Spain especially faced relatively high interest rates for their government bonds and were reluctant to be compelled to adhere to the strict conditionalities that would be attached to ESM loans for non-health related purposes.[31] Because corona-bonds, unlike ESM loans, come without strict EU oversight over national spending and with low interest rates, nine eurozone governments including Italy, France, Greece, and Spain publicly pleaded for them.[32] Germany, Austria, the Netherlands, and Finland, on the other hand, faced negative interest rates and would have to pay higher rates if they were to issue common corona bonds. Additionally, since the euro crisis, public opinion in Germany was overwhelmingly opposed to common bonds, as politicians and the media framed them as a bailout of the “southern sinners”.[33] By referring to their uncertain legal basis and the dangers of mutual liability, Germany and the Netherlands rejected the corona-bonds.[34]
Based on the member states’ interests and their bargaining positions, LI can explain why finally neither the ESM, nor corona-bonds were adopted, but the EU budget channelled recovery fund was. Because Germany and the Netherlands were less affected by the economic downturn and Germany’s power position as the biggest eurozone economy, they had a strong bargaining position to preclude corona-bonds. Nevertheless, because of the high exit costs of leaving the eurozone, they needed to help the most affected countries. The southern countries were hit hard by the crisis and, hence, were in favor of corona-bonds but lacked the power to force the northern countries to agree. What emerged then (e.g. the EU budget channelled recovery fund) is a compromise that fulfilled the southern countries’ need for cheap loans and grants as well as their aversion to the ESM, with the north’s distaste for corona-bonds with mutual liability and no conditionalities. Hence, Hypothesis 2, which claims that national interests and power positions shape intergovernmental bargaining and the European Union’s mandate regarding the coronavirus recession, is confirmed.
Limitations. The previous analysis is constrained by the fact that the coronavirus recession is still unfolding and hence the EU’s response might still alter in the next few years. Additionally, future research should include more profound data on the European interest groups’ preferences and further scrutinise the individual member states’ interests and power positions. Despite these limitations, the decisions taken so far already indicate that a purely neo-functional explanation could not have predicted the new EU recovery fund.
Conclusion
Overall, the analysis has shown that neo-functionalist spillovers, elite and interest group interests explain the broad processes leading to a monetary but not a fiscal union. The theory can also explain why, as response to the external coronavirus shock, the EU integrated further with the cultivated spillovers of EIB business loans and the SURE unemployment reinsurance loans. While ESM loans for health-related spending could be seen as political spillover, neo-functionalism cannot explain why European elites and interest groups had extremely divergent ideas regarding the funding for the economic recovery and why the existing ESM was not extended for non-health-related recovery spending.
Liberal intergovernmentalism has less explanatory beauty than neo-functionalism in merely explaining the monetary union as the outcome of several rounds of inter-state bargaining. The theory, though, does recognize the coronavirus recession as an exogenous shock and explains the limited debate on EIB loans, health-related ESM loans, and SURE as resulting from their relatively modest size and a coherent interest of all member states in the measures. Subsequent research should further examine interest group and member state preferences regarding them.
Finally, only LI can explain why neither nor the ESM, but instead the EU budget channelled recovery fund was devised as a compromise between southern and northern interests. Thus, overall liberal intergovernmentalism best explains the EU’s reaction to the coronavirus recession and highlights that in times of crisis not supranational spillovers but member state bargaining determines whether and in what form European integration results.
Works Cited
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Burchard, H., Karnitschig, M. & Tamma, P. (2020). Berlin and Paris pitch competing solutions to ‘corona bonds’ conundrum. Politico. Retrieved fromhttps://www.politico.eu/article/coronavirus-corona-bonds-berlin-and-paris-pitch-different-solutions-conundrum/
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McNamara, K. & Matthijs, M. (2020). Europe’s leaders meet this week to confront the coronavirus. The Washington Post. Retrieved fromhttps://www.washingtonpost.com/politics/2020/04/21/europes-leaders-meet-this-week-confront-coronavirus/
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References
[1] Gopinath, “The Great Lockdown.“
[2] Eurogroup, “Economic Response to Covid-19.”
[3] Ibid.
[4] European Council, “Conclusions of the President of the European Council.”
[5] Haas, The uniting of Europe, 16.
[6] Schimmelfennig, “European integration in times of crisis,” 969.
[7] Strøby Jensen, “Neo-functionalism,” 56.
[8] Schmitter, “Three neo-functional hypotheses,” 162.
[9] Strøby Jensen, “Neo-functionalism,” 59.
[10] Schimmelfennig, “European integration in times of crisis,” 974.
[11] Strøby Jensen, “Neo-functionalism,” 62.
[12] Ibid, 62.
[13] Cini, “Intergovernmentalism,“ 70.
[14] Moravcsik, “Liberal intergovernmentalist approach,” 482.
[15] Ibid, 482.
[16] Schimmelfennig, “European integration in times of crisis,” 973.
[17] Ibid, 973.
[18] Biermann et al., “Political (non-) reform in the euro crisis and the refugee crisis,” 261.
[19] Schimmelfennig, “European integration in times of crisis,” 987.
[20] Strøby Jensen, “Neo-functionalism,” 60.
[21] Eurogroup, “Economic Response to Covid-19.”
[22] Saeed, “Gentiloni: emergency finance has no strings attached.”
[23] Eurogroup, “Economic Response to Covid-19.”
[24] McHugh, “Business: get busy on stimulus.”
[25] Eurogroup, “Economic Response to Covid-19.”
[26] McNamara & Matthijs, “Europe’s leaders meet to confront coronavirus.”
[27] Commission, “Speech by President von der Leyen on the new Recovery Plan.”
[28] Schimmelfennig, “European integration in times of crisis,” 983.
[29] Burchard, Karnitschig, and Tamma,“Berlin and Paris pitch solutions to ‘corona bonds.”
[30] Vandenbroucke et al., “The European Commission’s SURE initiative,” 3.
[31] Burchard, Karnitschig, and Tamma,“Berlin and Paris pitch solutions to ‘corona bonds.”
[32] Wilmès et al., “Mister President, Dear Charles.”
[33] Matthijs and McNamara, “The euro crisis’ effect: northern saints, southern sinners,” 243.
[34] Smith-Meyer, “EU agrees on €500B of economic aid but no ‘corona bonds’.”