De facto differentiation in the EU’s economic and monetary union - A rationalist explanation

ABSTRACT

Although there are various legal tools to make European integration more flexible, the EU and its member states uphold long-term arrangements of de facto differentiation circumventing EU law. This article assesses their role in the EU’s system of differentiated integration. To that end, it advances a model based on rational choice theory, outlining the steps and conditions under which tolerated arrangements of de facto differentiation can emerge. This is illustrated in three case studies in Economic and Monetary Union (EMU): (1) Sweden’s de facto opt-out from EMU; (2) Kosovo’s adoption of the euro as sole legal tender, and (3) the Fiscal Compact. Data was gathered via document analysis and 11 expert interviews. The article concludes that de facto differentiation may constitute a viable alternative and useful means to make EU integration more flexible if strong national demand for differentiation meets the need for discretion or timely, pragmatic action.

KEYWORDS:

• Differentiated integration
• de facto differentiation
• Economic and Monetary Union
• Sweden
• Kosovo
• Fiscal Compact

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Schimmelfennig and Winzen (2020, 55) found de jure differentiation to last on average several years, while infringement procedures are usually closed after just over a year (Hofmann 2018). In order to place de facto differentiation in the same category, short-term deviations from the norm cannot be considered.

2. The term ‘no differentiation’ was chosen for its applicability in all types and cases of de facto differentiation. It can either refer to the status quo (no integration) or uniform integration.

3. Less realistic or more drastic options were omitted. For instance, a state seeking an opt-out from a certain policy could challenge its legality in court. The likelihood of winning such cases at the ECJ is very low, especially if it concerns a long-established policy. Theoretically, a state might choose to leave the EU rather than comply with a certain policy. It is, however, unlikely that taking this option precedes attempts to negotiate a de jure opt-out or to establish de facto differentiation.

4. The five criteria include pre-defined rates of inflation and long-term interest, a maximum of 3% annual budget deficit to GDP, a 60% limit of overall debt to GDP, and participation in the Exchange Rate Mechanism (ERM) which pegs national currencies to the Euro.

5. With hindsight, this expectation has proven wrong. Poland, Czechia, and Hungary have basically copied the Swedish approach.

6. Montenegro has also unilaterally adopted the euro despite not being a member of the EU.

7. See UNMIK/DIR/2001/24: https://unmik.unmissions.org/sites/default/files/regulations/02english/E2001ads/ADE2001_24.pdf

8. See for example guideline ECB/2001/8 which allowed Kosovo’s Central Bank to frontload €100m in cash ahead of 1 January 2002,

https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32001O0008&qid=1614092665179.

9. Denmark and Romania have chosen to opt-in and to comply with the entire set of measures. Bulgaria maintains a partial opt-in and is only bound to the fiscal measures.

10. See for example: https://www.theguardian.com/world/2011/dec/09/david-cameron-blocks-eu-treaty.