Responses to the Euro Area Crisis: Measuring the Path of European Institutional Integration

Abstract

The euro area crisis has exposed flaws in the institutional framework of the European Economic and Monetary Union (EMU). The immediate causes of the crisis have been widely debated — including weak governance, persistent erosion of competitiveness in some countries and easy financing by banks. However, there is little discussion about a fundamental shift in the nature of European integration, which took place in mid-1990s when plans for launching the euro became credible and binding. It was not understood that Europe had shifted from a Common Market Era, during which EMU’s foundations were laid, to a ‘Union Era’ which in retrospect exhibited an incomplete institutional framework. This article reviews the leap in governance now taking place, whilst taking stock of what has worked and proved resilient over the previous 60 years. This is done by means of an index — the European Index of Regional Institutional Integration (EURII) — providing a tool to synthesise and monitor European institutional integration since 1958, and track all institutional reforms since 2010. EURII has both backward as well as forward-looking components anchored on the project put forward in the 2012 Four Presidents’ Report.

Key Words:

• Economic and Monetary Union
• euro
• sovereign crisis
• governance reform
• institutions

Acknowledgements

The authors would like to thank for helpful comments Francisco Torres, Max Watson and participants to a Seminar on ‘The Governance of EMU: Recasting Political, Fiscal and Financial Integration’ that took place at Oxford’s St. Anthony College in March 2014. The views expressed in this paper do not necessarily reflect those of the ECB, and we remain responsible for any errors or omissions.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. See Fernandez-Villaverde, Garicano, and Santos (2013) and De Grauwe (2013). For a ‘fiscal narrative’ of the crisis see Schuknecht et al. (2011), for the ‘banking narrative’ see Constâncio (2013) and for the ‘competitiveness narrative’ see Sinn and Valentinyi (2013).

2. See Dorrucci et al. (2015) and Mongelli (2013) for an analysis of the crisis.

3. The construction of the index, and the underlying list of events, is available as an annexe to the ECB Occasional Paper nr. 160 (Dorrucci et al. 2015).

4. Being an institutional index, methodologies such as the Principal Components Analysis (PCA) cannot be implemented, as our weights cannot be determined statistically. The same applies to factor analysis and Unobserved Component Models (UCM).

5. The United Nations (UNDP) has produced a Human Development Index (HDI) which is a composite statistic of life expectancy, education, and per capita income indicators.

6. A functioning internal market for services is especially vital, as today services account on average for over 70 per cent of EU GDP. For a discussion on the differentiated implementation of the Single Market across countries as well as sectors see Howarth and Sadeh (2010). Moreover, in Dorrucci et al. (2015) we point to a differentiation between de jure and de facto implementation of EU legislation.