From lever to club? Conditionality in the European Union during the financial crisis

ABSTRACT

How did the European Union come to develop so many instruments of conditionality during the Eurozone debt crisis, despite the well-documented limitations of such measures in other contexts? This article argues that major EU actors – Council, Commission, and Central Bank – were influenced by their own recent and positive experiences with conditionality, especially in the EU’s enlargement in the early 2000s and the early phase of the global financial crisis. However, despite the promise of conditional instruments in these two earlier episodes, further EU reliance on conditional policies has not brought the positive outcomes the main European institutions had hoped for. As EU institutions turned to harder and harder forms of conditionality in the Euro crisis, they relearned many of the familiar negative lessons of conditionality and ultimately had to concede that the apparent success of its conditionality tools in the two earlier phases was exceptional. The article documents the evolution of conditionality over these periods, showing how EU conditionality instruments changed over time, beginning as a ‘lever’ to assist the accession of candidate states in the enlargement period, and evolving into a ‘club’ used to impose macroeconomic discipline in the late 2000s. It shows why this approach to the Euro crisis failed and was ultimately downgraded as Eurozone policy shifted in favour of monetary measures in which conditionality played only a marginal role.

KEYWORDS:

• Enlargement
• Eurozone
• conditionality
• financial crisis
• bailouts

Acknowledgement

The authors acknowledge extremely helpful advice from Cornel Ban, Tanja Börzel, Rachel Epstein, Randall Henning, Abby Innes, Michael Leigh, Matthias Matthijs, Martin Rhodes, Ulrich Sedelmeier, Milada Vachudova and participants at workshops in Berlin, Miami, Glasgow, and Denver.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes on contributors

Wade Jacoby is Mary Lou Fulton Professor of Political Science at Brigham Young University. He is author of Imitation and Politics: Redesigning Modern Germany (Cornell) and The Enlargement of the EU and Nato: Ordering from the Menu in Central Europe (Cambridge). He received the DAAD Prize for his scholarship on Germany and the EU and was a Braudel Fellow at the European University Institute and a Senior Fellow at the US Treasury. Jacoby is co-editor of German Politics and serves on the editorial boards of Governance and European Security.

Jonathan Hopkin is Associate Professor of Comparative Politics, London School of Economics and Political Science ([email protected]). He was previously lecturer at the Universities of Bradford, Durham and Birmingham, and visiting professor at Johns Hopkins University Baltimore, the Universidad Autonoma of Madrid, the Universities of Trento and Bologna. He is the author of Party Formation and Democratic Transition in Spain (1999, Macmillan) and co-editor of Coalition Britain (2012, Manchester University Press). He has published widely on the party politics and political economy of Europe. His latest book, Anti-System Politics, is published by Oxford University Press.

Notes

1 Demonstrating this connection would require additional interviews in all major EU institutions.

2 Not that austerity ideas came exclusively from Northern states. See Helgadóttir (2016).

3 Lütz and Kranke stress Commission orthodoxy relative to the more lenient IMF (2011), while Woodruff (2016) stresses the extreme orthodoxy of the ECB in the initial phases of the Eurocrisis (before the launch of QE). See also Clift (2019).

4 The EU’s Copenhagen criteria, which included democratic rule and a functional market economy, did involve core state functions. We treat these as a pre-requirement for opening negotiations. But the EU generally did not use its formal conditionality instruments for core state functions. For the 33 screening chapters, see https://ec.europa.eu/neighbourhood-enlargement/policy/conditions-membership/chapters-of-the-acquis_en

5 Hungary and Romania are not EMU members, and Latvia was not at the time of the IMF programme.

6 Official pre-accession assistance for the relevant 2000–2006 budgetary period amounted to 22 billion euro, which includes, Phare, ISPA, and SAPARD. See http://ec.europa.eu/enlargement/archives/questions_and_answers/11-22_en.htm#costs

7 See Clift (2019); Woodruff (2016) links conditional policies also to ordoliberal impulses emanating mostly from Germany. Again, CEE enlargement and (later) macroeconomic experiences were not the only way ideas about conditionality entered the EU institutions.

8 The ECB had little involvement because these were not Eurozone members (Latvia joined later). See Aslund 2010.

9 To be sure, local officials sometimes radicalized structural reforms beyond what the EU and IMF required. See Ban (2016, Chapter 9).

10 That said, while FDI inflows to the region remained positive, they fell sharply in magnitude after 2008. See Bohle and Greskovits (2019: 1075-8).

11 Of the three, only Hungary took this route.

12 However, Ban (2019) shows that the Romanian state also guaranteed bank balance sheets as part of the Vienna Agreement.

13 Spain differed in that its bailout was later (2012), smaller (€40 billion), came not from the Troika (but from the EU’s then-new European Stability Mechanism) and provided funds to backstop Spanish banks rather than government borrowing (although the two were connected).

14 ‘Eurozone approves massive Greece bail-out,’ BBC News, 2 May 2010 http://news.bbc.co.uk/1/hi/business/8656649.stm

15 For reasons of space, this article does not discuss the role of ESM conditionality. For that dimension, see Howarth and Spendzharova (2019); Matthijs (2017); and Schelkle (2017).

16 Democratic backsliding in Hungary and Poland have generated interest in subjecting structural funds to rule-of-law conditionality from 2021 onwards.

17 The ECB also used conditionality on the question of exactly how the Irish retired bond debt.