Hamlet without the Prince: Politics and the Eurozone

The current European crisis has most often been viewed as the combined consequence of misguided technical arrangements and unanticipated economic shocks. In contrast, little attention has been paid to the political requirements of a successful fiscal and economic system. Where these have been considered at all, they have been usually viewed in terms of a need for greater European unification: for example, the vesting of new and greater powers (such as for the supervision of banks) in pan-European institutions. However, a deeper question – that of the “democratic deficit” in the relation between the eurozone economic institutions and European society – has been largely neglected.

One way to understand the euro project is that it involved an effort at “institutional substitution”, seeking to embed the anti-inflationary policy of the Bundesbank in place of that of national central banks which possessed less inflation-fighting credibility. The logic was that the euro project could not succeed without the consent of the German people, which, in turn, required sufficient guarantees that the European Central Bank (ECB) would respect their particular historically derived aversion to inflation. The stability pact for fiscal convergence sought to secure this project of institutional substitution by limiting deficits and thereby also the political temptations to monetise them. For some time, both borrowers and lenders in Europe appeared to reap the benefits of this replacement. The anti-inflationary regime created the conditions for a strong euro, which for a time even helped to underpin a growing role for the euro as a global reserve currency. The foundation of the euro was the effort to take key economic decisions (in particular concerning the growth of money supply) out of the realm of politics.