The Maastricht treaty: historical turning point eventually led to crisis

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Russian academy of national economy and public administration under the President of the Russian Federation

The maastricht treaty: historical turning point eventually led to crisis

N.A. Bikalova, E.Yu. Kulakova

The shortcomings of the Maastricht treaty, first designed to unify the Europe and provide it with political and economic cooperation, now partially seem to explain the euro-crisis. Not to forget to mention the global economic crisis on public debt, that in combination with the principal defects of the Treaty created the unpleasant economic situation in the Eurozone we can observe today. Steps taken to solve the problem in Greece, Ireland and Portugal, in fact, make the whole situation only worse. That all lead to an idea that some thought patterns existing from the time the Maastricht treaty was signed are genuinely wrong and need to be modified. One of the factors refers to the economic philosophy that puts austerity “on the top of the list” in adjustment programmes, reform of the Stability Pact and even the “fiscal union” agreed in December 2011. Despite the continuing attempts to solve the crisis, it is obvious that it cannot be overcome within the framework of the Maastricht treaty. In early 2010 the most dramatic integration crisis in Europe, threatening nowadays the Euro to collapse, began and its consequences still remain present in the “victim”- countries. To make clear what initially caused the crisis and how it can be solved it is necessary to take a look at the history of the euro, a product of the Maastricht Treaty. After a long period of hot debates and the difficult ratification process, the Maastricht treaty, named like that after the Dutch town where it was signed, or “Treaty of European Union” came into force in 1993. The Treaty constituted a radical turning point in the European integration process. Further it would be mentioned a lot about the Economic and Monetary Union (EMU), which is the part of the first central pillar of the Treaty, that during the last years became the focal point of observation in regards to the sovereign debt crisis. Other two pillars which seem to be less important in the particular evaluation are the Common Foreign and Security Policy (CFSP), and cooperation on Justice and Home Affairs (JHA); both won't be discussed in the following paper.

Four structural shortcomings, four principal weaknesses of the Treaty that influenced the single currency from the beginning are directly connected to the current crisis in the Eurozone as was mentioned earlier. But before naming them it is important to notice that evaluation of the past really depends on today situation, that means 5 or 10 years ago assessment of the Treaty might have been different.

Firstly, construction of the economic and monetary union is asymmetric. Even despite the introduction of the common currency, which empowered a Europeanisation of monetary policy, fiscal part is still to the large extent in hands of the member states. States are supposed to coordinate their economic and fiscal policy competences however it is still not transferred on the global European level. As far as the EU states come through different cyclical development stages it is getting hard to gain an overall unified policy control with adjustments to specific national situations. What is interesting, the weak points of the Treaty's provisions for EMU were obvious already at the time of original negotiations, but nothing was done to prevent possible serious consequences, which now became apparent.

What is more, economic union doesn't refer to a European Federal state - which represents a political union, so no financial equalization mechanisms would be offered to compensate economic imbalances in the EU. No political solidarity existed from the outset. What does it mean in fact? In cases of imbalances the main threat falls on national wage costs, and there is no adjustment mechanism to balance the situation. Another thing is that those states “in danger” are deprived of the support of the Community. That is why support loans for Greece, Ireland and Portugal are vital in overcoming of this defect. Thirdly, austerity measures to pay down public debt largely prevail in comparison to budget consolidation via growth. Initially the Maastricht treaty doesn't comprise provisions regarding common economic policy, however there is a section on preventing excessive debts. Before the global financial crisis of 2008/2009 these provisions were not causing such a problem. But after the crisis to avoid failures in bank sector and to support the state economy in general, public debt virtually exploded in several countries.

And last but not least, the Treaty's implementation of the so-called system of “market states”. On the one hand, the Eurozone is a single market with a common currency. On the other hand, the member states decide on wage, taxes and social policy on their own, so there is always kind of a structural competition between them, which can only lead to the bottom. euro crisis economic

For these reasons the Eurozone might need to start implementing an alternative programme, as the undertaken measures to overcome the crisis haven't showed positive dynamic by now. Policy changes are urgent at the level of the whole Eurozone. In order to reduce the amounts of debt it is more rational to change the course towards growth strategy. It can be achieved in 3 main steps, starting with the formation of the supranational infrastructure programme and stimulation of the domestic demand by countries - like Germany - with account surpluses, and finally, austerity policies for those states who suffer most might be prolonged while putting the main focus on promoting investment.

In terms of infrastructure such specific actions as investment in alternative sources of energy and building supranational transmission lines might be the starting point. Regarding states with account surpluses should stimulate domestic demand by investments in social and healthcare sectors and expansive wage policy. This might help to stop further recession and simultaneously to cut down account deficits in the countries of the Southern Europe. For states in crisis its essential to promote again the tourism sector even if with indirect measures such as improving roads, airports; plus, R&D sector requires extra attention to create additional value as the level of technology level of exports in Portugal, for example, remains quite low.

Another solution which especially can help highly indebted states is the introduction of Eurobonds, government bonds issued by European states and shared between them. It can improve the creditworthiness of these countries and lead to a serious interest rate reduction. On the opposite side, states like Germany would accept higher interest rates to finance their own debts, while at the same time would become liable for the debts of countries where the crisis emerged heavily. In this way two of the main Treaty's defects might be solved - no bailout clause would be compensated and a base for further Community political union would start to form.

To neutralize the effect of the “market states” the well-knit system of coordination rules must be designed. It is highly recommended to use “inflation rate plus productivity increase” when preparing national wage policy. Moreover, a minimum European wage must be defined, in a size of 50-60% from the average wage in the state. In terms of taxes, the closest possible solution might be implementation of minimum tax rates and common corporate taxes as a long-term goal for states to strive for. To prevent the crisis from happening again it is vital to develop new measures of regulation for financial markets, lack of which was the initial reason for the world economic crisis 20008/2009. This covers several areas: to start with, the size of the financial institutions should be shrunk in size. That allows the whole system to be more stable in case it fails. Bank sector should break down its main functions - providing loans and investment function. In such way it is easier for authorities to control the trading platforms and for institutions narrowing their activity to one specific function allows them to do it in a more proper way. Tax heavens should be reduced over the Europe and taxes paid where value creation happens. Still there is a wide list of measures to add to the national policies in terms of financial markets on the European level and some of them were already implemented, we just mentioned a few of them.

The final step which can bind all the previous steps and reinforce them is the creation of the supranational economic government for the Eurozone elected on the democratic base. But before this happens there is a need in transitional stage: all the guidelines and implementations should be agreed upon the European Commission, the Council of the European Union and the European Parliament. The main competence of the economic government would be the determination of states' policy in terms of budget, allowing consistent fiscal policy in the Eurozone to be released.

Finally, looking back to historical process we can notice that those crisis periods for states can be a great catalyst for “beating” the long-term problems and improving existing standards and certain thought patterns. And in terms of the euro-crisis it is not only about the Eurozone but the global economy itself.

References

1. Busch, K. Is the Euro Failing? Structural Problems and Policy Failures Bringing Europe to the Brink. - Friedrich-Ebert-Stiftung, Internat. Policy Analysis, 2012 - 46 p.

2. Geary M.J. The Maastricht Treaty: Negotiations and Consequences in Historical Perspective - Introduction / M.J. Geary, C.S. Germond, K.K. Patel // Journal of European Integration History

Abstract

The article is devoted to consideration of the fundamental shortcomings of the Treaty of the European Union, which reflected the euro-crisis. An assumption is made, that for such countries as Greece, Ireland and Portugal to overcome the pressing economic situation the initial policy of the member-states must be reconsidered and certain measures on the supranational European level are to be introduced. In the final part possible exact steps to solve the crisis in Europe are suggested.

Keywords: Maastricht treaty, euro, crisis, Eurozone, public debt.

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