Crisis is a term that has come to define, almost exclusively, how we think and talk about the European Union (EU). It is hard to remember a time when European integration was not seen to be in crisis, from the turmoil over the European Defence Community in the 1950s to the political fallout over the failed European Constitution in the 2000s. The EU’s crises are, on occasion, constructed, by policy-makers who use the last chance saloon of EU summits to talk up the costs of failure and bring attention to their own starring role in brokering a solution. This does not mean that the perceived crises facing the EU aren’t also very real in some cases. EU policy-makers’ capacity to deal with policy problems can have profound implications for people’s livelihoods and their levels of trust in the European project. Nowhere more so than in the case of two of the most important challenges facing the EU at present: Grexit and Brexit.

Grexit – which stands for Greek exit from the euro area – has been a serious source of concern since late 2009, when the newly elected government of George Papandreou came clean about the true scale of government borrowing before and after the global financial crisis hit (Panagiotarea 2013). Six years – and  EUR 240 billion in EU and International Monetary Fund (IMF) loan commitments – later Grexit remains a distinct possibility. The Greek economy seemed to be slowly turning the corner twelve months ago but Syriza’s election in January 2015 ensured that it quickly turned back again (see Figure 1 and Hodson 2015). Much of the talk in recent weeks of Grexit has been designed to concentrate minds in negotiations over the disbursement of EUR 7.2 billion as part of the final tranche of Greece’s (second, extended) loan agreement with the EU and IMF.  And yet, such posturing should not distract from the mounting contradictions over Greece’s membership of the euro area, contradictions that have been compounded by the election of a Syriza government that is yet to convince how it can reconcile its manifesto commitments to anti-austerity with its commitments to international creditors. By calling a referendum on 5 July over negotiations with the EU and IMF, the Greek government has further inflamed this situation, with the result that default is now imminent and exit from the euro area has become a scenario that will be hard to avoid.

 

Figure 1: Difference between interest rate on Greek and German 10-year government bonds

 Bonds

 Source: European Commission

Brexit – that is British exit from the EU – has been brewing since Prime Minister John Major faced a parliamentary rebellion over the Maastricht Treaty (Berrington and Hague 1998). Prime Ministers since Major have faced mounting pressure to hold a referendum. Tony Blair relented over the European Constitution but the failure of this treaty after ‘no’ votes in France and the Netherlands provided a reprieve. Gordon Brown’s refusal to extend this commitment to the Lisbon Treaty added fuel to this controversy before David Cameron finally agreed in January 2013 to negotiate a new settlement with the EU before holding a referendum on the UK’s continued membership. Cameron’s election victory in May 2015 has allowed him to make good on this commitment and negotiations between the UK and other EU member states have begun in earnest. In these negotiations, Cameron has every incentive to suggest that the UK will leave the EU unless it gets a good deal. On the surface, this looks like a classic case of tying hands in two level games (see Hodson and Maher 2014) but such strategies are rare because they run the risk of ratification failure if domestic constituents don’t like the deal. According to a YouGov poll earlier this year, 42% would vote to stay in the EU, 35% would vote against and 19% are undecided. If these undecideds favour the ‘no’ side, the UK could be headed for the exit door.

How, if at all, are these crises over Grexit and Brexit related? Economically, Grexit is a major risk for the UK even though the latter remains outside the euro area. In macroeconomic terms, the business cycles of the UK and euro area are closely aligned. Weyerstrass et al. (2011) find that the degree of synchronisation between the UK and euro area business cycles is higher than it is for some countries that have subsequently joined the euro area. Altavilla (2004), meanwhile, finds that the UK business cycle has become more synchronised with the euro area than the United States since 1992. In financial terms, the UK is highly integrated with the euro area. According to the Bank of England’s Financial Stability Report in June 2014, the exposure of major UK banks to so-called vulnerable euro area periphery economies remains in the region of £140 billion (Bank of England, 2014: 49).

In view of this interdependence, international relations theory would expect the UK to play a proactive role in seeking to prevent Grexit. This was so under the premiership of Gordon Brown, who in spite of his reservations about the single currency was a reasonably vocal proponent of providing financial support to Greece in the early months of 2010. This response stands in stark contrast to David Cameron’s lack of engagement over the risk of Grexit and the euro crisis more generally. Cameron did provide bilateral loans to Ireland in November 2010, it is true, but only on condition that the UK would not support other euro area members in need of assistance.

That Cameron has shown a lack of leadership over Grexit is disappointing. That he has used the euro’s problems to provoke a stand-off over the UK’s membership of the EU is deeply regrettable. The links between Grexit and Brexit are clear enough from the Prime Minister’s speech at Bloomberg HQ in January 2013, at which he made a manifesto commitment to hold an in-out referendum on the UK’s continued membership of the EU. An explicit assumption in the Bloomberg speech was that  ‘in the next few years the EU will need to agree on Treaty change to make the changes needed for the long term future of the Euro’. Cameron ensured that he would not be a hostage to fortune, however, by promising that the UK would press ahead with its own negotiations should no such Treaty change be forthcoming. In so doing, Cameron presented other EU leaders with a choice between dealing with Grexit and Brexit together or separately. Some have argued that a ‘grand bargain’ would serve the interests of both the UK and other EU member states but it is hard to see how. The UK would certainly have opportunities to secure concessions for its own renegotiation as part of a wider package including treaty reforms on euro area governance. But other EU member states have a strong incentive to keep the UK as a member and so they are likely to offer significant concessions whatever form negotiations take. A grand bargain on Brexit and Grexit would also be harder to ratify. Reforms to significantly strengthen euro area governance would be likely to trigger a referendum in one or more euro area member and the results of such votes are not easy to predict in advance.

Given the risks associated with such a grand bargain, it is not surprising that EU leaders’ responded to Cameron’s Bloomberg speech by trying to decouple talk of treaty reforms linked to Grexit and Brexit. Before this announcement, plans for deeper integration in the euro area were gathering pace but thereafter euro area members converged around more modest plans for a partial banking union and limited further reforms to euro area governance without recourse to further treaty changes. Does this assumption about no imminent future treaty change on euro area issues still hold now that concerns over Grexit have been reignited? The answer, for now, is ‘yes’. Last month, German Chancellor Angela Merkel and French President François Hollande gave their support to strengthening euro area governance but appeared to rule out treaty change. Last week, the so-called Five President’s Report set out a 10 year plan for further reforms to euro area governance. These reforms are ambitious in their scope – they include the creation of a euro treasury and a fiscal stabilization mechanism for the euro area – but the report stops short of calling for treaty changes in the short-term.

The likely scenario then is that the EU will tackle its twin crises of Brexit and Grexit separately. A more open-ended question is whether the UK’s new settlement with the EU will require treaty change. Until recently, David Cameron was intent on seeking changes to EU treaties before a UK referendum but he now seems ready to settle for a ‘legally binding deal’. The latter, which could range from a European Council decision, to changes in EU legislation, to an intergovernmental treaty or the promise of future changes to the EU treaties, would be easier to put in place by 2017, but will it be enough to convince UK voters that Cameron’s new settlement is credible? Opinion polls suggest that a ‘yes’ vote is unlikely without a renegotiation but they do not tell us what form such renegotiation should take. What existing polls do suggest is that the government’s seal of approval will be key. In a YouGov poll conducted in May 2015, 58% of respondents said that they would vote to remain a member of the EU if ‘the British government under David Cameron renegotiated our relationship with Europe and said that Britain’s interests were now protected’.

 Figure 2: Distrust in the EU

EUTRUST

Source: Eurobarometer

Figure 3: Distrust in National Government

NGTRUST

Source: Eurobarometer

A final link between Brexit and Grexit – and perhaps the most important one – is that both crises are symptomatic of the ideational convergence and unstable domestic politics that has come to define the EU since the early 1990s (Bickerton, Hodson and Puetter 2015). Media coverage of both Brexit and Grexit tends to dramatise the differences between EU heads of state or government in dealing with these crises. But EU leaders have shown themselves not only capable, but also inclined, to reach a consensus during moments of political turmoil (Puetter 2014). Events can spiral out of control, of course, but there is no mistaking the deep determination among most EU policy-makers to reach a pragmatic settlement on Greece’s place in the euro area and the UK’s membership of the EU and that significant concessions will be made all round to achieve these goals. Reaching workable agreement at the EU level to prevent Grexit and Brexit will be difficult but legitimating such agreements at home will be more difficult still. Greece and the UK – along with many other EU member states – are deeply distrustful not only of the EU but also their own governments (see Figures 2 and 3). Syriza and the Conservatives may be riding high in the polls after recent elections but neither can be confident how deals reached in Brussels will play domestically and both must fear backlash against elites who are perceived to be out of touch. Should Syriza step back from the brink and strike a deal with international creditors, and negotiations still appear to be playing out behind the scenes, and stay in the euro area, it is anyone’s guess as to how long it can stay in power. Should the Conservatives strike a new settlement for the UK in Europe, it is impossible to know in advance how this will play with the electorate. As such, Brexit and Grexit may be constructed crises designed to focus minds, but they are, at the same time, alarmingly real.

Dr Dermot Hodson directs the MSc in Global Governance and Emerging Powers at Birkbeck. This blog post is a revised version of his contribution to an event by the University of Cambridge’s Britain in Europe (Newbie) network at the British Academy on 23 June 2015.

References:

Altavilla, C. (2004) ‘Do EMU Members Share the Same Business Cycle?’ Journal of Common Market Studies 42(5): 869-896.

Bank of England (2014) ‘Financial Stability Report’, June 2014, Issue No. 35 (London: Bank of England).

Berrington, H. and Hague, R. (1998) ‘Europe, Thatcherism and traditionalism: Opinion, rebellion and the Maastricht treaty in the backbench conservative party, 1992–1994’ West European Politics, 21:1, 44-71.

Bickerton. C., Hodson, D. and Puetter, U. (eds.) (2015) The New Intergovernmentalism: States and Supranational Actors in the Post-Maastricht Era (Oxford: Oxford University Press).

Hodson, D., & Maher, I. (2014) ‘British brinkmanship and Gaelic games: EU treaty ratification in the UK and Ireland from a two level game perspective’ The British Journal of Politics & International Relations 16(4): 645-661.

Hodson. D. (2015) ‘Eurozone Governance: Deflation, Grexit 2.0 and the Second Coming of Jean-Claude Juncker’ Journal of Common Market Studies Vol. 53(s1).

Panagiotarea, E. (2013) Greece in the Euro: Economic Delinquency Or System Failure? (Colchester: ECPR Press).

Puetter, U. (2014) The European Council and the Council: New Intergovernmentalism and Institutional Change (Oxford: Oxford University Press).

Weyerstrass, K., Van Aarle, B., Kappler, M., & Seymen, A. (2011) ‘Business cycle synchronisation with (in) the EURO area: in search of a “euro effect”’ Open Economies Review 22(3): 427-446.