How Valid is the Neo-Functionalist Explanation of the 1991 Decision to Move to the EMU? Illustrate your essay with specific examples.

One of the most decisive moments in the story of the European Integration has been the adoption of an Economic and Monetary Union (EMU) on behalf of most of its members.
Analysts from different academic backgrounds have been putting forth a variety of theories for examining this crucial political, economic and social event. Accordingly, some argue that one of the most prominent economic theories of integration, also known as the Optimum Currency Area (OCA) may provide an accurate explanation of the dynamics of economic and monetary unions in general and the EMU in particular. On the other hand, other analysts view the move towards the EMU as a political project, and thus base their rationale for its undertaking in terms of mainly, neo-functionalist or inter-governmentalist approaches.
In this paper, the main focus will be on the political explanatory theories, although the OCA will also be briefly covered: more precisely, the attempt here is to present a critical evaluation of the neo-functionalist approach, as a means of explaining the formation of the EMU in 1991. It is found that there is a limitation in adopting the inter-governmentalist perspective for understanding the EMU and it is argued instead that
the neo-functionalist aspect of ‘elite socialization’ coupled with the concept of Gill’s ‘neoliberal elite project’ provides a more accurate account of the introduction of the EMU.
The first section of the paper will feature a basic outline of what the EMU is and what the general issues surrounding it amount to. Following that one of the most prominent economic justifications of the formation of the EMU will be briefly explained and critiqued. Afterwards, the intergovernmentalist and the neo-functionalist theories of integration will be discussed, which will then be followed by the presentation of how each of these explains the emergence of the EMU respectively. Within this last section Gill’s conceptualization of the EMU as a neoliberal elite project will be juxtaposed to that of the elite socialization notion typical of a neo-functionalist approach, which will form the core of the argument presented here. This will then be followed by the concluding remarks. The first step to take when approaching the issue of how to evaluate the EMU is to establish what its main characteristics are and according to Verdun the EMU “refers to a union in which participating countries have agreed to a single monetary policy, a single monetary authority, a single currency, and co-ordinated macro-economic policies” (2003, 313). Accordingly, one of the most important features of the EMU is the relinquishment of sovereign rights as to how to pursue monetary policy at the national level. It was in light of this decision that in 1991 at the Maastricht summit, the majority of the members of the European Community (EC) agreed on the creation of a central institution, currently known as the European Central Bank (ECB), responsible for setting interest rates, monitoring money supply and for the Euro (Verdun 2003). This is a very important feature, from a political point of view in so far as “jurisdictional authority over monetary policy has been a major source of both practical and symbolic power among the sovereign states of Europe…” (Andrews 2001, 9). Thus, one of the most interesting questions asked and answered differently, according to which of the various theories one adheres to is related to the rationale behind member states’ decision to willingly give up such source of power. An examination of such theories will now follow, beginning with the economic theory of the Optimum currency Areas (OCA).
The ‘Optimum Currency Areas’ literature attempts to identify which states can benefit of from integrating under the auspices of a monetary and economic union. As far as the adoption of a single currency is concerned, there is a widespread recognition that the latter can effectively eliminate transaction costs incurred in the form of bank charges on exchange rates, and generally facilitate trade and exchange between them. However, states adopting single currency incur a significant cost as a result of the abolition of the exchange rate instrument as an adjustment mechanism; instead other instruments, namely, prices and wages are allowed to fluctuate in accordance with the business cycle and changes to productivity levels and competitiveness (Verdun 2000).
However, the OCA has been largely discredited and the European Community has been found not to be an Optimum Currency Area (Verdun 2000). For instance, Eichengreen and Frieden assert that the economic arguments of a single currency are not convincing for Europe in particular, since, unlike the United States, they claim, Europe does not have the internal capacity to adjust to different economic conditions in different parts of the Union because the EU lacks the sort of budget scale the US Federal Government has (2000).
Furthermore, there are distributional costs which the OCA theory does not fully address, resulting out of an uneven allocation of the wealth generated from the EMU, which is only exacerbated by the fact that the differences between European regions are large, on a number of indicators such as productivity, unemployment, per capita income etc. (Verdun 2000).
Moving onto the political theories of integration more generally, intergovernmentalism will be the first to be analyzed.
Intergovernmentalism emerged in the mid 1960s as a critique to neo-functionalist approaches to integration processes, which will follow shortly. The pioneering figure for this particular school of thought is Stanley Hoffman who emphasized the contextual aspects of European integration as opposed to the processes which are the main theme of neo-functionalism (Cini 2003). Intergovernmentalism places high importance on the role of states within the integration process: the state is assumed to have rational approach to bargaining and conflicting interests were a prevailing state of affairs within integration processes and thus driving forces behind such processes (Cini 2003; Verdun 2000). One of the key aspects which limits the use of this theory is the fact it places only a limited role on the bargaining power of domestic forces in shaping national preferences in the agenda setting and bargaining processes. The role of societal groups is in fact considered to be a defining element behind the introduction of the EMU, as it will be shown later after a brief consideration of the neo-functionalist approach to integration. The key exponent of the neo-functionalist approach for understanding the regional integration of Europe has been Ernst Haas, who first espoused his views in his book entitled The Uniting of Europe: Political, Social and Economic Forces 1950-1957. Neo-functionalism, like any other major theoretical framework can be located within a specific set of political circumstances, which have facilitated its rise. In this particular instance the relevant circumstance consists of the behavioural revolution in American Political Science, which had as its ultimate goal the study of political processes as opposed to a political analysis focusing solely on institutional and constitutional elements, with a particularly scientific mindset (Rosamond, 2000).
As its name itself implies, neo-functionalism, also draws much of its theoretical body from functionalism, which is in turn associated with the works of David Mitrany: without having to go into many details, it suffices to say that there are shared elements as well as significant points of departure between the two schools of thought. In terms of their ontological predisposition for instance, both of these theories emphasise the transformative nature of the main actors involved in the integration process, and epistemologically in both cases observation gathered amounts to gradual and incremental exchanges among a variety of actors (Schmitter, 2004). On the other hand, while the importance placed on technocracy as an element of policy making within the main institutions of regionally integrated states is inherited directly from functionalism, political agency is a key element in a neo-functionalist analysis, which in turn implies that the major institutions at work reflect and represent the self-interest of a variety of purposeful actors (Rosamond, 2003).
To expand, since the main concern was with the process of integration as opposed to the outcomes per se, neo-functionalism explored the dynamics of change initiated as states cooperated in a specific policy area, leading to the formation of pressure in neighbouring policy areas and thus prompting deeper levels of integration (Jensen, 2003). This is closely related to the concept of spill over, which “refers to the process where political co-operation conducted with a specific goal in mind leads to the formulation of new goals in order to assure the achievement of the original goals” (Jensen 2003, 84). This is an important concept when analysing the process whereby certain institutions acquire currency over others and certain steps are taken as opposed to others: in other words once a policy is formulated within a specific area then neo-functionalism contends that it is much more likely that other related areas will also undergo change towards a specific direction of greater unity and integration. At this point it is imperative to apply these two political interpretations of integration for analyzing the decision to form the EMU.
The integovernmentalist approach as mentioned earlier is based upon a state-centric point of view and as such it considers the EMU as an outcome of the exercise of bargaining power and promotion of self-interest on behalf of the largest and thus most powerful states. The interests of states such as Germany, France and to a certain extent the UK, which have been favourable to the EMU project for different reasons, have been played out in the agenda setting process of the European Council, so that the EMU could become a reality (Verdun 2003). To expand, in the case of Germany the preference for a liberalized financial regime can be traced back to the 1950s, where as the French wanted to contain German hegemony and the British government had been equally committed to provide market solutions since 1979 in the hands of a Conservative leadership, curbing thus the financial segregationist stance of the Labour Government which had been in power before then (Andrews 2001).
On the other hand, neo-functionalists identify EMU as an outcome of incremental policymaking and as an element of the ‘spill over’ effect previously discussed. In other words, supporters of this school of thought claim that, what brought about a deep form of economic and monetary integration has been the existence of a combination of a number of gradual political processes namely: the liberalization of capital in the European Community, the establishment of a fully fledged single market and the success of the Exchange Rate Mechanism (ERM), after which the EMU appeared to be a natural step forward to be pursued (Verdun, 2003). In the case of the ERM for instance, Andrews argues that, “the implementation of the Single European Act’s provisions for the regressive development of a unified European financial area increased pressure on national monetary authorities in many member states within the Community to abandon, at least on a de facto basis, monetary independence in order to maintain pegged exchange rates within the EMS” (2001, 3).
Moreover, in this incremental process which has led to the institutionalization of the EMU the role of supranational actors such as the Monetary Committee, the president of the Commission and the Directorate-General for Economic and Financial Affairs amongst others, is another important point to stressed by pro neo-functionalist analyses (Verdun, 2003), since it signifies the essence of political agency aforementioned. Taking one step further the argument presented here is that the EMU is not only an outcome of a incremental and natural process, nor is it the result of the will of the strongest states, but it is rather the manifestation of the will of a particular segment cutting across the various states of integrated Europe: it is in other words, a project of the neoliberal elite (Gill 1998). In particular, Gill’s argument is based on a different ontological and epistemological premise from that of neo-functionalist in general: he studies the dynamics underlying the emergence of the EMU project in 1991 from a historical materialist perspective; however, there are points of convergence with neo-functionalism’s thoughts on the subject matter.
For instance the idea of the existence of a distinctively neoliberal elite group can be in a way also related to the concept of ‘elite socialization’ which is part of the theoretical body of neo-functionalism itself. The concept of elite socialization involves the idea that “the European integration process would lead to the establishment of elite groups loyal to the supranational institutions and holding pan-European norms and ideas … (who) …will try to convince national elites of the advantages of supranational co-operation” (Jensen 2003, 86). Gill’s describes the elitist project as an attempt to institutionalise a new mandate of fiscal rectitude as part of modern practices of economic governance that will give credibility to governments and confidence to investors by creating a favorable business climate within Europe (1998).
Another key point of convergence between the two interpretations of the EMU lies in the way both take into consideration the possibility and reality that international negotiations become less politicized and more technical in nature (Jensen 2003); in the case of Gill’s argument the de-politicization of economic and social policy making will occur in face of lack of democratic accountability through the separation of the political and economic, as seen with the establishment of an independent European Central Bank (1998). In relation to this the concept of distributional consequences which the OCA fails to address, as much as the intergovernmentalist approach is highlighted: to expand, the ‘one size fits all regime’ implied within the system of a unitary and independent central bank such as the ECB, means that countries at different phases in their economic cycle needing perhaps high interest rates while others need lower ones are prohibited by the single interest rate and exchange rate regime of the ECB, making adjustment costs unevenly spread across regions and sectors within regions (Valdez and Wood 2003). Similarly the fiscal discipline implied within the Stability and Growth Pact, limits a state’s ability to adjust thorough fiscal policy management (Gill 1998, Valdez and Wood, 2003).
Lastly, another crucial point to take into account consists of the importance those neo-functionalism places on the role of political agency, as discussed in an earlier section of this paper. In the case of the EMU, Gill’s position resembles that of a neo-functionalist in that he emphasizes the role of political agency and the proactive position taken by governments and other actors in the way Maastricht Agreement was negotiated: drawing upon the Gramscian concept of historic bloc he specifically contends that social forces supporting the neoliberal restructuring of the European region epitomized by the institutionalization of the EMU, included sectoral interests of large financial houses and firms, government bureaucracies and European Community organizations, whose governments acted as the necessary medium for the realization of the EMU project.
In conclusion, the forgoing discussion has presented the case for considering the neo-functionalist approach for conceptualizing the EMU. It has combined some of the insights provided by this particular school of thought with those of Gill, whose work is mainly based on a historical materialist perspective. In doing so, an eclectic point of reference has been provided. The EMU is not merely an outcome of an economically substantiated calculation, but is rather a political project whereby a elite group expanding throughout Europe has played a major role. Neo-functionalism has proven to be essential in this respect due to the importance it places on the notion of elite socialization, political agency and de-politicization of decisions taken within the supranational institutions of what is now the European Union, all of which are likewise key themes of the critique presented by Gill, albeit from a different theoretical standpoint.