Why is the Eurogroup ruling Europe?

Let us suppose that the executive members for finance of Manchester, Glasgow, Nottingham, and Oxford city councils meet by chance at Bristol beach (UK). They decide to have a beer together, and during this informal meeting they take another, less irrelevant, decision: to raise your tax rate. Yes, I mean precisely yours, even if you live in London, or Smarden, or Edinburgh, or wherever in the UK...

What would be your reactions next year, when the happy moment would come to pay taxes? I suppose that you would be disappointed. But, over and above that, you would probably ask yourself an obvious question: “Who or what on Earth gave to these guys the right to raise my tax rate?”

The answer is: nothing. I am quite sure that nothing in the British (or French, or German) Constitution grants to an informal meeting of local politicians the right to raise taxes at the national, or even at the local, level. Such a decision, would it be enforced by some authority, would immediately provoke an upheaval.

Yet, this is exactly what is happening in Europe now, without people opposing, or even noticing it.

During the last weeks everyone has heard of the Eurogroup. The Greek crisis has been managed mostly by it: the Eurogroup has taken decision, has proposed or rejected “rescue” packages, has conceded or refused delays, and so on. But what is the Eurogroup?

According to the website of the Council of Europe, “the Eurogroup is an informal body where the ministers of the euro area member states discuss matters relating to their shared responsibilities related to the euro” (emphasis added). Is the Eurogroup mentioned in the Treaties, and where? Are there any rules disciplining its competences, its functioning, and its agenda setting? Is it really needed? How is it possible that such important decisions as the rescue plans for a sovereign state be taken by an informal body whose task is to discuss, not to decide? Is this a good thing?

Before answering these important questions, let us put them in perspective.

As it happens, the story of the Eurogroup is a very interesting one: Lakoff would probably call it a metaphor of the European integration model and of its shortcomings.

The creation of the Eurogroup was advocated by France in 1997, at the time the Stability and Growth Pact was introduced. French motivations were the usual ones: to get rid of (what French perceived as) German tyranny. Let us move a little step backward (reculer pour mieux sauter). Everybody knows that the euro was advocated by France (and Italy) on the purely delusional assumption that, being managed by a “European” bank, the single currency would put an end to Bundesbank’s hegemony. As a matter of fact, free capital movements and quasi-fixed exchange rates (i.e., the need to “defend” the Exchange Rate Mechanism – ERM – central parities) had deprived the European Monetary System – EMS – participant of their (national) monetary policies. Just as in any entry-level textbook version of the Mundell-Fleming model, EMS countries were forced to stick to the German interest rate, in order to avoid disruptive capital movements, and excessive swings in their exchange rates. In particular, if Germany raised its interest rates, the other countries were forced to follow suits, even if the conditions of their economies would advise against this move, or capital would have moved to Germany.

It is frequently stated by amateur economists that the euro is dysfunctional because it implies a “one-size-fits-all” monetary policy. This statement is extremely naïf. As shown above, the European monetary policy was “one-size-fits-all” well before the euro, because of the ERM-plus-capital-mobility mix (as implied by Mundell-Fleming model). It is precisely in order to get rid of such a policy constraint that the adoption of the euro was fostered. The French (and Italian) reasoning was: “Ok, financial markets are integrated, and for that reason we cannot really manage our ‘national’ interest rate anymore: henceforth there will be only one European interest rate dynamics (levels may differ because of the spread, but the movements will be synchronized). As of now, interest rate dynamics is chosen by the Bundesbank. Let’s merge our currencies, and the decisions about the interest rate will become collegial. It will still be a dysfunctional setting, but less than the present one, where only Germany decides. Perhaps we, the French, we will be able to induce some moderation in German decisions, and to obtain an interest rate dynamics closer to the interests of our economy”.

Two things were wrong with this approach.

Firstly, the Machiavellian French politicians were apparently unable to imagine the obvious: it was really easy to predict that any European collegial body would have been dominated by a majority corresponding to the members of the former “DM-area”. Let’s excuse them (the French, I mean): in order to have “esprit florentin” you must be born in Florence (in which case you are unlikely to become a French minister: Mazzarino himself was born in the Abruzzese mountains...). However, in case you are an énarque (the French version of Ottoman eunuch), have a look at Jens Weidman answer here:

Question: uestion: Today it is even harder for the Bundesbank to assert its influence as it is just one of 17 central banks in the Eurosystem. What impact does this have on your work?

Weidmann: Even though what you say is correct in terms of shares of voting rights, I certainly would not say that we are “just” one of 17 central banks. We are the largest and most important central bank in the Eurosystem and we have a greater say than many other central banks in the Eurosystem. This means that we have a different role. We are the central bank that is most active in the public debate on the future of monetary union. This is also how some of my colleagues expect it to be. (emphasis added... by Weidmann!)

Secondly, the desire to keep money under French (or whatever) political control was frustrated by the fact that there was no credible political counterpart of the ECB, and this is where the Eurogroup comes into the picture.

Let’s go back to basics. Dependence is a relation, and so is independence. You depend on something (or someone), and are independent from something (or someone). It was, and it still is, unclear, from what institution the ECB is or should be independent. The usual dialectic between Treasury and Central Bank does not make sense at the European level, for the very reason that there is no European Treasury (because there is no European government, no European budget, no European state, no European people, no European language, no European politics, and so on – even though there is an European history that nobody wants to learn). The obvious conclusion was that the ECB would have operated in an absolute political vacuum, which is something very different from independence, and it is something very worrying. So worrying that, lest the European citizens noticed it, Dominique Strauss-Kahn proposed the creation of the Eurogroup, on the wise ground that “in the absence of a visible and legitimate political body, the ECB might soon be regarded by the public as the only institution responsible for macroeconomic policy” (cited in Majone, p. 34). The Germans opposed this project: as we all know here, they were very reluctant to entrust any political body with the responsibility of managing money (albeit indirectly).

As a result, they obtained a completely emasculated Eurogroup: an informal, consultative body, without any definite competence. Only a half of DSK wishes were achieved: the Eurogroup was visible. The other half was not achieved: the Eurogroup was not legitimate (besides being powerless). The Treaties did not consider nor discipline it. It was unclear what its power were (for instance, it had no power to fine countries breaching the SGP rules, not to say to guide the ECB), it was unclear at what majority it decisions should be taken (and in fact regular voting was taking place only in the ECOFIN meetings), and so on.

This situation lasted until the Lisbon Treaty came into force at the beginning of December 2009 (twelve years later)! Since the reform of the Treaties, the Eurogroup is still not mentioned among the European institutions (in the Title III of the Treaty on European Union). Yet, Protocol 14 of the Treaty kindly informs us that:

Article 1

The Ministers of the Member States whose currency is the euro shall meet informally. Such meetings shall take place, when necessary, to discuss questions related to the specific responsibilities they share with regard to the single currency. The Commission shall take part in the meetings. The European Central Bank shall be invited to take part in such meetings, which shall be prepared by the representatives of the Ministers with responsibility for finance of the Member States whose currency is the euro and of the Commission.

Article 2

The Ministers of the Member States whose currency is the euro shall elect a president for two and a half years, by a majority of those Member States.

No information on the agenda setting, on the powers, on the voting procedures, basically: on anything but a mention to the informal nature and to the need of meeting when necessary (very reassuring, given the evident far-sightedness of our governments).

By the way (and keeping in mind my negative assessment of the French “strategy”), upon reading the Treaties, one realizes that the Eurogroup is a useless body. Its relevance is at best transitory (“pending the euro becoming the currency of all Member States of the Union”, as specified in the premises to Protocol 14). Moreover, back in 1998 the European Parliament itself recognized that “all decisions on economic policy, multi-lateral surveillance, and the Stability and Growth Pact will be taken within EcoFin, as the only legally constitutional body under the Treaty to have the necessary powers”. However, “in practice the Euro-11 Council [i.e., the Eurogroup] is likely to take decisions on economic integration which will be specific to the Euroland countries”, and “because of the qualified majority situation, [Ecofin] would have little difficulty in endorsing them”.

This situation did not change substantially later on, when the Eurogroup was legitimated ex post by Lisbon Treaty. The Article 136 of the TFEU (in the Chapter 4 “Provisions specific to member states whose currency is the euro” of the Title VIII “Economic and monetary policy”) specifies that:

1. [...] the Council shall [...] adopt measures specific to those Member States whose currency is the euro:

(a) to strengthen the coordination and surveillance of their budgetary discipline;

(b) to set out economic policy guidelines for them, while ensuring that they are compatible with those adopted for the whole of the Union and are kept under surveillance.

2. For those measures set out in paragraph 1, only members of the Council representing Member States whose currency is the euro shall take part in the vote.

A qualified majority of the said members shall be defined in accordance with Article 238(3)(a).

(i.e., “55 % of the members of the Council representing the participating Member States, comprising at least 65 % of the population of these States”: not a detail, see below).

One may discuss whether the concept of “economic policy guidelines” encompasses “rescue packages” (it will certainly do under an extensive interpretation). My point, however, is rather different. In both the ex-ante assessment by the European Parliament, and the  ex-post provisions of the Lisbon Treaty, the Eurogroup appears to be useless. It has no legitimate power to decide, and the body which has this power, the Ecofin:

(a) can discuss the same matters as the Eurogroup (and hence, no need of the latter), and:

(b) will necessarily reach the same decisions as the Eurogroup, because non-Eurozone members are not 

allowed to vote (and hence, once more, the Eurogroup is an unnecessary duplication).

Summing up the discussion so far, the Eurogroup was born basically as an unnecessary non-entity, set up for purely cosmetic reasons on French demand, and deprived of any real meaning by German will.

Let me add some reflections on this point. This paradoxical creature is the result of a specific feature of the European integration process: the tendency to favor process over outcomes, stressed by Majone following a distinction introduced by Bhagwati. In short, European politicians have always favored what they could display as an immediate result (the signature of a new treaty, and hence the integration process per se), over the future results of the integration process (i.e., over the goals the new treaty was supposed to achieve). This behavior has simple motivations: the process (i.e., the signature) takes place now, in front of the cameras; the supposed results instead will arrive in an uncertain future, and every politician discounts the future very heavily. The politicians' intrinsic short-sightedness has originated a huge “political economy” literature (think for instance of the political business cycle hypothesis). In the case of European integration, the primacy of process over outcomes has led to two unfortunate and eventually self-defeating features. Since what matters for politicians was always to reach an agreement (rather than what results this agreement would bring about), in order to speed-up the procedure (1) contentious issues were mostly side-stepped, and (2) any precaution principle, involving the definition of rules and institutions devoted to crisis management, was ignored.

As mentioned above, the Eurogroup is precisely the outcome of side-stepping the political contentious issue about who or what would be the political institution in charge of macroeconomic policy in the Eurozone (the “Treasury” from which the ECB would have been independent).

These reflections allows us to answer the question as to why such a political freak is ruling Europe, taking important decisions such as whether and how to rescue sovereign states.

The Eurogroup rules, despite being an informal body, because the strategy of side-stepping contentious issues and of ignoring the precaution principle has left a huge political vacuum in the European integration process. Once the crisis arrived, it was not clear who and how should manage it. At the same time, Germany, after consolidating thanks to the euro its hegemonic status, was not puzzled anymore by this supposed “counterbalance” of the by now blatantly German ECB. Quite the contrary: using the crisis as a “window of opportunity”, a decision was apparently taken to endow an informal body, completely controlled by creditor countries, with the power to rule over Europe. This is the European federalist’s dream (as described by Roberto Castaldi): to use a crisis as a window of opportunity to take outside any democratic control a decision that the constituency would otherwise not take, such as the decision to be ruled by an informal comité d’affaires of local, possibly unelected, politicians.

This may seem an abstract and largely irrelevant question. The same argument I used in order to show that the Eurogroup is a useless duplication of the Ecofin, could be reversed to demonstrate that my concerns are misplaced. After all, if both bodies would reach the same conclusions, who cares about what body takes ultimate decision?

Yet, even if we would be willing to disregard the importance to abide by the rules in a democracy, the resurgence of the Eurogroup as the “leader of an European awakening” (in Alberto Quadrio Curzio’s words) has practical implications that should not be underrated. In particular, much in the spirit of European federalism, this outcome results in a dangerous compression of democracy. I give you two examples of what I mean.

Firstly, we received already a serious warning on June 27th, when the Eurogroup decided to convene itself without the representative of a member country (yes: Greece). This decision has been commented extensively by both Varoufakis and Jacques Sapir. While agreeing with Sapir analysis, I allow myself to disagree on a detail. According to Varoufakis, he was told that:

“The Eurogroup is an informal group. Thus it is not bound by Treaties or written regulations. While unanimity is conventionally adhered to, the Eurogroup President is not bound to explicit rules.”

The argument was that the body is informal, not, as Sapir writes, that the meeting was informal. And unfortunately this argument, as the previous discussion demonstrates, is correct: the Eurogroup is an informal body, and as such it is not bound by rules. After all, the four executive members of my first example could have chosen to drink cider, instead of beer! The danger of entrusting an informal body with momentous decisions is evident. At any crucial moment, it can decide to give itself rules that deprive of voice one of the parties concerned by its decisions. Hence, in a sense the situation is even worse than the one depicted by either Sapir or Varoufakis. The questions then arises as to who, when and how entrusted the Eurogroup with the task of managing the “rescue” of Greece (i.e., of Greece’s creditors, as we all know here). Sapir affirms that it was the European Council, but, while trusting him, I was unable to find evidence of this decision. It would be extremely interesting to see in what terms the Eurogroup received its mandate.

Another example. Being an informal body, the Eurogroup has no definite voting procedure. We can assume by analogy that it would adopt the voting procedure of the Ecofin council, disciplined by Article 16(4) of the Treaty on European Union as well as Article 238(2) of the TFEU. However, we could also have assumed by analogy that the Eurogroup could not convene itself without a member country, and it did. If the Eurogroup did not exist, any decision would be taken by the legitimate body, the Ecofin. Interestingly enough, the voting calculator shows us that under the current rules, the four “Club Med” countries constitute a blocking minority for Eurozone-related issues, under both qualified majorities envisaged after the reform in November 2014. In other words, if you

(1) exclude from the vote Bulgaria, Croatia, the Czech Republic, Denmark, Hungary, Poland, Romania, Sweden and the United Kingdom (as envisaged by Article 136(4) of the TFEU), and

(2) Greece, Italy, Portugal and Spain vote against

the criterion of “at least 65% of the population” will not be met. This is what would happen by following the rules. I will not go as far as to say that the Eurogroup was somehow entrusted with the task of solving the crisis because it is not bound to follow this rule. Yet, the argument that, being an informal body, it is not bound by any rule has already been used. I maintain that a political solidarity between debtor countries is impossible. Everyone thinks that its situation is better than that of its neighbor, and all of them are ruled by commissioners of the creditor countries (Tsipras, in my opinion expressed here, could be a good example). However, once the informal Eurogroup (instead of the formal Ecofin) becomes the institution for the discussion of economic affairs, any political solidarity among Club-Med countries could be easily circumvent, by adapting the “informal” voting procedure.

Yes, I know: I am too “florentin”. This is because I am actually Florentine. But think about it. Are you able to find a sensible reason for entrusting an informal body with crucial decisions? My take is that this choice is political, not technical, and it aims deliberately at repressing democracy (which is what the euro was made for).

And yours?



(...apologies for my poor English. I hold the opinion that the hegemonic language is doomed to be badly spoken and poorly written. This is what happened to Latin, and what’s now happening to English. For that reason, although I am quite a careful writer in Italian, I do not really care a lot about reaching an impossible task: write a correct English. The half-full glass is that I am quite sure that those who wish to understand, will. The other will not, but they would not even if Shakespeare had written this post. However, unlike Shakespeare, I had this post grammar-checked by Words...)