The Eurozone crisis possesses many aspects. Most conspicuously, it has manifested itself as an economic, financial and fiscal crisis; as increasing unemployment and laggard economic growth; as bottlenecks in the financial system as well as liquidity and solvency problems of financial institutions; and as mounting public debt and threatening state insolvency. But at issue is also a constitutional crisis. The crisis has shaken the foundations of what we shall term the second, macroeconomic layer of the European economic constitution. The Maastricht principles of the European economic constitution are teetering, with implications reaching out beyond the economic dimension and extending to the national level, too. A constitutional analysis of the crisis must adopt a broad perspective and a comprehensive analytical framework.

Our discussion of the constitutional implications of the Eurozone crisis is based on a specific understanding of what constitutions in general and the European constitution in particular are about. In the nation-state context, especially in the revolutionary French and American traditions, constitutions are seen as unified normative entities which result from the exercise of constituent power – pouvoir constituant – by the people – the demos – at a clearly definable constitutional moment. This tripartite conceptual apparatus – ‘constituent power’ – ‘demos’ – ‘constitutional moment’ – is not applicable to the European constitution: there is no unified European constitution to which the European citizenry would have given birth as an expression of its constituent power at a particular constitutional moment. When discussing the European constitution, revolutionary constitutional concepts must be replaced by an evolutionary counterpart; namely constitutionalisation. Characteristic of the European constitution is its process-like nature; it is not a temporarily and substantively clear-cut normative entity but, rather, a continuous process of constitutionalisation.

European reactions to the Eurozone crisis fall into three categories. First, rescue packages have been assembled to pull the worst-hit countries out of the most acute difficulties, and financial stability mechanisms have been established. The objective has not merely been to provide emergency assistance but also to avert contagion and to enhance the confidence of financial markets in the euro area’s ability to cope with the situation. Second, emergency measures and building financial and institutional capacity to meet future crises have been flanked by efforts to strengthen European economic governance. Here the aim has been to remedy the insufficiencies and inefficiencies of the Maastricht constraints on national fiscal economic policy which had proven unable to prevent turmoil erupting in Spring 2010. Third, interventions by the ECB have supported and complemented other emergency measures, at times even playing a decisive role. In the following, we shall outline the major developments on all three fronts and then turn to their constitutional analysis in Part II. As a prelude, we shall summarise European reactions to the financial turmoil which preceded the fiscal crisis.

Prelude: tackling the financial crisis

As late as June 2007, the ECB raised interest rates, which was a token that the upcoming financial crisis was not yet foreseen. The first larger-scale indications of the upcoming financial crisis only became apparent in the latter half of 2007. The ECB responded with a series of measures that were mainly intended to ease liquidity shortage and ensure market funding for banks. General announcements on liquidity policy were accompanied by fine-tuning operations addressing short-term nervousness in the money market. As these were considered insufficient, the ECB engaged in a series of ad hoc or supplementary measures to guarantee longer-term financing to the banking sector and to normalise conditions in the money market.

European responses to the Eurozone crisis raise constitutional issues in both the European Union and its Member States. Furthermore, constitutional implications can be discussed at two levels, remembering the multi-layered nature of constitutions in general and the economic constitution in particular: in addition to explicit constitutional provisions and precedents, constitutions include a ‘sub-surface’ level of underlying principles, concepts and theories. In this chapter, we focus on doctrinal questions, related to ‘surface-level’ constitutional law and postpone ‘matters of principle’ to Chapter 6. Of course, these two levels neither can nor should be hermeneutically isolated from each other. The tougher doctrinal issues are, the more frequently legal argumentation must take recourse to the principles underlying individual provisions. Principles, in turn, can only be identified through the traces they have left in such ‘surface-level’ constitutional material as the Treaties or the case law of the ECJ, i.e. the constitutional court of the EU. It is perhaps more appropriate to speak of different emphases than two separate levels of discussion.

We shall argue that the Pringle judgment of the ECJ, together with the amendment to Art. 136 TFEU, which explicitly acknowledged Member States’ competence to establish a stability mechanism, have confirmed that significant changes in the macroeconomic constitution have occurred. We take these for granted, deferring to the weight the speech acts of the constitutional legislator and the constitutional court (ECJ) have in EU constitutional discourse. Yet, we feel free to criticise the argumentation in the Pringle ruling and the preceding view of AG Kokott, as well as in European Council Decision 2011/99 on the amendment to Art. 136 TFEU. Furthermore, we shall comment on the constitutionality of ECB action and thus enter a territory largely uncharted by constitutional scholarship. We shall also discuss the constitutional basis of reinforced economic governance, in particular the reach of Art. 136(1) TFEU in justifying specific Eurozone measures and the use of intergovernmental agreements to circumvent political obstacles blocking recourse to primary or secondary EU legislation.

This new contribution from Kaarlo Tuori and Klaus Tuori, offering an innovative constitutional analysis of the Eurozone crisis, is an important addition to the series Cambridge Studies in European Law and Policy. Combining expertise on law, theory and economics, the authors are able to open our eyes to the many aspects of the Eurozone crisis and its ramifications for societies and polities. They want to take us beyond thinking about the crisis merely as a financial crisis, a crisis of the banking sector or a threat to public debt, and to give it a broader public order and constitutional perspective. The Eurozone crisis goes to the very heart of the European constitutional order, understood in a multi-perspectival manner to incorporate both the legal order sustained by the EU treaties, and also the systems of the Member States. The Eurozone crisis thus entreats us to consider also issues of democracy and transparency, as well as issues about the values which underpin our societies in the early twenty-first century including issues around security in its widest sense. Tuori and Tuori, through a historically and conceptually grounded analysis, show how these issues are intimately linked to each other. We warmly welcome this volume to the series.

The constitutional principles of democracy and transparency

In the constitutional respect, the Eurozone crisis has not appeared only as a crisis of the macroeconomic constitution and entailed a significant change to the Maastricht principles. It has had important repercussions in other constitutional dimensions, too, primarily political and social. All the constitutional dimensions possess an institutional aspect. The institutional structure of the Union can be examined in the context of ‘substantively’ defined constitutional dimensions, and, indeed, analysing the status and mandate of the ECB has formed an integral part of our discussion of the macroeconomic constitution. But the institutional structure can and should also be explored as a whole; as a vital element of the political constitution, and in the light of the particular principles and values of this constitutional dimension. Evidently, the Eurozone crisis has lifted the macroeconomic constitution into a pacemaker position among the many constitutions of Europe. The economic constitution is clearly defining the agenda for the political dimension. Mutation of the macroeconomic constitution and expansion of the functions of expert institutions beyond their original role have consequences for the political constitution as well. The obvious danger is that the economic constitution also dictates the terms of development, so that insufficient attention is paid to specifically political constitutional values, such as democracy, transparency, legitimacy and accountability. This danger is enhanced by the sneaking, piecemeal mode in which the political constitution is being remoulded under the impact of the economic one.

Since the second half of 2012, financial markets have calmed down at least temporarily and the worst financial and fiscal crisis appears to be over. In the relative tranquillity, European institutions could focus on reflecting on the lessons of the crisis, as well as the need to develop EMU and to prevent future crises. Yet with the crisis easing, the enthusiasm for reforms appeared to decrease, too. Thus, despite the quite far-reaching reform plans on the table, the results of the subsequent meetings of the European Council have been meagre.

In June 2012, a Working Group consisting of the Presidents of the European Council, the Commission, the Eurogroup and the ECB, headed by Van Rompuy, put forth a scheme for a comprehensive reform of the EU. The scheme was further elaborated in the following months and received its final shape on the eve of the December 2012 European Council meeting. A more ambitious initiative for “launching a European debate” – ‘A blueprint for a deep and genuine economic and monetary union’ – was produced by the Commission and published on 30 November 2012. The European Parliament’s major contribution to the discussion is a Resolution of 20 November 2012 on the report of the four Presidents. Furthermore, the Commission has produced documents on individual parts of reform packages, in particular the proposed banking union.

Three secular trends

The sovereign debt crisis was the most dramatic manifestation of the Eurozone crisis. It also led to the most profound changes in the European macroeconomic constitution, with important spillover effects in the fields of the political and social constitution. Yet, it was only the last phase in a series of predicaments which hit most of the developed economies beginning in late 2007. The Eurozone crisis was a result of manifold economic factors, which include both long-term secular trends and more recent developments. Together the long- and short-term factors explain why so many of the underlying economic assumptions of the Maastricht macroeconomic constitution proved to be mistaken and why the Eurozone responded to the crisis in the manner it did.

Three secular trends in the global economy, which were more or less neglected in drafting the European macroeconomic constitution, need to be recognised in order to understand the root causes of the crisis: a constant increase of private and public debt in the developed economies since the beginning of the 1980s; inclusion of the emerging economies (EME), particularly those in Asia, in the global economy; and the trend-wise decline in the volatility of GDP growth and inflation which came to be known as the Great Moderation but which could in effect have been a change in the nature of economic cycles from shorter-term traditional cycles to medium-term financial cycles.

The privatization of public pension systems is commonly viewed as imperative to ease the strain on nations' fiscal resources. Yet, the overhaul of state pension systems is a high-risk political endeavor. Because privatization replaces the principle of public social insurance with individual responsibility for old age income, organized beneficiaries of state pension benefits will vehemently oppose reform. Structural pension reform is also perilous from a financial cost perspective. By channeling pension contributions away from public to private pension funds, the government accumulates a deficit to cover the current pension liabilities during the reform's transition period. Since the costs of pension reform accrue immediately but the long-term benefits – lower fiscal outlays – do not materialize until the distant future, it hardly surprising that governments pursuing such a strategy often suffer electoral defeat (Pierson, 2000b; Jacobs, 2011).

Given the high risks associated with the reform of state pension systems, it is puzzling to observe that this measure was adopted by so many European countries in the 1990s and early 2000s. During this period, several European governments have either privatized their pension systems or introduced funded components. Existing studies do not offer unequivocal conclusions about the causal pathway of reform because they concentrate on a single impetus instead of probing a variety of possible explanations. Works attributing pension reform to purely domestic pressures, such as rising longevity, low fertility, and concomitant financial exigencies (Taverne, 2001; Disney, 2003) cannot account for the timing of pension reforms.

Our analysis implies that standard accounts portraying the EU as a regulatory polity with little discretion over pension policy issues are wrong. The constraining impact of EU treaties on national pension policy choices and the creation of a single European pension market demonstrate that the scope of EU regulations is much broader than traditional accounts on the EU have acknowledged. Far from being limited to apolitical areas of market creation and maintenance, the European Union crucially shapes workplace pension regulations, with highly controversial implications for national labor relations and capital flows. European legal constraints have greatly reduced the capacity of national governments to influence workplace pension regulations, notably in the areas of investment rules, waiting and vesting periods, treatment of foreign pension funds, and regulatory supervision. Market integration and the management of cross-border externalities may drive EU pension legislation, but the reshaping of national pension policy choices is the outcome.

The findings of our inquiry have been discussed at length in the book. We provided evidence that pension reforms in the member states are not just a consequence of domestic factors, such as demographic aging, but also the result of international factors, in particular the constraining effects of the Maastricht Treaty. Using an event history set-up, we systematically tested whether the timing of pension reforms in Western Europe ensued from the diffusion of policy ideas, domestic pressures, or common shocks.

Workplace pension schemes represent social, labor market, and economic goals. They provide social protection in old age and serve as staff retention device for firms' most valuable employees. They have also been used as a financial service instrument to complete the single market in the European Union (EU). While much has been written about the social function of workplace pensions, less attention has been devoted to the use of pensions as market-making device in the EU. Yet, studying the role of workplace pensions in the EU's internal market is intriguing because it highlights tensions between supranational regulations and domestic pension systems.

In the European Union, age-related spending represents a large share of public expenditure and is therefore an issue of common concern among the member states. Pensions from public pay-as-you-go (PAYG) schemes are the main source of income for older Europeans. In 2012, the EU as a whole spent more than 10 percent of gross domestic product (GDP) on PAYG pensions. This share is expected to rise to 12.5 percent of GDP in 2060 (European Commission, 2012b: 4). Due to declining fertility rates and increased life expectancy, the population aged sixty-five and above is expected to increase markedly in the coming decades. This group will almost double, rising from 87.5 million in 2010 to 152.6 million in 2060 in the EU (European Commission, 2012a). Unfavorable demographic developments, falling employment rates, and persistent financial instability put enormous pressure on public budgets and make it harder for state pension systems to deliver on benefit promises.

In this chapter, we provide essential background information that is necessary to understand what is at stake in the process of pension market integration. National pension systems are under pressure due to unfavorable demographic developments, financial constraints, and new social risks that are not covered by many traditional pension plans. These pressures politicize workplace pensions in new ways and differently across divergent types of pension regimes. This creates dilemmas for would-be reformers in Europe. On the one hand, the EU-wide harmonization of workplace pension regulations is attractive for large corporations in Europe because compliance with a single regulatory framework is easier and more cost-effective than compliance with twenty-seven different regulatory systems. Individuals also stand to gain from pension market integration since they would no longer lose pension benefits and rights if they moved across borders. On the other hand, even a partial harmonization of pension regulations at the EU level produces winners and losers since certain pension regimes are inherently better suited to accommodate EU-mandated change than others. Thus, the creation of a single pension market represents a classic cooperation problem: converging on common rules is desirable in principle, but deep divisions exist over objective and means of harmonization. Countries facing high costs of adjusting to EU directives will seek to keep the pain of reform to a minimum. This makes any common policy hard to adopt.

At first glance, the governance of pension funds across borders may seem like a simple target for EU harmonization efforts. The potential benefits seem sizeable: more integrated capital markets, fewer barriers to labor mobility and substantial savings in administrative costs for corporations. However, a single pension market requires institutional changes in sensitive policy areas. Member states must agree on the harmonization of investment, social, and supervisory regulations.

Since the mature pension fund culture and liberal investment regulations in Beveridgean states fits well with EU pension directives, these countries face fewer adjustment costs and are therefore expected to support the creation of a single pension market. Countries with a Bismarckian pension system, however, face higher adjustment costs because a single pension market requires drastic changes in investment regulations, risk coverage, as well as waiting and vesting periods. These regulations, in turn, have a major impact on economic interactions between governments, workplace pension plan sponsors, and beneficiaries. Concerns that EU harmonization efforts might destabilize established patterns of labor relations makes cooperation in this policy area problematic. In this chapter, we ask why negotiations over pension market integration failed in the early 1990s, but succeeded in 2003. Any theory should explain both bargaining breakdown and success.

We argue that the key to understanding negotiation failure and success is the process of informal signaling between the member states.