The Functionalism Theory in the European Debt Crisis

Juan Felipe Ruiz Santos

The European Union is one of the most successful experiments of cooperation and international relations development in history, the true example of how integration between people does not rely on borders or power, but in common development and general welfare; not only economic but social, educational, even cultural ambit has been touched by these cooperation between the oldest and noblest cultures in human history. All this progress is the result of an intellectual theory developed around 85 years ago, based in technocratic management of supranational organization in order to establish ground rules to state behavior and ensures the satisfaction of all citizen common needs. It is called functionalism. Nowadays many people hesitate about the EU survival because of the financial and social situation in Greece, and the financial meltdown that is spreading all over the world. More troublesome is the position of some who claim to have foreseen the end of the Union, because of the financial crisis. Even if the causes for the crisis were indeed related to bad faith, to corrupt behavior of some European politicians and the gambling preponderance of Wall Street problems. Perhaps the solving of the actual problem requires rejecting Greece out of the Union, maybe not but the main path shown is that by integration and state authority surrendering to a international organization the people could rely to a group of experts in order to create a continental, rational, humane and integral policy that members should follow. The purpose of this paper is to show how the debt crisis began, who are the real responsible from it, to finish enunciating the reason why it appear and how the functionalism theory is again called in order to strengthen cooperation in the face of the European Union disintegration threat. The European debt crisis may have exploded in 2010, two years after the financial crisis that shocked the world, but its origins relay in the early beginnings of the Union itself, in 1992 on the Maastricht Treaty signing. But it was not because of the ideal of the Union by itself, neither by the purpose or the method used in its conformation. As the Idealism that Kant so bravely explain to the skeptics, the failure is based on corrupt behavior of individuals, which is not a constant in human nature but is indeed a possibility in every relation powered by human will. The first line to sign the treaty was a series of macroeconomic prerequisites, known as the Maastricht Criteria. There it was a top level for certain economic indicators established in order to prevent future crisis and the responsibility of the Union to endure alongside some problematic economies. These were those criteria:  Price Stability: Average annual inflation rate no higher than 1.5 percentage points above the reference value, i.e. the average inflation rate in the three EU countries with the best price stability. Budget Deficit: Government deficit must not exceed 3% of GDP 1

Wall Street’s appetite for risk went off the chart since 1980 with the deregulation career started by Allan Greenspan but it was the Gramm-Leach-Bliley Act the one that doom economy into the risk race and spread the NYSE cancer into all economies in the world. the weakest links of the Union get in deep trouble. caused by Wall Street gambling problem alongside with the deregulatory trend of the United States government and the interest rates policy after 9/11. But only after 9/11 interest rate policies change is that the appetite for risk when from exacerbated to immoral. 2005 National Bureau of Economic Research http://www. and more important there should have been a clear path or cruise of action in order to reduce the cyclicality of the stock crisis and the impact of how it could affect the macroeconomic 1 2 http://europa. Rumors extend like rapid fire and the gambling operation of the monetary market lead to a short sell destruction of Greece chances for rehab. traders and investment bankers need to take on stake a much higher level of risk in order to assure the same level of profit once taken with high interest rates. it was a worldwide scam and not a single economy escape from it. enabling it by short sell mechanisms and out-of-control hedging derivatives conversion into speculative vehicles Perhaps the auditing process of the European institutions was deficient.org/papers/w11728 2 . by covering their loses. By that act. Exchange Rate Stability: At least two years in ERM (European Exchange Rate Mechanism) II without severe tensions. There should have been a stronger regulation in terms of how the economies were exposed to the financial meltdown right after it happens. but when the economic crisis. What some people doesn’t know is that some countries. but let’s face it. hits the European Banking system. by allowing that rumormongers and speculators destroy the reputation of entire economies in their profit chasing. When interest rates goes down. American deposit system could merge with investment banking in order to create massive financial conglomerates capable of giving all the liquidity the market needs. it was generally accepted that they fulfill all requisites for the Union. use the financial services of Wall Street investment banking in order to achieve the Maastricht Criteria. One thing lead to another and suddenly public find out that Greece have been vitiating their numbers in order to stay in the Union.nber. but the out cost was to put at stake money from depositor in the first line of fire.eu/abc/eurojargon/index_en. because of their level of exposure to the systemic risk.htm Raghuram Rajan. maybe naive. diversifying risk and distorting credit positions by complicated and risky derivatives and hedge operations. And most possibly they were. as so politely suggest Raghuram Rajan in its paper Has Financial Development Made the World Riskier?2 Indeed the money market philosophy is guilty of all charges.   Debt :Government debt must not exceed 60% of GDP Interest Rates: Returns on ten-year government bonds not higher than two percentage points above the average returns in the three EU Member States with the best price stability.1 Now when the original 15 members of the European Economic Community signed the treaty. alongside to the mayor profit that relies on the Sovereign Credit Default Swap market. included Greece. Perhaps it is only a naïve behavior to assume that financial risk can be covered only by acquiring more exposure.

had positions all over the world. An agreement has to be made in pro of the welfare of people and against the massive power and system risk enhanced by the financial irresponsible practices and institutions. specially by the loss of power and profit expected from the financial firms. 3 . the real market is affected in a more direct manner. But that type of understanding between the most powerful economies is most likely to end as the Security Council of UN. which should be completely capacitated to pressure governments for real results in a very short time. and that is spilled over the world by the centralization of the power that these massive investment bank had achieve. induce the local financial system into a transformation from universal banking into specialized banking system and take in control the audit and the rating agencies with responsibility and due diligence. To close that disagreement. the control of the systemic risk exposure and the true consequences of the reputational and operational risk should be the main concerns of this organ. the size and the systemic importance of the financial firms. This current misalignment could end in the weakening of the capacity to negotiation of the European economy with its American pair. tittles and savings of the public. That is the spirit that first unites the European Community. while if there is no support of the US on any manner of the accord. stocks and even the banking relations would experience a deep change. If the money market in Europe gives into the wise advice of Chancellor Merkel and eliminate the short sell mechanism of the exchange. bonds. AIG. the creation of an actor capable to control certain aspects of the state context in order to assure the behavior of every actor and to act in pro of the citizen needs. there will be no room for action in pro of the people. it is essential to normalize the panic atmosphere and the social disruption that is hurting Greece and the whole world in these days. The European Union is the finest example of the success of this methodology and the validation of such theory. the behavior in Wall Street for the past forty years has been based in that the liquidity of the market is far more important that the stability of the value of the firms. but enabling a more stable and secure environment for the people in Europe. the European titles. one of the most problematic actors of this plot. The systemic importance and the extension of the action specter of the American financial system is so vast. The stability of deposits all over the world. While the economy and the regulators still biased by the powerful lobby applied by these massive conglomerates. But this idea could only fulfill its purpose if there is an understanding not only of means. it falls in paper and in practice. from industrial and emerging economies with no difference. reduce its exposure to tail risks involved into the low interest rate policy. But its important to understand that the systemic risk involved in the financial integration between USA and the EU is in a very unbalanced position. But even if the accord is only between the members of the European Union. Meanwhile Wall Street regulators allow the gambling and betting into the profit race by its low interest money market. born the call for a supranational organization entitled to ensure that the economies all over the world realizes the true danger and consequences generated by the market philosophy .variables of each member. mechanisms and limits but also in responsibilities and civil (perhaps penal) consequences for the actors. Meanwhile. that any measure taken without the White House acceptance will end into a definite change in the integration level that its now presented. That may be one of the most critical aspects that have to be treated.

Mechanisms. Moral. Italy. the size and the level of dependence of an economy of a single firm must be regulated. Strategies. Europe of Monnet. organized on technician support and experts of the theme qualified to regulate in the most technical and scientifically areas of the nuclear science. Luxembourg and the Netherlands. the European Union Official Site. perhaps with government obligatory participation which forces firms to lay low and reduce its systemic impact on the economy. in average € 700 millions daily. the same Modus Operandi was used by the EURATOM. the European Coal and Steel Community begin to unite European countries economically and politically in order to secure lasting peace. The six founders are Belgium. revising exposure level to systemic risk Strong Application of Basilea III. by its Instruments. Schumann and Mitrany: A Historical Glance to the EU from the Functionalist Perspective 4 . the cuts and reforms performed by the ECB pressuring the salaries almost 50% down and the liquidity of the financial system losing power every minute. multiple run-outs in several Greek banks every day. This is the goal that must be reached by the agreement between the local governments and the International coverage of the EU. to reestablish peace at the financial European markets and to protect the Euro economy from future threats inherent to the speculative-profit philosophy. As a transition to a future goal. 2000: 245. Civil and Penal Responsibility for individuals in directive charges of the financial system. with a new perspective and in function of a new challenging goal. which culminated in the Second World War. a more strong vision of the way how states are financing externally and internally. As of 1950. based on Idealism overcoming the Hobbes conception of the Leviathan state.htm 4 Original from Dinan.”3 Back there the ideology was to empower supranational organizations in order to turn it capable to control the decisions that countries made. as a general rule for the Commercial Banks to ensure liquidity and securing the public deposits. Operations and Risk Administration Government Treasury Observance. a way to control the war tempting apparatus by its very supplies. The validation of this new branch of the European Union.”4 That though show be reborn. Emi Kurt. Schumann and Mitrany: A Historical Glance to the EU from the Functionalist Perspective”.eu/about-eu/euhistory/index_en. in order to reduce the financial system size and its influence in the political ambit.     3 EUROPA. Objective Assessment of the Exchange Market. So the ECSC was in the first mean. History of the European Unionhttp://europa.When the European Union was first organized the main concerns at the time was to endure the peace that was achieved after the World War II “The European Union is set up with the aim of ending the frequent and bloody wars between neighbors. is not by a physical treat or a war menace but for a panic environment. France. Later on. Germany. weakening the currency in the money markets and mining the public perception of the integrated government of the European Zone. It’s worth mentioning that this agreement should be enforced all over the world and that mostly there should be these criteria involved:   Moral and Systemic Risk Assessment & Management Specialized Banking Model. Functionalism is a “classical theory of regional integration that holds that a common need for technocratic management of economic and social policy leads to the formation of international agencies. That way of thinking is the main slogan of the functionalism theory enounced by Emi Kurt in “Europe of Monnet. by enforcing a common supranational force to regulate the atomic energy usage and application over Europe.

 Regulation and supervision of the Audit and Rating Agencies. It is not talking about unique defense mechanism or political dependence (not yet at least). So as it has accomplished its original purpose. in the way that it could report no additional benefit for the stakeholders in those countries. jointed with one standards patron over the financial market and a single policy directing the financial and budgetary branches of each government in the Zone could make the first step out of the turbulence an regenerating the trust on the institutions that have already save them of so many crunches in the past. joining common efforts to ensure the needs of the people who is currently paying the higher price for the mistakes of irresponsible individuals. the EU has no further use. Now it’s the time to renew the objective that could lead turn to be the next step into the fully integration. Standard Procedures and public Responsibility The validation of the European Union as an international organization is determined by an historical performance but not as a current functional objective. it is a talk about returning the peace and the stability to the economy. One unique monetary and macroeconomic policy. At least reducing some of the conditions that generate the enormous amount of risk in the Earth Financial Market and its impact on the Euro Zone would be one of the possible outcomes of this integration. as the common market and de economic parity has been already achieved. By ensuring this commitment of “financial responsibility” the Zone could start pressuring other economies besides the ones in their geographical limits in order to achieve a common global financial stability long term. 5 . by the way how it has worked out the last 60 years. the Economic Union and the common market criteria.

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