The Politics of The Eurozone Crisis in Southern Europe A Comparative Reappraisal 1St Ed 2020 Edition Leonardo Morlino Full Chapter

The Politics of the Eurozone Crisis in
Southern Europe: A Comparative

Reappraisal 1st ed. 2020 Edition
Leonardo Morlino
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The Politics of the
Eurozone Crisis in
Southern Europe
A Comparative Reappraisal
Edited by
Leonardo Morlino · Cecilia Emma Sottilotta
The Politics of the Eurozone Crisis in Southern
Europe
Leonardo Morlino · Cecilia Emma Sottilotta
Editors
The Politics
of the Eurozone Crisis
in Southern Europe
A Comparative Reappraisal
Editors
Leonardo Morlino Cecilia Emma Sottilotta
LUISS Guido Carli The American University of Rome
Rome, Italy Rome, Italy
ISBN 978-3-030-24470-5 ISBN 978-3-030-24471-2 (eBook)

https://doi.org/10.1007/978-3-030-24471-2
© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer
Nature Switzerland AG, part of Springer Nature 2020
This work is subject to copyright. All rights are solely and exclusively licensed by the
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The use of general descriptive names, registered names, trademarks, service marks, etc. in this
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The publisher, the authors and the editors are safe to assume that the advice and
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Contents
1 Introduction 1
Cecilia Emma Sottilotta and Leonardo Morlino
2 How Member States Cope with the Eurozone Crisis 13

Sonja Puntscher Riekmann and Fabio Wasserfallen
3 Institutional Inertia, Ignorance

and Short-Circuit: Cyprus 27
Yiannos Katsourides
4 In the Eye of the Hurricane: Greece 57

Dimitri A. Sotiropoulos
5 Vincolo esterno or Muddling Through? Italy 85

Cecilia Emma Sottilotta
6 Dissecting the Exceptional Case: Malta 109

Roderick Pace
v
vi CONTENTS
7 Unstable Preferences and Policy Changes: Spain 133

Xavier Coller and Fernando Ramírez de Luis
8 Challenges and Opportunities Under Conditionality:

Portugal 173
Marco Lisi and Vera Ramalhete
Appendix: Eurozone Crisis-Related Events in Southern

Europe—A Chronology (2010–2015) 203
Index 215
Notes on Contributors
Xavier Coller is Professor at the Department of Political Science and

Administration at the Universidad Nacional de Educación a Distancia
(UNED), Madrid, Spain.
Fernando Ramírez de Luis is a Research Assistant at the Universidad

Pablo de Olavide, Sevilla.
Yiannos Katsourides is a full-time Faculty Member at the Department

of Governance and Politics, University of Nicosia.
Marco Lisi is Assistant Professor of Political Science at the Universidade

NOVA de Lisboa.
Leonardo Morlino is Emeritus Professor of Political Science at LUISS

Guido Carli, Rome.
Roderick Pace is a Professor at the Institute for European Studies of the

University of Malta.
Vera Ramalhete is a Researcher at the Instituto Português de Relações

Internacionais (IPRI), Universidade Nova de Lisboa.
vii
viii NOTES ON CONTRIBUTORS
Sonja Puntscher Riekmann is Professor of Political Theory and

European Politics in the Department of Political Science and Sociology
and head of the Centre of European Union Studies at the University of
Salzburg.
Dimitri A. Sotiropoulos is Professor of Political Science in the

Department of Political Science and Public Administration at the
National and Kapodistrian University of Athens.
Cecilia Emma Sottilotta is Assistant Professor of International

Relations and Global Politics at the American University of Rome.
Fabio Wasserfallen is Associate Professor, Chair of European Politics

and Co-Director of the Institute of Political Science at the University of
Bern.
List of Figures
Chapter 5
Fig. 1 Primary deficit (+)/surplus (−) as a percentage
of GDP in France, Germany, Greece, Italy and Spain
(Source Author’s elaboration based on ESCB [2018a]) 90
Fig. 2 Total deficit (+)/surplus (−) as a percentage
of GDP in France, Germany, Greece, Italy and Spain
(Source Author’s elaboration based on ESCB [2018b]) 91
Fig. 3 Percentage of Italian citizens tending
to trust/not to trust the government (2009–2015)
(Source Author’s elaboration based on Eurobarometer
[2010, 2011, 2012, 2013, 2014, 2015, 2016]) 93
ix
List of Tables
Chapter 6
Table 1 The EU, Malta and the southern EU member states:
basic comparative economic data 117
Chapter 7
Table 1 Economic indicators, Spain 2008–2017 (%) 135
Chapter 8
Table 1 Electoral results, Portuguese legislative
elections 2009–2015 (%) 178
Table 2 Economic indicators, Portugal 2007–2015 (%) 180
xi
CHAPTER 1
Introduction
Cecilia Emma Sottilotta and Leonardo Morlino
1 Setting the Stage

On 20 August 2018, the third economic adjustment programme for Greece
came to an end, symbolically marking the conclusion of almost a decade of
bailouts. Nevertheless, ten years after its beginning, the consequences of
the Eurozone crisis are still felt throughout Southern Europe.
As far as the economic dimension is concerned, the picture is mixed.
Between 2007 and 2015, Greece lost about 25% of its gross domestic prod-
uct (GDP), while in Spain and Italy, the jobs lost in the wake of the crisis
have not been fully regained (Menéndez-Valdés 2018). Cyprus’ economy
today seems to be set on a path of recovery in terms of economic output, but
the crisis bequeathed rising levels of social inequality and high long-term
unemployment (Ioannou and Charalambous 2017). Since the economic
C. E. Sottilotta (B)
The American University of Rome, Rome, Italy
e-mail: c.sottilotta@aur.edu
L. Morlino
LUISS Guido Carli, Rome, Italy
e-mail: morlino@luiss.it
© The Author(s) 2020 1

L. Morlino and C. E. Sottilotta (eds.),
The Politics of the Eurozone Crisis in Southern Europe,
https://doi.org/10.1007/978-3-030-24471-2_1
2 C. E. SOTTILOTTA AND L. MORLINO
adjustment programme for Portugal ended in 2014, the Portuguese econ-

omy has been expanding, although there is an ongoing debate on whether
this was due to the decision to end austerity measures in 2015 see or to
broader recovery across Europe (see Gomes and Borges de Assuncao 2018;
Lains 2018; Fernandes et al. 2018).
Arguably, however, the most relevant legacies of the Eurozone crisis
do not pertain to the economic domain: the emergence of protest parties
(Morlino and Raniolo 2017), the growth of Euroscepticism (Verney 2017),
unprecedented levels of political instability (Bosco and Verney 2016), a
shrinking of welfare states (Wulfgramm et al. 2016), higher levels of socio-
economic inequality (Dolvik and Martin 2015) had a relevant impact on
South European countries.
Considering all these elements, it is not surprising then that the crisis
is described by some as a ‘critical juncture’ in the history of European
integration (Braun 2013; Heinrich and Kutter 2013; but see also Morlino
and Raniolo 2017), as relevant reforms to the architecture of the Economic
and Monetary Union (EMU) bound to have long-term consequences were
negotiated in a relatively short time span. As further illustrated below, those
reforms, including the so-called Six Pack, ‘Two Pack’1 and the Treaty on
Stability, Coordination and Governance in the EMU (TSCG), also referred
to as ‘Fiscal Compact’, strengthened fiscal discipline and introduced new
surveillance mechanisms, consistent with a ‘morality tale’ narrative which
presented the crisis as the result of the inability or unwillingness of EU
periphery states to abide by the rules set in the Stability and Growth Pact
(SGP) (Tsoukala 2013).
1 The Six Pack includes five regulations and one directive, more specifically: (1) Regula-
tion 1175/2011 amending Regulation 1466/97: on the strengthening of the surveillance of
budgetary positions and the surveillance and coordination of economic policies; (2) Regula-
tion 1177/2011 amending Regulation 1467/97: on speeding up and clarifying the imple-
mentation of the excessive deficit procedure; (3) Regulation 1173/2011: on the effective
enforcement of budgetary surveillance in the euro area; (4) Directive 2011/85/EU: on
requirements for budgetary frameworks of the Member States; (5) Regulation 1176/2011:
on the prevention and correction of macroeconomic imbalances; (6) Regulation 1174/2011:
on enforcement action to correct excessive macroeconomic imbalances in the euro area. The
Two Pack includes two regulations: (1) Regulation 473/2013: on common provisions for
monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit
of the Member states in the euro area; (2) Regulation 472/2013: on the strengthening of
economic and budgetary surveillance of Member States in the euro area experiencing or
threatened with serious difficulties with respect to their financial stability.
1 INTRODUCTION 3
A theoretically sounder ‘consensus narrative’ (Baldwin et al. 2015) sub-

sequently emerged, focusing on the ‘sudden stop’ nature of the crisis;
according to this account, rather than by the profligacy of peripheral mem-
ber states, the crisis was determined by unaddressed macroeconomic imbal-
ances deepened and fed by the introduction of the single currency. Never-
theless, the EMU reforms negotiated and implemented between 2010 and
2015, as well as the underlying competing visions on whether and how to
pursue further economic and fiscal integration, still spark debate today.
Looking at the past to gain some perspective on the present, it is there-
fore timely to provide a reappraisal of how those crucial reforms to the
EMU were negotiated. In doing that, we aim to fill a gap in the litera-
ture on the politics of the Eurozone crisis in Southern EU member states,
which exception made for Malta were seriously affected by the crisis. In
this sense, this book aims to provide an in-depth analysis of the process of
domestic preference formation in Cyprus, Greece, Italy, Malta, Portugal
and Spain, based on novel data gathered in the framework of the Horizon
2020 project ‘The Choice for Europe since Maastricht’ (EMU Choices ).
As further illustrated in the chapter by Sonja Puntscher Riekmann and
Fabio Wasserfallen, the overarching objective of the EMU Choices project is
to study EU member states preferences for further economic and financial
integration, engaging with liberal intergovernmentalism (LI) as originally
formulated by Andrew Moravcsik. According to this approach, European
integration can be explained as the result of a tripartite process whereby
the formation of actors’ preferences which are mainly shaped by national
economic interests; relative power, which determines the chances of success
of certain policy options over others; and the institutionalisation of credible
commitments (Moravcsik 1998, 2018).
The liberal intergovernmentalist paradigm arguably offers a compelling
framework to analyse and explain the outcome of EU-level bargaining (see
for instance Schimmelfennig 2015). In fact, research based on data gath-
ered by the Horizon 2020 EMU Choices consortium (see Wasserfallen et al.
2018) lends support to the hypothesis that national economic interests
indeed played a key role in shaping member states’ preferences: as Tarlea
et al (2019) showed, the structure of the banking sector in EU member
states is a systematic predictor of variation in negotiating positions.
Nevertheless, when it comes to dissecting the process preference for-
mation in South European countries, important qualifications are in order.
As noted by Csehi and Puetter (2017), when the governments of member
states reached the bargaining table their stances were often decoupled from
other domestic interests which according to LI should have played a key

role. This produced a situation where EU-level interaction was crucially
relevant, while parliamentary and societal actors ended up being marginal
to the preference formation process. The picture emerging from the case
studies contained in this volume is indeed consistent with this understand-
ing of domestic preference formation against the backdrop of the Eurozone
crisis.
In their chapter, Xavier Coller and Fernando Ramírez de Luis come to
a similar conclusion with regard to Spain, a country whose government’s
reaction to the crisis shifted from Keynesianism to austerity and whose pref-
erences during the negotiations were widely shaped by the interpretation
of the expectations of international actors, mainly the European Central
Bank (ECB), the International Monetary Fund (IMF), the Ecofin and the
Eurogroup, especially the German government. The chapters authored by
Roderick Pace and Yiannos Katsourides focus on the cases of Malta and
Cyprus respectively, applying the main tenets of LI to small EU states
decision making vis-à-vis larger EU member states in the context of the
Eurozone crisis. Taken together, the two cases offer an interesting mosaic,
providing insights on why and how Malta managed to remain immune
from the crisis while Cyprus was seriously hit by it.
In dissecting the Italian case, Cecilia Emma Sottilotta argues that in
the time span considered, Italy’s preferences in terms of further European
integration have apparently not reflected concrete economic interests as
opposed to other general concerns, as liberal intergovernmentalist theory
would suggest (Moravcsik and Schimmelfennig 2009). Her chapter shows
that rather than following a vincolo esterno logic or a process of domes-
tic deliberation, Italy’s stances were essentially dictated by the short-term
imperative to reassure financial markets and avoid a direct intervention of
the troika, that is the IMF, the European Commission and the ECB, which
were jointly in charge of enforcing structural adjustment programmes for
bailout member states.
The articulation of domestic preferences was problematic also in the case
of Greece. Dimitri Sotiropoulos’ chapter unpacks the sequence of choices
and circumstances that produced a loss of interest by Greek governments
in proactively participating in decisions on European integration during
the crisis and highlights the long-lasting political consequences of the crisis
for Greece, in particular as far as the implosion of the Greek party sys-
tem is concerned. In their contribution, Marco Lisi and Vera Ramalhete
1 INTRODUCTION 5
explain how Portugal’s traditionally pro-integration stances were signifi-

cantly constrained by the country’s predicament during the negotiations,
while in the immediate aftermath of the Portuguese bailout the country’s
preferences were mostly stable, crucially influenced by the political and ide-
ological positions of the core executive, and based on the determination to
go even ‘beyond the troika’ in fiscal consolidation.
In sum, the contribution of this volume to the debate on Southern
Europe and the Eurozone crisis is twofold. On the one hand, it provides
a nuanced, empirically rich account of Eurozone crisis decision making in
each of the six Southern EU member states. On the other hand, engaging
with LI it contributes to problematising the aspect of domestic preference
formation during the crisis.
The next section provides an overview of the unfolding of the Eurozone
crisis and of the reforms under scrutiny, also introducing the contested
issues which were selected as case studies to analyse domestic preference
formation in the country chapters. The account is complemented by a
chronology of the crisis in the countries considered (see Appendix I).
2 The Eurozone Crisis: Negotiated Responses

and Contested Issues
As is well known, the busting of a speculative bubble within the under-
regulated US subprime mortgages sector caused a credit crunch that cul-
minated in the collapse of financial colossus Lehman Brothers in September
2008. Due to the global integration of financial markets as well as of supply
chains in product markets, the ensuing transmission of financial distress to
the real economy in the USA and across borders was extremely rapid and
produced a dramatic contraction of investment as well as domestic demand.
As the financial crisis unfolded, the built-in vulnerabilities of the Euro-
zone began to emerge. The first country to be severely hit by the financial
hurricane was Greece, whose finance minister disclosed in October 2009
that the country’s deficit in that year would soar to 12.5% of GDP, a much
higher figure compared to that originally estimated by the former con-
servative government (Barber 2009). When Greece lost access to capital
market in May 2010, it became clear that the financial and economic crisis
in Europe was turning into a full-fledged sovereign debt crisis.
Concern started to rise over the situation of other heavily indebted
Eurozone countries, notably Ireland, Italy, Portugal and Spain. Eventu-
ally, bailout packages were finalised for Greece (May 2010 and July 2011),
Ireland (November 2010), Portugal (May 2011), while in June 2012 Euro-
zone finance ministers agreed to lend Spain up to 100 billion euros to shore
up its ailing banking system (Minder et al 2012). Italy avoided a bailout and
direct oversight by the troika via the formation of a technocratic govern-
ment led by former EU commissioner Mario Monti, which introduced a
number of austerity measures meant to reassure international financial mar-
kets (Morlino and Sottilotta 2017). Those measures were swiftly approved
by the Italian parliament which (similarly to what happened to other mem-
ber states) was essentially entrapped in a discourse on the interdependence
of European and national interests (Puntscher Riekmann and Wydra 2013).
At the EU level, the response to the crisis was twofold. On the one
hand, it focused on the introduction of emergency lending facilities such
as a Greek Loan Facility (May 2010), a European Financial Stabilisation
Mechanism with a 60 billion euros lending capacity (May 2010) and a
European Financial Stability Facility with a lending capacity of 440 bil-
lion euros supplemented with a 250 billion euros commitment by IMF.
Eventually the European Stability Mechanism was established, introduc-
ing a permanent financial assistance mechanism with a lending capacity of
500 billion euros, and further steps were taken to build a European banking
union.
On the other hand, at the height of the crisis the EU responded with
a stiffening of fiscal discipline. The path of convergence set forth in the
SGP entailed a 3% of GDP limit for budget deficit and a 60% of GDP gov-
ernment debt. Since its inception, however, the SGP had lacked effective
enforcement mechanisms, apart from ‘peer pressure’, ‘moral suasion’ and
a no bailout clause which was generally deemed an adequate disincentive
to discourage fiscally irresponsible behaviours (Larch et al 2010).
To strengthen the pre-emptive and corrective arms of the SGP, the
so-called Six Pack was introduced in December 2011. This policy pack-
age consists of five regulations and one directive meant to address public
deficits and macroeconomic imbalances by reinforcing economic and fis-
cal surveillance in the EU through the introduction of measures such as
reverse qualified majority voting (rQMV) for the imposition of sanctions
against non-complying countries and the ‘European Semester’, a compre-
hensive framework for the coordination and monitoring of fiscal policies
across member states with standardised deadlines throughout the year.
A few months later the Fiscal Compact was adopted, entering into force
on 1 January 2013. Among the other things, the signatories of the TSCG
committed to enshrine a ‘debt-brake’ rule into their own constitutions,
1 INTRODUCTION 7
following the analogous principle—the so-called Schuldenbremse—already

introduced into the German constitution in 2009. The provisions of the
TSCG were complemented with the ‘Two Pack’ regulations which rein-
forced coordination and transparency in budgetary policies and introduced
stricter surveillance mechanisms for euro area members, especially those
experiencing financial difficulties.
The adoption of these measures was decided under intense time pressure
and unsurprisingly gave rise to a number of issues, which were politically
contested across EU member states. Each of the country chapters takes
cues from some of those issues, which were selected based on their rele-
vance in terms of domestic repercussions and impact on the stability of the
Eurozone as a whole (on this point, see Hodson and Puetter 2016). Data
on the formation of domestic preferences vis-à-vis EMU reforms is drawn
from the EMU Formation data set from the EMU Choices Horizon 2020
project and is based on over 141 structured interviews conducted in the
28 EU member states between May 2016 and March 2017 with former
negotiators and policy makers, including government officials, members
of the parliament, interest groups representatives and experts with special
knowledge on Eurozone crisis decision making. Interviewees were asked to
provide an assessment of positions and influence of domestic, supranational
and international actors on key decisions.
The names and exact positions of the interviewees are subject to strict
confidentiality as stipulated in the Data management Policy and Ethics
Clearance of the EMU Choices Project. The data set includes influence
scores for 23 different domestic and external actors that were potentially
involved in the formation of national preferences vis-à-vis reforms in fis-
cal and economic governance of the EMU that were debated during the
2010–2015 period. The codes used for citing interviews in the book (e.g.
‘ITA1’) are a simplified version of those used by the EMU Formation data
set created by the EMU Choices consortium.2
The first issue included in the EMU Formation data set was whether
or not to support Greece and was discussed by the Euro group before the
2 In the original data set, the coding was slightly different, e.g. ITA01.ITA, where the first
part of the code ‘ITA’ refers to the country, the number, i.e. ‘01’ identifies the interviewee,
and the final part of the code, i.e. ‘.ITA’ refers to the research team which carried out the
interviews. To maximise readability, we maintained the first and the second part of the code.
The EMU Choices project data sets and codebooks are available at www.EMUchoices.eu/
data.
Greek government actually decided to apply for a bailout in May 2010. The
Eurogroup eventually decided to offer support on 15 March 2010 (Euro-
pean Commission 2010). The second issue hinged upon the possibility to
endow the ESM with a firepower greater than 500 billion euros, a figure
that was considered adequate by some member states, namely Germany,
Austria, Finland, whereas others would have preferred a larger size. The
third issue arose over the provision, eventually incorporated into the Six
Pack, to introduce rQMV that is a semi-automatic mechanism triggering
sanctions to punish member states violating the SGP. The fourth issue,
emerged during the negotiation of the Fiscal Compact, was whether and
how to institutionalise the commitment of member states to budget dis-
cipline by incorporating a debt brake into the domestic legal systems. In
the first two drafts, reference was made to ‘national binding provisions of
a constitutional or equivalent nature’, a vision that embodied the German
preference, while the final text included a ‘softened’ version of the original
formula, referring to ‘provisions of binding force and permanent character,
preferably constitutional, that are guaranteed to be respected throughout
the national budgetary processes’ (Kreilinger 2012: 4).
Taken together, these contested issues epitomise the conflict between
Southern countries advocating in favour of fiscal transfers and the North-
ern countries prioritising fiscal discipline (see also Lehner and Wasserfallen
2019) and provide a useful analytical framework to investigate the process
of domestic preference formation. What emerges from our empirical anal-
ysis is that, within a framework of uncertainty and urgency generated by
the crisis, in the countries considered there was a low level of involvement
of parliaments, with the sole exception of Malta which nonetheless was
essentially immune from the crisis. At the same time, as testified by the
different contributions contained in this volume, the paths leading to the
crisis and the ways in which each of the South European countries adjusted
to external constraints during the negotiations diverged in many important
dimensions. This diversity calls for special attention with the ultimate goal
of providing an empirical reappraisal of the politics of the Eurozone crisis
in the region.
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1 INTRODUCTION 11
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ledge.
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Macmillan.
CHAPTER 2
How Member States Cope

with the Eurozone Crisis
Sonja Puntscher Riekmann and Fabio Wasserfallen
1 Introduction
The Eurozone crisis unfolding post-2008 and engulfing a number of mem-
ber states, first, in the financial sector and, second, as a sovereign debt
challenge, was of a different kind compared to previous crises in Euro-
pean integration. Some European leaders considered it as a possibly lethal
threat not only to the single currency, the centre-piece of the Treaty of
Maastricht, but to the European Union (EU) as a whole. However well
founded this perception may have been, it is generally regarded as trigger-
ing the member states’ willingness to agree on rescue measures and new
preventive and corrective provisions to offset the danger that had hitherto
S. P. Riekmann (B)
Department of Political Science and Sociology, Centre of European
Union Studies, University of Salzburg, Salzburg, Austria
e-mail: Sonja.Puntscher-Riekmann@sbg.ac.at
F. Wasserfallen
Institute of Political Science, University of Bern, Bern, Switzerland

https://doi.org/10.1007/978-3-030-24471-2_2
14 S. P. RIEKMANN AND F. WASSERFALLEN
appeared impossible. At the same time, the crisis also unleashed a variety
of interpretations about causes and consequences, the non-abiding by the
rules established in the Stability and Growth Pact (SGP) becoming the
most important case in point.
While rescue operations were carried out through credits and loans dis-
bursed to member states in difficulties to recapitalise their debt on financial
markets, SGP rules were reinforced by a number of regulations and one
directive to ensure better compliance. They were, however, not consid-
ered sufficient. The EFSF/ESM Treaties came with another innovation,
the Treaty on Stability, Coordination and Governance in the Economic
and Monetary Union (TSCG or ‘Fiscal Compact’), as the precondition
for disbursement of credits. As both are intergovernmental treaties—thus
adding to the hybridity of the EU’s institutional setup—they inspire an
intergovernmental reading of crisis resolution mechanisms.
These developments in turn raise the question of member states’ prefer-
ences and positions in the pertinent negotiations as investigated in the Hori-
zon 2020 project EMU Choices. The project empirically assesses those pref-
erences, positions and negotiation strategies in the period of 2010–2015,
with a comprehensive document analysis and expert interviews in Brussels
and all 28 member states on national preference formation and policymak-
ing on the European stage regarding specific contested issues, such as the
rescue packages for Greece, the size of the European Stability Mechanism
(ESM), the introduction of a debt brake in national (constitutional) law and
the reverse qualified majority voting (rQMV) on the Commission’s recom-
mendations for sanctioning of fiscal misbehaviour (see Wasserfallen et al.
[2019] for a more detailed discussion of the data and the data collection).
The overall goal of the project is to analyse if and how member states’
negotiators heed their given national political economy, make concessions
and thus compromise on diverse positions. A first important finding on
the overall politics of EMU reforms is that the conflict among member
states was structured over all reforms on a one-dimensional conflict scale
on which supporters of fiscal transfer-opposed countries advocating fiscal
discipline. The southern countries and Belgium advocated for more fiscal
transfers, whereas the fiscal discipline group includes northern, central, and
east European countries, with the Netherlands and Finland as the most
extreme counties (Lehner and Wasserfallen 2019).
This broader picture, derived from a comparative analysis of all EU mem-
ber states, is explored in further detail herein by examining the politics of
the Southern European countries, highlighting interesting nuances and
2 HOW MEMBER STATES COPE WITH THE EUROZONE CRISIS 15
differences among this set of member states and contributing important

facts to the larger debate. For example, where the ideological controversy
between the north and the south from different views on fiscal discipline
and growth models dominated much of the public discourse, Southern
member states were, with the exception of Greece, quite swiftly prepared
to implement measures that did not mirror these ideological differences
(see chapters by Morlino and Sottilotta, Coller and Ramírez de Luis, Lisi
and Ramalhete, Katsourides in this volume), yet the Greek government
formed by the far-left Synaspismós Rizospastikís Aristerás (SYRIZA) even-
tually submitted to the harsh conditions imposed by the Troika in return
for the loans; such a move was seen as lacking an alternative. As for Malta,
it is considered to be an ‘exceptional case’: first, because Malta owing to its
regulations could by and large avoid the crisis of its banking system, and
second, because there was consensus among political parties on the need
to save the euro (see chapter by Roderick Pace in this volume).
This book on southern countries is a central stand-alone aspect of the
overall EMU Choices project, which generates insights on various aspects
of domestic preference formation and negotiations on the European level,
studying all 28 member states with quantitative analysis of two compar-
ative data sets and qualitative analysis of about 165 expert interviews. As
specialists in Southern Europe, the authors of this book have conducted
interviews on positions and preference formation in the countries analysed
this book. They can thus draw on rich and detailed empirical material.
As such, this book adds to the EMU Choices research with further in-
depth analyses of six southern countries, of which several were hard hit by
the EMU crisis. In this sense, the contributions of this book both further
investigate the Southern block as a central player in European negotiations
and highlight the area of the Eurozone that was, and still is, facing the
most far-reaching social, economic, and political challenges. The focus on
Southern Europe thus sheds light on an understudied but important aspect
of the EMU’s challenges.
Drawing on findings about past decisions, the EMU Choices project
also aims to deliver plausible, if tentative answers to questions about the
future prospects of deepening European Monetary and Economic Union
as spelled out by the European Commission, the Five Presidents’ Reports
and other actors. In this regard, the project also scrutinises which reform
proposals or parts thereof may be feasible in the light of member states’
visions for the future of the Eurozone and the Union.
Here, a caveat is important: as we are dealing with a moving target due to

government changes in important member states, our conjectures are spec-
ulative. Unless another ‘wicked’ crisis occurs, our basic assumption is the
following: while major ideological cleavages will still be about risk-sharing
versus risk-reduction, redistribution versus fiscal discipline and supranation-
alism versus intergovernmentalism, concrete solutions are more likely to be
pragmatic piecemeal reforms that accommodate some of these diverging
interests rather than a major overhaul of the Eurozone’s institutional setup
based on one dominating ideological stance.
This chapter, first, sets out to describe the nature of the Eurozone’s fis-
cal and financial crisis and its members’ capacity to act; second, it shows
in greater detail how member states actually operated, as well as who the
drivers were and who the followers in selected examples; third, it will point
to possible future controversies about deepening economic and fiscal inte-
gration, maintaining the status quo or enhancing differentiation in the
Eurozone.
2 Crisis Perceptions, Ideological Cleavages

and Compromise
If crises are moments of truth, the question is what and whose is the truth?
Who decides that problems have turned into a serious crisis in which ‘exist-
ing paradigms, policies, institutional roles and rules’ are challenged? When
a whole political system may be ‘tested and contested’, traditional modes
of problem-solving no longer work and new ones are yet to be found (Laf-
fan 2016: 916). To what extent is economic integration complemented by
political integration (Wasserfallen 2014)? How and how fast do political
and economic elites recognise that ‘simple’ problems have become ‘wicked’
and that new tools and rules are needed to resolve them (Rittel and Webber
1973)? Who and what frames the cognitive approach to the problem? And
last but not least: Which interests prevail and which succumb (Puntscher
Riekmann 2018)?
A key hypothesis of our project is that the national political economy
shapes member state preferences and positions, but it also frames the inter-
pretation of given problems and eventually of crises. This was very much so
in the case at hand. While financial markets defined the truth at the onset
of the crisis, they simply seemed to unveil a much older truth—i.e. that the
Eurozone consisted of very diverse (political) economies that had hardly
converged since Maastricht, despite the pledges enshrined in that Treaty
as well as in the SGP (Hall 2018). While the lack of stabilisation mech-
anisms to compensate for macro-economic imbalances between member
states and the risk of asymmetric shocks had been criticised by a number
of economists at the single currency’s inception (Obstfeld et al. 1997), the
builders of the euro thought they may ignore such warnings because the
common currency is based on clear rules about debt, deficit and inflation,
including the no bail-out clause of the Treaty (Article 125 TFEU) that was
to prevent the mutualisation of debt.
Once the crisis became really ‘wicked’ and this position untenable, sev-
eral truths came to the fore that were, however, morally weaponised in
national political discourse and the media (Dyson 2014). The first truth
was that if the Euro was to be saved, the fiscal ‘saints’ could not wash
their hands of responsibility and had to find considerable resources to sup-
port the ‘sinners’ regardless of the gravity of the sin; the second truth was
that fiscal sinners would only be granted aid on the condition of passing
structural reforms in economic and fiscal policy, and that such truth is to be
enshrined in a Memorandum of Understanding and enforced by the Troika,
a novel institution formed by the Commission, the European Central Bank
(ECB) and the International Monetary Fund (IMF). The third and at a cer-
tain point most decisive truth was that despite its restrictive mandate, the
ECB could announce outright monetary transactions and quantitative eas-
ing programs to stabilise the single currency. Last but not least, financial
regulation was further Europeanised with the so-called Banking Union.
Although much of the discussion centred on the question of fiscal
responsibility and public debts, the main empirical finding of the literature
studying the economic causes of the EMU crisis does not point to increas-
ing debts and reckless spending. Instead, increasing imbalances in com-
petitiveness and exports led to accumulated, massive balance-of-payments
transfers from the south to the north, which in turn destabilised the Euro-
zone (Johnston et al. 2014; Copelovitch et al. 2016). Accumulating imbal-
ances drove this massive transfer of money. This analysis of the causes
of the Eurozone crisis highlights the problem discussed above—namely
that, if anything, the economic structures of the different Eurozone coun-
tries became even more distinct after the introduction of the Euro. Rather
than leading to a convergence of political economies, the common mone-
tary union has further amplified existing differences. Notwithstanding this
quite well-established empirical analysis, the narrative of reckless spending
in southern countries as the cause of the crisis is persistent and prominent.
The story of the Eurozone crisis is but another instance of actors shifting
truths under pressure. This general wisdom notwithstanding, it is difficult
to foresee when actors are capable of such shifts, as these are hard to recon-
cile with previously held fiscal truths and to communicate to the electorate;
in the Euro crisis, it took almost three years from recognising the problem
in late 2009 to Draghi’s announcement of ‘Whatever it takes’ mid-2012.
Much depends on whether an integrative or disintegrative framing of cri-
sis interpretation prevails (Falkner 2016: 965) and whether actors have a
common purpose (e.g. saving the euro) or at least sufficiently overlapping
interests (e.g. the failure of the euro may be detrimental for the whole
Eurozone). Finally, it remains to be seen whether this changed mindset is
irreversible once the crisis has subsided.
3 Crisis Actions, Power and Bargaining Success

In any case, European leaders did take action based on a mix of truths:
aid was granted despite ideological cleavages, but was combined with the
older truth of fiscal discipline to be imposed by the Six- and the Two-Pack,
including the European semester and, in case of programme countries, by
a new institution of disputed legitimacy—the Troika—whereas opposition
to the ECB non-standard measures withered in the light of the Court
of Justice of the European Union (CJEU) interpretation of its mandate
(Saurugger and Fontan 2017). Moreover, negotiations on the urgently
needed Banking Union gathered momentum and were rapidly concluded,
even if national ‘options and discretions’ still exist and a potent backstop
remains wanting. EMU was significantly deepened by all these measures.
However, this deepening did not solely serve the interests of the Euro-
zone’s northern core. This is quite surprising, given the widespread belief
that the crisis provoked a power shift towards the northern group of Euro-
zone with Germany at its helm. However, Lundgren et al. (2019) chal-
lenge this conventional wisdom with their analysis of the data collected in
the EMU Choices project. The empirical findings show the following: first,
the negotiations produced no clear winners and losers; in particular, Ger-
many was one of the countries that had to give the most ground to other
member states. Second, states’ power resources were of limited importance
for bargaining success, with more salient factors related to preferences and
coalitions. Member states with less extreme and intense preferences were
more successful in achieving their preferred outcomes, as were states shar-
ing a coalition with the Commission. Third, the negotiations involved a
considerable amount of compromise and reciprocity, with member states

trading gains and concessions within and across issues, as they exchanged
wins and losses within larger reform packages.
The results of Lehner and Wasserfallen (2019) further suggest that
France and Germany, as the leaders of the two opposing coalitions on the
question of fiscal transfer versus fiscal discipline, are critical for the negotia-
tion of package deals based on the principles of compromise and reciprocity.
In that sense, despite the differences in opinion among southern member
states and important nuances discussed in several chapters of this book, they
have to form a somewhat cohesive coalition in this larger political environ-
ment structured by diverging interests and variations in power. The south-
ern countries also have to build on the power of France as their de facto
leader and close negotiation partner of Germany (the leader of the oppos-
ing coalition of fiscal discipline advocates). Degner and Leuffen (2019)
analyse in more detail the Franco-German integration axis, showing that
France and Germany’s power is particularly strong in the agenda-setting
stage, where policy alternatives are selected to negotiate on the European
level (and other solutions blocked).
All of these findings of the EMU Choices project add to larger literature
on bargaining dynamics and success in EU decision-making (Bailer 2004;
Arregui and Thomson 2009; Thomson 2011; Golub 2012; Cross 2013;
Arregui 2016), providing detailed and systematic results on the dynamics
and power constellations in the politics of EMU reforms. While the Euro-
zone core’s (and hence Germany’s) willingness to compromise is in line
with a tradition of reciprocity and solidarity, one should not forget that
‘saving the euro’ was a powerful motif that served their interest as much
as that of southern states to remain in the Euro. Thus, ‘while for sure,
the economic woes of the crisis were highly unevenly distributed, the steps
taken to resolve the crisis reflected a balancing of gains and concessions
leaving no states as unequivocal winners or losers’ (Lundgren et al. 2019).
Based on all these findings, we may thus draw some preliminary con-
clusions: the division between northern and southern member states also
implies that reform packages are more likely to garner support if they bal-
ance the ‘dislikes’ of both sets of countries and build on common con-
cern for Eurozone stability and long-term success. Their design is likely
to be similar to that of the Banking Union, which demonstrated that the
‘Southern’ group can—despite initial opposition—accept deepening supra-
national governance (introduction of the Single Supervisory Mechanism)
if the reform also provides some element that eases fiscal pressures under
at least some circumstances (such as the Single Resolution Fund in case of

a large bank’s failure). The package deal on the Banking Union was con-
strued as a combination of both aspects that facilitated a compromise based
on mutual concessions.
4 Future Perspectives: What Are the Chances

for EMU Reform?
Do EMU Choices results allow for predictions about the future develop-
ment of EMU? The situation in 2018 is not the same as at the apex of
the crisis: despite prophecies of doom (e.g. Stiglitz 2016), the Euro and
the Eurozone appear to have stabilised, with former programme countries
such as Spain, Portugal, and Ireland again growing and capable of recap-
italising their debt on international financial markets, and Greece hoping
to return to normal soon; on the other hand, EMU deepening projects
(e.g. transformation of the ESM into an European Monetary Fund (EMF),
introducing European Deposit Insurance Scheme (EDIS) in the Banking
Union) are still languishing in the Commission’s drawers and waiting for
member states’ willingness to make bolder commitments. The elephant in
the room is Italy, in which some large banks still seem to hoard significant
amounts of non-performing loans and whose per capita purchasing power
is said to potentially undercut that of Spain in the foreseeable future.
At the same time, in 2017, Germany and France’s national elections have
produced quite divergent outcomes: French elected president Emmanuel
Macron who ever since has advocated deeper integration of EMU with
a number of far-reaching proposals, whereas Angela Merkel won again
the German chancellery but, due to vote losses, finds herself in a weak-
ened position within her party and in the grand coalition with the Social
Democrats. Also, at the time of this writing in late October of 2018, she
has initiated her retreat from politics by announcing that she will not seek
re-election as party leader of the CDU after her party’s weak election results
in Hessen and Bavaria. The newly elected chair of the CDU will be a major
power factor with which Merkel has to coordinate German positions on
the European stage. Merkel’s response to Macron so far was a call for wait
and see, despite the strong commitment to Europe and EMU reforms in
the coalition pact.
In early 2018, Italy held an election that yielded a relative majority of the
Five Star Movement that formed a government with the Northern League:
with some nuances, both parties profess euro-sceptic positions, particularly
with regard to fiscal policy. In the fall of 2018, this was epitomised by the
row between the Italian government and the European Commission on
the Italian budget proposal. The deficit of 2.4% of GDP envisaged therein
greatly surpassed the threshold of 0.5% stipulated in the Fiscal Compact and
foreseen for countries with large state debt. Finally, Brexit has changed the
game, not least by altering negotiations of the EU Multiannual Financial
Framework (MFF), as net-payers required to fill the gap upon the depar-
ture of the UK and recipient states (particularly CEE members) show no
willingness to take cuts in cohesion funds.
The finance ministers of the Nordic and Baltic member states, as well
as Ireland and the Netherlands, have formed a common position about
EMU. They first claim that discussions about the future of EMU have to
be inclusive of Eurozone insiders and outsiders; second, that a ‘stronger
EMU requires first and foremost decisive action at the national level and
full compliance with our common rules’, and by building up fiscal buffers in
national budgets; third, that initiatives must have public support in mem-
ber states, whereas the European debate should focus on ‘need to haves’
instead of ‘nice to haves’; fourth, completion of the Banking Union should
be given priority and aim at realising the elements spelled out in the Coun-
cil Roadmap of 2016; fifth, the ESM should be strengthened and possibly
developed into a EMF in which ‘decision-making should remain firmly in
the hands of Member States’; and sixth, the signatories to the document
conceive of a post-2020 MFF that helps foster sustainable growth but is
aligned with the implementation of structural reforms in which responsi-
bility and ownership lies with member states (Warren et al. 2018).
Thus, talks about the future of EMU have to be analysed against this
backdrop. In this regard, EMU Choices data collected in 2016 and 2017
in the 28 member states show two important findings: first, a prevailing
preference for the institutional status quo, particularly for working within
the existing Treaties, with a European federal vision definitely a minor-
ity position (though some sympathy for stronger differentiation); second,
with regard to economic and fiscal policy, classical state-led policy is ruled
out by almost all interviewees (including states with a long tradition in this
respect). A significant majority advocate national public investment to fos-
ter growth and employment as well as an ECB monetary policy taking into
account growth and employment data beyond price stability.
Reading the two findings together and interpreting them in the current
situation, we believe that it is likely that member states will bring about
changes to complete the Banking Union but shirk the crucial issue of EDIS,
and initiate the transformation of the ESM into a EMF but maintain the
intergovernmental structure. They are also likely to avoid the more far-
reaching ambition of Macron to establish a European Finance Minister
who commands greater own resources to foster growth and employment.
Thus, on the basis of our data and more recent evidence collected by a
new series of interviews in the Permanent Representations, we have reason
to conclude that more delegation of powers to the supranational level is
unlikely, let alone a concept that would give credit to Macron’s vision of
European sovereignty.
Most of the articles of the EMU Choices research consortium discussed
in this chapter build on liberal intergovernmentalism as ‘baseline theory’
of integration (Moravcsik 1998, 2018); they apply and extend this ‘base-
line theory’ of EU decision-making with analyses of the project’s com-
prehensive quantitative and qualitative data. Overall, the rich findings of
this research program support the notion that liberal intergovernmentalism
offers a fruitful starting point for analysing the politics of EMU reform. In
contrast, other scholars of the EMU Choices research consortium explicitly
deviate from liberal intergovernmentalism. This is most evident in the con-
tribution of Csehi and Puetter (2017), who point to the importance of the
supranational arena in shaping and reshaping national preferences and also
argue that member states might enter supranational deliberations without
(strong) national preferences due to a lack of preference articulation, diffi-
culties in preference aggregation and interrupted feedback loops between
societal interests and government decision-making.
5 Conclusions
Our exploration of the data collected through document analyses and
expert interviews in the framework of the Horizon 2020 project EMU
Choices yields a number of interesting results. While the Eurozone crisis
finally pushed northern member states to rescue southern member states by
installing the EFSF/ESM and to stabilise the Euro by allowing the ECB
to set non-standard measures, they complemented these steps by reiter-
ating and sharpening mechanisms to ensure fiscal discipline in secondary
legislation with the Six- and the Two-Pack, as well as the intergovernmen-
tal Fiscal Compact and its focus on the debt-braking rule. Moreover, the
so-called programme countries, including southern members and Ireland,
had to face policy prescription and close monitoring of implementation by
the Troika.
Thus, solidarity came at the price of encroachment on national fiscal,

economic and social policy. Both sides were driven by their interests to save
the euro and to stay in the Eurozone, whereas financial sector exposure was
of significantly higher relevance as political or ideological positions (Tarlea
et al. 2019). Measures were a mix of supranational and intergovernmental
provisions showing that member states leaped to further deepen EMU, but
at the same time reassert their decision-making power in particular with
regard to financial aid. As a result, the debates on the following questions
are ongoing and will gain salience as soon as some Eurozone members
again face economic turmoil: Are the enacted crisis measures that recently
allowed some hard-hit southern Eurozone members to return to financial
normalcy the blueprint for addressing upcoming cries? Can this approach
reduce the north and south’s economic imbalances, which had not been
overcome by the creation of the Euro and were exacerbated in the crisis?
Despite all the progress with the substantial reforms enacted during the
Eurozone crisis, they will not be sufficient for a sustainable stabilisation
of the Eurozone. We should thus expect new crisis politics in the not-so-
distant future.
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CHAPTER 3
Institutional Inertia, Ignorance

and Short-Circuit: Cyprus
Yiannos Katsourides
1 Introduction
For most advanced economies worldwide, including the economies of the
European Union (EU) and especially the members of the Eurozone, the
recent (and ongoing) economic crisis has been one of the most severe since
the Great Depression of the 1930s. In 2010, the financial and economic
crisis in the Eurozone worsened and began to develop into a sovereign debt
crisis (De Grauwe 2010). To address the crisis, many countries were forced
to implement fiscal austerity measures, and these measures have been partic-
ularly severe in the periphery countries of the Eurozone, mainly in Greece,
Ireland and Portugal (Theodoropoulou and Watt 2011) as well as Spain
(Navarro 2012). These measures were to a large extent the consequence
of EU decisions.
This extraordinary situation in which the entire EU and the member
states found themselves has initiated a process of fiery discussion regarding
Y. Katsourides (B)
Department of Governance and Politics,
University of Nicosia, Nicosia, Cyprus
e-mail: katsourides.y@unic.ac.cy

https://doi.org/10.1007/978-3-030-24471-2_3
28 Y. KATSOURIDES
the goals and architecture of the economic and political integration as well
as specific decisions. In this process, many issues were highly contested
and incited heated debates and opposing positions among member states
and institutions. Member state positions on these various issues were also
the result of an internal process of institutional bargaining and decision
making and also political calculations among the most important political
and economic actors. Interest articulation, state positioning on particular
and contested European issues that arose because of the financial crisis and
the state strategy to promote its positions are essentially what this chapter
is about.
The present chapter considers the process (and outcomes) of formulat-
ing Cyprus’ negotiating position vis-à-vis four highly contested European
issues (see below) during the economic crisis and the opinions held by the
different actors and institutions. All of these issues were decided before the
economic crisis actually hit Cyprus which renders the evaluation both ben-
eficial and problematic. Beneficial because it gives the researcher the chance
to see how the economic and political system in Cyprus articulated their
positions towards significant European issues in times of normality. Prob-
lematic because evaluation does not incorporate factual crisis variables and
how they impacted upon Cyprus’ institutions’ and actors’ decision-making
processes. Examination therefore unavoidably covers the period after the
particular four contested issues were decided since the twist of the eco-
nomic crisis in Cyprus happened later, but most importantly because the
treatment for Cyprus (the 2013 March bail-in) was implemented for a first
time and it was meant to become a blueprint for the future (Dijsselbloem
2018, chapter 5).
While the preferences expressed by the Cypriot government during the
first phase of the Euro crisis negotiations—for instance, the decision to
firmly support Greece during the negotiations of the first bailout package
in 2010—were dictated by eminently domestic reasons, after contagion
spread to the country external constraints became dominant. It is safe to say
that the overarching concern and perception in Cyprus as in many other—
if not all—Eurozone countries was that the cost of exiting the Eurozone
would be much higher with much more acute consequences for the country
and its citizens than remaining; even if that would mean the adoption of
harsh austerity measures.
With regard to data and methodology, the analysis utilises five personal
expert interviews with Cypriot government and public officials who were
involved in the decision-making process in formulating Cyprus’ position
3 INSTITUTIONAL INERTIA, IGNORANCE AND SHORT-CIRCUIT: CYPRUS 29
vis-à-vis the particular issues examined for the purposes of the ‘The Choice
of Europe since Maastricht’ research project (EMU Choices ). Interviews
were conducted based on a semi-structured questionnaire. The codes used
for citing interviews in the chapter (e.g. ‘CYP1’) are a simplified version
of those used by the EMU Formation data set created by the EMU Choices
consortium (see Introduction to this edited volume by Sottilotta and Mor-
lino). Other sources were also utilised such as statistical data, reports from
the Cypriot press, some significant personal testimonies in the form of
books or newspaper interviews (e.g. the former Governor of Cyprus Cen-
tral Bank Panicos Demetriades 2017), as well as secondary literature. The
analysis takes note of the external pressures and constraints upon Cyprus,
however, and given the particular time period under investigation, the
emphasis is on the internal perceptions and inefficiencies of the Cypriot
political actors, the relations between them and the type of economic model
prevailing in the country.
The examination of Cyprus reveals a case of institutional ignorance on
the one hand and institutional inertia on the other. Cypriot policy mak-
ers did not bother themselves too much with European affairs believing
that things would continue to develop as usual and that the crisis would
not affect Cyprus in a serious way, if not at all. Moreover, most of these
actors left it entirely to the government and particularly to the ministry
of finance to formulate policy positions, sharing again this naive percep-
tion that things would remain in an autopilot position, and only later they
realised the importance of getting involved in such critical decisions. A
two-tier process is evidently at play in the case of Cyprus which reveals lack
of knowledge, lack of resources and lack of forecasting abilities: on the one
hand, being a very small country and unable to significantly affect EU deci-
sions Cyprus had focused for many years in aligning itself with other big
countries depending on the issue (e.g. the UK) and concentrated mostly in
promoting its positions regarding the unresolved Cyprus problem. Inter-
nally, policy formulation regarding issues discussed at the EU level was
entirely left to the hands of the government, whereas the country’s eco-
nomic development model was based on earthen legs built around a huge
banking sector with close ties to the political and social establishment. The
latter seems to have affected negatively the ability of the Cypriot entire
institutional fabric to face the challenges of the crisis often short-circuiting
the entire system of banking governance and control.
30 Y. KATSOURIDES
The chapter is structured in six parts. Section 2 briefly discusses the way
small states formulate policies within larger institutional settings emphasis-
ing the theory of liberal intergovernmentalism (LI). Section 3 introduces
the island’s historical relationship to the EU and the parameters that gov-
ern it. Section 4 examines the nature of the crisis in Cyprus and its impact
on various levels arguing that it was the result of both domestic failures
and external decisions. Section 5 analyses the main preferences and objec-
tives pursued by Cypriot policy makers during the Euro crisis negotiations
regarding the four contested issues taking into account the influences from
external actors. Section 6 considers how those objectives were pursued in
terms of negotiating strategy and which actors were more important in
shaping this strategy. The conclusions provide an informed assessment of
the current preferences of Cyprus in terms of Eurozone participation and
discuss the legacies of the crisis.
2 The Importance (and the Consequences)

of Being Unimportant
The way in which a state formulates its negotiating position is dependent
on several factors and is situated in various paradigms of study (e.g. LI,
neofunctionalism, etc.; see Ioannou et al. 2015). Although these larger
paradigms of study offer valuable generalisations, the formation of national
preferences is a process worthy of study in its own merit. Within the state,
policy formulation is a multivariate equation where many different and
often opposing interests coexist: state agencies and institutions, political
parties, trade unions, employers’ associations, national banks, the media,
the public opinion, etc. External actors and international or regional insti-
tutional settings often play a role in national decision making in terms
of either influence, motivation or limitations. Therefore, policy positions
are formulated by an interplay between domestic preferences and external
constraints.
All the above are particularly true and telling in the case of small states
such as Cyprus. Smaller states face different issues—or similar issues with
difference salience—when forming their positions within European insti-
tutions than larger states do. Usually, they face bigger constrains in for-
mulating and implementing a policy in the European arena (Panke 2010;
Moravcsik and Vachudova 2003). Moreover, the institutional setting in
the EU has also changed against smaller states in recent years with the
introduction of the qualified majority voting (QMV) shifting the balance
against small states (Verdun 2015). Smaller states find it more difficult to
‘upload’ their preferences and policies to the European level and often pre-
fer to attach their commitment with one of the larger countries or a group
of countries. Moreover, a smaller state’s domestic policies might already
be heavily influenced by its larger neighbours. However, it could also be
the case that smaller states are more flexible in terms of adapting their
positions to current trends than larger states. Institutional learning is par-
ticularly important for smaller states in the process of national preference
articulation especially within the context of the EU in terms of accumulated
knowledge from past experience and also in terms of available resources to
utilise.
In view of the LI theory, this chapter tries to examine how the above
issues fit within the basic premises of the theory taking into account the
smallness of Cyprus. LI suggests that national preferences are shaped by the
economic interests of powerful domestic groups in a situation of interna-
tional interdependence; substantive agreements reflect the constellation of
national preferences and bargaining power; and the design of international
institutions is a function of the kind and size of co-operation problems they
are supposed to manage (Schimmelfennig 2015: 178). LI expects that in
the aftermath of the economic crisis strong incentives for further integra-
tion will be created. At the same time, it is also expected that the costs of
further integration will be highly contested among member states.
There are various and opposing views on how smallness affects particular
countries in their dealings not only within the EU context but more gen-
eral. For example, Moravcsik (1993) has argued that small states are keener
to support supranationalism within the EU than bigger states that are more
reluctant to surrender sovereignty. It is in this direction that smaller EU
states like Cyprus were more eager to join the Eurozone than other, bigger
countries. Stemming from this, Moravcsik also asserted that in formulat-
ing their policy positions and because they lack sufficient resources and
infrastructure smaller states usually delegate this procedure to the Euro-
pean Commission (EC). However, as Panke (2010) has argued, small states
inherent inefficiencies due to size can be compensated by a process of insti-
tutional learning and experience within the EU under certain precondi-
tions: for example, lobbying strategies, effective participation which in turn
requires sufficient personnel in the ministries, etc. Panke’s (2010) research
revealed that Cyprus belongs in a group of countries that are less active than
others within the EU. In this same survey, it was also found that Cyprus
32 Y. KATSOURIDES
struggled with problems of knowledge about the EU, brain drains into the
private sector, insufficient contacts to organised interests and NGOs, etc.
In another vein and more relevant to issues of economic governance and
therefore pertinent to the context of economic crises, small states are also
thought to be more vulnerable to exogenous economic shocks as the one
the EU has been experiencing since 2008. Although this is generally true,
Brown (2010) also reasoned that small states do not necessarily promote
good governance because of their size which is presented in other analyses
as a good predictor of good governance. Factors such as clientelism and
nepotism undermine the process of good governance, thus leaving the
economy vulnerable.
3 The Context to Cyprus’ Perception of the EU

Cyprus was part of the largest wave of EU enlargement in May 2004. In any
analysis of the Cyprus political landscape in regard to European integration
and the EU, several contextual components must be considered. First, the
nature of Cyprus’ course to the EU is key: the process towards accession
has always been elite driven. The people of Cyprus were never called to
express their direct opinion (i.e. in a referendum) on European issues—
such as EU accession, joining the Eurozone, or on any amendments of the
various treaties. As a consequence, European issues have only sporadically
been significant in national or European elections.
Cypriot public opinion was overwhelmingly and wholeheartedly in
favour of accession to the EU (Agapiou-Josephides 2011). The same
applied to political parties and the entire political elite particularly after
left-wing Anorthotikó Kómma Ergazómenou Laoú’s (AKEL) change in
position towards the EU in 1995 (Katsourides 2014a). All EU treaties
were unanimously adopted with the leftist AKEL abstaining on some occa-
sions. A differentiated stance emerged in the first years after accession with
constantly diminishing levels of trust in and support for the EU system.
This is largely attributed to the EU position towards the much-debated
referendum on the Annan Plan for a possible solution to the Cyprus prob-
lem in April 2004, which was thought to be punitive for Cyprus. However,
the decline was most evident in the early 2010s and onwards and was mostly
related to the EU’s role in Cyprus’ economic crisis (Katsourides 2016).
A pro-European stance marked the dominant ideology in Cypriot pol-
itics, media and public opinion, at least until recently. Cypriot Europhilia,
which seems to be primarily utilitarian, is mainly based on three factors
(Katsourides 2014b). First, the Cyprus problem (see, e.g., Ker-Lindsay

2011), the island’s long-lasting political division seems to be critical to any
understanding of the debate on EU-related issues. For Cyprus, EU mem-
bership was an important recognition of its claim to sovereignty. The post-
1995 consensus reflects the belief that the EU can provide a framework for
solving the Cyprus problem and a safety net against Turkey (Featherstone
2000). In other words, smallness and the consequent sense of insecurity
towards Turkey played a defining role in Cyprus decision to enter the EU.
Second, all political actors, the media and the public viewed EU acces-
sion as membership in the wider European family where the rule of law
and respect for human rights prevail. This perception is arguably typical
and expected since the EU has been long regarded as a place of peace and
democracy. In this way, the EU was viewed as a way of dealing with the
country’s pathologies (e.g. clientelism) and its turbulent past. Third, EU
membership was expected to generate political and social modernisation
and increase the economic prosperity of the country and consequently its
inhabitants. All these have created a consensual political and party system
that facilitated the country’s course to the EU.
The aforementioned indicate that, for Cyprus, joining the EU was based
primarily on strategic considerations regarding national interests without
any ambitions of contributing in big European debates. It is in this con-
text and despite the changes in governments that Cyprus never developed
fully informed positions on the various European debates and opted to
follow the majority and particularly supranational institutions such as the
EC. Moreover, Cyprus never participated in a meaningful way in transna-
tional EU bodies and most national actors never had clear and elaborated
positions on significant EU issues. In general, Cyprus was always in favour
of strengthening the EU supranational institutions and the formulation of
joint European policies in major economic sectors (all interviews). However
and despite the above, there was also a widespread belief that Cyprus acces-
sion could offer the EU significant added value because of the country’s
unique geographical position being in the crossroads of three continents
and its friendly relations with neighbouring Arab countries.
With the Cyprus problem uppermost in most people’s minds, the key
economic challenges facing Cyprus, including the institutional changes that
needed to be made, received little more than passing attention (Demetri-
ades 2017: 12). The common misconception was that the economy was
sufficiently robust to withstand any shocks from EU membership, which,
at any rate, would be mostly positive. Few recognised the risks emanating
34 Y. KATSOURIDES
from a fully liberalised financial system and hardly anyone thought that the
banking system, if left unmanaged, could become the source of another
disaster.
As the economic crisis deepened, and as Cypriots saw their expectations
unfulfilled—with regard to both the Cyprus problem and their social status
public sentiments changed, with the EU increasingly being viewed as part
of the problem rather than the solution (Katsourides 2014b), whereas the
inefficiencies of the local entire institutional setting have been exposed. At
the same time, there has been a partial and fleeting politicisation of Europe
since the March 2013 bail-in.
4 The Nature of the Crisis in Cyprus and Its

Impact
From 1974 until the outbreak of the economic crisis in 2011, Cyprus expe-
rienced robust growth, job creation, an increasingly improved standard of
living among the population and very low levels of unemployment, social
exclusion and poverty. Both substantively and compared to the European
and EU averages, the post-1974 period could be described as a ‘golden
era’ for the Cypriot economy (Charalambous 2014). However, this positive
picture on the surface was undermined by the permeability of clientelistic
relations and unidimensional and vulnerable model of economic develop-
ment (Demetriades 2017; for clientelism see Faustmann 2010, 1998). The
economic crisis and the bail-in agreement of 2013 exposed all these defi-
ciencies and malfunctions of Cyprus economic model, notwithstanding the
way Cyprus was treated by its European partners.
Cyprus’ economic history in the last 25 years could be summarised in
four stages according to the Cypriot Institute of Labour (2014). The first
stage was a period of economic development and capital accumulation
mostly generated by tourism and lasted until 2001. The years 2002–2003
marked a transition stage where financial services and financialisation grad-
ually started overtaking tourism as the main driving force of economic
development. The obligations associated with Cyprus’ EU accession, and
the less direct pressures of globalisation, have created a momentum of
significant change in the private sector, with the changes in the Cyprus
stock exchange representing an extreme example of this dynamism, in that
they have introduced a new ‘casino’ capitalism into the domestic economy
(Featherstone 2000: 151). From 2004 to 2008, there was a third stage of
economic development where economic development was mostly inward
driven and was basically dependent on the financial sector, easy lending,
residence building en masse, the further expansion of the banking sector
and financial bubbles. The fourth stage was the stage of the crisis and of
structural adjustment from 2009 onwards. Within this latter stage, two sub-
stages are identified: a phase of soft adjustment from 2009 to 2011 and
subsequently the worsening of the crisis particularly in the years 2012–2014
which invited a harsh, externally imposed austerity programme.
Economic growth, low levels of unemployment and poverty, substantial
benefits for civil servants and the absence of intense labour disputes over-
shadowed the perils inherent in becoming a service economy, preparing
for entry into the EU. By the 2000s, the Republic of Cyprus economy
was heavily dependent on services—financial, banking, tourism and edu-
cation. During 2004–2008, the services sector expanded even more, by
40,000 jobs (Trimikliniotis 2012). The Republic of Cyprus became a tax
haven that attracted large sums of foreign direct investments, mostly but
not exclusively from Russian capital. The influx of Russian money was made
through politically connected Cypriot law firms and this link between Rus-
sia and Cyprus came to be uppermost in German policymakers’ minds and
the press in the turbulent years of 2012–2013 (Demetriades 2017: xvi,
31–32). Although Cyprus’ offshore status ceased to exist when it joined
the EU Russian and Ukrainian company registrations remained buoyant as
Cyprus opted for the lowest corporate tax rate in Europe (10%). Agriculture
had become a peripheral economic activity with a negligible contribution
to the national output, while secondary industry accounted for only 11% of
the GDP, down from 18% in the 1980s. In labour relations, in the period
preceding the crisis, a rather consensual climate marked a divergence from
the tensions and conflicts of the 1940s (Ioannou 2011).
Importantly, the banking and financial sector grew extremely rapidly
in the last two decades, and by 2010 its volume in capital terms reached
almost 8 times the country’s GDP (Stephanou 2011). Demetriades (2017:
11) notes that the Cypriot banking sector grew uncontrollably from 2004
when Cyprus entered the EU and by 2011 banking sector assets more than
doubled reaching 141 e billion or 9.5 times GDP. Dijsselbloem (2018)
also attests to this in his recent book. Banking and, more significantly,
the race to attract offshore capital, became conceptualised as the motor
of the economy and was insulated from restrictions and strict regulations
(Charalambous 2014: 10). The two largest banks, in particular the Bank of
Cyprus and the Popular Bank, grew four times Cyprus’ GDP and were able
to use their financial muscle to capture the political process and the media,
36 Y. KATSOURIDES
protecting themselves from more effective regulation and supervision that

could have averted the crisis. The two Cypriot banks became too big to
fail, too big to save and too big to regulate (Demetriades 2017: xvi).
For some analysts (e.g. Manison 2018), the Republic of Cyprus (RoC)
developed a mixture of oligarchic and debt-financed capitalism fostered
and facilitated by lawlessness and irresponsible government and bank
policies; she calls this ‘crony capitalism’. ‘Institutional incompetence and
nepotism—reflected most notably by the appointment and deployment of
less-than-competent staff by self-serving, politically motivated managers—
allowed crony capitalism to prevail and deprived Cyprus of the most salient
virtue of capitalism, namely genuine competition’. The pursuit of quick
financial gains through speculating in shares of public companies resulted
in stock market booms and subsequent collapses, especially in 1999–2000.
Banks wasted resources in greedily extending credits to purchase their own
shares, while the regulatory authorities irresponsibly turned a blind eye
to insider trading and devious distributions of private placements by the
ruling oligarchs. The Central Bank of Cyprus (CBC) failed in adequately
supervising the irresponsible behaviour of the banks, highlighted by the
absence of proper risk assessments in the extending of a multitude of loans.
The introduction of the Euro in 2008 further exposed the Cypriot bank-
ing system as it led to an additional, large, liquidity injection in the system,
mostly Euro deposits by non-residents (Clerides and Stephanou 2009).
Euro entry facilitated a vast inflow of funds, from Greek banks as well,
as they absorbed increased flows from banks of the Eurozone core. This
soon turned to bust as the Eurozone crisis took hold: Cypriot banks made
catastrophic losses on Greek Government Bonds and as funds fled from
Greece, Greek deposits fled from Cyprus. The Cypriot banking system is
heavily reliant on liquidity supplied by the CBC which is, in turn, reliant
on Eurosystem of National Central Banks, including the European Central
Bank (ECB). In the course of the Eurozone crisis, the ECB/Eurosystem
has provided a channel for the banking systems of core countries to supply
liquidity to the banking systems of peripheral countries, while minimising
the risks for banks of the core. Cypriot reliance on the Eurosystem—ulti-
mately on the banking systems of core countries—has afforded enormous
political leverage to the troika of the International Monetary Fund (IMF),
the EC and ECB, as was seen in the events of March 2013.
When the global economic crisis of 2007–2008 started spreading panic
internationally, there were still no significant signs of negative effects on
Cyprus. Cypriot banks were not directly affected by the collapse of Lehman
Brothers, although the resulting shockwaves would soon touch upon the
Cypriot economy through the Greek sovereign crisis. While the crisis was
evident as early as 2009, it did not really begin to affect Cyprus until after
2011. However, the real effect of the crisis on the people of Cyprus was not
felt until March 2013, following the bail-in agreement with the consortium
of Cyprus’ international lenders.
Cyprus had entered a phase of recession in 2009 (1.9% of the GDP),
followed by a two-year recovery (2010–2011) that restored the country’s
GDP to that of 2008. The deterioration of the economy in Cyprus took
place in 2012–2014 with great intensity and velocity comparable with that
of Greece and significantly worse than that of Spain and Portugal. However,
it was shorter in length because of the two-year recovery that preceded the
deterioration in 2010–2011 (Cyprus Institute of Labour 2014: 8).
The 2012–2013 financial crisis in Cyprus is closely related to the deep
and prolonged recession in Greece (Dijsselbloem 2018). It involved the
exposure of Cypriot banks to the Greek debt crisis, the downgrading of
the Cypriot economy to junk status by international rating agencies and
the loss of access to international credit markets. Cypriot banks’ invest-
ments in Greek sovereign bonds were completely derailed following the
voluntary private sector involvement (PSI) in the Greek debt haircut in
February 2012 as part of the Eurogroup agreement (Pegasiou 2013: 344).
Cyprus’ ‘hypertrophic’ banking system could not absorb the increase of
its non-performing loans (NPLs) in Greece and the ‘haircut’ of the Greek
sovereign debt (Demetriades 2017; Tombazos 2014). Although the right-
wing opposition tried to portray the crisis as a crisis of public finances
in view of the forthcoming presidential elections at the time, in Cyprus,
the crisis was above all a banking one. In December 2011, pubic debt in
Cyprus was 71% of the GDP, which was 10% below the mean of the EU and
lower than Germany’s 78.7%. By contrast, private indebtedness was 286%
of GDP and the third highest in Europe (Demetriades 2016). Bank credit
was provided abundantly. The Cypriot state was unable to raise liquidity
from the markets to support its huge financial sector and was forced to
request assistance from the European Financial Stability Facility (Pegasiou
2014). The Greek PSI resulted in massive losses of over than e4 billion for
the Cypriot banks, an amount that was nearly a quarter of the country’s
GDP (Demetriades 2017: 2).
Although the leftist government of Demetris Christofias did not want
to commit to a rescue programme in 2012 which is pointed out until
today as a main reason for the bail-in that followed (e.g. Dijsselbloem
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The Politics of The Eurozone Crisis in Southern Europe A Comparative Reappraisal 1St Ed 2020 Edition Leonardo Morlino Full Chapter

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The Politics of The Eurozone Crisis in Southern Europe A Comparative Reappraisal 1St Ed 2020 Edition Leonardo Morlino Full Chapter

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The Politics of the Eurozone Crisis in

Southern Europe: A Comparative

ISBN 978-3-030-24470-5 ISBN 978-3-030-24471-2 (eBook)

2 How Member States Cope with the Eurozone Crisis 13

3 Institutional Inertia, Ignorance

4 In the Eye of the Hurricane: Greece 57

5 Vincolo esterno or Muddling Through? Italy 85

6 Dissecting the Exceptional Case: Malta 109

7 Unstable Preferences and Policy Changes: Spain 133

8 Challenges and Opportunities Under Conditionality:

Appendix: Eurozone Crisis-Related Events in Southern

Xavier Coller is Professor at the Department of Political Science and

Fernando Ramírez de Luis is a Research Assistant at the Universidad

Yiannos Katsourides is a full-time Faculty Member at the Department

Marco Lisi is Assistant Professor of Political Science at the Universidade

Leonardo Morlino is Emeritus Professor of Political Science at LUISS

Roderick Pace is a Professor at the Institute for European Studies of the

Vera Ramalhete is a Researcher at the Instituto Português de Relações

Sonja Puntscher Riekmann is Professor of Political Theory and

Dimitri A. Sotiropoulos is Professor of Political Science in the

Cecilia Emma Sottilotta is Assistant Professor of International

Fabio Wasserfallen is Associate Professor, Chair of European Politics

Cecilia Emma Sottilotta and Leonardo Morlino

1 Setting the Stage

© The Author(s) 2020 1

adjustment programme for Portugal ended in 2014, the Portuguese econ-

A theoretically sounder ‘consensus narrative’ (Baldwin et al. 2015) sub-

other domestic interests which according to LI should have played a key

explain how Portugal’s traditionally pro-integration stances were signifi-

2 The Eurozone Crisis: Negotiated Responses

following the analogous principle—the so-called Schuldenbremse—already

Pesenti, Christopher Pissarides, Guido Tabellini, and Beatrice Weder di Mauro.

How Member States Cope

Sonja Puntscher Riekmann and Fabio Wasserfallen

© The Author(s) 2020 13

differences among this set of member states and contributing important

Here, a caveat is important: as we are dealing with a moving target due to

2 Crisis Perceptions, Ideological Cleavages

3 Crisis Actions, Power and Bargaining Success

considerable amount of compromise and reciprocity, with member states

at least some circumstances (such as the Single Resolution Fund in case of

4 Future Perspectives: What Are the Chances

Thus, solidarity came at the price of encroachment on national fiscal,

Thomson, Robert. 2011. Resolving Controversy in the European Union: Legislative

Institutional Inertia, Ignorance

© The Author(s) 2020 27

2 The Importance (and the Consequences)

3 The Context to Cyprus’ Perception of the EU

(Katsourides 2014b). First, the Cyprus problem (see, e.g., Ker-Lindsay

4 The Nature of the Crisis in Cyprus and Its

protecting themselves from more effective regulation and supervision that

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Appendix: Eurozone Crisis-Related Events in Southern