It could be argued that many of the problems plaguing the EU in the recent years stem from a lack of integration among the various countries in the union.

These missing "integration points" include, but probably are not limited to, financial (starting from the taxation), judicial/law, political, and military systems.

The creation of the Euro, I think, could have been a good occasion to move forward with a financial/taxation integration.

Why was this not done? Was it deemed "too soon"? Or are there more complex reasons that I am currently overlooking?

  • A lot of people hated any financial integration and inherently were opposed to it, remember just 50 years before Europe had been at war and they still didn't trust each other, never mind the fact that richer countries didn't want their economies dragged down by poorer ones. – SleepingGod May 30 '17 at 9:08
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    You find a good deal of the same arguments in today's debates about Eurobonds ;) They would be a first step toward more financial integration. – jjdb May 30 '17 at 9:27
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    I read the euro was pushed through exactly because the financial integration desired by its "architects" was out of reach. The intention was to get the ball rolling and slowly make integration an inescapable next step. Of course, they forgot that balls roll downhill... I can't find the reference now though. – Cyrus May 30 '17 at 13:46
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    @ohwilleke that's all true, but it still leaves the political question "why?" There were political reasons for refraining from greater integration of financial systems across the euro zone, and it's not as if greater integration was not contemplated. In other words, it is still informative to ask why the "mission statement" did not call for the kind of integration contemplated in the question. Shadow1024's answer addresses this somewhat: the strategy of implementing piecemeal change to reduce shocks to the system and, perhaps more importantly, to make it more palatable to the people. – phoog Jun 2 '17 at 11:30
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    @phoog Maybe the answer is too obvious to acknowledge. Europe is made up of linguistically and cultural distinct nations who value their national autonomy and sovereignty is a way that far transcends the far more trivial regional divisions within true federal states like the U.S., Mexico and Germany. – ohwilleke Jun 2 '17 at 18:50

It wasn't deemed required; for example the Director of the IMF’s European Department writes:

In sum, the euro’s architecture was built on the premise that market forces, combined with minimal coordination of policies, would suffice to align economies, discipline fiscal policies, and allow countries to withstand idiosyncratic shocks.

The gist of that is echoed here:

what I recall from discussions at the time was the belief that two factors would make the adjustment problems manageable. First, countries would adopt sound fiscal policies, and thereby reduce the incidence of asymmetric shocks. Second, countries would engage in structural reforms that would make labor markets— and, presumably, wages—flexible enough to cope with such asymmetric shocks as occurred despite the soundness of the fiscal policies.

And this paper mentions:

The proponents of the second perspective, which has been dubbed the ‘endogenous currency area’ (ECA) argument (alternatively, the ‘self- validating currency area’ argument) [..] assert that the creation of a currency area can itself induce changes that actually enable the participating countries to achieve a sufficient degree of integration [..] ex post to make a currency area viable [...]. ECA proponents argue that greater optimality arises because adopting a single currency typically has expanded trade dramatically with other currency union members .

and the ECB reported in 2002:

If national fiscal stabilisers work in the wake of adverse shocks, the need for other types of adjustments -- such as supranational transfers, international risk sharing through the financial system, changes in prices and wages, and/or changes in real exchange rates -- are somewhat reduced.

Note that these viewpoints were somewhat controversial even at the time (the second and third links are criticisms of this viewpoint).

It also fits with how much of the EU's was constructed. As Robert Schuman put it in the Schuman Declaration: "Europe will not be made all at once, or according to a single plan. It will be built through concrete achievements which first create a de facto solidarity."

The Euro was effectively a continuation of the European Currency Unit launched in 1979. While I can't find a conclusive reference for it, I would imagine that the creators of the Euro imagined further integration in some form at an unspecified future point. Thus far such integration has largely failed to materialize due to various reasons outside of the scope of this answer.

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  • I think one point missing from the answer is that harmonising tax systems would have been so darn complicated. It's a minefield, with widely different systems and powerful interested vested in many small details of the system. That's not outside the scope of the answer but the main reason for the whole mess. The rest, the notion that it wasn't required, can be put down to wishful thinking and motivated reasoning. – Relaxed Jul 29 '18 at 9:45
  • Even your sources confirm that, not a single one of them fully endorses the notion that it wasn't required. The second and third are critical, the first one calls it “a premise” and the ECB writes "If national fiscal stabilisers work […]“ This from international institutions with a duty to be very careful in making politically charged statements. – Relaxed Jul 29 '18 at 9:46
  • Misses the point entirely. The abolition of the original national currencies is a mechanism to bind the block together, by making it harder for a member state to leave, and currency union is therefore a political - not an economic - policy objective. The EC wants to take away taxation powers from the member states, in order to create a genuine central government running a single financial system; but asking the member governments to go that far is like expecting turkeys to vote for Christmas. – Ed999 Apr 25 at 21:23

financial (starting from the taxation), judicial/law, political, and military systems.

Making any big reform is hard. And such idea would require dozens of huge reforms. Voters in many countries would be nervous, and it would be enough for one country to derail whole process. (Less ambitious projects like EU constitution were condemned by voters, so had to be implemented indirectly, as a reforming treaty.)

So why the project went on anyway?

There are some clear advantages from common currency in trade or tourism. The idea was that the only necessary precaution is a legal mechanism enforcing basic financial prudency among gov member states (like budget deficit below 3% GDP and public debt below 60% GDP). So if there is independent central bank and restrained gov spending, then the system should be more or less stable.

It even sounded logic - countries obtained benefits of common currency while maintaining sovereignty where unification gains would be lower or too hard to achieve.

The problem is that a few things were overlooked:

  • stability of banking sector (EU level regulation to enforce that were passed after the crisis)

  • vulnerability to asymmetric shocks (deep fiscal integration would be necessary, so no chances in foreseeable future)

  • generally not enforcing penalties for violation of rules (another issue is that those rules were not so good and were extended after crisis)

  • possibility of some countries to cook the books (like Greece)

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  • The impossibility of easily expelling a bad apple (Greece) is also a problem to this very day. – JonathanReez Apr 27 '19 at 15:02
  • It would be a mistake to think there is any enthusiasm anywhere for expelling even Greece. The exit of Britain has been a shock to them, and they would be too frightened of the block breaking up if they were to start expelling additional members. – Ed999 Apr 25 at 21:15

To understand the EU it is necessary to understand that it operates as a mutually antagonistic system, based upon three bodies which have opposed objectives.

On the one hand, the bureaucracy - the European Commission - wishes to centralise all power in its own hands, through centralising all decision making and authority, and taking it away from the member states.

Opposed to this, the Council of Ministers represents the individual member governments, each of whom are more or less implacably determined to keep the real power in the hands of the 26 member governments.

Opposed to both, the European Parliament wants to be the organ which has real control of the project, being directly elected by the people, and therefore having greater political legitimacy than the other two bodies.

The eternal struggle for supremacy between these different centres of power is what prevents the project from moving forward. To some extent, the French government - but really few of the other governments - supports the bureaucracy, so long as the French government believes that it can exercise some control over that bureaucracy, for example by filling it with French appointees.

The governments of the member states fight really hard to retain the financial and economic levers of control - within their own territories - under their sole control. This is why they fight hard to prevent central control of their fiscal and tax systems from being introduced. They want to continue to set their own taxes, and do not want a central government in Brussels to have control of tax and spending policies. Thus they do not want the 26 financial systems of the 26 member states to be unified under the control of Brussels. So when the single currency was created, they made sure that it was the member states, not the EU's bureaucracy, who continued to have real control of the individual nations financial systems.

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  • In practice, EP and EC don't have opposing objectives: both want more EU. The only opposing force is the veto power in the CoM. – Sjoerd Apr 11 at 23:39
  • Also, the French don't appoint anyone to the bureaucracy. The EU itself recruits. That recruitment process is generally considered to be well-run. Entrance exams are systematically used for objective judgement of applicants, and these test broad skills. It's hard to pass this exam, but the positions are sufficient attractive that the EU can afford to be selective. It also helps that the EU bureaucracy is small for the half a billion EU citizens. This answer of course conflates the bureacracy and the Commission; France does appoint one and only one member to the Commission. No "filling" there. – MSalters Apr 14 at 11:00
  • In practice the EP believes it should have a bigger say in running the EU than the EC has and vice versa. So they are continuously at odds with one another. Granted, both want the project to survive, whereas the CoM contains Eurosceptic elements -- fewer without Britain as a member, but certain of the Governments are notorious for their lukewarm support: most member states are interested only in what financial benefits they can derive from membership, and are in perpetual conflict with others - such as Germany - who find themselves footing the bill. So even the CoM have opposed objectives. – Ed999 Apr 25 at 21:11

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