De-facto differentiation in Economic and Monetary Union: A Rationalist Explanation

While the European Union (EU) still grapples with Poland and Hungary’s selective application and controversial interpretation of EU law, it is oft overlooked that the circumvention of the EU’s legal framework and procedures has long served as a means to create differentiation. In fact, this phenomenon scholars refer to as de facto differentiation is not limited to insubordination of member states but occurs also in the form of long-lasting arrangements tolerated by the EU. This article adopts a rationalist perspective and employs a supply and demand model to assess why this form of differentiation is demanded by states and tolerated by the EU despite the availability of legal means of differentiation. The model’s propositions were tested in three illustrative case studies in Economic and Monetary Union (EMU): (1) Sweden’s de facto opt-out from EMU; (2) Kosovo’s adoption of the euro as sole legal tender, and (3) the creation of the Fiscal Compact as an international treaty outside EU law. Ultimately, it was found that de facto differentiation may constitute a viable alternative and useful means to make EU integration more flexible when strong national demand for differentiation meets the need for discretion or timely action. This, however, applies only to cases in which the integrity of the EU’s key principles is not threatened.