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Abstract

  1. Top of page
  2. Abstract
  3. About break-ups and leaps forward
  4. 1. Creeping institutional change in the first decade of EMU’s existence
  5. 2. The Lisbon Treaty: strengthening the grounds for intergovernmental responses to the crisis
  6. 3. Shifting power relations and the new German dominance
  7. 4. The role of the ECB
  8. 5. Ad hoc crisis mechanisms – a permanent change of game in the EMU
  9. 6. Reforming economic governance of the euro area
  10. 7. Conclusions: the eurozone’s new governance framework is taking shape
  11. References
  12. Author Information

Abstract

This article studies recent governance dynamics in the euro area under the pressure of the sovereign debt crisis from 2009 to the end of 2011 from an institutionalist perspective. It investigates five cases of implicit or explicit institutional change which reveal the pace and the scope of explicit and implicit institutional change in the monetary union under crisis conditions. It argues that key steps of crisis management have actually created path dependencies for further institutional change. It also argues that incoherent responses from multiple actors in the face of immediate crisis management needs, new policy challenges and coordination difficulties in the crisis have strengthened the case for more substantial institutional change. An institutional set-up that continues to adapt only incrementally to the inner and outer challenges by not impacting more strongly on national sovereignty and by not strengthening supranational policy-making based on its own sources of legitimacy will not be able to solve the collective action problems inherent in the European Monetary Union (EMU)’s architecture with a centralized monetary policy and insufficient integration in the fields of economic, budgetary and financial policy coordination.

Policy Implications

  •  The adaptability of the institutional framework of the euro area should not be underestimated.
  •  Substantial adjustment to its governance have occured and will happen below the level of Treaty change.
  •  In the medium-term, a more fundamental reform may be required in order to account for problems of governance efficiency and, increasingly, problems of legitimacy.
  •  An institutional set-up that continues to adapt only incrementally to the inner and outer challenges by not impacting more strongly on national sovereignty and by not strengthening supranational policy-making based on its own sources of legitimacy will not be able to solve the collective action problems inherent in the Euro area’s asymmetry; namely, a centralized monetary policy and insufficient integration in the fields of economic, budgetary and financial policy coordination.

About break-ups and leaps forward

  1. Top of page
  2. Abstract
  3. About break-ups and leaps forward
  4. 1. Creeping institutional change in the first decade of EMU’s existence
  5. 2. The Lisbon Treaty: strengthening the grounds for intergovernmental responses to the crisis
  6. 3. Shifting power relations and the new German dominance
  7. 4. The role of the ECB
  8. 5. Ad hoc crisis mechanisms – a permanent change of game in the EMU
  9. 6. Reforming economic governance of the euro area
  10. 7. Conclusions: the eurozone’s new governance framework is taking shape
  11. References
  12. Author Information

In the course of the sovereign debt and the banking crisis that have hit member states of the euro area with full force since early 2010, both policymakers and academic observers have come to a point where they no longer take the eurozone’s long-term existence for granted. An increasing number of observers see a breakup becoming more and more likely unless there is a leap forward in integration, for instance by forging a political union.3 This view is increasingly shared by market participants who seem to converge on the perception that ‘under the current structure and with the current membership the euro area does not work. Either the structure will have to change, or the current membership will have to change’ (UBS, 2011, p. 1).

So, in the midst of the ravaging crisis, this article asks whether and in which ways the European Union (EU) has undergone institutional change in the course of the current crisis up to the end of 2011 and whether it constitutes a substantial change to the governance system of the euro area. Three combined strands of developments together changed and continue to change the governance of the euro area. There are, firstly, the reforms of the Lisbon Treaty, which came into force on 1 December 2009. The Lisbon Treaty’s institutional reforms, in particular with regard to the European Council, form a relevant background for crisis management and for the moves towards something like an economic government. Secondly, and related to the first point, the crisis management mode under which the eurozone has been functioning since early 2010 has led to new power relationships between member states and institutions, in particular with the ECB. Furthermore, some of the crisis management decisions taken under the intense external pressure exerted by the financial markets pre-determine long-term institutional reforms following at a later date. Thirdly, there is a political appetite for explicit governance reform that seems to be driven by two considerations: drawing lessons from how the root causes of the severe crisis in the euro area build up in order to make the euro area more crisis-resilient in the future, and, under the pressure of the market-driven crisis, demonstrating the political ability to act and to rethink the governance of the euro area. Among others, Hall and Taylor (1996) have identified factors that shape member states’ willingness to engage in institutional change, including the process of European unification, despite the implied loss of competences and sovereignty: First of all, they rationally pursue a fixed set of preferences. Secondly, in particular in the euro area under crisis conditions, politics consists in solving collective action dilemmas, usually with suboptimal outcomes. Thirdly, institutional arrangements can serve as a remedy to collective action dilemmas, in particular because they shape the actors’ expectations about how others are likely to behave and hence their strategic calculations. Against this background it is consistent for member states to engage in institutional engineering, given the profound impact of the crisis and the discussion of its root causes, which are seen in insufficient regulation, a lack of policy coordination and irresponsible political behavior.

In the following, the article studies five cases of implicit or explicit institutional dynamics which in reality are closely interdependent but are treated distinctly for analytical purposes: (i) the increased role and profile of the European Council lead by a permanent president; (ii) the role of the German government in crisis management, governance reform and the definition of policy priorities; (iii) the ECB, which has turned into the only institution able to swiftly and credibly contain financial market panic; (iv) the establishment of temporary and permanent sovereign debt crisis mechanisms and (v) new measures for closer surveillance and coordination of budgetary and economic policy (the Six Pack), which broaden and deepen policy coordination yet without so far venturing into sovereignty transfers.

The analysis reveals the pace and the scope of explicit and implicit institutional change in the monetary union under crisis conditions, arguing that key steps of crisis management have actually created path dependencies for further institutional change.

An institutional perspective on the euro area’s ability to survive

With regard to the question how the sovereign debt crisis is actually shaping the euro area, institutionalist perspectives have relevant concepts and analytical insights to offer. They help to better grasp institutional dynamics and to understand both decision-makers’ ability to transform and the resilience of the euro area’s institutional architecture. While institutions can generally be understood in a very broad sense, encompassing both formal and informal institutions, the empirical focus of this article is on the explicit or incremental evolution of formal institutions.

Institutional change can be the result of explicit decisions (such as Treaty amendments, law-making, the implementation of European Council conclusions) or an incremental evolution, which means in the EU context below the level of Treaty change or even below the level of secondary law amendments. Ruptures and radical institutional innovation are indeed possible but, in particular in the EU, institutional change most of the time occurs incrementally in the course of policy-making. In the EU, with its experimental character of multilevel policy-making in a negotiated system (Scharpf, 1988), institutional engineering and policy-making are even less separated than in nation-states. Often, formal institutional structures are still under development while policies are already made. There is a continual process of adjustment in a policy growing in scale and scope which, in the crisis, is confronted by its own major weaknesses. Formal institutional change is very frequently the ex post codification of incremental change brought about by practical policy-making in the given framework.

Streek and Thelen (2005)2 have developed a useful typology of five types of change:

  • Layering describes a process of adding new institutional elements to existing ones. The process is assumed to be formal in nature, based on an explicit decision to change the institutional organization.
  • Displacement means that an element of the institutional setup becomes more important over time. This process, like the following three, can be formal in nature, that is, based on an explicit decision on the institution as such, or it can occur implicitly in the course of policy-making.
  • Redirection takes place when, for example, the objectives of an institution are changed.
  • Drift describes a development in which institutional organizations are challenged (possibly even destroyed) through external developments.
  • Depletion happens when an institution breaks down. This typology helps to sharpen the analytical approach to the vast empirical developments underway in the sovereign debt crisis and will be applied in the following analysis.
Table 1. Formal and information institutions
 FormalInformal
  1. Source: Based on Schwarzer (2005, p. 33)

NatureTreaties, secondary legislation, court rulings, Council conclusionsSocial constructs such as shared norms, ideas, identities
CreationExplicit decisionIntended or unintended effect of social interaction
PrerequisitesShared interest in outcome or possibility of impositionSocial interaction, trust
ChangeExplicit decision to change, or incremental evolution (e.g. through displacement or redirection, see below)Social interaction, build-up or breakdown of trust and reliability
Possible impactBinding power, constraining behavior, redefining preferences in view of constraints, information distribution, increased transparency and reliabilityTrust enforcing, increase reliability, enable consensus building, basis for formal institutionalization, enforcement of nonbinding rules

1. Creeping institutional change in the first decade of EMU’s existence

  1. Top of page
  2. Abstract
  3. About break-ups and leaps forward
  4. 1. Creeping institutional change in the first decade of EMU’s existence
  5. 2. The Lisbon Treaty: strengthening the grounds for intergovernmental responses to the crisis
  6. 3. Shifting power relations and the new German dominance
  7. 4. The role of the ECB
  8. 5. Ad hoc crisis mechanisms – a permanent change of game in the EMU
  9. 6. Reforming economic governance of the euro area
  10. 7. Conclusions: the eurozone’s new governance framework is taking shape
  11. References
  12. Author Information

Since the founding treaty of EMU entered into force in 1993, the institutions and governance structures of the EMU have undergone considerable changes; the most significant of which can be characterized as layering in the typology developed by Streek and Thelen. In other words, an initially incomplete governance framework was step by step completed with additional elements. One cause of change has been the asymmetric structure of the EMU’s architecture. First of all, there is no commonly defined economic and fiscal policy facing the centralized monetary policy, although these policy areas and the common monetary policy influence each other directly in their effects. Secondly, the initial institutional mechanisms were designed for groups of different member states: while the ECB is in charge of the monetary policy only for the EMU countries, the Economic and Financial Affairs Council (ECOFIN), as the initial key decision-making body in the economic pillar, included all EU member states.

Since the beginning of the EMU this double asymmetry has led to institutional compromises and changes that gradually reinforced the distinction of the eurozone as a Community in the Union. The most important element of this creeping institutionalization was the founding of the Eurogroup, initially an informal meeting of the ministers for economic and financial affairs of euro area member states, but the only and exclusive forum for the EMU at government level that allowed a monthly exchange (Pütter, 2006; Schwarzer; 2010).

The macroeconomic dialogue (also called the Cologne Process) was introduced just before the start of the Monetary Union in 1998 in order to establish a dialogue among government representative, the social partners and Commission and ECB representatives. So far, one meeting per year has been held at the political level and one at the administrative level. The exchange is yet not very intense due to the low frequency of meetings, the large number of actors involved and the heterogeneity of interests underlying this discussion, which so far have not been overcome by reshaping the macroeconomic dialogue.

Several other processes which can be summarized under the heading of the open method of coordination were added in policy areas where spillovers could happen, but for which no readiness existed to proceed with integration. Examples that are relevant for the euro area but do not exclusively concern member states sharing a single currency are the Luxembourg process on employment and labor markets, the Cardiff Process on product and capital markets, and later, the Lisbon Strategy in 2000 and the EU 2020 strategy of 2010.

The reform of the Stability and Growth Pact of 2005, which also constitutes an institutional reform of the EMU governance framework (Schwarzer, 2005), aimed at giving more political leeway to governments while bringing long-term sustainability and the composition of public expenditure to the center of attention. The major motive of flexibilizing the Pact was to take into account specific national economic and budgetary conditions more easily in the future.

Meanwhile, no EU treaty negotiated since the Maastricht Treaty actually brought about a fundamental change to the governance of the EMU, either with regard to exclusive fora for the EMU, or in terms of changing the rules and procedures for policy coordination. The Lisbon Treaty is indeed the first piece of primary law to mention the Eurogroup in a protocol, but it does not bring about new elements exclusively designed for governing the EMU.

2. The Lisbon Treaty: strengthening the grounds for intergovernmental responses to the crisis

  1. Top of page
  2. Abstract
  3. About break-ups and leaps forward
  4. 1. Creeping institutional change in the first decade of EMU’s existence
  5. 2. The Lisbon Treaty: strengthening the grounds for intergovernmental responses to the crisis
  6. 3. Shifting power relations and the new German dominance
  7. 4. The role of the ECB
  8. 5. Ad hoc crisis mechanisms – a permanent change of game in the EMU
  9. 6. Reforming economic governance of the euro area
  10. 7. Conclusions: the eurozone’s new governance framework is taking shape
  11. References
  12. Author Information

However, the Lisbon Treaty in general altered the rules of EU decision-making in a way which has become relevant for the euro area. Some changes to the general institutional setting and decision-making procedures have taken an unexpected turn. The Treaty was at first perceived as bringing more supranationalism to the EU. But in the course of 2010 the EU seemed to become more intergovernmental.

The European Council and President – the new power center

The most relevant formal institutional change for the question of leadership and power relationships was surely the installation of the permanent President of the European Council. Herman Van Rompuy’s first weeks in office roughly coincided with the beginning of the sovereign debt crisis. The combination of the new presidential system, which, in a process of layering, has been added to the existing institutional setting, and the seriousness of the crisis put the European Council in precisely this period in the spotlight of attention (Dinan, 2011). In the background, the European Council’s first president successfully tackled the difficult task of establishing himself as a moderator among the 27 heads of state and government – most of whom instinctively do not appreciate being moderated or even led. He did not profile himself as a strong leader with a distinct political agenda. In his first two years in office, he has apparently closely consulted the heads of state and government of the large member states and seemingly managed to get a sense of member governments’ preferences before taking action at European Council meetings.

Van Rompuy‘s successful mediation has strengthened the European Council within the institutional structure of the EU. Over the years the European Council, which is mentioned as an EU institution in the Lisbon Treaty (Art. 15 TEU) for the first time, had gradually taken over real power and impetus from the Community framework (Kurpas et al., 2007) – a process that accelerated in 2010. Very early in 2010 Van Rompuy explained that the European Council would first seize the financial and economic crisis agenda and later turn to international climate negotiations, foreign policy issues and strategic partnerships. He also suggested that the European Council should be convened up to ten times a year – which, at the outset, seemed to be a radical break with the previous rhythm of four regular Council meetings per year. But, in the end, the European Council met eight times in 2010 – mostly occupied with crisis management and international affairs. All in all, in 2010 the ground was prepared for the European Council to become the central leader and agenda setter in the EU across policy areas (von Ondarza, 2011, p. 6) at the expense of the original community institutions.

The loser of Lisbon and crisis management: the rotating presidency

2010 also put a term to the rotating council presidency in its previous form (Bunse et al., 2011; von Ondarza, 2011). This is the result of two Lisbon innovations. Firstly, the increased role of the European Council chaired by Van Rompuy has substantially reduced the agenda-setting ability of the rotating presidency and of the sectoral councils which the rotating presidency chairs. Secondly, the fact that the high representative chairs the meetings of the foreign ministers and represents the EU externally has removed further interesting features from the rotating presidency, for instance the hosting of international summits. In this way, the two generally most prominent national political leaders – the head of state or government and the foreign minister – play largely no important role during their presidency.

The crisis mode clearly accelerated this process: the dominant topic on the EU agenda since the start of 2010 has been the sovereign debt and the banking crisis in the euro area and these were mostly dealt with in fora that are not chaired by the rotating presidency. The rotating presidency’s role is reduced to being a ‘service provider’ (von Ondarza, 2011, p. 5) rather than acting as an agenda setter or policy entrepreneur. In the view of Streek and Thelen (2005) this challenge to the rotating council presidency in its traditional role can be described as institutional drift. It is conceivable that this trend will intensify if, in the future, the rotating presidency is replaced by permanent chairmanships in further Council formations.

Struggling for its impact and role – the European Commission

Moreover, the European Commission has had to struggle to maintain its standing and has continued to lose institutional authority, as it has done since the resignation of the Santer Commission in 1999. The seizure of long-term policy orientations and strategic reflection by the European Council has challenged its role both in crisis management and in the process of economic governance reform. This can best be illustrated by the reported rivalry between European Commission President Barroso and Herman Van Rompuy and the fact that the task force to reform the economic governance of the EMU was a Van-Rompuy task force and not a Barroso task force.

This trend may continue once the European Council is less occupied with the crises and turns to other policy areas. The weakening of the European Commission has influenced inter-institutional relations, in particular those for the European Parliament (EP), which ‘now sees the Commission neither as a partner nor a rival, but a lesser entity in a new political landscape’ (Dinan, 2011, p. 117).

While the formulation of strategic directions and agenda-setting is increasingly provided by the European Council, the European Commission has seen its operational role increase through the recent economic governance reforms. On the one hand, the legislative package called the Six Pack has confirmed and strengthened the European Commission in budgetary and economic policy coordination, without, however, transgressing limits of national sovereignty. The European Semester also puts the European Commission in a central position. Yet the definition of policy priorities has shifted to the European Council or the Euro Summit, as for instance the detailed agenda of the so-called ‘Euro-Plus Pact’ shows, which is likely to be more important for economic policy coordination than, for instance, the EU2020 Strategy drafted by the European Commission.

As part of the Troika, the European Commission also has had a crucial role to play in the negotiation of rescue packages as soon as a member state requests a loan. Interestingly, the Commission has been very successful in imposing its views on the adequacy of programmes on the International Monetary Fund (IMF) which, at least in recent years, initially tended to take a more neo-Keynesian approach than the European Commission would defend. Lütz and Kranke (2011) empirically trace the prevalence of the Commission over the IMF and argue that the Commission, as the member states’ agent with a weak internal position, is actually very able, thanks to a paradox of weakness, to impose its views on the Fund. All in all, rather than as institutional drift the change of the role of the European Commission in the governance structures of the euro area that is underway can best be described as redirection.

The EP – a rising, yet struggling star

The EP, in contrast, is one of the institutions that benefits most from the Lisbon Treaty. With the new Treaty, the joint decision procedure has now become the ordinary legislative procedure that puts the Parliament on an equal footing in all related legislative procedures. Its powers have thus, for instance, increased in the fields of justice and home affairs as well as in cohesion and agricultural policy and the negotiation of trade agreements (EP, 2010a). The Lisbon Treaty also gave the Parliament more rights in budgetary policy, as it expands the scope of parliamentary control, giving the EP a stronger role in the determination of annual budgets and making its consent mandatory for the EU’s 7-year financial framework.

In 2010 Parliament used its new powers, surprising the member states in a series of demonstrations of power, the first being the rejection of the SWIFT agreement (allowing sharing EU citizens' bank data with the US authorities) in February 2010. It likewise actively engaged in the negotiations on the European External Action Service. It had only marginal decision rights but managed to secure important concessions from the high representative and the member states via its budgetary powers (Kietz and von Ondarza, 2010, p. 1).

The Parliament obviously strives for an equal footing with the Council in the EU’s institutional triangle (Kietz and von Ondarza, 2010, p. 2). In September 2009, in an unprecedented move, it committed Manuel Barroso to detail his key political projects as candidate for a second term as Commission president before the EP. This gave the Parliament’s power to appoint and dismiss the European Commission a new quality and can be seen as an attempt to have a say in the setting of long-term policy priorities, which it does not formally have, despite its strengthened role thanks to Lisbon.

This practice and other elements that strengthen the EP as an actor in the institutional triangle of the EU are laid down in the revised ‘Framework Agreement on relations between the EP and the Commission’ of October (EP, 2010b.) While this agreement of course does not alter the EP’s role as enshrined in primary law, it is widely seen as being an important tool for the Parliament to further extend its influence over the running legislature. This observation is obviously shared by the Council, which claimed that ‘several provisions … have the effect of modifying the institutional balance set out in the Treaties’, mentioning in particular provisions on international agreements, infringement proceedings against member states and the transmission of classified information to the EP (European Council, 2010, p. 1).

In the sovereign debt crisis the EP severely criticized measures taken by the member governments of the euro area that did not involve the EP and partly were not even implemented in the community framework. The creation of the rescue mechanisms based on intergovernmental treaties raised particular concern, not only because Parliament had no opportunity to be involved in the emergency summit decisions but also because there is a growing concern that the current and future stabilization mechanisms of the euro area may evolve into an entity of surveillance and coordination at the heart of the euro area but without being based on community law or involving the EU institutions.

Meanwhile, the EP has essentially used four channels to be involved in the debate on crisis management and governance reform. Firstly, it was a co-decider in the legislative procedures setting up the Financial Supervisory Structure and the Six Pack (see below) – two opportunities for the EP’s Economic and Monetary Affairs (ECON) Committee to impose more supranational reasoning on the member states than the positions of the ECOFIN had initially foreseen. Secondly, the EP ran a temporary CRIS Committee (on the financial, economic and social crisis), which was charged with analyzing the extent and causes of the crisis for the EU and the member states and was tasked with proposing measures to improve financial market stability. Thirdly, the EP has continued its 3-monthly monetary dialogue with the ECB president as well as its (so far) informal dialogue with the president of the Eurogroup. Fourthly, it has begun to define its space in the new economic and fiscal policy coordination architecture organized under the umbrella of the European Semester. A first step was its discussion of the Annual Growth Survey 2011, the key European Commission document that initiates the European Semester at the beginning of each year. There is scope for the further development of the involvement of the EP, in particular, as the effectiveness and legitimacy of the European Semester still need to be improved (see below). Furthermore, the EP could extend its formal and informal consultation (so far with the ECB president and the Eurogroup president) to the new president of the Euro Summit. Moreover, the EP (formally or informally) can become more involved with national politicians, in particular when a country is placed under an excessive deficit procedure (EDP) or an excessive imbalance procedure (EIP). It could hence ask national politicians to testify before it, for example, in the case of a serious breach of the member state’s obligations.

3. Shifting power relations and the new German dominance

  1. Top of page
  2. Abstract
  3. About break-ups and leaps forward
  4. 1. Creeping institutional change in the first decade of EMU’s existence
  5. 2. The Lisbon Treaty: strengthening the grounds for intergovernmental responses to the crisis
  6. 3. Shifting power relations and the new German dominance
  7. 4. The role of the ECB
  8. 5. Ad hoc crisis mechanisms – a permanent change of game in the EMU
  9. 6. Reforming economic governance of the euro area
  10. 7. Conclusions: the eurozone’s new governance framework is taking shape
  11. References
  12. Author Information

The trend towards intergovernmental cooperation bears a potential for conflict – not only with the EU’s supranational institutions. Beyond the institutional change described above, power relations have shifted considerably.

Marginalization and new groups emerging

If decisions of crisis management and governance reform are taken among the heads of states and government without a major contribution by supranational actors, this process is likely to marginalize small and medium-sized member states. It is an open secret that President Van Rompuy closely consults with the German chancellor and the French president but is said to pay less attention to the heads of state and government of small-sized and medium-sized member states who continue to see the European Commission as key to positioning their interests. This is no new phenomenon and parallels the behavior of most Commission presidents in pre-Lisbon times. Small and medium-sized member states hence continue to argue for strong supranational actors, as it is through them that they see a chance to assure to be heard in EU policy-making.

Unsurprisingly, they have harshly criticized the dominant role of the large member states, for instance the Franco-German Deauville compromise on the reform of the euro area of October 2010. Unlike in previous events of Franco-German leadership, neither government consulted their partners before tabling their proposal at the subsequent European summit. A similarly explosive case was the last-minute package deal in late 2010 between London, Paris and Berlin in which the British prime minister secured a guarantee of the British rebate in exchange for Germany’s insistence to revise the EU Treaty when installing the sovereign debt crisis mechanism.

On several occasions there have been counter reactions, in particular from Central and Eastern Europe, against what is being perceived as Franco-German dominance. One example was a gathering of Central and Eastern European Countries initiated by Poland on economic governance questions in a reaction to France’s refusal to accept the Polish finance minister during the Polish rotating EU presidency as a guest to the Eurogroup.

Germany’s new role in the eurozone

Germany’s political and economic weight after reunification has become particularly visible in the sovereign debt crisis. Partly involuntarily, the country has taken on a key role in the EU. It has not only by far the largest economy but recently was also one of the most dynamic economies in the EU. Thanks to painful adjustments in previous years when the country had to pull itself out of the situation of being the sick man of Europe (2003), Germany has turned into the engine of growth of the euro area in 2010. It enjoys unbroken confidence in financial markets with top credit ratings and low risk premiums. Its size makes it the largest state and its credibility makes it the most important guarantor and creditor for fellow euro area member states through its contribution of 27 percent of the guarantees of the current European Financial Stability Facility (EFSF)4 and the future European stability mechanism.

Germany accepted this position as the guarantor sine qua non only with considerable hesitation, even frustration. There is a widespread perception that the sovereign debt crisis occurred only because other member states did not engage in structural reforms and budgetary austerity and essentially undermined the euro area’s stability framework, which was a necessary condition for Germany to give up the Deutschmark. Germany’s initial reluctance to help Greece, its occasionally harsh way of pushing for tougher rules and sanctions in policy coordination and for the creation of a European insolvency procedure, as well as its unusually uncooperative strategies in pushing for its interests have made Germany’s role and commitment to the EU one of the key issues in the debate on the future of Europe.

Throughout crisis management, domestic conditions constrained the government’s action, among them critical public opinion, the parliamentary opposition and the Constitutional Court, in particular with regard to the question whether the rescue packages are constitutional5 and how far the further reform of the euro area can go. In addition, strong concerns emerged that the rescue package for Greece and the €750 billion rescue fund would change the EMU in such a way that incentives for sound fiscal and economic policies would fade – in a situation in which the existing surveillance and coordination mechanisms had already proven to be inefficient. Out of this concern, the German government launched nine proposals for the reform of euro area economic governance in May 2010 – which have importantly defined the subsequent reform agenda that is still being implemented.

One of the characteristics of traditional German policy towards the EU was strong support for the EU institutions. The German government has supported a strengthening of the EP for decades, traditionally backed the European Commission and positioned itself as a defender of the Community method, when other capitals such as Paris eyed the possibility of cooperation in small groups or a directorate beyond the community framework. Under the pressure of the crisis, this policy stance at least temporarily shifted. German Chancellor Merkel (2010) in a speech at the College of Europe in Bruges actively defended, for the first time, the idea of the intergovernmental Union method as a legitimate and useful alternative to the Community method. Moreover, recent governance proposals consider the Euro Summit to be the key decision-making and coordination body, while a legal and political strengthening of the European Commission or the EP so far does not seem to be a priority for the current government. The implications of this policy shift for the EU may only be fully measured in years’ time but, if the trend persists they are likely to accelerate the evolution towards more coordination, instead of integration.

Germany also takes a pivotal role in defining the economic policy agenda for the eurozone, in particular with its proposal of the Euro-Plus Pact, which is essentially about structural reform and budgetary austerity. Among German efforts to export its own economic policy agenda is also a bilateralization of conflicts over measures to cope with the debt crisis (see, for instance the pressure exerted on Greece before the rescue packages were agreed upon and more recently, when the German chancellor and the French president pushed the Greek prime minister towards abandoning the referendum).

4. The role of the ECB

  1. Top of page
  2. Abstract
  3. About break-ups and leaps forward
  4. 1. Creeping institutional change in the first decade of EMU’s existence
  5. 2. The Lisbon Treaty: strengthening the grounds for intergovernmental responses to the crisis
  6. 3. Shifting power relations and the new German dominance
  7. 4. The role of the ECB
  8. 5. Ad hoc crisis mechanisms – a permanent change of game in the EMU
  9. 6. Reforming economic governance of the euro area
  10. 7. Conclusions: the eurozone’s new governance framework is taking shape
  11. References
  12. Author Information

If there is one institution whose factual role in economic governance has changed since the start of the sovereign debt crisis, it is the ECB. As early as 2007 the ECB became a more and more present crisis manager through interventions in the financial markets. The ECB launched the so-called securities market programme, that is, it started purchasing government bonds in the secondary market. It took this unprecedented move in order to prevent an excessive fall in bond prices that would lead to a further deterioration in confidence among investors. From a central banking perspective the programme served to ensure the proper transmission of monetary policy during the sovereign debt crisis. By preventing overly sharp moves, countries’ access to financial markets can be kept open and financial institutions spared write-downs on their portfolios. So the ECB in fact became a key player in the management of the debt crisis, which some argue exceeds its mandate and may complicate the pursuit of its primary objective: to guarantee price stability. While it would be an exaggeration to classify this evolution as redirection, because the ECB arguably still pursues a monetary policy (though with means that some observers would evaluate as belonging to the field of fiscal policy), there is a clear case of displacement: the ECB has become more important in the institutional arangements of the EMU. It no longer only runs the euro area’s monetary policy but has evolved into a crisis manager that is willing and able to ensure the survival of the euro area.

Its prominent rule in day-to-day crisis management also leveraged its political influence in the euro area in two ways. Firstly, when it came to debating governance reforms, the ECB (2010) formulated explicit expectations towards the member states that it tabled while the work of the Van-Rompuy task force was continuing. In several speeches, Central Bank President Jean-Claude Trichet added to the economic governance debate. One key issue in the reform debate was the question of private sector involvement (PSI) in the event of a sovereign debt crisis over which the ECB put itself into strong opposition with Germany, a promoter of early PSI (see below).

Secondly, the ECB became directly involved with disciplining member states to implement reforms on the domestic level. A joint letter of 5 August 2011 from Trichet and the ECB president-in-waiting Mario Draghi to Prime Minister Silvio Berlusconi was leaked, in which the two central bankers laid out a detailed reform programme for the Italian republic (Corriere della Sera, 2011). The acting and future ECB presidents explicitly refer to the conclusions of the emergency summit of euro area heads of state and government that had committed themselves to ‘honour fully their own individual sovereign signature and all their commitments to sustainable fiscal conditions and structural reforms’ (Corriere della Sera, 2011). So the central bankers were effectively pressuring a defecting head of government to honor his commitment – all this with sanctions in their hands that were much more powerful than the peer pressure exerted by the fellow heads of state and government: not buying further Italian debt on the secondary markets.

Thirdly, the ECB is also part of the Troika composed of European Commission, ECB and IMF representatives who negotiate with and monitor progress in those member states that have received an aid package. On the surveillance and on the sanctioning side, the ECB hence transgresses previous limits of its influence on national governments. Both moves shed a new light on the question of political independence or involvement of the ECB. While it can be argued that the pressure of the crisis justifies these radical moves into new fields of action, a key question in the future governance reform debate will be how to provide for the conditions to bring the ‘ECB back to basics’, that is, limiting its role to the core of monetary policy. This is particularly important as market pressures combined with the path dependency provoked by these moves in the first place may eventually push the ECB further down that line of action. Given its institutional self-interest in the maintenance of the euro and its own existence, the ECB, from an institutional logic, is to be expected to privilege its own survival over policy objectives laid down in its own statues. It is hence up to the member states to ensure way out of the current evolution.

Germany and the ECB –‘you’ve lost that loving feeling’

The evolution of the German relationship with the ECB is particularly interesting. On the one hand, the German government strongly influenced the way the Maastricht Treaty and the ECB statutes conceive the ECB. Hence, in terms of independence and focus on monetary stability, the ECB mirrors the old Bundesbank’s role and orientation.

In the course of the sovereign debt crisis, however, the ECB had undertaken measures that, from a normative German perspective, are widely seen as contradicting the initial idea of the ECB. But while prominent economists are very outspoken against these moves (see, for instance the comments by Axel Weber, the former Bundesbank president who was expected to become the next ECB president), the government cannot criticize the ECB’s action – as long as there is no crisis mechanism in place that can take the task of stabilizing bond rates in the markets off the ECB’s shoulders. Market participants clearly see the (even silent) support of the ECB’s secondary market purchasing (SMP) programme by the German government as key to its success.

Meanwhile, with regard to the ECB’s disciplining efforts towards euro area governments such as Italy, the German government is keen to see the ECB transgressing its political responsibilities as both probably share the sober assessment that there are hardly any other disciplining mechanism that can encourage reluctant political leaders to embark on deep-seated reform and consolidation processes apart from market discipline (which can turn into panic) and the threat of withdrawing behind the scene stabilization through the ECB’s SMP.

The German government and the ECB have been opposed to each other on one even more fundamental topic: the role of PSI in the handling of the sovereign debt crisis. The German government early on in the reform debate argued for automatic PSI as soon as a member state asked for a loan from the rescue mechanisms, in the early stages of reflection not even distinguishing between solvency and liquidity crises. The ECB, meanwhile, took a very active position against the German government, highlighting the risks involved by aiming at an institutionalization of PSI, both with regard to the direct effects (the destabilization of bond-holding banks) and the indirect contagion effects through the bond markets.

5. Ad hoc crisis mechanisms – a permanent change of game in the EMU

  1. Top of page
  2. Abstract
  3. About break-ups and leaps forward
  4. 1. Creeping institutional change in the first decade of EMU’s existence
  5. 2. The Lisbon Treaty: strengthening the grounds for intergovernmental responses to the crisis
  6. 3. Shifting power relations and the new German dominance
  7. 4. The role of the ECB
  8. 5. Ad hoc crisis mechanisms – a permanent change of game in the EMU
  9. 6. Reforming economic governance of the euro area
  10. 7. Conclusions: the eurozone’s new governance framework is taking shape
  11. References
  12. Author Information

On 2 May 2010, a €110 billion rescue package was agreed to save Greece from illiquidity. But the loan package that had been designed to take the country off the markets until spring 2013 failed to calm the markets, whose volatility increased to such a degree the week after that so that far-reaching policy decisions had to be taken on the weekend of 7–9 May 2010. The EU designed two new crisis management instruments: the EFSF and the European Financial Stabilization Mechanism (EFSM). The EFSM is based on guarantees from the Community budget of up to €60 billion, while the EFSF is an inter-governmental body providing up to €440 billion in guarantees from the euro area member states. the IMF decided to complement these mechanisms with potential financial support to euro area countries of up to €250 billion.

The EFSF mechanism has undergone two key reforms in the first 18 months of its existence. On 21 July 2011 an emergency Euro Summit decided to expand the possible instruments of the EFSF, including secondary bond market purchases and the ability to provide loans to member states for the recapitalization of the national banking sector. On 26 October 2011 the decision was taken to leverage the EFSF in order to increase its lending volume to up to €1 trillion. The European stability mechanism (ESM) that will take over from the temporary mechanisms probably in the course of 2012 will most likely incorporate these measures (European Union, 2010a).6

The creation and extension of the crisis management mechanisms is a case of institutional layering. The adding of these new institutional elements has several implications for the overall governance set-up of the euro area. First of all, conditionality attached to loans has proven to be the most effective disciplining device for national economic and fiscal policies. In the future, it is conceivable that the ESM may be at the core of budgetary and economic policy coordination for those member states that require loans in times of liquidity shortage. It is conceivable that – in Streek’s and Thelen’s terms – displacement will then occur: the ESM may develop into a more pro-active actor if, once in place, it can actually provide preventive loans before a crisis actually hits, meaning that it can extend its role in supporting structural adaptation processes. The framework of this will probably be provided by the European Council’s policy agenda and the European Commission’s annual growth reports, but the ESM may evolve into a key player in these coordination mechanisms. Secondly, the ESM has the potential to take the ECB out of its current role as only effective crisis manager through its intervention in the bond markets, but only if it is provided with the necessary means to intervene and the flexibility to act as a crisis manager. These decisions can be interpreted as the litmus test for national governments’ willingness to actually reduce the ECB’s role as a crisis manager and let the EFSF or ESM shoulder this task by backing the intergovernmental mechanisms.

6. Reforming economic governance of the euro area

  1. Top of page
  2. Abstract
  3. About break-ups and leaps forward
  4. 1. Creeping institutional change in the first decade of EMU’s existence
  5. 2. The Lisbon Treaty: strengthening the grounds for intergovernmental responses to the crisis
  6. 3. Shifting power relations and the new German dominance
  7. 4. The role of the ECB
  8. 5. Ad hoc crisis mechanisms – a permanent change of game in the EMU
  9. 6. Reforming economic governance of the euro area
  10. 7. Conclusions: the eurozone’s new governance framework is taking shape
  11. References
  12. Author Information

In parallel to managing the sovereign debt crisis, the EU advanced at an impressive speed with the reform of its economic governance mechanisms in 2010–2011. A first achievement was the establishment of new European financial supervisory structures. The legislative acts were decided upon in a joint decision procedure and were completed in November 2010. They established the European Systemic Risk Board, which is responsible for the macro-prudential oversight of the financial system in the EU and three further new European authorities for the supervision of financial activities with regard to banks, markets and insurances and pensions.

At the European summit on 25–26 March the heads of state and government decided to install a task force to prepare a report for necessary economic governance reforms under the chairmanship of Herman van Rompuy. On 27 September 2010 the European Commission, which had also been part of the task force, tabled a Six Pack of legislative acts with three objectives: to reform the Stability and Growth Pact, which is supposed to ensure sound public finances in the EU, to establish new standards for national fiscal frameworks to underpin the coordination of budgetary polices, and to introduce rules and standards for the future surveillance and coordination of national economic policies. Four of the six related legislative texts proposed by the European Commission were decided under the joint decision procedure. The EP was hence fully involved in the process and its reports at the end of 2010 showed that it was willing to confront the ECOFIN over a host of issues. Shortly after the Commission proposals, the Van Rompuy task force released its report which, additionally, identified the need for a European mechanism to deal with sovereign debt crises.

Both proposals reflected the acknowledgement that the current debt crisis would not have hit the Euro area the way it did had the member states better coordinated economic and budgetary policies since the launch of the euro in 1999. It became a widespread consensus that budgetary discipline is only part of the problem. External imbalances within the euro area and insufficient policy coordination in the first 11 years of the EMU have led to a considerable divergence in economic performance. Too large macroeconomic imbalances are part of the reasons for the severe sovereign debt crisis some member states are currently undergoing. Given these insights, combined with the pressure on national budgets resulting from demographic changes in the EU member states, it became a major political concern to strengthen the rules for economic and budgetary policy surveillance in the eurozone.

The Six Pack

With the Six Pack decision of October 2011, fiscal policy coordination has been considerably strengthened. National fiscal frameworks now have to meet minimum quality standards (reliability and transparency) and cover all administrative levels. Fiscal policy planning is encouraged to adopt a multi-annual perspective, so as to reach the medium-term objectives (Council Directive 2010). Meanwhile, a new concept of prudent fiscal policy-making has been introduced in fiscal monitoring with a stronger focus on achieving the medium-term objective. Alongside these measures, which are designed to improve national budget procedures, the European rules for surveillance and coordination of budgetary policy-making (the EDP and the Stability and Growth Pact) were reformed in 2011.

The rules of the Stability and Growth Pact have been changed in the following ways: the 3 percent deficit target will be replaced by a balanced budget objective, the reduction of debt to 60 percent of GDP has been imposed on member states, both an insufficient reduction of deficit and public debt can be santioned on proposal by the European Commission and against the will of the member states. Expenditure benchmarks will now be used alongside the structural budget balance to assess adjustments towards medium-term objectives. Expenditure growth rates should not exceed trend growth. Member that do not meet the medium-term objective should set their annual expenditure growth below trend growth (unless extra revenues are collected).

The EDP can now be launched based on government debt developments as well as based on government deficit (Council Regulation, 2010. If a member state continues to ignore council recommendations within the EDP the Commission makes a recommendation to the Council. That recommendation is considered as having been adopted unless a qualified majority of member states votes against it and results in a new 0.2 percent of GDP non–interest-bearing deposit (Regulation of the European Parliament and of the Council, 2011). The initial policy recommendations by the council based on a Commission recommendation remain subject to qualified majority vote. Financial sanctions kick in at an earlier stage of the EDP.

The Stability and Growth Pact has hence become more complex as a result of the recent reform. On substance, the major shift is that the expenditure growth rate and debt development are accounted for (only the debt criterion triggers EDP) and a stronger focus is being put on medium-term objectives. While the reversed majority increases reputation costs, administrative and political discretion remains. Hence, the actual implementation of the rules still depend crucially on the member states own interests in implementing implement the rules. While the European Commission has seen as slight increase of its formal power, it remains to be seen how it reads its new role and how able it will be, if it wants to, to take a strong position in the coordination of economic and budgetary policies in the euro area. Meanwhile, the EU does not have the right to directly intervene in a national budgetary policy.

The legislative package also creates a surveillance mechanism to account for competitiveness divergences and macroeconomic imbalances (European Union, 2010b). It is conceived of as an alert system based on an economic reading of a scoreboard consisting of a set of indicators covering the major sources of macroeconomic imbalances. The EIP is based on Article 121.6 Treaty on the Functioning of the European Union (TFEU) and includes financial sanctions for member states that do not follow recommendations.

The European semester

On 7 September 2010 the European Semester was approved by the EU member states as part of the new economic governance architecture. It is supposed to ensure that the EU and the eurozone will coordinate ex ante their budgetary and economic policies while national budgets are still under preparation, in line with both the (revised) Stability and Growth Pact, the macroeconomic surveillance mechanism and the Europe 2020 strategy.

As tested so far once in the year 2011, the European semester starts with an Annual Growth Survey, in which the Commission provides an analysis on the basis of the progress on Europe 2020 targets, a macroeconomic report and the joint employment report, and recommends key measures to improve growth perspectives. The survey includes country-specific recommendations and is to be discussed by Council formations and the EP ahead of the spring European Council.

At the spring Council, the heads of state and government identify the main challenges facing the EU and give strategic advice on policies. The member states are supposed to take these into account when presenting their medium-term budgetary strategies through stability and convergence programmes and, at the same time, draw up national reform programmes and set out the action they will undertake in areas such as employment, research, innovation, energy or social inclusion. These two documents are sent to the European Commission each April for assessment.

Based on the Commission’s assessment, the Council will issue country-specific recommendations to countries whose policies and budgets are out of line (for instance, if their plans are not realistic in terms of macroeconomic assumptions or they do not address the main challenges in terms of fiscal consolidation, competitiveness, imbalances and so on). Each July the European Council and the Council of Ministers provide policy advice before member states finalize their draft budgets for the following year. Draft budgets will then be sent by governments to the national parliaments, which continue to fully exercise their right to decide on the budget.

The assessment of the first European Semester (January to June 2011) was rather sober. It ambitious objectives have not (yet) made a significant impact on national policy-making. A recent study (Hallerberg et al., 2011) shows that countries adapt very differently to the constraints imposed by the new coordination framework, depending on various factors. In addition to concerns about the European Semester’s effectiveness, doubts about its legitimacy have been raised. A stronger involvement by the EP is seen as one possible way forward to overcome both problems of legitimacy and effectiveness as it could become a ‘forum in which information is exchanged and its role of watchdog for the relationship between the Commission and the Council [could be] made more visible and effective’ (Hallerberg et al., 28).

The Euro-Plus Pact

The Euro-Plus Pact is an economic policy agenda designed to address the imbalances in the euro area (European Council, 2011) in addition to the Six Pack. It was endorsed on 11 March 2011 and was formally adopted on 24 March by 17 euro area member states as well as Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania. The Pact focuses primarily on areas that fall under national competence. Each year, concrete national commitments will be undertaken by each head of state or government. Implementation is monitored by the European Commission, which will feed its observations of the process into its annual growth report, and politically by the heads of state or government. The Pact’s four objectives are to foster competitiveness, employment and the sustainability of public finances and to reinforce financial stability. In addition to the issues mentioned above, attention is paid to tax policy coordination.

The countries with a surplus are seen as a benchmark (Heise, 2011, p. 14), whose economic policy should be imitated by countries running an external deficit. More explicitly than the macroeconomic imbalance procedure, the Pact defines imbalances as an asymmetrical problem and puts the burden of adaptation on the countries in deficit. Meanwhile, these countries are seriously constrained in the adaptation instruments they may use: exchange rates are non-existent for euro area members while the Stability Pact constrains their budgetary means. Under the pressure of peer reviews and European Commission reports, which are likely to raise some awareness among financial market actors, at least while the debt crisis is not entirely overcome, the only way forward for deficit countries is hence fiscal austerity and structural reform.

Further reaching reforms, including a revision of the EU Treaty

After a further escalation of the sovereign debt crisis and a deterioration of the situation in the banking sector, the Euro Summit of 26 October 2011 committed itself to making ‘further progress in integrating economic and fiscal policies by reinforcing coordination, surveillance and discipline’ (Euro Summit 2011, p. 7). Apart from measures to be implemented on the national level, in particular the following points have been announced (Euro Summit 2011, p. 8–10): Firstly, their intentions to use Article 137 TFEU to provide for more scope of interference by the European Commission and the Council in examining national budgets of member states in EDP as well as closer monitoring and coordination of programme implementation in case of the slippage of an adjustment programme. Secondly, the role of the Commissioner should be strengthened. Thirdly, macroeconomic and microeconomic policies should be coordinated even more closely, building on the Euro-Plus Pact in the objective of achieving a further convergence of policies to promote growth and employment while the ‘pragmatic coordination of tax policies’ (Euro Summit 2011, pp. 8–10) is deemed necessary.

The Summit has also committed itself to the following changes in the governance structure of the euro area. Euro Summit meetings are to be held after European Council meetings at least twice a year, including the Commission president, which will ‘provide strategic orientations on the economic and fiscal policies in the euro area’ (Euro Summit 2011, pp. 8–10). Additional meetings can be called by the new president of the Euro Summit. The president of the Euro Summit will prepare the summits together with the Commission president and will inform the non-euro area member states and the EP. The Eurogroup will be given a stronger preparatory structure, including a permanent Brussels-based president of the Eurogroup Working Group. Reporting lines between these structures, the Eurogroup president and the Euro Summit president will need to be defined. There will be a monthly meeting between the president of the Euro Summit, of the Eurogroup, of the European Commission, to which the president of the ECB and the presidents of the supervisory agencies and the EFSF/ESM can be invited.

7. Conclusions: the eurozone’s new governance framework is taking shape

  1. Top of page
  2. Abstract
  3. About break-ups and leaps forward
  4. 1. Creeping institutional change in the first decade of EMU’s existence
  5. 2. The Lisbon Treaty: strengthening the grounds for intergovernmental responses to the crisis
  6. 3. Shifting power relations and the new German dominance
  7. 4. The role of the ECB
  8. 5. Ad hoc crisis mechanisms – a permanent change of game in the EMU
  9. 6. Reforming economic governance of the euro area
  10. 7. Conclusions: the eurozone’s new governance framework is taking shape
  11. References
  12. Author Information

Drawing together the observations from the five cases of institutional change analyzed here, a picture of the future economic governance framework of the euro area is emerging. It can be characterized as follows. Firstly, in the course of sovereign debt crisis management, new actors have come to the forefront: the ECB has considerably expanded its scope of action and influence and the Troika’s responsibility in implementing conditionality in loan-taking countries has brought together the IMF, the ECB and the European Commission onto a new level of policy interference with euro area member states.

The current crisis has, moreover, accelerated the process of layering, that is, adding new elements to the institutional organization of the EMU that had begun well before the start of the crisis. The newly created EFSF and the future ESM may turn out to be the institutional hub for policy coordination, raising questions of democratic accountability and legitimacy. But as the empirical analysis has shown, there are also cases of redirection, which eventually may lead to a drift if certain institutions are formally or informally loosing importance to such a degree that they can no longer assume their initial role.

Crisis management decisions, for instance, the decision to create a temporary rescue mechanism, have clearly created path dependencies which made euro area member governments start seeking a permanent solution only weeks after the temporary mechanism was created. All subsequent changes to the temporary mechanisms are meanwhile likely to be included in the permanent ESM, the founding treaty of which is currently under ratification. The analysis has further shown that incoherent responses from multiple actors in the face of immediate crisis management needs, new policy challenges and coordination difficulties have, along with the evolving crisis, strengthened the case for more substantial institutional change.

Consequently, a closer institutionalized euro core is emerging within the EU-27. The 17 euro area member states are bound together by tougher rules and harder sanctions, a shared policy agenda and newly institutionalized mechanisms such as the EFSF and the future ESM. This has implications for future EMU enlargements: entering the EMU not only means entering a more closely integrated core but also implies that euro area accession countries are willing to buy their way into the rescue mechanisms (in which they would automatically be on the donor side upon accession as they have to fulfill the convergence criteria). While it is improbable that the convergence criteria for EMU accession in laid down in the Treaty on the Functioning of the EU will be changed, the political and economic hurdles that need to be overcome will definitely change in such a way that EMU accession may become less attractive.

Thirdly, if an economic government emerges for the euro area, this is most probably not going to develop itself out of the European Commission, but rather out of the European Council. In particular, the Euro Summit conclusions of 26 October 2011 underpin the perception that the European Council sees itself as the core institution to ensure policy coordination and surveillance as well as the definition of policy priorities.

The ongoing euro area crisis catalyzed the increasing role of the European Council outside the EU institutional triangle of Parliament-Commission-Council but at the heart of decision-making. This intergovernmental power center is the reason why, despite the upgrade of the EP and despite the strengthening of leadership on the European level, the EU is seen as becoming more intergovernmental, and some have even observed a renationalization taking place. For instance the Van-Rompuy task force, which assembled mostly finance ministers of the EU member states was widely interpreted as a signal that the member states would prefer intergovernmental consensus seeking at the price of a marginalization of the European Commission and the EP which, in contrast to the Commission, was not represented in the working group.

One might argue that, even if the EU has become relatively more intergovernmental, there are to date no cases in which an actual renationalization has taken place and in which the community method has actually been pushed back. Indeed, at least in 2010, intergovernmental approaches were chosen in those fields where the community method does not apply – and hence can be read as a way for the EU to expand its scope of action. But since mid-2011 eurozone governance reforms have come back on the agenda, which means that choices need to be made whether the political leaders of the euro area head for more coordination or joint policy-making, including eventually an extension of the community method to the fields of budgetary and economic policy-making and surveillance. To date, governments have privileged coordination over integration, but still a profound debate over the future political nature of the euro area has started.

Fourth, the evolving governance mechanisms go hand in hand with the development of a distinct economic policy agenda for the euro area. The application of the macroeconomic imbalance procedure is likely to be asymmetric (that is, adaptation is mostly to be expected on the side of the deficit countries), the Euro-Plus Pact surely is. This means that the deficit countries are embarking on a long process of budgetary austerity, structural reforms and real devaluation. Depending on the overall growth environment, this may not prove sustainable politically, socially and economically to some member states.

Depending on the future evolution of the sovereign debt and the banking crisis, the euro area members may have to take more far-reaching steps, both with regard to budgetary policy coordination and economic policy co-ordination and with regard to the ESM to deal with sovereign debt crises. This will be anything but easy to achieve. One reason is that already now integration has reached a degree where any further step will touch on key features of national sovereignty. Even the implementation of tougher budgetary and economic policy coordination can trigger resistance if national policymakers feel there is too much interference with national policies.

While the euro area has shown a remarkable capacity to adjust the functioning of its governance below the level of Treaty change, in the medium-term a more explicit and fundamental reform will be required in order to take into account problems of governance efficiency and, increasingly, of legitimacy. An institutional set-up that continues to adapt only incrementally to inner and outer challenges by not impacting more strongly on national sovereignty and by not strengthening supranational policy-making based on its own sources of legitimacy will not be able to solve the collective action problems inherent in the EMU’s asymmetric organization; namely, a centralized monetary policy and insufficient integration in the fields of economic, budgetary and financial policy coordination.

It is very likely that a debate on limits to sovereignty and the technocratization of politics as a reaction to the reforms launched in 2010 will emerge. An increasing number of observers think that the problems of efficiency and the legitimacy of policy coordination can only be overcome by a larger transfer of sovereignty and more democratic legitimization on the EU level. This would require a major step of political integration after the current reform, which could be a revised EU Treaty, elaborated by a Convention and possibly only ratified and applied to the eurozone members.

Footnotes
  • 1

     This paper was first presented at the Dahrendorf Symposium in November 2011 in Berlin. I am grateful for helpful comments from the participants in the debate, the editors of this special issue and two anonymous referees.

  • 2

     This framework has also been applied to the the evolution of the EMU by Salines et al. (2012), who cover part of the cases analysed here.

  • 3
  • 4

     Own calculations based on The Parties (2010).

  • 5

     The main question here is whether the rescue packages constitute a bail-out or not. The No-Bail-Out-Clause of Art. 125 TFEU is one of the core features upon which the Constitutional Court, back in 1992, had ruled that the Maastricht Treaty and the introduction of the single European currency were compatible with the German basic law.

  • 6

     Any further decisions that may have to be taken to expand the EFSF and increase its ability to contain the crisis.

References

  1. Top of page
  2. Abstract
  3. About break-ups and leaps forward
  4. 1. Creeping institutional change in the first decade of EMU’s existence
  5. 2. The Lisbon Treaty: strengthening the grounds for intergovernmental responses to the crisis
  6. 3. Shifting power relations and the new German dominance
  7. 4. The role of the ECB
  8. 5. Ad hoc crisis mechanisms – a permanent change of game in the EMU
  9. 6. Reforming economic governance of the euro area
  10. 7. Conclusions: the eurozone’s new governance framework is taking shape
  11. References
  12. Author Information