Centralization of rule-making versus embeddedness in the Eurozone

ABSTRACT

A new consensus has emerged which stipulates that the Eurozone problems are caused by a lack of embeddedness of the euro in proper financial and fiscal unions. This paper reviews the debates on the Eurozone’s state of disembeddedness and argues that it is not enough to embed the monetary union in scaled-up financial and fiscal unions. For the euro problems to disappear it needs to be embedded in social Europe. The transfer of policy prerogatives at the supranational level does not make the structure embedded, but the substance of the policy measures. From a Polanyian perspective, the extent of the Eurozone dis/embeddedness depends not on the level of centralization of policymaking, but on the interplay between the two forgotten Polanyian principles: improvement and habitation. This paper tries to assess the extent of dis-embeddedness through these two principles.

KEYWORDS:

• Eurozone
• Polanyi
• disembedded
• embedded currency area
• banking union

Acknowledgments

I would like to thank Alison Johnson for her valuable feedback at the 15th Biennial European Union Studies Association Conference in Miami, Florida and Matthew Watson and David Canon for their continuous mentorship.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. Social Europe is highly contested concept because of the limited influence of the EU within this policy field (Clift 2009). The EU legislative activity in social policy is thought to be comparable to that of federal government in the US on the eve of the New Deal in 1930 s (Leibfried 2010, 264). It can be argued that the EU has a sui generis social policy that is market-friendly and focused on modernising and making the social benefits system sustainable (Daly 2006).

2. Although Polanyi 2001[1944] himself has flirted with the idea of ‘regional planning’ as a counter-force to globalization, he was aware of the limitations of such undertaking.

3. Parallel to the efforts of creating a competitive home market, the EU is actively promoting the diffusion of competition rules abroad via various bilateral and multilateral instruments.

4. For discussion of the OCA see Snaith (2014).

5. This section does not represent an exhaustive list of all Polanyian iterations. There is an ongoing debate focused on the commodity fiction of money as it relates to the Eurozone crisis (for details see Holmes 2014; Savevska 2019).

6. These commodities are fictitious because they are not produced for sale but perform other key functions beyond their exchange one.

7. In his analysis, he made it explicit that the unfolding of economic liberalism was instantaneously followed by protectionism. Contrary to the ‘belief in spontaneous progress,’ Polanyi 2001[1944], 39) underscored the role of government in the extension of both the improvement and the habitation principles.

8. Seikel (2016) argues that because the Fiscal Compact, which extended reversed qualified majority voting to all aspects of the excessive deficit procedure, has enabled a strict enforcement of austerity that entail liberalization, all the while, the market-correcting policies need to meet a high majority threshold under the ordinary legislative procedure which results in policies around the lowest common denominator.

9. The QE refers to the sovereign bonds PP which started in 2015, but we have to note that the ECB has other PP, such as covered bonds PP implemented in 2009, 2011 and 2014, asset-backed securities PP initiated in 2014, and the more contentious corporate bonds PP which started in 2016, thanks to which its balance sheet ballooned to almost €4 trillion.

10. The ruling from May 5 that challenges the legality of the ECB’s bond purchases endangers the supremacy of EU law https://www.bundesverfassungsgericht.de/SharedDocs/Downloads/EN/2020/05/rs20200505_2bvr085915en.pdf?__blob=publicationFile&v=5.

11. The first legislative efforts of tearing down the barriers to the free movement of capital were made in the late 1980 s with the adoption of the Liberalization Directive (88/361/EEC) and the Banking Coordination Directive (89/646/EEC), which were based on the mutual recognition principle (Mügge 2013). More serious efforts were made only in the late 90 s with the launch of the Financial Services Action Plan (FSAP) that targeted institutional obstacles that prevented cross-border integration by foreseeing greater coordination and harmonization of EU-wide regulation. In order to facilitate the process of fast and smooth adoption of legislative measures, the Lamfalussy process was launched in 2001, which envisaged the adoption of framework legislation by the Council of Ministers and delegated the technical legislation to the Commission and the respective committees, which were replaced with three new authorities under the European System of Financial Supervision (Grossman and Leblond 2011; Mügge 2013). The FSAP and the Lamfalussy process have undeniably succeeded in securing a de jure liberalization of the financial services market, and although de facto liberalization was still not fully completed by the start of the Eurozone crisis, with the money markets seeing the fasted integration (Coeuré 2012), the volume of cross-border interbank transactions and the share of investment in mutual funds in other member states were increasing at high pace (Grossman and Leblond 2011). It was this private-risk sharing mechanism in the EU that was significantly impaired by the crisis and financial markets have fragmented along national lines (Coeuré 2012).

12. Three European Supervisory Authorities: the European Banking Authority, the European Securities and Markets Authority, and the European Insurance and Occupational Pensions Authority, and the European Systemic Risk Board (ESRB), which was established following the suggestion of the Larosière group (Regulation EU/1092/2010). The new macro-prudential rules that are in line with the Basel III guidelines and empower the ECB to establish higher capital buffers than those required by the national authorities within the new Single Supervisory Mechanism within the Eurozone (Council Regulation 1024/2013/EU).

13. Contrary to the BU, the CMU does not presuppose a centralization of authority, but merely a harmonization of rules across the EU.

14. There are ongoing proposals for the creation of a European Monetary Fund that will also act as a backstop for the common SRF.

15. European Parliament and the Council of the European Union Regulation (EU) No 806/2014 of 15 July 2014 [Official Journal L 225/1, 30.7.2014].

16. Five Regulations and one Directive that amend the Stability and Growth Pact.

17. ESM is a new stabilization fund which entailed signing of an intergovernmental treaty.

18. See Steinbach (2015) for a comparative analysis of the sovereign debt assumption in the US and the Eurozone and Sylla (2009) for a detailed historical analysis of the role of Hamilton’s debt restructuring which in a matter of two years produced remarkable results in that the T-bills were sold at 100 or 120% of par rather than 15 cents on the dollar (Sylla 2009). The struggles between the federalist and the nationalist gave rise to the unique US banking system in that because states lost the power to coin fiat money under the new Constitution, they started chartering banks en mass. So for a long period of time, we had a disembedded banking union.

19. See Bagus (2012) for the difference between the Fed’s and the ECB’s open market operations. While the former can buy T-bills outright, the latter lends money to the banks which post sovereign bonds as collateral.

20. See Nyborg (2017) for details about the ECB management of its collateral framework.

21. See Chang (2016, 85) for details on how the ECB used this threat to nudge the Italian prime minister Berlusconi into action.

22. The ECB has refused to provide European Court of Auditors (2017) with information about its decision.

23. M. Snadbu, ‘Banking Union Will Transform Europe’s Politics,’ (25 July 2017), Financial Times. Retrieved from https://www.ft.com/content/984da184-711c-11e7-aca6-c6bd07df1a3c.

24. Directive (EU) no. 2014/59 of the European Parliament and the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms. [Official Journal L 173/190 12.6.2014].

25. Namely, failing banks face two different options, liquidation or resolution, which are governed by different sets of EU and national rules (Merler 2018).

26. See https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-economic-governance-monitoring-prevention-correction/stability-and-growth-pact/corrective-arm-excessive-deficit-procedure/excessive-deficit-procedures-overview_en.

27. ECB’s press release on 12 March 2020.

28. See the new-intergovernmentalism debates (Bickerton, Hodson, and Puetter 2015).

29. Remarks by President Charles Michel: https://www.consilium.europa.eu/en/press/press-releases/2020/02/21/remarks-by-president-charles-michel-after-the-special-meeting-of-the-european-council-on-20-21-february-2020/.

30. Commission’s roadmap: file:///C:/Users/msave/Downloads/Annex%207%20-%20Roadmap%20for%20an%20EUBS%20(1).pdf.

31. COM/2020/456.

32. COM/2016/726; COM/2016/725; COM/2017/690; COM/2018/770.

33. Whyman, Baimbridge, and Mullen (2012) estimate approximately that there exist over 70 directives and other legislative measures concerning social policy. Taken together, the minimal binding legislative measures pertaining mainly to gender equality and safety at work, along with the collective agreements established through the Social Dialogue, and the non-binding instruments such as the OMC and the case law constitute the European Social Model (ESM).

34. If we look at the 2020 Strategy, which is implemented and promoted via the European Semester, we see a turn towards an active welfare state regime cantered on active labor market policies, flexible labor laws, active aging, up-skilling of the labor force and commitment to lifelong learning. Social investment is justified by the fact that the knowledge-based economy with its growth and jobs imperative requires investment in a skilled workforce (COM/2010/2020).

35. Analysis of the in-depth reviews and country-specific recommendations from 2016–2018. https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-economic-governance-monitoring-prevention-correction/european-semester/european-semester-timeline/eu-country-specific-recommendations_en.

36. This will not necessarily reduce the democratic deficit because the EP elections are considered second order to the national elections.

37. According to Polanyi 2001[1944], 247–248, the double-movement forms only when certain conditions are met: a) when the market society ‘refuses to function’, and b) when a ‘revolutionary situation’ crystallizes and society tries to escape a compete annihilation by the self-regulating market.

38. Such as the no-bailout clause and the prohibition on monetary financing.

Additional information

Funding

This work was supported by Erasmus + Programme under a Jean Monnet Grant [number 586930-EPP-1-2017-1-KZ-EPPJMO-MODULE].