‘Tough Love’: How the ECB’s Monetary Financing Prohibition Pushes Deeper Euro Area Integration

Abstract

This paper analyses the underlying dynamics of institutional change in economic governance in EMU. We show that the crisis revealed significant gaps between the intentions of the designers of EMU and the observed outcome. Building on the path dependence literature we use the framework of historical institutionalism to understand how policy-makers were constrained in their options for the containment and resolution of the sovereign debt crisis. We argue that the principle which prohibits the central bank from financing governments as enshrined in the Maastricht Treaty was a causal factor in fostering reform and deeper integration.

Keywords:

• Economic Governance
• EMU
• ECB

Acknowledgements

The authors would like to thank Nataliya Taleva and Christina Jordan as well as the participants of the College of Europe Conference on economic governance in Bruges on 1 March 2011 for their helpful comments.

Notes

1. Without disregarding the role of agency this paper focuses more heavily on the institutional dynamics of change in the European political economy.

2. Now Art. 123.1. It states ‘Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the member states (hereinafter referred to as ‘national central banks’) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of member states shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments’.

3. Now Art. 124 TFEU.

4. Now Art. 125 TFEU.

5. http://www.ft.com/intl/cms/s/0/c4325d02-15de-11e1-8db8-00144feabdc0.html#axzz1qJtxsAg6.

6. http://www.bloomberg.com/news/2011-11-11/ecb-as-lender-of-last-resort-will-resolve-debt-crisis-for-portugal-s-silva.html.

7. http://www.telegraph.co.uk/finance/financialcrisis/8886113/David-Cameron-has-got-it-wrong-on-the-ECB.html.