Financial market regulation: crisis-induced supranationalization

Abstract

This article reviews the crisis-induced reforms of financial market regulation in the European Union (EU) from the perspective of the joint-decision trap and the orders of change frameworks. It argues that although the legislative response of the EU was quick and substantial, most reforms were lower-order changes that expanded existing regulatory tools and introduced several new ones. Only the banking union can be classified as a paradigmatic change, because its adoption required overcoming a long-lasting joint-decision trap. The crisis had changed the default condition of this trap by threatening a Eurozone break-up, which induced member states to reconsider their policy preferences and accept the supranationalisation of banking supervision that they have been refusing for two decades. Therefore, the lasting institutional consequence of the crisis will be the empowerment of supranational actors, especially the European Central Bank.

Keywords:

• European Union
• crisis
• financial market
• regulation
• reform

Acknowledgements

The author thanks Gerda Falkner, Elliot Posner, two anonymous reviewers and my colleagues at the Institute for European Integration Research for helpful comments.

Notes

1. The European Securities and Markets Authority was empowered to supervise credit rating agencies, which was a supranational power unopposed by member states since all the most important agencies are from the US.

2. The Council (2015) also agreed to provide fiscal backing to the SRF in the form of bridge financing for the period until it is fully mutualised.

3. See Scharpf (2006) for the role of the default option – usually the status quo – in facilitating exits from the joint-decision trap.

4. This classification relies on the EU-specific definition of the paradigmatic change (see Falkner 2016), which differs from the more general definition of paradigmatic change introduced by Hall (1993). The crisis, as traumatic as it was, has not led to any paradigmatic change under Hall's definition because no alternative paradigm developed enough to challenge the existing paradigm of market-based fractional reserve banking (Mügge and Sterlinga 2010, 324). On the margins, the crisis increased interest in alternatives that were part of the economic debate decades ago (see Sigurjónsson 2015 for review), some of which attracted support from civil society activists (Jackson and Dyson 2013, for example).