A New Role for the European Stability Mechanism in Post-COVID-19 EMU? Explaining the Failure of the Pandemic Crisis Support and Assessing Ways Forward

Abstract

Since the establishment of the Pandemic Crisis Support, it has been hypothesized that the European Stability Mechanism might play a new role in stabilizing investments in the European Economic and Monetary Union through a targeted support for the financing of European public goods. The article inquires into the changes in the European Stability Mechanism’s institutional design that could make this possible. It starts by analyzing its lending policy, its accountability structure, and the structure of incentives that underlie negotiations at the Board of Governors. The article then explains the failure of the Pandemic Crisis Support against the background of a neo-institutionalist analysis of the two-level games that develop at intergovernmental fora, and does so through an investigation of the 2020 negotiations that led to the institution of the Pandemic Crisis Support, first, and the The Next Generation EU, later on. Finally, it illustrates which alterations in the institutional design of the European Stability Mechanism could represent a different, and more favorable, structure of incentives for lenders and borrowers.

Keywords:

• COVID-19
• Economic and Monetary Union of the European Union — EMU
• European Stability Mechanism — ESM
• intergovernmentalism
• post-pandemic recovery

JEL CLASSIFICATIONS:

• F5
• E6
• G2

Acknowledgments

I would like to thank Marco Lisi and Alice Cunha (NOVA University of Lisbon) for commenting on the research on which this article is based, as well as two anonymous reviewers for their useful remarks.

Notes

1 The SRF has been established by the SRM Regulation (EU) No 806/2014, and represents an operative tool in the hands of the Single resolution Board. It allows for a regulated resolution tool for failing banks, and sets in after statutory bail-in mechanisms have been exhausted. It is meant to reduce taxpayers’ risk, as per EU law the fund raises annual fees from banks located in all of the Banking Union countries.

2 The emergency voting procedure implies that three countries, namely Germany, France, and Italy, which sum up to the minimum requirement of 85% of weighted votes, will play a decisive role in the decision, and accordingly simplifies the terms of the negotiation. Being the emergency voting procedure a mechanism that only sets in at the early stages of a possible financial crisis, i.e. when the decision to grant financial assistance is still to be made, it speeds up intervention in critical situations, but it does not annul the complexity of a negotiation in the plenary, which will be restored at later stages, when the decision to grant further instalments has to be made following the periodical compliance reports on the memorandum of understanding. This might be a further element of uncertainty in the implementation phase.

3 This definition recalls, but is not co-extensive with, Scharpf’s (1988, 258-9) “problem solving” negotiating attitude, by which he understands “the appeal to common (’solidaristic’) values” in the presence of a “common utility function”, as opposed to “bargaining”, which is characterised by “the appeal to the individual self-interests of all (necessary) participants and by resort to incentives”. Scharpf’s classification admits of “mixed motives” games, in which more than one attitudes is at play. This is actually the case with the negotiation in question.

4 To the acknowledgement of this external element, current scholarship adds internal political dynamics in key financially stable countries as a decisive factor in temporarily shifting long-standing economic policy preferences (Donnelly 2021).

Additional information

Funding

Funding has been received from the Portuguese Foundation for Science and Technology [UIDB/00183/2020].

Notes on contributors

Gabriele De Angelis

Gabriele De Angelis is a political theorist, and works as a researcher at the NOVA University of Lisbon, Portugal.