Limits of legitimacy and the primacy of politics in financial governance

ABSTRACT

What makes institutions that govern global finance legitimate? Contemporary debates, fuelled by the recent crisis, commonly draw on the concepts of input and output legitimacy to answer this question. As this article argues, however, this distinction is as difficult to apply in practice as it may be sensible in theory. Limitations in input legitimacy, which covers the inclusiveness and fairness of policy goal definition, cannot be compensated by higher output legitimacy, for example through supranational or global institutions. Whether such institutions are appropriate venues for producing policy hinges on the specific goals that they are charged to realize. And if these goals do not emerge from a deliberation process that can itself be considered legitimate, such institutions will do little to make policy outcomes more legitimate per se. After all, a supranational body might excel in the pursuit of one particular policy goal, but be wholly unsuitable to another. In short, this article argues that rather than seeking legitimacy of financial governance in the institutions through which it is made, we should focus on the desirability of specific policy outcomes and distribution of their costs and benefits when deciding how and by whom policy should be made. This argument is demonstrated using the case of capital market policy in the European Union, a case for which this article exposes serious legitimacy deficits, largely owing to an excessive influence of the financial industry compared to other societal stakeholders.

KEYWORDS:

• Legitimacy
• global financial governance
• European Union
• delegation
• Lamfalussy
• financial markets

Notes

1 Investment services cover the activities of investment banks, (institutional) investors, securities exchanges, commodity exchanges and clearing houses. Effectively, legislation in this field governs what are normally considered capital markets as distinct from banking and insurance. For that reason, the term ‘capital market policy’ will be used interchangeably with the less common, if more accurate ‘investment services policy’.

2 Confidential interview with a high-ranking Commission official, Brussels, 13 December 2006.

3 Confidential interview with a member of staff at the European Parliament, Brussels, 12 January 2006.

4 Unfortunately, the actors in the ‘Others’-category are not specified any further. At least some of them fall into the category of non-financial corporate issuers of debt and equity securities.

5 Confidential interview with a lobbyist from a US investment bank, London, 7 April 2006.

6 Confidential interview with a member of the European Parliament, Brussels, 7 December 2005.

7 For example, only one out of the 26 members of the Securities Markets Expert Group, the precursor of ESME which evaluated market integration and legal harmonization, was not directly or indirectly an industry representative.

8 This argument mirrors a similar point made by Rethel in this volume with respect to Islamic finance.