Money rules the world and yet, the real cause of its emergence remains disputed. In their quest to identify the driver behind currencies, economists, historians and anthropologists still disagree over the importance of the transaction needs of market actors as opposed to the financing needs of sovereigns (Goodhart 1998). Yet, it is hard to deny that money and sovereigns are deeply tied together. For instance, it is no coincidence that virtually all modern currencies currently in circulation emanate from a sovereign. All of them? No! In 1999, a ‘currency without a state’ (Padoa-Schioppa 1999) – the euro – has been launched in Europe and is now the official currency of close to 340 million Europeans who live in the nineteen participating members of Europe’s Economic and Monetary Union (EMU). The stateless feature of the European currency was embraced at the euphoric times of its creation as a monetary and political innovation. Back then, the euro was indeed considered – mostly by central-bankers – as a genuine post-modern currency, truly disconnected from the traditional anchors of a currency: gold and the political power (Padoa-Schioppa 2000). More than anything, the euro thus constituted the first large-scale experiment of a sovereign-less currency.
In this introduction I explain why the euro crisis has dramatically impacted EMU’s institutional setting and why this has propelled Europe towards a distinctive fiscal integration trajectory. I then present the actors which embody Europe’s fiscal authority, review the existing literature and conclude with a few remarks on the data collected, on the expected contributions of this book and on the roadmap of this book.
A Sovereign-Less and Fragile Currency
Absent a central state, EMU’s architecture has been characterised from its inception by an asymmetrical institutional design marked by the co-existence of a centralized, supranational monetary policy capacity on the one hand and decentralized, intergovernmental fiscal and economic policies constrained by EU rules, on the other. During the run up to the Maastricht Treaty adoption, expert observers (Feldstein 1992; Frankel 1992) had however expressed strong doubts that this unbalanced institutional order would be sustainable over time and stressed that EMU would not be resilient enough to satisfy the heterogeneous needs of all euro area economies. No currency, it was argued, could be viable over the long run without some form of central fiscal authority (Eichengreen 1990; Friedman 1997). The crisis which unravelled in the European Union (EU) from spring 2010 until autumn 2012 proved to be the first ‘robustness test’ for the euro’s unbalanced design. It laid bare EMU’s shaky fiscal foundations.
Admittedly, crises always played a crucial role in European integration and often acted as catalysts to precipitate agreements on key mutualisation steps. The euro crisis was no exception to that rule. It proved however to be distinctive in both its magnitude and its nature. Often portrayed as the deepest economic recession experienced in Europe since the Second World War, the euro crisis had several dimensions. Economically, it was characterised by a severe slowdown that resulted both in higher debt levels and in a rise in unemployment levels almost everywhere in Europe and in particular in its southern periphery. Socially, the crisis led to deteriorating living conditions as real wages decreased in a number of European countries and social expenditures were cut as a consequence of austerity measures. Politically, the euro crisis proved to be a watershed in the consolidation of populism in Europe, and saw the growth of anti-establishment movements across the continent. During the most heated phase of the crisis, mass public protests proliferated on the streets of Europe’s cities.
Without downplaying those three dimensions, I claim in this book that the aspect that really made the euro crisis singular was a fourth feature: its institutional dimension. The crisis put EMU’s institutional setting under severe stress: it ‘exposed brutally the fiscal void of the monetary union’ (Schelkle 2013: 105) and revealed that the absence of a central fiscal backing can bring severe consequences to the EMU’s economies, thereby reviving earlier discussions on the inescapability of a fiscal union for the long term sustainability of the euro (Eichengreen and Wyplosz 1993; Goodhart 1998). During the most severe moments of the euro crisis, the constitution of a genuine fiscal union thus seemed unavoidable. This is particularly evident when one considers that the insolvency risks of several euro area countries were posing a systemic and existential threat to the euro. Against this backdrop, one would have expected that the euro crisis, because of its mere magnitude, would have been seized as an opportunity for EU leaders to formally create a genuine fiscal union and to clarify who is EMU’s lender of last resort and how it is fiscally supported.
And yet, intriguingly, this did not happen. Calls for a genuine and formalised fiscal union have been resisted and by the end of the euro crisis, no grand fiscal back-up or fiscal capacity had been agreed upon. Instead, a distinctive form of fiscal authority institutionalized through varying informal, ad hoc and covert channels. Those newly-centralized powers were not captured by the European Commission, probably for the first time in the history of European integration. Instead, those fiscal powers have been spread across both existing and new executive EMU bodies, a phenomenon that is particularly puzzling and challenging to study for institutionalists.
Against this background, the objective of this book is to analyse the institutionalization dynamics of a European fiscal authority, understood as the centralization of fiscal powers at the European level and taken as the corollary of the EU’s policy response to the euro crisis. The book’s purpose is hence to both describe and explain the distinctive way through which this European fiscal authority, a new and recent empirical phenomenon in Europe, has institutionalized. The analysis will be guided by the following questions:
- Why did the euro crisis management result in the institutionalization of a central yet fragmented fiscal authority, whose constitutive elements are spread across all EMU executive actors but where no single actor can claim to exert supreme control?
- More specifically, with what type of new fiscal instruments was the euro crisis managed? Did the patchwork of adopted instruments and mechanisms generate a viable fiscal decision-making?
- How does the pattern of fiscal institutionalization integrate within traditional and predominant interpretative models of European integration, if it does at all?
- Looking ahead, how should EMU be reformed to make the euro sustainable?
The Institutionalization of a Fiscal Authority
I argue that the numerous and diverse institutional changes that occurred during the crisis have prevented scholars and observers from distinguishing an underlying unifying feature. The central claim of this book is thus that the euro crisis response has resulted in the emergence of a fiscal authority, understood as the institutionalization of central fiscal powers at Europe’s centre. The analysis hence relies on a distinctive understanding of the concept of ‘fiscal authority’, in line with the nature of the EU which occupies a middle ground between a confederation and a fully-fledged federation; between a regime and a state. This idiosyncrasy is all the more valid in the fiscal field: while the EU now disposes of a stronger fiscal control over national budgets and has even acquired some borrowing powers, it has no classic, state-like fiscal powers to directly raise taxes and is unlikely to acquire this competence in a foreseeable future. Similarly, it is unlikely that the EU will embark on any grand fiscal redistribution schemes any time soon.
This inquiry therefore deliberately departs from the historical and classic meaning of ‘fiscal authority’, taken as the legitimate ability of a nation-state to directly raise taxes in order to fund public expenditures. In my assertion, the ‘fiscal authority’ that has emerged with the euro crisis can better be grasped as the de facto and unintended institutionalization of fiscal powers through varied channels. ‘Fiscal’ is therefore equated with ‘budgetary’ throughout the book. Table 1.1 below delineates the institutionalization of a fiscal authority into four dimensions: an enhanced fiscal surveillance, a fiscal capacity, a lending of last resort capacity and a banking resolution regime.
Table 1.1
Elaboration of the outcome, its dimensions and their operationalization
The outcome | Key dimensions | Key features |
|---|---|---|
Institutionalization of a fiscal authority | Enhanced fiscal surveillance | Tighter surveillance, higher enforcement discretion and stronger sanctioning power |
A fiscal capacity | Commitment and mobilization of public money (as financial assistance) | |
A lending of last resort capacity | Discretionary provision of substantial liquidity and acquisition of a de facto task of EMU lender of last resort | |
A banking resolution regime | Mobilization of private funds and enhanced market discipline |
The constitution of this fiscal authority, a ‘fiscal federalism sui generis’ (Enderlein et al. 2012), is therefore considered as a hybrid sum of functions whose fragmented centre-formation runs across types of institutions (supranational/intergovernmental) and across nature of institutions (agencies, bodies/mechanisms, EU institutions) while its integration patterns run across types of institutional change (informal/formal; temporary/permanent; covert/overt). This is the political outcome which I will be both describing and explaining in this book. The euro crisis triggered indeed a vast ‘institutional tinkering’ (Jabko 2013: 132) which partly corrected the initial design flaws of Europe’s thin fiscal regime. New rules and procedures have thus been written (e.g. Fiscal Compact, the Bank Recovery and Resolution Directive) or expanded (e.g. the Six Pack and Two Pack which revisited and extended the Stability and Growth Pact) whereas new instruments have flourished (e.g. the Single Supervisory Mechanism and Single Resolution Mechanism). Moreove...