The eurozone’s sovereign debt crisis proved to be one of the most challenging tasks European policy makers had to face. Political-ideological, democratic, institutional and other constraints prevented the euro area governments from putting an abrupt end to it simply by increasing integration into the fiscal area. Instead, policy makers decided to “borrow” a crisis management strategy from the International Monetary Fund (IMF) and created an additional regional financial firepower – the European Stability Mechanism (ESM). This strategy could be called a “Crisis Management Mechanism” and was based on loans for recipient euro area countries under strict conditionality. The functioning of this Mechanism was underpinned by roles taken by the European Central Bank (ECB) and the European Court of Justice (ECJ).
Independent institutions of the EU assumed different roles during the sovereign debt crisis, but how to determine them? Were the ECJ and the ECB proactive leaders, or just agents of the eurozone governments? Or maybe the ECB and the ECJ merely rubber-stamped the strategy decided by the governments or acted under the business-as-usual mode? The two most important independent variables, which determined the strategic decisions taken by independent institutions, were the pressure in the sovereign debt markets via contagion effects and the pressure from the Crisis Management Mechanism developed by the governments of the member states.
There is a general consensus that the ECB was an indispensable player during the crisis. These explanations cover only part of the whole story and there are still ample unanswered questions, e.g.: if we think of the ECB as being the most important player, why did it hesitate to start a sovereign bond buying programme (QE) at the early stages of the crisis, or why were stricter ECB’s Emergency Liquidity Assistance (ELA) collateral requirements applied to programme countries?
The enhancements of the eurozone’s financial architecture during the sovereign debt crisis was put under the ECJ’s scrutiny. According to Wilkinson, or Scicluna the creation of the ESM and the ECB’s Outright Monetary Transactions (OMT) programme was not legal under EU treaties. Other authors argued that the positive ECJ’s rulings transformed, or even created a new European Economic Constitutional constellation. However, it is difficult to agree that market discipline was replaced by bureaucratic discipline in the eurozone. By introducing the Crisis Management Mechanism, the European policy makers have not enacted, but evaded the real transformation of the European Economic Constitution. The main economic policy principles enshrined in the Maastricht Treaty and the role of the market discipline were largely preserved without deeper integration into the fiscal area. Political and market pressures surely played a role, albeit implicitly, as regards the ECJ and the ECB during the sovereign debt crisis.
Accounts based on the two classical integration theories: liberal intergovernmentalism and neofunctionalism, could well explain some events and decisions taken during the sovereign debt crisis, but no one can provide a unified framework that could be used in explaining the roles taken by the independent institutions. According to the new intergovernmentalism, these institutions acted as de novo bodies (ECB) with relatively simple and issue-specific mandates. These claims could be true in some episodes but fails to explain why the ECB took the lead when its President M. Draghi pledged to do “whatever it takes” to save the euro. This intervention was the turning point in the crisis management, even though it was later significantly diluted by additional conditionality in line with the Crisis Management Mechanism. Therefore, we should be careful about exaggerating the role of independent institutions. In most cases during the sovereign debt crisis, the independent institutions hesitated to act and waited for implicit guidance from the governments. A unified approach could provide a better framework for evaluating decisions taken by the ECB and the ECJ during the sovereign debt crisis.
Based on the suggested approach (Table 1), the ECB initially assumed a pro-active leadership role, so called “whatever it takes” moment. On the other hand, later, the ECB become the agent of the principal, constrained by the decisions taken at the political level. The agent of the principal role was also evident, when the ECJ took a decision on the legality of the ESM. Furthermore, the ECB assumed the role of rubber-stamper when it decided not to object to emergency liquidity provision to the Greek banks, and the ECJ, paradoxically, acted under the business as usual mode when it decided on the legality of the OMT.
- Roles assumed by independent institutions during the sovereign debt crisis and main determinants
This new approach could prove to be very useful in analyzing the European response to the COVID-19 crisis. Due to the significantly higher costs in the current episode, the Crisis Management Mechanism might be recalibrated, putting even more pressure on the independent institutions to act. This broad framework, with some adaptations could also be used for the analysis of crisis management implemented by the IMF and the roles assumed by independent institutions in other regions with potential spillover effects. In addition, the questions on how and why the Crisis Management Mechanism was developed could be a subject for further research with a view to better understanding its functioning and its effects on independent institutions moving ahead.
This blog post draws on JCMS article, “Independence of the ECB and the ECJ during the Sovereign Debt Crisis: From Active Leadership to Rubber-Stamping?”
Marijus Bernatavicius, PhD Candidate and Teaching Assistant from 2016, at Vilnius University, Institute of International Relations and Political Science. His research interests are in the areas of political economy and European integration.
Academic profile: http://www.tspmi.vu.lt/en/zmogus/marijus-bernatavicius/