Introduction
The new ‘postfunctionalist’ conventional wisdom of political science theories of European integration argues that EU politics was dominated by constraining dissensus (Hooghe and Marks Reference Hooghe and Marks2009). Postfunctionalism argues that political parties and mass publics are increasingly responding to the perceived positive or negative effects of European integration. In a nutshell, the more they see the EU and its policies as negative, the more they are likely to resist further integration.
This is a highly plausible argument. Its effects should become most clearly visible during the euro crisis which is without doubt the most severe crisis in the EU's history and which has had a huge negative impact on most if not all member states. Paradoxically, however, the constraining dissensus does not seem to constrain governments very much. Far from constituting a break in integration, it has led to a veritable boost. Within a few years only, the EU has created new institutions (most notably the European Stability Mechanism (ESM)), massively extended the mandate of others (the ECB assuming a quasi-fiscal role and taking over banking supervision) and adopted an impressive number of far-reaching and highly intrusive rules for fiscal policy and banking that were unimaginable before (most notably Treaty changes, the Fiscal Compact treaty, the ‘Six Pack’ and ‘Two Pack’ regulations as well as the banking union legislation). Despite the formation and increasing strength of populist EU-critical parties, massively declining rates of trust in the EU, and the ousting of many incumbent governments, the overall response to this integration-induced crisis is more integration, not stalemate or disintegration. Why?
We argue that the EU reacts to increasingly critical mass publics in its usual mode of joint-decision-making (Falkner Reference Falkner2011), which it has continued in highly unusual times. More specifically, it has reacted to the crisis by conflict-minimising decision procedures of incomplete contracts, delegation to independent institutions and integration by regulation. As a result, the EU perpetuates its highly peculiar structure of regulating, but not assuming, core state powers (Caporaso et al. Reference Caporaso, Kim, Durrett and Wesley2015). This peculiar decision-making pattern allows it to increase integration (of a particular type), despite massive protests, by insulating it from the constraining dissensus. At the same time, it perpetuates this decision-making pattern and its pathologies.
Joint-decision-making and the avoidance of intergovernmental conflict
The joint-decision trap as an alternative explanation of integration
A crucial and essentially still unresolved puzzle for theories of European integration is to explain the dynamics and trajectories of centralisation and decentralisation in the EU – in other words, the strengthening of the European versus the member state level. Neofunctionalism, intergovernmentalism and also postfunctionalism attempt to explain this dynamics with the preferences and powers of specific actors which differ between theories. For instance, supranational actors, such as the European Commission or the ECJ, can use their powers to achieve more centralisation, supported by transnational business and domestic political elites. EU-critical publics in turn would lead to a more decentralised EU or at least to a weakening of centralising tendencies.
In this longstanding debate, Fritz Scharpf introduced a new explanatory pattern. He started from the observation that the EU had reached a strange equilibrium: ‘frustration without disintegration and resilience without progress’ (Scharpf Reference Scharpf1988: 239) and argued that the EU would neither progress towards a more federal union nor decline into an intergovernmental organisation, but remain in a stable intermediary state. This was the ‘joint-decision trap’ (see Scharpf Reference Scharpf2006 for an ex-post evaluation of his own theory). This innovative explanation was not actor-based but institutional. The joint-decision trap is characterised by two features: member state governments are directly involved in taking decisions at the higher level, and these decisions are taken by unanimity or quasi-unanimity. This peculiar set-up is typical for the EU and for German federalism but not for other federations such as the USA. As this is an institutional configuration, it is largely insensitive to actor preferences on specific policy issues. Instead, member state governments which take part in European-level decision-making are reluctant to take steps towards an ever closer union because of their institutional self-interests. To give an example: while states may strongly desire an increased military role for the EU and may be strongly aware of their own limits in this respect, they refrain from creating a European military capacity because they do not want to give away a crucial aspect of their existence, the control over military power. The result is that states neither keep their military forces solely for themselves nor create European military structures which are solidly financed and organisationally autonomous.
More specifically, the joint-decision trap is the cause of two distinct pathologies: a blockade effect, which makes agreement on common EU policies difficult as long as a minority of member states prefers uncoordinated national solutions, and a ratchet effect, which makes a return to uncoordinated national policies difficult as long as a minority of member states profit from common EU policies once agreed upon. In other words, integration is difficult and resisted even if most participants would prefer it for functional reasons, but disintegration from levels once achieved is also difficult.
Although the concept of the joint-decision trap has been frequently applied to the EU (see Falkner Reference Falkner2011 for a recent assessment), most attention was devoted to analysing the blockade effect – hardly surprising given the experiences of marathon negotiations in the EU Council and the widespread feeling of stalemate from the early 1960s until the 1980s. During this period, not only Treaty changes and enlargement decisions, but even the overwhelming part of ordinary legislation had to be adopted by unanimity. The national veto and the resulting blockades seemed to be the EU's curse.
Since the mid-1990s, however, the integration process gained momentum again. The internal market was completed, and, despite successive rounds of enlargement, the EU did not become completely paralysed but on the contrary entered into ever more policy fields. The EU had learned to overcome the joint-decision trap by two means. The first was the relaxing of the unanimity requirement for decision-making in the Council and the increasing delegitimisation of the national veto. As a result, the joint-decision trap became weaker and blocking minorities less important.
The constant roll-back of the unanimity requirement over the last 25 years is part of the standard account of EU history. With few exceptions, most EU laws can now be passed with a qualified majority in the Council (and an absolute majority in the European Parliament). Although Treaty changes are still subject to unanimous approval in the European Council and ratification by all member states including referendums in some, the Lisbon Treaty introduced a ‘simplified revision procedure’ (Art. 48, paras. 6 and 7 TEU), which ‘only’ requires unanimity in the European Council but no ratification by national parliaments for changes to part 3 of the TFEU. During the euro crisis, it was used for changing Article 136 TFEU on reinforced budgetary discipline.
However, the significance of relaxing the unanimity requirement should not be overestimated. The Council still does not use simple majority voting in the legislative procedure but a ‘double majority’ of 55 per cent of the member states representing 65 per cent of the EU's population. In addition, the possibility of majority voting did not involve major changes in the practice of consensual decision-making in the Council. Votes happen, but member states try to avoid them (Hayes-Renshaw Reference Hayes-Renshaw2006).
While the Council has indeed slowly moved away from strictly unanimous decision-making, the European Council has increased in significance. This has not only been the case with emergency decision-making during the euro crisis but is a long-term trend of a ‘new intergovernmentalism’, which according to some authors characterises the last two decades of the EU (Bickerton et al. Reference 186Bickerton, Hodson and Puetter2014; Puetter Reference Puetter2014). The European Council still decides by unanimity most of the time.
Thus, despite a considerable relaxation of the unanimity requirement in the last three decades, the EU's decision-making architecture is still not neutral in terms of outcomes but biased in favour of the status quo. Even compared to the USA, which puts a high premium on preventing unhampered central government decisions, the EU has substantially more veto players and possibilities for blocking decisions (Moravcsik Reference Moravcsik2002). In areas relating to the euro crisis, the two conditions for the joint-decision trap – direct member state participation in central decision-making and quasi-unanimous decisions – still largely apply.
The use of conflict-minimising strategies
The second way of dealing with the joint-decision trap is to accommodate its underlying intergovernmental conflicts with conflict-minimising integration strategies. As these are less prominently discussed in the literature than the relaxation of unanimity, we will discuss three such strategies more extensively here: delegation to non-majoritarian actors, incomplete contracts and integration by regulation. These strategies emerged incrementally as a reaction to past decision-making blockades (Falkner Reference Falkner2011; Héritier Reference Héritier1999) and are highly relevant for explaining the EU's reaction to the euro crisis.
Delegation to non-majoritarian actors. The significance of the European Commission or the ECJ as supranational ‘engines of integration’ (Pollack Reference Pollack2003) is well known and works in several respects. Supranational agenda-setting and hierarchical decisions from supranational actors are a way out of the joint-decision trap because they can resort to hierarchical-unilateral decisions instead of being bound by unanimity requirements (Scharpf Reference Scharpf2006). Thus, the Commission can use its agenda-setting function for proposing pro-integrationist and conflict-minimising legislation. In its role as an independent regulator (for instance, in competition policy) it can exercise its powers against member state resistance. Most notably, the Commission can use its role as a guardian of the Treaties for breaking out of decision-making blockades in the Council with the strategic use of infringement procedures (Schmidt Reference Schmidt and Falkner2011). This makes it possible for the ECJ to overcome political blockades by judicial politics. Corporate taxation is a case in point: for many years, member states were unable to agree on a common system of corporate tax legislation. But by drawing far-reaching conclusions from the primary law of the four freedoms, which the member states had never imagined, the ECJ was able to create a set of rulings which incrementally draw corporate taxation under the umbrella of European law (Genschel et al. Reference Genschel, Kemmerling and Seils2011). Ironically, the potential of integration through judge-made law is particularly high if the potential for agreement in the Council is low because this prevents the Council from changing ECJ rulings by legislation or Treaty change (Alter Reference Alter, Hawkins, Nielson and Tierney2006; Tsebelis and Garrett Reference Tsebelis and Garrett.2001). As we will argue in the next section, the ECB took over as a supranational engine of integration in situations of intergovernmental decision-making blockade.
Incomplete contracts. In this case, intergovernmental conflicts are either obscured by vague wordings or postponed to a later stage by limiting the agreement to uncontroversial general principles and long-term goals which are in need of specification in order to be applicable (Cooley and Spruyt Reference Cooley and Spruyt2009; Héritier Reference Héritier, Genschel and Jachtenfuchs2014). Incomplete contracts are not only widespread in EU legislation but also characteristic for the decisions of the European Council, which has often limited its decisions to the setting of general goals (‘completion of the internal market’) and symbolic dates (‘1992’). Whereas international relations theory tends to regard contracts with a low precision as rather ineffective in shaping state behaviour (Abbott et al. Reference Abbott, Keohane and Moravcsik2000), the situation is different in the EU. Here, incomplete contracts open a window of opportunity for non-majoritarian actors such as the Commission to advance integration by adopting much more specific implementing decisions. For the ECJ, incomplete contracts are a welcome opportunity to adopt highly specific integration-friendly rulings, as in the case of corporate taxation discussed above (Stone Sweet Reference 189Stone Sweet2004: 24). The European Semester may be the prime example of such an approach.
Integration by regulation. There are two fundamentally different instruments of integration (Genschel and Jachtenfuchs Reference Genschel, Jachtenfuchs, Genschel and Jachtenfuchs2014). The EU can either regulate how member states use their national capacities for policy-making (integration by regulation) or it can create such resources for itself and use them in addition to those of the member states (integration by capacity building). Historically, western states developed and consolidated through capacity building: by creating national security forces (police and military), a national tax-financed budget and a comprehensive public administration (Skowronek Reference Skowronek1982; Tilly Reference Tilly1990). The EU lacks precisely those capacities of a sovereign state: it has no army or police of its own, no large administrative infrastructure, no tax income of its own and a rather limited budget compared to its GDP, and there is no indication that it could soon acquire such capacities. Instead, it governs by regulation. But our understanding of the EU as an essentially regulatory polity goes beyond the original formulation by Majone (Reference Majone1996), according to which the EU integrates the internal market by harmonising and replacing market regulations by the member states with European regulations. Beyond this, however, it also subjects policies which are remotely or not at all related to the internal market to European regulation, including core state powers such as security, budgets and public administration. A comparison with the USA illustrates the difference: in the USA, the federal government receives substantially more tax income than the states but is in turn hardly involved in taxing and spending policies of the states. In the EU, taxation remains an exclusive prerogative of the member states and the EU's budget is negligible if compared to the combined budgets of the member states. In turn, however, the EU regulates national taxation and budgets to a degree that is unimaginable in the USA (Genschel and Jachtenfuchs Reference Genschel and Jachtenfuchs2011; Hallerberg Reference Hallerberg, Genschel and Jachtenfuchs2014). This difference is significant for our understanding of the euro-polity and its reaction to the euro crisis.
For at least two reasons, integration by regulation is less vulnerable to decision-making blockades than integration by capacity building. First, it leaves the formal responsibility of the member states for carrying out their tasks intact. Member governments, responsible to democratically elected national parliaments, remain responsible for taxes, infrastructure, social welfare or other priorities, and arrest criminals and carry out military missions. Only the specific modalities of how these tasks are carried out is subject to common European regulation (Hodson Reference Hodson2009; Kemmerling and Seils Reference Kemmerling and Seils2009). On first sight, therefore, integration by regulation does not change the vertical division of powers in the EU but keeps the old division of labour intact, according to which the EU is essentially responsible for Pareto-improving technical regulation whereas the member states are responsible for highly salient, politically controversial and deeply intrusive policies (Hix Reference Hix2007: 143–44; Moravcsik Reference Moravcsik2005). The facade of statehood remains intact and reduces the pressure for justification of member states towards their domestic publics – member states can claim that they control the EU and the exercise of their core powers. In addition, most regulatory policy measures are not immediately effective, particularly in the case of directives which usually include a generous period for national implementation. The costs of implementation may not be immediately visible, may fall on the next government and may also be watered down after adoption, as the Stability and Growth Pact illustrates (Hallerberg Reference Hallerberg, Genschel and Jachtenfuchs2014; Heipertz and Verdun Reference Heipertz and Verdun2010).
Creating European capacities, however, visibly changes the vertical division of power between the EU and the member states in favour of the former, as the EU acquires resources for action which it did not possess before. This increases the audience costs (Lohmann Reference 188Lohmann2003) of member state governments because it makes a fundamental difference whether, for instance, they give the EU the right to tax or merely allow it to regulate member state taxes in order to improve the functioning of the internal market.
The second reason is that integration by regulation obscures the redistributive consequences of European policies because at least nominally all member states are subject to the same rules. For example, the Stability and Growth Pact requires all member states to keep their public debt below 60 per cent of GDP even though it is much more difficult for some member states to comply with the rule than for others. Although it is well known from the literature that regulation also has redistributive effects, and that these effects may be really strong, it is politically important that this horizontal redistribution is not directly visible. Creating common capacities instead immediately leads to the question of who pays and who profits how much. EU budget negotiations and most notably the negotiation of the medium-term financial perspectives nicely illustrate the salience of easily visible redistributive effects, as does the history of the European Stability Mechanism (ESM) and its predecessor, the European Financial Stability Facility (EFSF), analysed in the next section.
To summarise our argument: the blockade effect of the joint-decision trap has not brought integration to a standstill but merely to an increasing reliance on conflict-preventing mechanisms. This constant attempt to avoid the joint-decision trap gives the EU reaction to the crisis its specific institutional form, which is characterised by delegation to independent institutions, incomplete contracts and a strong preference for integration by regulation. These mechanisms have made it possible to increase the level and the scope of integration (Börzel Reference Börzel2005; Lindberg and Scheingold Reference Lindberg and Scheingold1971) despite a massive increase of membership and the constant threat of decision-making stalemate. The ratchet effect makes incremental and orderly disintegration difficult.
The conflict-minimising mechanisms by which member states tried to escape the joint-decision trap also loosened the grip of the constraining dissensus on member state governments. As far as possible, capacity creation was avoided. If capacity was created (for instance, in the case of the ESM), it was constructed in an intergovernmental way. For many measures taken, important elements were left open due to incomplete contracts. Others were delegated to non-majoritarian institutions, which are by definition not subject to direct majoritarian control. The consequences of others were not visible at the time of their adoption due to their regulatory nature. These are no dysfunctional side-effects of intergovernmental conflict-avoidance but the very core of it and the main reasons why the EU could overcome the joint-decision trap and escape the constraining dissensus. We will now show how these mechanisms worked during the euro crisis.
The anatomy of the crisis
The relation between monetary and fiscal policy has been a key problem of European Monetary Union from the very start. Functionally, both policies are closely related (e.g., Sims Reference Sims2012: 217–23). Most monetary policy actions have fiscal implications because, for instance, a rise of the interest rate increases the costs of government debt. Fiscal policy actions, in turn, feed back on key monetary variables like the inflation rate. In the run up to monetary union, it was therefore a contested issue therefore whether one could have a European monetary policy without a European fiscal policy. Indeed, many academic commentators argued that this was not possible and was known from the outset (Eichengreen Reference Eichengreen2012).
Politically, however, it was inconceivable to endow EU institutions with the fiscal capacities of a federal government, i.e., with independent taxing power, budgetary autonomy and the right to issue debt. The implied loss of national sovereignty would have been so obvious and great, and the required level of transnational solidarity so demanding, that the option of a European fiscal federation was never truly considered. Over time, and despite a rhetoric of ‘own resources’, the EU's budget became more, not less intergovernmental, with the lion's share consisting of explicit national contributions. The domestic opposition to ‘true’ fiscal federalism was huge. Take the example of Germany: the largest government party, the Christian-Democrats, had traditionally championed a strongly euro-federalist approach to integration (Jachtenfuchs Reference Jachtenfuchs2002). In principle, it should have been supportive of the idea of European fiscal capacity building. In practice, however, it had to cope with a vocal opposition from the Bavarian Christian Socialist Union, the central bank, the federal constitutional court, and large segments of the media who saw European fiscal empowerment as a threat to national sovereignty and German fiscal interests. Fiscal integration by capacity building was not an option – but neither was monetary integration without any fiscal backing.
Integration by regulation and incomplete contract
The conflict-minimising way out of the dilemma was a purely regulatory integration of fiscal policy on the basis of incomplete contracts. The core of this regulatory solution is encapsulated in three provisions of the Maastricht Treaty: Article 126 TFEU on the avoidance of ‘excessive government deficits’, the ‘no bail-out’ clause of Article 125 TFEU, and Article 123 TFEU's prohibition of debt monetization by the ECB. The purpose of these provisions was to make European monetary policy compatible with national fiscal policy by strictly separating the two – squaring the circle. How exactly they would achieve this purpose was left intentionally open at Maastricht. The treaty provisions were vague and incomplete in order not to upset the fragile Franco-German compromise on monetary union (Jabko Reference Jabko, Genschel and Jachtenfuchs2014). The Stability and Growth Pact closed some of the remaining regulatory gaps but failed to allay doubts about the incentive compatibility and effectiveness of the regulatory approach to fiscal integration (e.g., Sims Reference Sims1999: 415–36). For instance, what incentive should the Council of ministers ever have to impose fines on an over-indebted member state in accordance with Article 126 (para. 11) TFEU and thereby add to that state's fiscal problems and inability to comply with European fiscal rules?
Budgetary surveillance
The lack of incentive compatibility of the Stability and Growth Pact became quickly apparent after the start of monetary union in 1999. While the European Commission tried to infuse a certain rigour into the excessive deficit procedure, the attitude of the member states was more relaxed. France and Germany repeatedly ignored Commission advice to get their budget deficits below 3 per cent of GDP, and received de facto backing from the Council against the Commission's recommendations on sanctions. Other member states had a similarly bad record of compliance. By 2005, half of the EMU member states were in excessive deficit (Hallerberg Reference Hallerberg, Genschel and Jachtenfuchs2014). This hardly mattered, however, because the financial markets ignored the deficit procedure anyway: countries in excessive deficit were not punished by higher interest rates. To the contrary, interest rates converged on the low German level throughout the Eurozone. Inflation rates were generally low. In this setting, the fiscal regulation of the Stability and Growth Pact was redundant.
This changed with the onset of the Greek crisis in 2010: market fears of an impending national insolvency increased the rate spreads between the Eurozone member states again and revealed the ineffectiveness of the EU's fiscal regulation. The markets did not grant any bonus to countries that had always complied with the Stability and Growth Pact in the past such as Ireland and Spain. Rather, these countries were punished by steeply increasing interest rates, as investors flocked to countries like Germany and the Netherlands, which were considered save euro-havens even though they had a record of breaking the Stability and Growth Pact.
The Greek crisis showed that the potential insolvency of a Eurozone member state was not a national affair, as the no-bail-out clause might suggest, but a problem of the Eurozone as a whole. In contrast to the USA, where the impending insolvency of a single federal state (such as Massachusetts in the 1990s) hardly matters for other federal states or the stability of the US dollar because the fiscal fall-out is largely absorbed by the large federal budget, this is not the case in the EU. Given the EU's lack of fiscal capacity, the failure of even a small member state such as Greece (2 per cent of Eurozone GDP) has immediate knock-on effects on other member states that can undermine the euro and push the EU into existential crisis (Hallerberg Reference Hallerberg, Genschel and Jachtenfuchs2014).
While the EU reacted to the crisis also by creating some limited fiscal capacity (see next section), its main response consisted in intensive regulatory activity. In several steps, a whole series of far-reaching measures was adopted. In March 2011, the euro-Plus Pact was adopted by the European Council, in July, the first ‘European Semester’ was concluded, and in December of the same year, the ‘Six Pack’, five regulations and one directive intended to strengthen the Stability and Growth Pact entered into force. In January 2013, the ‘Treaty on Stability, Coordination and Governance’ (TSCG, the Fiscal Compact) followed, and, in May 2013, two regulations on increased budgetary surveillance (the ‘Two Pack’) followed. It is not easy to understand the complex system of standard EU legislation, intergovernmental Treaties, declarations, programmes, national action plans etc., accompanied by increasing differentiation of membership which is now summarised under the general label of ‘EU economic governance’.Footnote 1 As most of the rules are still rather new, it is too early to judge whether they will be effectively implemented – the past history of the Stability and Growth Pact is a history of breaking initial commitments.
Still, the scope and the intrusiveness of the measures are impressive. The overall purpose is also clear: the convergence of macroeconomic cycles and budgetary policies in the member states is to be achieved by increasingly tighter regulation. The rules are deeply intrusive: the Fiscal Compact demands from signatory states to add a balanced budget rule to their national constitutions and to establish independent fiscal institutions. The European Semester requires governments to send draft budgets to the European Commission for scrutiny even before they are sent to national parliaments (for an assessment of the European Semester, see Hallerberg et al. Reference Hallerberg, Marzinotto and Wolff2012).
The rules also strengthen the European Commission, mainly because they transform it into the central supervisory and enforcement agency for member states’ macroeconomic performance and for their budgetary policies. The Commission produces a number of economic indicators (e.g., the ‘scoreboard’ of the macroeconomic imbalance procedure) and receives macroeconomic and budgetary information from the member states. In using these indicators, it has a considerable amount of discretion. More importantly, it can issue binding orders to member states which it finds to be in violation of the rules of the European semester (for instance, the ‘Country-specific recommendations’). If a member state does not follow these ‘recommendations’, a process starts which can ultimately lead to financial sanctions. While these sanctions are not automatic, they are to be adopted by reverse qualified majority (i.e., a qualified majority in the Council is needed to reject the Commission proposal), which amounts to a major strengthening of the Commission's role (Cisotta Reference Cisotta2013: 6–7).
The purpose of the entire set of regulations is clearly to bring member states' macroeconomic performance and budgetary policies in line with the help of a dense and detailed set of indicators, targets as well as procedural rules. While a lot of emphasis is placed on the initial phases of the policy cycle by monitoring developments with increased reporting (e.g., the Annual Growth Survey and the Alert Mechanism Report) and a long set of indicators and by trying to prevent imbalances with a whole arsenal of medium-term objectives, national reform programmes, country-specific recommendations and so on, there is also an increased emphasis on sanctioning rule violations in the ‘correction’ phase, with the Excessive Deficit Procedure and the Excessive Imbalance procedure.
At the same time, these rules very much resemble the Open Method of Coordination (OMC), initially introduced by the 2000 Lisbon Strategy in order to coordinate policies for which the EU does not have an explicit mandate, such as employment and growth policies (Dawson Reference Dawson2011; Trubek and Trubek Reference Trubek and Trubek2005). The ‘open’ part of the OMC implies relying on incomplete contracts. Only general targets are set (such as a balanced budget or the avoidance of macroeconomic imbalances). The essence of the European Semester, however, is a process of mutual observation and adaptation. The difference to the classical OMC is that it is at least in part accompanied with the possibility of massive sanctions which makes it less an exercise of mutual learning but more one of hierarchical enforcement.
By adopting these complex and far-reaching regulations, the EU has largely avoided the creation of a strong fiscal capacity at the European level. It has also escaped the constraining dissensus by several means. Resorting largely to ordinary legislation meant adoption by QMV instead of unanimity, which would have been necessary in the European Council. Resorting to directly binding regulations avoided the need for national implementation and the risks of delayed and incomplete implementation. Differentiated integration both in the ‘Six Pack’ regulations as well as in the Fiscal Compact and in the euro-Plus Pact allowed to leave out dissenting states. Finally, the framing of the entire set of rules as measures for improving convergence and applicable to all member states keeps the facade of statehood intact. The member states alone remain formally responsible for taxing and spending, and national parliaments do not lose their ‘crown jewels’ (as the President of the German Bundestag, Norbert Lammert, has called them), the right to pass the budget. The procedures are in many respects similar to the OMC but with much executive discretion for the Commission and a weakened formal possibility for the Council to block binding Commission recommendations because of the reverse QMV requirement. The rules adopted apply to all member states, although they are much easier to achieve for some than for others. A key difference is, however, their visibility. As is well known from the literature, policies which are directly redistributive (i.e., which shift resources or power from one actor to another) are sensitive to high levels of conflict. The EU's budget negotiations are a well-known illustration of such policies and conflict levels, as are debates about changing voting rights in the EU Council or the size of national groups in the European Parliament. Regulatory policies may also have massive redistributive implications but they are often not clearly visible during the adoption of the decision (Jachtenfuchs Reference Jachtenfuchs, Jørgensen, Pollack and Rosamond2007). In sum, the regulatory mode of ‘EU economic governance’ avoids the building of a strong EU fiscal capacity, conceals its redistributive consequences and the far-reaching changes to the EU's institutional architecture which strongly strengthens the executive at the expense of the Community method (Dawson and de Witte Reference Dawson and de Witte2013), and achieves this to a large degree through an intergovernmental treaty (the Fiscal Compact) without an explicit process of Treaty change (Peers Reference Peers2013: 37–38).
Banking supervision
In parallel to the strengthened supervision of national budgeting processes, it became increasingly clear that the ‘euro crisis’ was not only a crisis of public finances but also of private banks. In theory, the case for regulating banks on the EU-level is clear as European regulation is a much more credible commitment and can much better deal with negative externalities than national supervision. Politically, however, states had a massive interest in keeping banks under national supervision because banks are an important source of tax income (in some member states in particular), and because they are important indirect instruments of economic policy. However, member states became increasingly aware of the ‘sovereign-bank nexus’, a vicious circle during which crises of public finances and of the banking sector mutually reinforce each other. In its ‘roadmap towards a banking union’, the Commission estimates that more than 4.5 trillion euro of taxpayers' money had been used to rescue banks in the EU (COM (2012) 510, p. 3). Estimates vary, but member states were clearly aware of the enormous sums involved and of the impossibility of insulating themselves against bank crises occurring elsewhere.
If banking crises in the internal market were to be prevented, the appropriate territorial scope of remedial action should not be limited to the Eurozone but would have to cover (at least) the entire EU. However, the United Kingdom in particular did not agree to a European supervision of its banking sector, in part because it was faced with an increasingly successful protest party (UKIP) and a very sceptical public opinion towards further transfers of sovereignty to the EU. The conflict-minimising means to adopt the complex set of rules which figured under the umbrella term ‘banking union’ was a conscious choice of the legal base. The ‘Banking Recovery and Resolution Directive’ (BRRD) 2014/59, Regulation 806/2014 on the ‘Single Resolution Mechanism’ (SRM) and a number of supplementary rules were adopted according to Article 114 TFEU on the approximation of laws in the internal market allowing for qualified majority voting. Regulation 1024/2014 on the ‘Single Supervisory Mechanism’ (SSM) was adopted by unanimity but by the Eurozone member states only, and merely with consultation of the European Parliament according to Article 127(6) TFEU. Key elements of the ‘Single Resolution Fund’ were adopted by intergovernmental agreement among 26 member states but without Sweden and the United Kingdom. It was thus possible to reduce the influence of vocal opposition from some member states.
Although the length of a legislative measure is only a very crude measure of its potential intrusiveness, the banking union is impressive in this respect: 90 pages for the SRM regulation 806/2014, 159 pages for the EBBD directive 59/2014 and 337 pages for the capital requirements regulation 575/2013 are well above the EU's normal standards. But the importance of the banking union set of rules does not only reside in its enormous degree of detail but also in its strong delegation to independent institutions, mainly the ECB. Since November 2014, the ECB assumes a completely new set of tasks not foreseen in the EU Treaties, namely the role of the European banking supervisor. The powers of the resolution authority to dissolve banks have been described as ‘near dictatorial’ (Ferran Reference Ferran2014: 14). Further delegation, mainly in the field of prudential regulation and supervision, has conferred powers to a whole system of regulatory agencies forming the European System of Financial Supervision which consists of the European Banking Authority (EBA, now located in London), the European Securities and Markets Authorities (ESMA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Systemic Risk Board (ESRB). The Joint Committee of the European Supervisory Authorities is a forum for cooperation between the EBA, the ESMA and EIOPA as well as for exchange with the ESRB. There is clearly no shortage of regulatory bodies for European financial supervision!
At the same time, the structure and substance of European banking regulation is an almost classical example for the arcane complexity of regulatory policies, which makes distributive and power implications less visible. Even for specialists it is difficult to understand the exact tasks of more than half a dozen agencies and coordinating bodies created in a short period of time. Public debate about the pros and cons of such a system hardly emerged. Most public discussions focused on a single element of the system, the Single Resolution fund, which is an instance of capacity creation and will be discussed in the next section.
Capacity building by conflict-minimising means
To cope with this crisis, the EU had to create some of the fiscal capacities ex post that the member states had always been wary of granting to EU institutions ex ante. The more the sovereign-bank nexus became important, a backup for bank resolution seemed imperative. This is a showcase of functional spillover: in defiance of the original intentions of the member states, the integration of one policy field (monetary policy) creates problems in other policy fields (fiscal policy and banking supervision) that trigger its further integration.
Fiscal capacity
In the wake of the Greek crisis, the EU began building up fiscal capacity in three steps (Schelkle Reference Schelkle, Genschel and Jachtenfuchs2014): in March 2010, the European Council passed the first rescue package for Greece; in May 2010, the ECOFIN Council agreed on the contours of a provisional European Financial Stabilization Facility (EFSF); and in December 2010, the European Council agreed on a more permanent crisis resolution mechanism, the European Stability Mechanism (ESM). Each step was highly contested within and between member states. One issue was why the vertical distribution of power should be changed in favour of European institutions at a moment of manifest European failure. Another, even more contentious issue concerned the distributive consequences of European fiscal capacity building: who foots the bill? Especially in Germany, Finland and the Netherlands there was little enthusiasm for guaranteeing financial risks, which, in public perception, were caused by the reckless policies and moral degradation of individual ‘PIIGS’ countries (i.e., Portugal, Italy, Ireland, Greece and Spain), and not by the common fault of entering into monetary union without sufficient fiscal backup. Creating a ‘transfer union’ became a political taboo in Germany. The conflict-minimising advantage of a purely regulatory integration, to keep fiscal policy a purely national responsibility, became the cause of new conflicts as European publics began to blame each other for the common problems: lazy Greeks, domineering Nazi-Germans, etc. The villain in these conflicts was not primarily EU institutions but other member states.
The constraining dissensus at home aggravated intergovernmental conflicts in Brussels. Yet, the mechanisms of conflict-minimising integration allowed for the build-up of considerable fiscal capacity nevertheless. These mechanisms included, first, incomplete contracts. Numerous weekend summit meetings in 2010 ended with early hour agreements, the content of which was already controversial the next morning. This allowed the heads of government to present politically convenient readings of the agreement at home, while civil servants in Brussels hammered out the details of the deal.
Second, European fiscal capacity building was limited to a bare minimum (Schelkle Reference Schelkle, Genschel and Jachtenfuchs2014). At each step of the process – the first rescue package for Greece, the EFSF and the ESM – the relevant actors were careful to avoid any semblance of a comprehensive fiscal empowerment of the EU. The role model was the International Monetary Fund, not the fiscal order of a federal state. Functionally, the newly created European capacities were strictly limited to the provision of liquidity support. The member states refused to assume joint liability for the funds but limited their national guarantees, as far as possible, to the national share in the funds' capital. Also, the decision-making procedures were strictly intergovernmental, and introduced weighted voting according to capital shares rather than the voting weights established by the Lisbon Treaty.
Third, European fiscal capacity building was accompanied by additional fiscal regulation. On the one hand, the general provisions of the Stability and Growth Pact were supplemented by a complex set of new macroeconomic regulations including the ‘Six Pack’, the ‘Two Pack’ and the Fiscal Compact. The promise was that these additional regulations would provide the regulatory effectiveness that the Stability and Growth Pact obviously lacked. On the other hand, the financial support of the EFSF and the ESM was made contingent on certain conditions to be fulfilled by the recipient country (‘conditionality’). In the case of Portugal, this included not only general fiscal requirements, but also rather detailed plans for the reform of labour market legislation, the health sector, public education, and the judiciary (Portugal Reference Portugal2013). It is not entirely obvious if and how this conditionality helped to improve Portugal's access to capital markets. The purpose was mostly political: to demonstrate to the publics in surplus countries that Portugal did not receive its aid free of charge.
Fourth, non-majoritarian actors, especially the ECB, moved centre stage. In principle, the ECB can make quick and effective fiscal aid to troubled Eurozone countries by directly or indirectly buying their public debt. While this fiscal assistance ‘through the monetary backdoor’ (Schelkle Reference Schelkle, Genschel and Jachtenfuchs2014) conflicts with the prohibition of debt monetisation (Art. 123 TFEU), the ECB repeatedly used it during 2010 and 2011 to compensate for delays and set-backs in the intergovernmental creation of fiscal capacity and further generalized it later with the announcement of the OMT programme. Because the governments were unable or unwilling to calm the markets by unlimited collective guarantees, the ECB picked up the slack. For many observers, Mario Draghi's announcement: ‘ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough’ (Draghi Reference Draghi2012) was the decisive turn in the euro crisis. The justification given was, of course, monetary: the disruption of the monetary transmission mechanism. The effect was to unburden the Council of conflictive decisions on intergovernmental fiscal capacity building.
As the ECB is an independent supranational institution, criticism from member states or from academics (Sinn and Wollmershaeuser Reference Sinn and Wollmershaeuser2011) could be ignored. The result of these conflict-minimising integration strategies is ambiguous. On the one hand, they allowed for the build-up of considerable fiscal capacity in a context of a vocal constraining dissensus. On the other hand, they hardly contributed to calming down the dissensus but, to the contrary, fuelled it. The Eurozone governments paid a high price for their crisis management. Twelve out of 17 were voted out of office between 2010 and 2012. As Jean-Claude Juncker once remarked: ‘We all know what to do but we just don't know how to get re-elected once we have done it’ (quoted in Hix and Høyland Reference Hix and Høyland2011: 271). The rest had to cope with a massive wave of Euroscepticism. In Germany, Eurosceptics seized upon the constitutional court to reign in the government. Issues concerned the control rights of the federal parliament (Kinski Reference Kinski2012), the admissibility of the EFSF and the ESM under the German constitution and the lawfulness of the ECB's purchase programmes for government bonds (Schmidt Reference Schmidt2013). Both the constitutional court and the parliament have seen their positions as veto players in European affairs strengthened in the process.
Banking resolution
In the framework of the ‘banking union’, both administrative and financial capacity has been created. With its takeover of a substantial part of banking supervision, the ECB had to build up a substantive additional administrative capacity. The new structure has substantial powers in banking supervision and banking resolution. Still, it is not a centralised system as it exists for instance in the USA but a multilevel system bringing European and national supervisors together. In a special report, the European Court of Auditors criticises that before the ECB took over its leading role in November 2014 the EBA had a limited legal mandate and limited staff for conducting effective banking supervision and resolving disputes between national legislators. Also, and despite the enormous length of the legislation creating the banking union, the exact division of tasks between the various supervisory bodies on the European level and most notably between the ECB and the national regulators is not yet settled (European Court of Auditors Reference European Court of Auditors2014). Most notably, there is a dispute whether the ECB is responsible for all European banks with only a secondary role for national supervisors, or whether there is a division of tasks with the ECB supervising the largest banks and the national regulators the others. Thus, the crucial question of the vertical division of powers between the European and the national level is still governed by an incomplete contract, as can be expected in a situation of joint decision-making.
The Single Resolution Fund which is a part of the Single Resolution Mechanism for the ordered dissolution of banks is another substantial aspect of capacity creation at the EU level. Once fully operational, it is expected to amount to more than €50 billion from bank contributions. Like the ESM, the Single Resolution Fund starts with ‘national compartments’ in order to avoid that contributors from one country pay for bank resolutions in another country, at least as long as contributions from the latter are sufficient to cover the losses. Over the years, an increasing mutualisation is foreseen. This may sound as a major step forward towards the building up of a true European financial capacity instead of segmented national compartments. One can speculate that agreement on this principle was possible because the Single Resolution Fund consists of bank contributions but not of public funds. The more serious issue is, however, that the fund is widely believed to be sufficient only for the resolution of a medium-sized bank. It is insufficient in the case of a failure of a large European bank or of a systemic crisis. Instead of attempting to solve the problem of bank failures in an integrated market, the Single Resolution Fund as well as the entire banking resolution procedure may rather be ‘meant as placebos to avert political protest against a regime in which the financial industry has blackmailed taxpayers into providing support, for fear that otherwise things might get much worse’ (Hellwig Reference Hellwig2014: 16). In the case of large bank failures, the taxpayer will have to step in again, and the Council has only been able to agree that it will deal with this issue at a later stage while the Single Resolution Fund is slowly becoming operational.Footnote 2
The European dilemma
The joint-decision trap has two effects, a blockading effect and a ratchet effect. The blockading effect makes the integration process prone to crises, the ratchet effect makes it difficult to solve such crises by orderly disintegration. As a result, the EU structurally prefers to react to crises of integration with more integration rather than with less.
The blockade effect of the joint-decision trap makes integration prone to crises because of its tendency to favour conflict-minimizing integration strategies such as delegation to non-majoritarian actors, incomplete contracts and regulatory integration. This has allowed progress in integration in terms of scope and depth despite increasing membership and heterogeneity. But it has also led to an increasing estrangement between governments and electorates in the same member state as well as between governments and electorates of different member states. This development creates a latent Euroscepticism, which transforms into a manifest dissensus as soon as integration produces negative consequences. When output legitimacy decreases, the lack of input legitimacy becomes a problem for the EU.
The ratchet effect prevents disintegration as a means to cope with a crisis. In principle, there are three options for reacting to crises of integration: not doing anything, disintegration and further integration. The first is a non-option because it changes neither output nor input deficits. The second option offers the potential to increase input legitimacy by increasing the democratic accountability within member states. But there are high hurdles to overcome before this option can be realised. Independently of whether disintegration is pursued radically by the exit of several states from the Eurozone or incrementally by lowering the level of integration, it needs to pass high majority requirements or unanimity, unless some states decide to leave the EU unilaterally.
The possibilities to use conflict-minimising strategies in order to undermine the ratchet effect for disintegrative strategies are limited. All three major European non-majoritarian actors (the Commission, the ECJ and the ECB) are strongly pro-integrationist. Suggesting that the Commission should sue the ECB in front of the ECJ for its breach of Treaty law by entering into the monetary financing of public debt (Vaubel Reference Vaubel2013: 18) is at odds with their self-definition. Using national non-majoritarian institutions such as the German Bundesverfassungsgericht as an agent of disintegration has also not worked until now. Despite numerous reserves and caveats in the past decades, the Bundesverfassungsgericht has until now resisted openly disintegrative rulings (Schmidt Reference Schmidt2013). It is also not easy to obtain incomplete contracts on disintegration, as David Cameron is currently experiencing. Instead, the British announcement of its intention to leave certain policy areas has increased differentiated integration – rather than giving the UK leverage for renegotiation with formal Treaty changes, the other member states prefer to continue with further integration via territorial differentiation by adopting measures for the Eurozone countries alone, by concluding intergovernmental treaties of the willing or by substantively vague procedural solutions such as the European semester.
The EU thus chooses the last and well-known option of solving crises of integration with incremental increases of integration (Marsh Reference Marsh2013). In the short term, this buys time and might help to alleviate the immediate symptoms of the crisis, to conceal the huge redistributive implications of the crisis and thus to keep constraining dissensus at bay. In a medium- to long-term perspective, however, this does not improve input legitimacy but rather risks to decrease it and increase constraining dissensus. It also further exacerbates the negative effects of the crisis politics of the last years: a massive strengthening of the executive and of non-majoritarian actors at the expense of parliamentary accountability and a massive intervention of the EU in core state powers with massive redistributive effects. Normatively, this is not very attractive, and, politically, this state of affairs may overstretch the legitimacy of EU institutions.
