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Kenneth Dyson
To cite this article: Kenneth Dyson (2013) Sworn to Grim Necessity? Imperfections of European
Economic Governance, Normative Political Theory, and Supreme Emergency, Journal of European
Integration, 35:3, 207-222, DOI: 10.1080/07036337.2013.774777
ARTICLE
KENNETH DYSON
School of European Studies, Cardiff University, Cardiff, CF10 3YQ, UK
ABSTRACT This contribution examines the Euro Area crisis and European economic
governance reforms through a less technocratic lens. It argues for the need to reframe
debate around foundation issues in normative legal and political theory. The defining
issue is supreme emergency. The credibility of its capacity to act in supreme emer-
gency is of existential significance for the Euro Area. At the same time this capacity
poses is bound up with basic legitimacy issues. In particular, it involves ultimately
contentious requirements for supranational executive discretion, including credible
contingent commitments to take exceptional measures. Meeting these requirements
exposed a power vacuum within the Euro Area, consequent on domestic political
constraints. This vacuum was filled——if reluctantly——by the European Central
Bank. However, difficult legitimacy issues remain. They leave open the credibility of
the ECB contingent commitment to act in supreme emergency.
KEY WORDS: Euro area crisis, European economic governance, European Central
Bank, supreme emergency, normative political theory.
context, there is room for argument about better design with respect to
collective responsibility for sovereign debt and bank recapitalization and
resolution. What kind of institutional arrangement minimizes risk of moral
hazard? How is political, fiscal, monetary, and banking and financial
market authority to be organized and coordinated? How high should be
the threshold for triggering action? How can incentives for exit be
maximized?
The risk in avoiding addressing these difficult and unwelcome questions is
that grim necessity may force them to be answered in imprudent, unsustain-
able ways. In the face of the historical and institutional specificities of the
Euro Area, the consequences could prove fatal. In the final analysis, given
the imperfections of state capacity and implementation, and the consequent
modest role that rules can play, the capacity to act in supreme emergency is
essential to deter short-term, speculative financial trading. It involves the
threat of imposing losses on those who put at risk the long-term collective
good of European integration founded on economic stability.
The treaty provision that prohibits monetary financing of member state
governments precludes a major direct role for the ECB in sovereign bond
markets, at least in primary markets. The ECB Securities Markets
Programme (SMP) of May 2010, which conducted interventions in second-
ary bond markets, was justified by reference to the ECB obligation to
ensure depth and liquidity in dysfunctional market segments and restore
the smooth functioning of the monetary transmission mechanism.
However, it lacked a clear direct link to conditionality requirements. For
this reason, and for reasons of principle, the SMP encountered deep reser-
vations from the Bundesbank. It was connected to the early departure of
its president, Axel Weber, as well as of the German Chief Economist of
the ECB, Jürgen Stark (2011). The ineffectiveness of the SMP in gaining
credible commitments to fiscal and structural reforms by the Italian
government in late 2011 led to erosion of support within the ECB itself.
The SMP was wound down by the new ECB president Mario Draghi. It
was replaced with the longer-term bank liquidity provision programme
and by the OMT Programme. The OMT was a contingent commitment to
buy sovereign bonds in secondary markets subject to an agreed fiscal
consolidation and structural reform programme with the EFSF/ESM and
its timely implementation.
Minimizing hazard in the incentive structure suggests a strong case for
entrusting a central role to the ECB in any procedure to activate and
terminate exceptional measure in supreme emergency. The ECB would
have a strong corporate self-interest in protecting stability-oriented
principles both by setting a very high threshold for activation and by early
exit from exceptional measures. Institutional self-interests might lead to a
more relaxed approach by a special-purpose vehicle like the ESM or some
future European Monetary Fund (EMF). Less damage would be done to
moral hazard.
In addition, central banks have carefully honed skills in ‘constructive
ambiguity’, keeping markets guessing. The ECB had the internal capacity to
develop a set of indicators that would signal readiness for exceptional mea-
218 K. Dyson
sures once warning lights began to flash. At the same time it would act as a
reassurance that the threshold might be fixed at a suitably high level. Hence
the process of activation would have to give the ECB a clear veto role.
As the banking and sovereign debt crises mounted, the ECB encountered
conflicting incentives in developing its role as a supranational authority
with discretion to act in supreme emergency. One incentive for it to
abandon its principled opposition to crossing the Rubicon of fiscal policy
stemmed from the greater risks in allowing this function to fall into the
hands of a politicized body or a intergovernmental bureaucratic structure
with self-interest in expansion. Another incentive was provided by the
ECB’s own bureaucratic self-interest in protecting the currency that it
manages. Its own survival was at issue. The ECB had evolved a corporate
self-interest and identity as a supranational institution that distanced it
from the Bundesbank. It recognized that markets abhorred a vacuum and
that the European Council was driven by domestic political incentives that
generated complacency and procrastination. Only the ECB had the instru-
ments to act to avert extreme emergency. At the same time, this shift to a
more innovatory and politically visible and contested institution co-existed
with more conservative instincts within the Eurosystem. There was
discomfort with the subversion of the formal principle of central bank
independence, notably the separation of fiscal and monetary policies and
the provision for no privileged access for governments to central bank
finance.
Whatever the constraints posed by historical and institutional specifici-
ties, and the inherent caution and conservatism of central bankers, the will
and capacity to take supra-national discretionary action in supreme
emergency remains the ultimate insurance device. It provides a credible
commitment to irreversibility in EMU and a device that would further
legitimate exceptional closer surveillance and intervention in domestic
policies, as Draghi stressed with respect to the OMT programme. In
addition, a supranational capacity to act in supreme emergency offers a
shield for protecting state sovereignty and for enabling longer-term,
growth-focused policies that help restore debt sustainability. However, its
attractions diminish if the threshold of harm is lowered, increasing moral
hazard. Lowering the threshold and giving too much authority to the
European Council would simply pose the existential question in a new,
equally unwelcome form——‘who rescues the rescuer?’ (Wulff 2011).
Supranational executive discretion to act in supreme emergency becomes
self-defeating once the institution involved suffers deterioration in its risk
profile and loses creditworthiness and credibility. Hence commitments
have to be contingent.
Conclusions
Faith might be placed in the Euro Area eventually acting under the ‘rule
of a necessity that knows no rules’. Resort to exceptional measures in the
face of grim necessity would involve a deeply unwelcome admission of
the modest capacity of stability-oriented rules to tame both volatile, herd-
like financial markets and states with variable, often weak compliance
capacity. More problematically, it would expose a deep dilemma at the
heart of the Euro Area. On the one hand, the need for supra-national
executive discretion to deal with supreme emergency reflected the gaps of
the Maastricht economic governance paradigm both in preventing and in
managing crises. On the other hand, these design flaws exposed the
weakness of justificatory principles for enhancing supranational executive
discretion to take exceptional measures. In the specific historical and
institutional context of the Euro Area, equipping its institutions to take
exceptional measures in supreme emergency is fraught with enormous
legitimacy and consent difficulties. The issue of supranational executive
discretion to act in supreme emergency inevitably provokes intensified
debate about the ‘democratic deficit’ and the technocratic character of the
EU. It risks the alienation of public opinion in creditor states, notably
Germany, and continuing resort to judicial review. Hence debate about
supreme emergency is unlikely to be welcomed by policy-makers and
likely to be kept off the public political agenda.
Reframing the core problem of European economic governance in terms
of supranational executive discretion to act in supreme emergency helps to
embed the debate about its reform in broader normative political argu-
ments. These arguments were neglected in official EU thinking about the
Sworn to Grim Necessity? 221
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