ROBERT SCHUMAN CENTRE FOR ADVANCED STUDIES
Organized by Miguel Poiares Maduro, Bruno De Witte and Mattias Kumm
THE DEMOCRATIC GOVERNANCE OF THE EURO
RSCAS Policy Papers
RSCAS PP 2012/08
ROBERT SCHUMAN CENTRE FOR ADVANCED STUDIES
Global Governance Programme
EUROPEAN UNIVERSITY INSTITUTE, FLORENCE
ROBERT SCHUMAN CENTRE FOR ADVANCED STUDIES
GLOBAL GOVERNANCE PROGRAMME
The Democratic Governance of the Euro
ORGANIZED BY
MIGUEL POIARES MADURO, BRUNO DE WITTE AND MATTIAS KUMM
RSCAS Policy Paper 2012/08
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Robert Schuman Centre for Advanced Studies
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Table of Contents
Introductory Remarks
Miguel Poiares Maduro....................................................................................................................... 1
The Euro Crisis and the Democratic Governance of the Euro:
Legal and Political Issues of a Fiscal Crisis
Miguel Poiares Maduro, Bruno De Witte and Mattias Kumm............................................................ 3
Democratic Governance of the Euro: Shortcomings and proposals for reform (rev/16.4. 2012)
Roland Bieber.................................................................................................................................... 13
The Democratic Governance of the Euro: some proposals
Carlos Closa Montero........................................................................................................................ 21
Lessons for the Euro and its Governance from History
Harold James..................................................................................................................................... 33
The European Economic Constitution in Crisis:
Between ‘State of Exception’ and ‘Constitutional Moment’
Christian Joerges ............................................................................................................................... 39
The European Stability Mechanism: a constitutional authority in disguise
Giulio Napolitano.............................................................................................................................. 45
1
Introductory Remarks
Miguel Poiares Maduro*
This policy paper includes some of the contributions for a group set up at the EUI to address the crisis
of the Euro area with a focus on its democratic dimensions. The perspectives included in here are
diverse and not necessarily unanimous in the solutions they propose to address the crisis. They also go
from the more general issues (what is needed to save the common currency and how to legitimate it) to
more concrete questions regarding particular aspects of the new governance regime that the EU has
slowly been setting up for the Euro. Common to them, as mentioned, is the democratic question. What
democratic challenges does this crisis raises and how to address them?
The democratic question is crucial to understand the present crisis and decide how best to address
it. Many of the financial problems at the origin of the crisis can be represented as democratic
problems, either as failures of the political processes or as market failures that the democratic
processes of the states are not able to correct. The Euro might help to address some of those
democratic failures. But it may also aggravate them by increasing interdependence and the spill over
effects of the fiscal policies of some states in other states. The key issue then is how to develop a
model of governance for the Euro area that can maximize its potential in correcting the democratic
failures of states and markets instead of aggravating them. The contributions in this paper assume that
this is possible and try to put forward proposals on how to do it. The EU should not be constructed as a
challenge to national democracy but, instead, as offering democracy and social justice where States
can no longer offer them. But there are also different visions on the extent to which that is possible and
how to achieve it.
Other contributions focus, instead, in what the Union has already done to change the governance
mechanisms of the Euro. The emerging governance of the Euro raises, itself, a variety of democratic
challenges that need to be addressed: from the accountability of some of its new “institutions” (such as
the ESM) to the coordination between what is to be done within the EU legal system and what is being
done outside it.
A final theme is the relationship between national democracy and EU democracy. Here, the views
are not the same. Some believe that the democratic legitimacy of the new powers gained (or to be
gained) by the EU passes by an even stronger involvement of national democracies (in particular in the
form of national parliaments participation) in the EU decision-making process. Others, as myself,
believe that the Union cannot continue to fundamentally depend on a permanent “negotiation” with
national politics and needs to develop its own political space, even if this ought not to replace national
politics but to complement them.
Ultimately, the proposals put forward in this paper aim at contributing to a constructive debate not
only on how to save the Euro but also on its merits and demerits. This is a necessary discussion to be
had. If further integration will be necessary to solve the current crisis this ought not to be presented to
citizens simply as a logical necessity on which they no longer have a choice. It is necessary to make a
case for the Euro and not only to make a case on how to save it. These essays contribute to that.
*
Professor and Director of the Gloval Governance Programme, RSCAS, EUI.
3
The Euro Crisis and the Democratic Governance of the Euro:
Legal and Political Issues of a Fiscal Crisis
Miguel Poiares Maduro, Bruno De Witte and Mattias Kumm*
The European financial crisis is not going to be fixed by Council agreements or technical fixes.
Instead it also raises profound political questions that affect the future of the European Union as a
whole. A first part of the Memo will briefly describe how the fiscal crisis raises fundamental political
questions relating to the democratic legitimacy of practices of national as well as European institutions
(I). A second part will analyze different ways in which the democratic legitimacy of European
institutions can be enhanced within the parameters of the existing institutional framework. In practice,
we suggest a constitutional changes but without Treaty amendments (II). A third part discusses in
greater detail a number of specific suggestions that concern the implementation of the ESM, the Fiscal
pact and the Six-Pack (III).
I. The Euro Governance and the Democratic Question
We need to discuss not only the governance of the Euro but also the democratic quality of that
governance. The latter must be at the centre stage of the reforms that are being put in place. First,
because many of the problems at the origin of the crisis correspond to democratic failures of the states
that the EU needs to help correct. Second, because whatever institutional answers are being proposed
at the European level, they will have to be democratically legitimate themselves. In this respect, a
fundamental challenge for the future reform will be to overturn the presumption, shared by many that
these issues can only be democratically addressed at the national level or, if addressed at the European
level, would necessarily have to reproduce the democratic model of the State. Ideally, the governance
of the Euro might be used to finally develop a new approach to the democratic challenges of European
integration.
The fiscal crisis has highlighted a political gap: the scope and level of politics has not followed the
scope and level of political problems in Europe. This is our most important democratic deficit. First,
we have not internalized the degree and democratic consequences of the interdependence generated by
integration. The financial troubles of a few States - the unintended consequences of seizing
opportunities provided by the integrated market - became a problem for all. An immigration influx
into Italy spills over into all other States. A wrong assessment by German authorities on the health risk
of a particular vegetable leads to high losses for farmers all over the Europe. In all these areas, national
policies have important external effects in other Member States. These are European issues but they
are in good part still governed at national level and, when governed at EU level, still largely dependent
on national politics.
At the same time, the EU is both a source of wealth creation, through market integration, and of
redistributive effects, by competition in that market and the increased majoritarian character of its
decisions. This requires for democracy to be extended as far as the problems and the interests they
affect do. But it also requires some democratic notion of distributive fairness to legitimate the impact
of what is done and decided in common.
European integration generates therefore a deep interdependence between national policies that has
never translated itself into European politics. But if national politics is not able to incorporate the
existing European interdependence on certain issues then it cannot, itself, provide appropriate and
legitimate democratic solutions to those issues.
*
(with the contributions of Roland Bieber, Carlos Closa Montero, Filippo Donati, Sergio Fabbrini, Harold James,
Christian Joerges and Giulio Napolitano)
Miguel Poiares Maduro, Bruno De Witte and Mattias Kumm
4
A credible solution to the current crisis depends on addressing this democratic deficit but also
provides an opportunity to do so. The crisis started because of a democratic problem: the fiscal
policies adopted by some states had an impact on all other European states and there was no effective
mechanism of governance, at the Union level, to hold them accountable for that. Solving that
democratic problem requires developing instruments of governance to prevent those externalities and,
if necessary, impose particular economic and financial policies on some States. We have taken some
necessary steps in that direction. But this, in turn, also needs to be democratically legitimated. Once
the EU binds, for example, the financial assistance being given to some states to the adoption of
certain policies, a claim emerges for it to be accountable also for the outcome of those policies.
II. A Constitutional Change Without Treaty Amendments
So how can the democratic legitimacy of European institutions be enhanced within the parameters of
the existing institutional framework?
The first concerns the politics of European elections. It is important to make the elections for the
European Parliament genuine European elections for the choice of the President of the European
executive. For this, it would be sufficient for the different European political groups to present
competing candidates before the next election. If the election campaign would focus on this, the
European Council would, in practice, have to appoint the winning candidate. Of course there are
obvious risks with this approach. The politicization of the Commission is bound to affect its perceived
neutrality and the authority it derives from being conceived as a semi-technocratic body. Some in the
group were understandably deeply concerned with this risk. But we believe that such a shift is
important for a wide range of reasons. First, it is already the case that the position of President of the
Council is limiting the influence of the Commission as an honest broker between Member States,
while simultaneously the Commission has to engage with an increasingly assertive European
Parliament. In this context, the Commission needs to acquire new political capital in order to preserve
(and perhaps strengthen) its position in the EU institutional system. But more importantly, and
somehow paradoxically, under the Fiscal Treaty and other fiscal crisis related legislation like the sixpack
the Commission gains considerable powers to intervene in the budgetary processes of Member
States, once they have shown themselves unable to meet the strict budgetary requirements imposed on
them. For those powers and the discretion that comes with these powers to be exercised effectively
and legitimately, the Commission must be able to rely on the kind of legitimacy that comes with direct
link to the outcome of European elections. Budgetary questions were at the heart of the historical
parliamentary struggles for control over a democratically unaccountable executive – they are the inner
sanctum of parliamentary prerogatives - and it is unlikely that national Parliaments will give much
weight to a Commission that is seen as the instrument of the collective executives of Member States.
The effects of such a shift would be profound: In a democratic Europe we should not be surprised
to see that European citizens disagree about the kind of policy measures that are the best response to
the financial crisis and other political issues that the EU rightly addresses through legislation. It is a
mistake to insist, as national politicians invariably do, when they defend the measures taken at late
night Council meetings, that there is no alternative to the decision they have made. For many citizens
that is the reason why they turn their back on Europe: They do not like the policy choices generated on
the European level, and there is no alternative personnel and menu of policy options present to engage
with on the European level, so they associate Europe with those policy choices they deem undesirable.
If faced with a genuine choice in personnel, programmes and policies, disgruntled citizens would be
able to articulate their dissent not by turning away from Europe and seeking refuge in populist recipes.
They might instead, as European citizens, vote or mobilize for an alternative Europe, personified in a
different President, committed to different policies. It is revealing, the extent to which European
citizens from different Member States increasingly feel engaged in national elections in other Member
States, particularly those understood as playing a key role in EU policies. This signals the extent to
which European citizens perceive the EU as shaping their lives and need to believe that they have
The Euro Crisis and the Democratic Governance of the Euro: Legal and Political Issues of a Fiscal Crisis
5
options as to what determines those lives. But it also highlights the increase risk that they will see
those lives being determined by national politics in which they have no voice. The only viable
alternative is to offer such politics at European level. Tying the outcome of the European elections to
the determination who will be the next Commission President will lead not only to a surge of interest
in European parliamentary elections and allow the Commission to more effectively fulfil the functions
assigned to it, it is also likely to be the best antidote to the spread of nationalist populism and
Euroscepticism.
On a second level the European Union can increase its democratic legitimacy by more closely
aligning its policy priorities to the problems that, given the ineffectiveness of Member State solutions,
it should address. The European Union is widely believed to be an institution that enables Member
States collectively to reap the benefits of greater market integration, both on the European and global
level, while at the same time ensuring political control over markets to ensure through appropriate
regulation that mobile market actors can´t exploit the freedoms offered by transnational markets to
undermine public goods.
The financial crisis is a case in point. It illustrates clearly that financial institutions have not been
regulated sufficiently to ensure that the highly dynamic global financial markets effectively serve as
the infrastructure of an efficient market economy. To the extent the crisis in Europe is described as a
sovereign debt crisis, this is, in large part, of a result of states bailing out financial institutions, fearing
the contagion effects of financial institutions failure. To a good extent the sovereign debt crisis is just a
knock-on crisis to the 2008 financial crisis, as the example of Ireland and Spain illustrate. Meanwhile
financial institutions, often invoke global competition and exit options in globalized financial markets
to oppose regulations that burden or restrict financial transactions, . This is the type of blackmail that
challenges the European Union to prove that it can actually do what it has promised: To make use of
Europe´s considerable regulatory capacities and market clout to tame the forces empowered by
otherwise unfettered global markets. There is no reason why Europe should not follow through on this:
The enhanced cooperation procedure can be used to overcome the lack of consensus among Member
States and an aggressive interpretation of the jurisdiction of the EU can ensure that exit options are
effectively closed or minimalized. The EU is becoming a victim of the crisis when it should be
perceived as the solution for the crisis. We understand well the difficulties of articulating and making
concrete such message. But it is precisely because of these difficulties that it is even more important to
structure a series of initiatives around this narrative. A narrative that presents the Union as protecting
the European model of social markets both by being a reformer of the States but also by protecting and
empowering them at the global level.
Our point here is not theoretical or communicational. It requires restructuring key European
policies in light of this European narrative and the need for European politics. This narrative should be
mainstreamed into different policy proposals. Let us exemplify with a couple of proposals that could
be pushed for in the context of the upcoming debate on the financial perspectives post-2014.
Let us start by noting that this debate should be used as an opportunity to democratize EU politics
along another dimension: The Union should be made accountable not only for what it spends but also
for the wealth it generates. It must distribute ‘its’ money and not that of the States. The democratic
argument requires a clear connection of the Union’s financial resources with the wealth it generates
and with the economic activities of a state that have important externalities for other states. The recent
Commission proposals for EU own resources are a step in the right direction. But it is important to
clearly highlight the link between own resources and either economic activity that is made possible by
the EU or economic activities with substantial cross-border externalities. Both VAT and a financial
transactions tax are susceptible of being presented as such. Of the two, the financial transaction tax
may be the one more susceptible of success. In this respect, though this has not been discussed
between all of us, some believe it is possible to introduce a EU financial transactions tax through
enhanced cooperation.
Miguel Poiares Maduro, Bruno De Witte and Mattias Kumm
6
There is nothing in the enhanced cooperation provisions themselves that prevents a group of states
to adopt a common tax to fund their contributions to the EU budget. This is how such a proposal could
be conceived to be compatible with the existing EU Treaties. Naturally, nothing in the enhanced
cooperation regime may affect the rights and obligations of non-participating Member States (Article
327 TFEU). Furthermore, such a new tax would have to respect the Council Decision on own
resources that can only be amended by unanimity (Article 311). What needs to be done then is for
participating states to adopt a new own resource under enhanced cooperation that will be, at the same
time, compatible with the Decision on own resources and the rights and obligations of nonparticipating
states under the Treaty and that Decision. There is a way to do this: The new common tax
could be used to pay for the GNI contribution of participating Member States. So long as there would
be a clause stating that those States would commit themselves to transfer, if necessary, any part of
their GNI contribution not covered by the new European tax, this tax would not affect the rights and
obligations of other Member States under the Treaties and the Decision on own resources. In effect, it
would basically be a new way for some member States to comply with their obligations within the
existing own resources Decision. One may question why not leave that to the Member States . But the
advantages and reasons to move to such a system are several. First, it would be a first step towards
genuine EU own resources (if there can be no taxation without representation it is arguable that there
also cannot be any representation without taxation since any democratic system requires some
principle of distributive justice). Second, it would be a first link between the Union’s resources and its
role as a regional regulator of cross-border externalities, in particular, in this case, those generated by
mobile financial institutions. Third, it would relieve the national budgets of participating States (from
their GNI contributions) and, in this way, it would also put pressure on non-participating Member
States to adhere to the system (it would, in fact, become difficult for these States to justify to their
citizens why they would still have to transfer funds from their national budgets when other States are
relying on a EU tax). Fourth, it will also be a first step in detaching the EU budget from national
contributions, a step that we consider fundamental to later be able to have a more constructive
discussion on the EU budget itself.
The second proposal is to use such opportunity to restructure and represent the nature of EU
policies. One possible lesson of the current crisis is the failure of the foundations supporting the
political and social contract underpinning the European Union. Poorer countries would open their
markets and in return would get funds and cheaper credits in the expectation that such money would
reform their economies. It does not seem to have worked this way and the main reason may have to be
found in the lack of capacity of EU policies to provide incentives for reform. This is another of the
structural unbalances affecting the nature of the EU relationship with the Member States. On the one
hand it has a growing number of regulatory and “disciplinary” powers upon the States. On other hand,
its purse power is not only limited but moreover, apparently, largely ineffective in reforming the
states. The Union financial arm, no matter how limited, should be much better used for reform
purposes in the States. More than being concerned with goals, EU funds should be concerned with
institutional change at the level of the States. On example, to make this more concrete: In the area of
education and research, instead of defining themes of research for which the Union will provide funds
to national institutions, the EU should fund institutional changes in those higher education and
research centres. In other words, it should make the award of those funds conditional on certain
institutional criteria to be fulfilled, determined in light of what can promote systemic change at
national level (such as, in this case, mobility, internationalisation of faculty and student bodies etc.
etc.).
In this respect, one may also envision to clearly differentiate the funds awarding conditions and
priorities between Member States so as to link them to the structural reforms needed in each Member
State (again, funding of projects should be largely complemented or even replaced by funding of
institutional changes, including in national administrations). One may even imagine that a sort of
structural reform contract could be entered into with some states for the use of certain funds. This
would be particularly important in the case of states that are currently subject to adjustment programs
The Euro Crisis and the Democratic Governance of the Euro: Legal and Political Issues of a Fiscal Crisis
7
or others to be subject to sanctions in the future. May be a contract For the mechanisms of Euro
governance to be democratically legitimate it is important for the intervention of EU institutions to
take not only the form of sanctions but also the form of incentives.
III. Improving the Democratic Quality of Economic Governance
We will now, in the reminder of this paper, move to a more specific consideration of the way in which
macro-economic governance currently works in the European Union, and the ways in which this poses
the question of democratic accountability. In our search for ‘more democracy’, we consider the
various dimensions of the democratic ideal: strengthening parliamentary control of governments and
independent agencies; improving transparency of decision-making; creating channels of accountability
and financial and judicial control; promoting the direct involvement of citizens and responsiveness to
civil society. We emphasize that most of the improvements suggested below (like those already
suggested above) do not require a formal revision of the European Treaties, which, in the current
political circumstances, would be a very hazardous enterprise.
A Fragmented Institutional Landscape of Economic Governance
As a result of the many political initiatives and legal reforms that have been adopted in the past years,
both inside and outside the institutional framework of the European Union, we are faced with a very
fragmented institutional landscape where the macro-economic governance of Europe is concerned. A
reflection on the improvement of the democratic quality of decision-making must, therefore, take
account of the great diversity of institutional sites within which that reflection must take place, both at
the national level and at the European level.
At the national level, those questions will arise during the parliamentary debates on the approval of
the ‘stability amendment’ of the TFEU (approved by all 27 governments in 2011), the ratification of
the European Stability Mechanism treaty (signed by 17 states) and of the Fiscal Compact (signed by
25 states). They will also arise during the debates on how to implement in national (possibly
constitutional) law the ‘golden rule’ and other requirements imposed by the Fiscal Compact and the
ESM treaty. Finally, macro-economic and budgetary policies and procedures of the EU member states
must be adapted to the new requirements of the EU legislation (‘six-pack’) adopted in 2011.
At the European level, there are many different institutional sites within which democratic
challenges can and must be addressed:
 The application by the EU institutions of the EU’s revised legislative framework on excessive
deficits and macro-economic imbalances, as resulting from the adoption of the ‘six-pack’ in
2011.
 The functioning of the financial services supervision system introduced in 2010 (although this is
not macro-economic governance strictly speaking, it is of course closely related to it)
 The common governance of the extra-EU stability mechanisms (EFSF today; ESM in the future,
once it enters into force)
 The common governance under the Fiscal Compact, once it enters into force
 The co-decision procedure in which the additional economic governance proposals of the
Commission (the ‘second package’ of November 2011) are being discussed
 The follow-up of the Euro Plus Pact by the European Council
 The debate about launching new EU policies and measures (Eurobonds, financial transaction tax,
new European social model, reformed cohesion policy, etc.)
This is not a complete picture of all the macro-economic governance sites, and it leaves aside the ‘no
go areas’ for democratic control constituted by the activities of the ECB and the central banks of the
Miguel Poiares Maduro, Bruno De Witte and Mattias Kumm
8
non-euro countries, as well as the international sites of monetary and economic governance such as the
IMF.
Identification of the various elements of democracy and of the different institutional sites allows for
the development of targeted reforms, which aim at strengthening the democratic character of each of
those institutional sites in accordance with its own characteristics. In addition to the overall
“constitutional” reforms discussed above, we also targeted improvements that take account of the
nature of the democracy deficit of each site, and the feasibility of the proposed remedies. For example:
whereas parliamentary control is present in the discussion of the Commission’s ‘second package’,
because of the fact that it must be approved through the EU’s ordinary legislative procedure, the
governance of the EFSF and future ESM is mainly in the hands of the participating governments and
(national) parliaments will have difficulties in exercising their control powers.
At the same time, the institutional landscape is characterised by a large degree of overlap (for
example: between the obligations under the Fiscal Compact and the obligations under existing EU
legislation), and a great degree of confusion on ‘who does what and within which institutional
framework’. Therefore, reconstituting democratic governance should not only aim at proposing
targeted responses for each of the existing institutional sites but should also try to counteract this
fragmentation and help in the emergence of a comprehensive democratic discussion on the future of
macro-economic governance, both at the national and at the European level.
One practical way in which the European Commission could stimulate this is by creating an
independent Euro Governance Forum which could:
 Combat confusion and improve transparency by collecting and presenting legal and economic
data and political opinions in a rigorous and objective manner; at present, there is no single
(web) site that provides a reliable gate to the whole Euro governance landscape.
 Promote deliberation by organising regular debates in which the main governance actors would
confront their views with members of European national parliaments and representatives of civil
society. Those debates could deal with the overall direction of euro governance, but also with
particular questions within that overall debate, such as: the introduction of Eurobonds, the
recourse to enhanced cooperation for the creation of a financial transaction tax, the performance
of the financial services supervisors, etc.
 A more ambitious version of the latter would be the organisation, in each national parliament, of
a debate on the state of the State in the Union, in parallel with the EP debate on the state of the
Union. This debate should count with the presence of at least a European Commissioner
presenting an overall view of the different reports, recommendations and assessments that the
Unions is now supposed to produce for each State. It would be an opportunity for the
Commission to be responsive to national politics in the exercise of that role but also for that role
to shape national political debates.
Improving the Operation of the Reformed Economic Surveillance Regime
We are currently in the first year of effective application of the reformed economic surveillance
regime that was introduced by five EU Regulations and one EU Directive commonly known as the
Six-Pack. The reforms were primarily inspired by the wish to make the existing surveillance
mechanism – as introduced, in its basic features, by the Maastricht Treaty – more effective in
preventing and addressing macro-economic imbalances that may destabilize the euro area and the
Union as a whole. As those reforms were made under the ‘Community method’, with a crucial input
from both the Commission and the European Parliament in addition to that of the national
governments represented in the Council, the regime which was put in place also seeks to respect the
democratic achievements of the European Union and to make economic governance a policy area
which is ‘as democratic’ as other areas of EU policy, whilst acknowledging, of course, the particular
The Euro Crisis and the Democratic Governance of the Euro: Legal and Political Issues of a Fiscal Crisis
9
and independent role played by the ECB in the monetary domain. Nevertheless, we think that further
improvements are needed to enhance the democratic quality of this governance mechanism, if
anything because this will improve the acceptance, by national politics and public opinion, of the
‘bitter pills’ that the new regime will ask the member states to swallow from time to time.
Art. 121 TFEU sets forth a procedure for the coordination of the economic policies of the Member
States, which is based on a Council recommendation, setting out broad guidelines for the economic
policies of the Member States and of the Union, on the basis of the conclusions of the European
Council. No role in the broad guidelines decision-making process is provided for the European
Parliament, which is merely informed of the Council recommendation adopting the broad guidelines.
The Council, on the basis of reports submitted by the Commission, carries out surveillance on the
consistency of the implementation of economic policies of Member States with the broad guidelines.
In case of inadequate performance, recommendations may be addressed to the Member State
concerned by the Council, on the basis of a recommendation by the Commission. The European
Parliament is simply informed of the results of multilateral surveillance. The Regulation n. 1175/2011
of the European Parliament and of the Council has now introduced an ‘economic dialogue’, whereby
the competent committee of the European Parliament may invite the President of the Council, the
Commission and, where appropriate, the President of the European Council or the President of the
Euro Summit to appear before the committee to discuss measures adopted for the coordination of the
economic policies of the member States. The economic dialogue, anyhow, provides no duty of the
Commission and of the Council to report to the European Parliament. In addition, Parliament has not
been granted any effective involvement in the adoption of the measures within the process of
multilateral surveillance under Article 121 TFEU. In addition, the national parliaments do not
participate in that dialogue despite the fact that they are the ones that will eventually decide how to
comply with the European recommendations. Some suggestions put forward in our group include:
 Integrate the specialized committees of the national parliaments in the economic dialogue
established by Regulation n. 1175/2011.
 Establish a public debate in the Council before the adoption of the “broad guidelines”
(Article 121, 3rd
subparagraph). This can be introduced by an amendment to Article 8 of the
Council’s Rules of Procedure.
 Before the discussion in the European Council, the “conclusion” (Article 121 (2), subparagraph
2 TFEU), could be transmitted to the European Parliament for debate by analogy with voluntary
consultation.
 The draft « conclusion » on the broad guidelines should be transmitted to national parliaments
by analogy to the procedure laid down in Article 2, Protocol n° 1 TEU.
 The “broad guidelines” should be formally presented to the national parliaments (preferably by a
Member of the Commission). This could, in fact, be part of the debate of the state of the State in
the Union mentioned above.
The Entrenchment of National Budget Discipline by the Fiscal Compact: How to Preserve
Democratic Decision-Making?
The short period in which the Treaty on Stability, Coordination and Governance in the Economic and
Monetary Union (commonly nicknamed as ‘Fiscal Compact’) was negotiated and concluded left little
time for the participation of national and European Parliaments, a circumstance that may render its
effective implementation more difficult.
This Treaty intends to reinforce the financial stability of the Euro Area through an enhanced
coordination of the Member States’ budget policies, the provision of benchmarks for structural deficit
and debt-to-GDP ratio, as well as an enforcement mechanism for non-compliance to such benchmarks.
Miguel Poiares Maduro, Bruno De Witte and Mattias Kumm
10
There was, arguably, no strict need to adopt a new treaty to implement what is contained in its final
text. Certainly, most of what it contains in terms of economic governance at the European level could
have been adopted through enhanced cooperation within the EU or by means of a modification of
Protocol No. 12 on the excessive deficit procedure. The treaty confirms the creation of the Euro
Summit and also provides for a new body, the Meeting of the Heads of State or Government of the
Contracting Parties, whose membership will reflect the number of states that will eventually ratify the
Fiscal Compact, but whose role is limited to loosely monitor the implementation of the Fiscal
Compact. Those bodies will operate in an informal manner. No new hard governance mechanisms are
introduced at the European level, and therefore there also arises no additional need to improve
democratic accountability at the European level beyond what is written in Article 13, namely the
creation of a conference of members of the EP and of the national parliaments of the Fiscal Compact
countries to discuss together the issues arising from the implementation of the treaty. However, to the
extent that the coordination mechanism of the Fiscal compact builds upon the existing EU economic
coordination regime, the misgivings about the latter’s democratic quality – noted in the previous
section - indirectly apply here as well.
The European Stability Mechanism: A New Public Authority Lacking Constitutional Quality
The establishment of the European Stability Mechanism, by means of a treaty signed on 1 February
2012 between the 17 euro area states, represents an important step in the European integration process.
Its permanent nature transforms the Union into a community of risks, not only of benefits. As a
collective insurance device against future damages that could affect a country or a people, it is a
properly constitutional mechanism.
The legal status and some fundamental rules of the ESM, unfortunately, seem unable to meet the
challenges raised by such an ambitious program. Transparency and accountability needs are not
satisfied. And the day by day effectiveness of the Mechanism could be seriously undermined by
failings in its institutional design. Indeed, this Treaty – in contrast with the Fiscal Compact – does
create its own institutional regime in the margin of the ‘mainstream’ institutional framework of the
European Union, and the question of its democratic quality is therefore of prime importance.
The Treaty defines the ESM as an ‘international financial institution’. The term ‘international’ is
correct in so far as the Mechanism is established by means of a separate international agreement; it is
not an agency of the European Union, but a separate organization under public international law, even
though its operation is, of course, narrowly linked to the EU’s economic governance regime. The term
‘financial’ might be misleading in conveying the impression that this is a commercial entity. In reality,
however, its subscribers are member states of the Union. The governance is in the hands of ministries
of finances. Its purpose is to give aid to member states, not to earn money or raise revenues. The
definition as an international financial institution may therefore hide the fact that the Mechanism will
be a European public institution which should, because of its nature, be subject to norms of
transparency and accountability that are similar to those applying to the functioning of the EU
institutions.
The procedures to grant financial assistance, under the ESM Treaty, are ill conceived. On the one
hand, they are complicated and slow. On the other hand, they depend on the request for help by an
ESM member state. But if the state concerned does not make the request – for internal political
reasons – the financial stability of all the Eurozone could be threatened. This is why it would be
important to introduce a third-party trigger of ESM support: the power to start the procedure should be
conferred also to a qualified number of other member states, or perhaps to the European Systemic Risk
Board, even though this is an EU agency and not a specific ESM body.
In the decision-making system of the ESM, too much discretion is given to the Board of Governors
(composed of the ministers of finance of the ESM member states). The Board has been vested with the
power to grant support to a member state. In order to foster the efficiency of the financial assistance, it
The Euro Crisis and the Democratic Governance of the Euro: Legal and Political Issues of a Fiscal Crisis
11
can also allow the states to allot the subsidy to the re-capitalisation of a financial institution. Finally, it
can decide to purchase bonds of a member state both on the primary and the secondary market. While
adopting such measures, the Board of Governors seems to enjoy a broad discretion, as suggested by
the fact that it ‘may decide’ to adopt the measures mentioned above. Indeed, the Treaty does not set
any general goal or set of objectives that would constrain the exercise of those powers. Although the
appraisal by the Commission shall be taken into account, it is not binding on the Board and the Board
does not have a duty to state its reasons. It seems that such a duty to give reasons (which is imposed on
all EU institutions under Article 296 TFEU) should be introduced, especially for all those cases in
which the Board sets aside the advice of a European institution.
The dispute resolution mechanism of the ESM violates the principle of nemo iudex in causa
propria. Indeed, the Treaty entrusts the Board of Governors itself with the settlement of disputes
arising on the interpretation and application of the ESM Treaty between the ESM and one of its
member states. The creation of an independent Board of Appeal – like those foreseen for some
European Union agencies – would be more appropriate.
Finally, the ESM Treaty does not provide any of the accountability tools that are usually made
available in the structure of European Union agencies. There are no consultation procedures with
either general stakeholders or specialized parties, such as institutional investors and creditors. There
are no transparency duties, nor are there rules about access to information. The Board of Governors
does not have to report to the European Parliament, and there are no procedures to assess the ESM’s
operation. Only the financial administration of ESM is subject to a specific set of rules. Every four
months, the member states shall receive a report on financial administration. The Treaty also provides
for two levels of audit, internal and external. In this view, the Board of Governors also appoints a
Board of Auditors, which, nonetheless, shall be independent. The only document released by the
Board of Auditors is its annual report. The latter is submitted to the Board of Governors, which makes
it accessible to the national parliaments and supreme audit institutions of the member states, as well as
to the European Court of Auditors. Oddly enough, the report does not have to be made available to the
European Parliament.
Finally, we must realize that the ministers of finance who compose the Board of Governors remain,
each of them, accountable to their national parliaments. In some cases, they will need the prior
approval of their parliaments for their decisions. The German Constitutional Court, in its judgment of
7 September 2011, held that the budgetary responsibility of the Bundestag is an essential constitutional
principle. The Bundestag must ‘retain control of fundamental budgetary decisions even in a system of
intergovernmental administration’. The same approach may be adopted by the constitutional courts of
other ESM countries, or their national parliaments may simply insist on a prior consent to funding
decisions taken by their country’s representative in the Board of Governors.
We conclude that, in order to increase the legitimacy and the accountability of the ESM, it is highly
recommendable to set up a regular consultation process, to increase transparency, to allow access to
data and records, to introduce reporting obligations towards the European Parliament, and to agree on
a common approach for all national parliaments. Those reforms could provisionally be introduced by
means of a memorandum of understanding between the ESM member states, but should subsequently
be introduced in the Treaty by means of its amendment. It must be noted, in this respect, that the ESM
Treaty has no special revision clause, so that its future amendment will be subject to the general rules
of public international law, that is, amendments will have to be approved by means of a new treaty
between all the ESM member states.1
1
In principle, all 17 euro states should become parties to the ESM Treaty, but Article 48 provides that it will already enter
into force upon ratification by signatory states representing at least 90% of the total subscriptions; thus, the nonratification
by (a number of) smaller countries would not prevent the start of the ESM. The number of ESM member
states can also fluctuate upwards by accession of EU Member States other than the current Euro area countries (Article
44).
13
Democratic Governance of the Euro:
Shortcomings and proposals for reform (rev/16.4. 2012)
Roland Bieber*
I.
This paper discusses some shortcomings in the democratic foundation of economic governance within
the European Union and among its Member states and presents some proposals for reform.
The paper comprises five sections:
A. Terminology and Criteria
B. The rules on the ordinary functioning of EMU – shortcomings and proposals with regard
to democratic principles
C. The rules on governance in EMU in extra – ordinary situations – shortcomings and proposals
with regard to democratic principles
D. The Treaty on Stability, Coordination and Governance in the EU (TSCG)
E. The Treaty establishing the European Stability Mechanism (ESM)
II.
A. Terminology and Criteria
- “Economic Governance” refers to measures, adopted by the European Union and/or its Member
States, which aim at the establishment and the functioning of the economic and monetary union
provided for by Article 3 (4) TEU. Acts adopted on the basis of the TSCG and ESM are considered as
part of economic governance.
“Governance” comprises two sets of measures, those, which concern the ordinary functioning of
EMU and those which relate to extra – ordinary situations (e.g. non – compliance).
-“Democratic Principles” are understood here to include transparency, participation (of individuals
and groups), accountability of actors, efficacy of institutions, procedures and instruments, the Rule of
Law and solidarity.
B. The rules on the ordinary functioning of EMU - shortcomings and proposals for reform with regard
to democratic principles
1. Transparency
a) Shortcomings
 The ambiguity of Articles 5 and 121 TFEU in general and of Article 121 (1) TFEU in
particular (who, Member States or the Union and which of their institutions, are responsible for
economic policy decisions?);
*
Professor Emeritus, former Jean Monnet chair of European Law, former Vice Dean, University of Lausanne/Switzerland.
Roland Bieber
14
 The ambiguity of the legal implications of the recommendations, adopted pursuant to
Article 121 (2) TFEU (by definition not binding, but sanctioned, if not followed);
 The “recommendations” for the broad guidelines to be submitted by the Commission to the
Council do not fall within the scope of Articles 1 or 2 of Protocol n° 1 (national parliaments) and
are therefore not formally transmitted to the national parliaments;
 The lack of transparency of political choices made in the implementation of the ESM (Articles
13, 14).
b) Proposals
 Establish a public debate in the Council before the adoption of the “broad guidelines”
(Article 121, 3rd
subparagraph). This can be introduced by an amendment to Article 8 of the
Council’s Rules of Procedure.
 Before the discussion in the European Council, the “conclusion” (Article 121 (2), subparagraph
2 TFEU), could be transmitted to the European Parliament for debate by analogy with
voluntary consultation.
 The “broad guidelines” should be drafted in greater detail, setting out more specifically the
measures, which each Member State is supposed to adopt. In this way the gap could be closed
between the “broad” guidelines and the extremely detailed “measures”, adopted with regard to
Member States with an excessive deficit (Article 126 (9) TFEU, cf. Decision n° 2010/320, OJ
2010, L 145, p. 6, as amended by Decision 2010/486, OJ 2010, L 241, p.1 = Greece).
 The draft « conclusion » on the broad guidelines should be transmitted to national parliaments
by analogy to the procedure laid down in Article 2, Protocol n° 1 TEU.
 The “broad guidelines” should be formally presented to the national parliaments (preferably
by a Member of the Commission).
2. Participation
a) Shortcomings
 The recommendations setting out the broad guidelines are adopted outside of the ordinary
legislative procedure without any participation of the European Parliament and are not based on
a proposal from the Commission within the legal meaning of Article 293 TFEU.
 The EP is informed by the Commission of its recommendation, which leads to the adoption of
the draft guidelines. Although the EP may discuss the recommendation in plenary (cf. Article
114 EP Rules of Procedure), no follow – up is envisaged for the further procedure. Only an
“economic dialogue” has recently been established (Article 2 a),b) of Regulation 1466/97 (as
amended by Regulation 1175/2011). The dialogue involves the competent committee of the EP,
the President of the Council and of the Commission but does not lead to any right of the EP to
effective participation in the decision - making.
 Equally, assistance, which is granted by the Union to a Member State pursuant Article 122
TFEU, does not require any consultation or co - decision by the European Parliament. It is
decided by the Council alone. Parliament is informed ex - post facto only.
 National Parliaments are not involved either.
 No participation of the European Parliament in decisions taken under the TSCG is provided.
Article 13 TSCG provides only for a right of the EP and of national Parliaments “to discuss”
policies and “other issues”.
Democratic Governance of the Euro: Shortcomings and proposals for reform (rev/16.4. 2012)
15
b) Proposals
 Since the “broad guidelines” touch upon fundamental economic and social choices, a serious
public debate and decisions by elected institutions are of fundamental importance for their
legitimacy.
 Hence the European Parliament should be given a right to participate in the adoption of the
broad guidelines. Various improvements can be envisaged to this end:
 as has been mentioned above (1.b), voluntary consultation of the EP (with the possibility of a
debate and a vote in Plenary) could be introduced without amending the Treaties.
 A more consequential solution for this democratic lacuna would be a Treaty amendment in
order to replace the decision-making procedures provided for in Articles 121, 122 (and 126(9),
(11), cf. infra C. 8) TFEU by the ordinary legislative procedure, adding in particular a right of
co-decision on the part of the European Parliament.
 The EP should be consulted by the Commission on its proposal of « common principles » for
the correction mechanism foreseen in Article 3 (2) TSCG. The existing inter – institutional
agreement (EP/Commission) could be amended to this end.
3. Accountability
a) Shortcomings
 The Council is not accountable to the EP for its decisions under Article 121 (2) TFEU. Only an
ex – post information of the competent EP – committee has been introduced (cf. supra, 2 a)).
Multilateral surveillance results (Article 121 (3) TFEU) are, however, reported to the EP (Article
121 (5).
 No reporting obligations to the EP are foreseen on the activity of the Commission in the
operation of the ESM (Article 13 ESM).
b) Proposal
 Establish coherence between Paragraphs 5 and 2 of Article 121 TFEU by “Upgrading” the
“economic dialogue” (cf. supra 2 a)) to a formal duty of reporting.
 Provide for reporting of the Commission to the competent EP – committee on its activities
provided for in Article 13 ESM.
4. Efficacy of institutions, procedures and instruments
a) Shortcomings
 The most important single shortcoming is the absence of “positive” measures, which establish
minimum rules for economic policy in the form of binding directives for the economic policies
of the Member States and which have been adopted according to a democratic decision - making
procedure.
 Until 2011 the recommendations adopted pursuant Article 121 (2) TFEU had been drafted in
very general terms, which did not stimulate a dynamic in the Member States for their
implementation.
 Although Regulations 223/2009 and 479/2009 have established a framework for common
statistical data and for the transmission of budgetary data, the Commission (Eurostat) has still no
Roland Bieber
16
systematic direct access to all accounting and budgetary information of public budgets in the
Member States.
 Certain economic data, which normally do not figure in national budgets (e.g. future payments
for pensions, long – term contracts with the private sector, public undertakings) are not available
to Eurostat.
b) Proposals
 The focus of Union action should be brought forward so as to obviate ex post facto intervention
in the form of sanctions. One way of achieving this would be to enable the “broad guidelines”
referred to in Article 121(2) TFEU, instead of being adopted in the form of non- binding
recommendations, to be adopted as binding directives. Member States, while remaining free to
select the means to be used, would then nonetheless be committed to the achievement of the
stated aims. It would, in addition, be possible to lay down time-limits.
 It would also serve the same aim of constructive policy-formulation if, following the example of
EU social policy rules (Article 153(2)(b) TFEU), a number of areas of economic policy were
designated in which the EU is empowered to lay down mandatory minimum requirements by
means of directives.
5. Rule of Law
a) Shortcomings
 The Rule of Law principle, on which the Union is founded, would require a consistent use of
legally binding instruments for the achievement of the Union’s objectives, including EMU. The
uncoordinated co – existence of non – binding recommendations and sanctions for the
achievement of a single policy (Article 121 and 126 TFEU) generates confusion among national
actors and citizens about the nature and size of obligations resulting from the EU Treaty. The
various regulations, adopted in November 2011 (“six – pack”) establish a closer legal link
between the commitments resulting from the EU – Treaties and internal policies. The regulations
are, however, still too strongly influenced by a “carrot and stick” approach (cf. infra B).
 Also the overlap of various instruments for economic governance establishes a threat to the rule
of law.
b) Proposal
 It is suggested to bring economic policy entirely within the realm of “shared competences”
(Article 4 TFEU). This would allow a more consistent operation of the powers of both the Union
and the Member States. It would furthermore allow to reduce the sharp contrast between “soft
law” and sanctions in this area.
 Equally a more consistent system of legal instruments, which is applicable within the Union for
the economic governance, should be aimed for. To this end, a framework agreement should be
concluded, which sets out the relationship between the various instruments.
6. Solidarity
a) Shortcomings
In the European context, solidarity suffers from a particular problem. It is not perceived by the citizens
as a genuine European value. It is rather considered in a horizontal manner between states or people.
Democratic Governance of the Euro: Shortcomings and proposals for reform (rev/16.4. 2012)
17
In matters of economic policy the Treaty provides only for solidarity by the Union and only in
exceptional circumstances (Article 122 TFEU). The budget of the Union is, however, too small to
allow measures of a substantial financial impact by the Union. On the other hand, solidarity among
Member States but within the context of the Union is not envisaged. As a result various ad – hoc
agreements (ESM, Fiscal Compact) have been concluded between Member States. Their close link
with the Union creates again confusion among citizens about responsibility and accountability.
b) Proposal
In parallel to a transfer of economic policy competences to the Union as mentioned above (supra 4 b)
and 5 b)), a “solidarity mechanism” should be established for the purpose of assisting Member States
in budgetary difficulties. This fund would be financed and administered outside the EU – budget but
within the Treaty framework. Inspiration for this concept could be found in the rules on the
financing of the CFSP (Article 41 (2), (3) TEU). Such a mechanism could raise consciousness of the
added value of European solidarity, which would not suffer from national bias.
C. The rules on governance in EMU in extra – ordinary situations - shortcomings with
regard to democratic principles and proposals for reform
Extra – ordinary situations may arise from lacking consistency of the economic policy of a Member
State with the broad guidelines (Article 121 (4) TFEU); from an excessive government deficit (Article
126 TFEU) and from “severe difficulties” in a Member State (Article 122 TFEU).
7. Transparency
a) Shortcomings
 The most important shortcoming with regard to economic policy measures in extra – ordinary
situations is related to the request by the Council for the adoption of “measures” by a Member
State, which has failed to put into practice recommendations in the excessive deficit procedure
(Article 126 (9) TFEU):
 Recent practice has shown, that the Council has used this instrument for imposing extremely
detailed and far reaching legislative and administrative requirements (e.g. Decision 2010/320
(Greece)) which contrast sharply with the ordinary EU competences in economic policy matters.
Neither the Treaty nor implementing legislation (Regulation n° 1467/97 (as amended by
Regulation 1177/2011) contains any definition of the “measures”, which may be requested.
Hence, transparency as to the possible instruments used by the Council is absent.
 Information about divergences between the guidelines and national policies are scarcely made
publicly available (Article 121 (4) subparagraph 1 TFEU).
 Similarly findings and recommendations in the excessive deficit procedure are not
systematically accessible for the public (Article 126 (7) TFEU).
 With regard to assistance in cases of “severe difficulties” it is not specified in Article 122 (2),
what kind of “conditions” could be imposed on a Member State, which receives assistance.
b) Proposals
 Regulation 1467/97 should be amended in order to insert an exhaustive catalogue of measures,
which may be requested under Article 126 (9).
Roland Bieber
18
 Measures, which the Council wants to be adopted by a Member State (Article 126 (9)), should
be transmitted prior to the adoption of the respective decision of the Council to the EP.
 Information in cases of Articles 121 (4) and 126(7) TFEU should, as a general rule, be made
publicly available, unless a prevailing interest for confidentiality can be proven.
 Implementing legislation for Article 122 TFEU (financial assistance) should be adopted,
establishing details of the conditions, which may by imposed when assistance is granted.
8. Participation
a) Shortcomings
 No parliamentary participation is provided for in the cases of Article 126 (9) (decision by the
Council addressed to a Member State and requesting the adoption of certain “measures”) and of
Article 126 (11) (sanctions). Only the latter provides for an ex – post information of the EP.
 In the light of the far reaching consequences for the people of the relevant Member State this
situation is absolutely not acceptable from a perspective of democratic decision – making.
 Moreover, the adoption of implementing legislation to Article 126 provides only for the outdated
consultation procedure of the European Parliament (Article 126 (14) TFEU).
 The EP is not involved in the adoption of decisions on assistance pursuant to Article 122 TFEU.
b) Proposals
 Since the adoption of measures under Article 126 (9) and (11) TFEU requires the broadest
possible legitimacy on the level of the Union, the European Parliament should have a power
of co – decision. The ordinary legislative procedure should therefore be made applicable to those
cases by way of an amendment to the TFEU.
 Before such an amendment could come into effect, the Council should agree to voluntary
consultation of the EP.
 Article 126 (14) should be amended in order to substitute the ordinary legislative procedure to
the presently applicable consultation procedure.
 For the granting of assistance (Article 122 TFEU) the ordinary legislative procedure should
be introduced. Also in this case as a first step, voluntary consultation of the EP should be
agreed by the Council.
9. Accountability
a) Shortcomings
 Considering the potential heavy impact of interventions according to Article 126(9) and of
sanctions (Article 126 (11) TFEU), the mechanism for accountability is weak. The Council is not
at all accountable to Parliament for decisions taken under Article 126 (9) and has to inform the
EP only ex post about sanctions, which had been imposed (Article 126 (11).
 No reporting is provided for on the implementation and on effects of assistance (Article 122
TFEU).
Democratic Governance of the Euro: Shortcomings and proposals for reform (rev/16.4. 2012)
19
b) Proposals
 The Council should not impose a measure, which it envisages to request from a Member State in
accordance with Article 126 (9), if the European Parliament has objected to it by a qualified
majority. (This requires, by definition, prior information of the EP (cf. proposal 7. b)).
 A similar mechanism could be applied to sanctions (Article 126 (11).
 As far as assistance (Article 122) is concerned, an implementing regulation should lay down
precise reporting obligations for the Commission on the effects of the assistance and on the
compliance with the conditions, on which it was granted.
10. Efficacy of institutions, procedures and instruments
a) Shortcomings
The entire mechanism for the coordination of national economic policies and for the prevention of
excessive deficits has proven to be ineffective.
It is built on the assumption that economic and budgetary policies in a multi – layered democracy
can be brought to convergence by a combination of non binding acts, prohibitions and sanctions. As a
matter of principle, sanctions are a poor instrument for the achievement of lasting results in any
context. They intervene only ex post facto, they react to results but do not prevent causes. They are
particularly inappropriate, when it comes to public deficits, which normally result from multiple
causes over a longer period of time and where those, who feel the sanctions, are not necessarily
identical with those who have collected the benefits.
b) Proposal
The chapter “economic policy” (Articles 120 – 126 TFEU) should be re – considered. A substantially
revised approach should first and foremost be based on a new attribution of competences (“shared”),
which would allow the Union to adopt “positive“ measures in matters of economic policy and which
could replace the unbalanced system of sanctions.
11. Rule of Law
a) Shortcomings
The power of the Council to request the adoption of “measures” (Article 126 (9)) is worded in too
general terms. Its use cannot be anticipated, hence legal security is threatened. It risks to be used in a
way which is contrary to Article 13 (2) TEU and which was not intended by the authors of the Treaty.
b) Proposal
Article 126(9) should be given a more precise wording or a definition in implementing legislation (cf.
proposal n° 7 b)).
Roland Bieber
20
12. Solidarity
a) Shortcomings
In their present wording, the provisions concerning exceptional situations consider economic and
budgetary crisis in Member States as an internal problem of those states. Except for the mechanism of
Article 122, the action of the Union is essentially punitive. Since economic or budgetary crises
normally have their origin in the policy of a Member State, which was democratically founded when
adopted, any punitive action is not likely to be perceived by the people concerned as an act of
solidarity by the Union, but rather as an intervention in the internal political process.
b) Proposal
The Union should assume responsibility for economic crises within EMU. In return, its competences
for the adoption of binding acts have to be increased and its budget for assistance to Member States in
difficulties would have to be increased.
An alternative would consist of creating within the Union a system of horizontal solidarities among
Member States, consisting, among others, of funds to be provided under certain circumstances (=
ESM). This latter system is however, not transparent to the citizens in its origin and in its functioning.
It is therefore unlikely to generate a sense of solidarity between the peoples of the Union.
21
The Democratic Governance of the Euro: some proposals
Carlos Closa Montero*
A. How to improve the democratic quality of the existing euro governance instruments?
Proposals concentrate both on the in force instruments (i.e. the TEU, the RFEU, the Six Pack) and new
treaties pending ratification (chiefly, the TSCG).
 Improving accountability: democratic oversight on the Commission in EDP and EIP. The
Commission role has been greatly reinforced both in the Six Pack and the TSCG. Commission
recommendations in both the EDP (Excessive deficit procedure) and Excessive Imbalance
Procedure (EIP) become quasi automatically adopted since they trigger sanctions if not rejected
by “reversed” qualified majority (a qualified majority of Member States vote against). Greater
democratic scrutiny on the Commission will improve the legitimacy of the reinforced EDP. This
could happen at two different levels:
o Whenever the Commission proposes a sanction for a Member State, the
President/Commissioner may have a hearing in plenary session with the Parliament of
the Member State concerned. This will enhance debate, deliberation and transparency
and will contribute to better present to national public opinion the infractor position
and the Commission recommendation. It will also temper the tune of Commissioners
and will bring closer to the citizen decisions taken in Brussels.
o The Commission should present to the EP any sanctioning recommendations.
 Improving accountability: the President of the Euro Summits. Whenever the TSCG enters
into force, the President of the Euro Summit should make himself available to attend plenary
sessions with national parliaments in order to discuss euro summit matters.
 Improving the representativeness and legitimacy of the President of the Euro Summits.
Appointment should involve the EP which could, at minimum, hold a hearing with the
candidate(s).
 Reinforcing the institutional connection with the Union. The implicit assumption of the
TSCG seems to be the merger between the posts of President of the European Council and
President of the Euro Summit. If or whilst this does not happen, the President of the European
Council should be included into the euro summits.
 Improving the working of the Euro-summits. A better clarification of the role of the
Budget/Fiscal/Economy ministers under the form of a Council could make euro governance
more robust institutionally and continued through time. This is more required given the
exigencies of coordination stemming from the new TSCG.
 Democratic constitution-making on euro-governance. Merging of the TSCG and the
TEU/TFEU as foreseen in article 16 of the former should proceed through the ordinary revision
procedure (article 48) hence involving national parliaments and the EP through a Convention.
o Merging both Treaties should also provide an opportunity for revising unanimity as
the general revision requirement, given the framework for imposing externalities that
the rule offers.
 Democratic implementation of the TSCG at domestic level. Commission must report on the
implementation of article 3(2) TSCG. This includes, inter alia, the obligation of creating
provisions of binding force and permanent character, preferably constitutional, or otherwise
guaranteed to be fully respected and anchored through the national budgetary process.
Commission Report could examine the democratic quality of the domestic processes of
*
CSIC Institute of Public Goods and Policies and European University Institute.
Carlos Closa Montero
22
constitutional reform or law making leading to the implementation of this provision. Likewise,
the Euro summit with the support of the Commission could launch processes of debate as they
were organised after the failure of the 2005 constitutional treaty. Naturally, nothing guarantees
that democratic debate leads to the sought result.
B. What are the consequences in democratic terms for the Union?
The new Treaty raises at the level of primary legislation rules related to fiscal and macroeconomic
governance. The 2005 reforms show that the regulation of the SGP through secondary legislation
allows for rapid change to adapt to circumstances. Also, during the Convention, the Working Group
on Economic Governance rejected the constitutionalization of the Stability Pact. The new Treaty
grants the Pact rules the kind of rigidity associated with primary legislation. They become protected by
constitutional rigidity and, hence, they only can be changed by means of a process of “constitutional
revision”. Moreover, if the TSCG is ever included into the TEU, unanimity will add further
constitutional rigidity to these rules.
One of the cornerstones of democracy is that majorities (defined by means of any given rule) may
decide on policy options within the framework set by existing constitutional rules. As far as the
discretionary preferences of majority do not contradict constitutional rules, they may be legitimately
transformed into policies and, hence, the values attached to these policies may orientate a given
community.
This basic relation between secondary norms (as a proxy of democratic process), and primary
legislation (i.e. constitutionalism) applies to any domain in general. I argue that in fiscal governance
within the Euro there has been a non linear movement linear towards an increased constitutionalization
of the norms in detriment of (democratic) governance. I also argue that the decision in favour of a
certain model of fiscal policy tilts the balance in definitive way not only towards specific ideological
preferences but also against “democracy”.
Last but not least, the democratic quality of the TSCG is dubious: a treaty drafted behind closed
doors, in a situation of emergency and with a clear outcome determined by the preferences of certain
players. In parallel, some of the processes of domestic constitutionalisation (i.e. Spain) present the
same lack of democratic quality: rushed through parliament without deliberation under the feeling that
action was required due to ECB/EU Commission requirements.
Democracy has a lot do with asking to citizens and it seems to me that frustration, aloofness and
dissatisfaction increasingly describe the perception of at least a substantive part of European
citizenship. It may be the case that the very tight requirements of the TSCG implemented in dramatic
conditions with little margin of flexibility may be perceived (and rightly so) as a strong attack on the
social contract that seems to be the backbone of postwar European democracies. It could be argued
that national governments are the primary responsible for this, which is the same of saying that
citizens are responsible. Whether this is right or not, it may seem that a requirement for TSCG and EU
legitimacy may increasingly pass through policies that help a reconstruction of the social contract.
23
Working Group on the Democratic Governance of the Euro
Proposals for reform
(In order to enhance the role of Parliaments in the governance of the Euro)
Filippo Donati*
1.- Democracy is one of the founding values of the European Union (Art. 2 TEU). The functioning of
the Union is based on the principle of representative democracy (art. 10.1 TEU), implemented through
the European Parliament, where citizens are directly represented at the Union level (art. 10.2 TEU),
and the National Parliaments, where citizens are directly represented at the member State level (art. 12
TEU).
2.- The European Monetary Union (EMU) requires economic policy cohesion among the Eurozone
States. The 2011 debt crisis, which jeopardized the stability of the entire euro system, has its origins in
the unsound financial policies of certain member states. The depth of the debt crisis clearly indicated
the need for a higher degree of economic and fiscal coordination and convergence in the Eurozone. In
order to achieve this goal, a set of measures have been recently adopted, including reinforcement of
the stability and growth pact (SGP) through the Six Pack legislative package, the institution of the
European Stability Mechanism (ESM), the amendment of art. 136 TFEU and, finally, the Treaty on
Stability, Coordination and Governance in the Economic and Monetary Union (Fiscal Compact).
The Fiscal Compact, whose content in part simply confirms existing rules, is intended to reinforce
the financial stability of the Euro Area through an enhanced coordination of the Member States’
budget policies, the provision of benchmarks for structural deficit and debt-to-GDP ratio, as well as an
enforcement mechanism for non-compliance to such benchmarks. The Fiscal Compact is based on a
commitment by each Contracting Party to a balanced government budget and on the provision, in the
event of significant deviations, of an automatic correction mechanism to be implemented at the
national level. Informal Euro Summit meetings shall take place when necessary, and at least twice a
year, in order to strengthen convergence in the Euro Area.
Although the Fiscal Compact is an intergovernmental agreement formally separate from the EU
legal framework, the Contracting Parties clearly indicate their intention to take all necessary steps in
order to incorporate the substance of the agreement into the EU Treaties.
3.- The Euro governance system raises important issues with respect to the democratic principles
enshrined in the Union Law.
Art. 121 TFEU sets forth a procedure for the coordination of the economic policies of the member
States, which is based on a Council recommendation, setting out broad guidelines of the economic
policies of the Member States and of the Union, on the basis of the conclusions of the European
Council. No role in the broad guidelines decision-making process is provided for the European
Parliament, which is merely informed of the Council recommendation adopting the broad guidelines.
The Council, on the basis of reports submitted by the Commission, carries out surveillance on the
consistency of the implementation of economic policies of Member States with the broad guidelines.
In case of inadequate performance, recommendations may be addressed to the Member State
concerned by the Council, on the basis of a recommendation by the Commission. The European
Parliament is simply informed of the results of multilateral surveillance. The Council regulation (EC)
n. 1444/97, on the strengthening of the surveillance of budgetary positions and the surveillance and
coordination of economic policies (as amended by Regulation (EU) n. 1175/2011 of the European
Parliament and of the Council), has introduced an “economic dialogue”, whereby the competent
committee of the European Parliament may invite the President of the Council, the Commission and,
*
University of Florence.
Filippo Donati
24
where appropriate, the President of the European Council or the President of the Euro Summit to
appear before the committee to discuss measures adopted for the coordination of the economic policies
of the member States. The economic dialogue, anyhow, provides no duty of the Commission and of
the Council to report to the European Parliament. In addition, Parliament has not been granted any
effective involvement in the adoption of the measures within the process of multi- lateral surveillance
under Article 121 TFEU.
Furthermore, the European Parliament is not involved at all in the provision of financial assistance
to the Member State (Art. 122 TFEU), that requires only a decision adopted by the Council, on a
proposal from the Commission.
Under Fiscal Compact, the governance of the Euro Area will be based on orientations defined by
the Heads of State or Government whose currency is the euro in the Euro Summit meetings, without
any direct involvement of the European Parliament. Specifically, the Fiscal Compact provides that
Euro summit meetings shall be convened in order to discuss core issues concerning the governance of
the Euro Area and the rules that apply to it, and to furnish strategic economic policies to increase
convergence in the Euro Area. The Euro Summits (with participation of Heads of State or
Governments of all Member States) will further discuss the modification of the global architecture of
the Euro Area, the fundamental rules that will apply to it in the future and the implementation of the
Fiscal Compact. Whilst the President of the European Central Bank participates in the Euro Summit
meetings, the President of the European Parliament may participate only if invited. No participation at
all is provided for the President of the European Commission.
The accountability of Heads of States and Government toward their national Parliament is not
sufficient to give democratic legitimacy to the governance of the Euro Area. The invitation of the
President of the European Parliament to be heard at Euro Summit meetings, as well as the reporting
requirement after each Euro Summit meeting, are not sufficient to grant democratic legitimacy to Euro
governance.
4.- Also the excessive deficit procedure, as designed by Art. 126 TFEU and further specified by the
Fiscal Compact, allows insufficient involvement of Parliaments.
According to Art. 126 TFEU, the Council may request the adoption of measures for deficit
reduction by the relevant Member State and may impose sanctions against a Member State that has
taken no effective action for the correction of its excessive deficit. The European Parliament is merely
informed of the Council sanctioning decisions.
The Fiscal Compact has introduced new rules designed to make the procedure more effective, by
providing, in case of deviation from the objectives defined in the revised SGP, an automatically
triggered correction mechanism. The Fiscal Compact provides that such correction mechanism shall
fully respect the prerogatives of National Parliaments. Notwithstanding this (quite vague) provision,
the nature, size and time-frame of the corrective action to be undertaken will be subject to common
principles decided by the European Commission, with no participation of the European Parliament or
of the National Parliaments.
A contracting party subject to an excessive deficit procedure is now required to put in place a
budgetary and economic partnership programme including a detailed description of the structural
reforms necessary for an effective and durable correction of its excessive deficit. The Fiscal Compact
sets forth that the content and format of such programmes “shall be defined in European Law”, most
probably in a Council decision according to Art. 126(9) TFEU. No involvement of the concerned
National Parliament or of the European Parliament is foreseen.
Whilst Art. 126(13) TFEU requires a qualified majority for the Council to impose sanctions on a
Member State, under the new Fiscal Compact rules the Council can stop the sanctions proposed or
recommended by the European Commission only by a “reverse majority” voting, e.g. when a qualified
majority, calculated without taking the vote of the Member State concerned, is opposed to the
Working Group on the Democratic Governance of the Euro
25
proposed or recommended sanction. Again, no provision allows any involvement of the concerned
National Parliament or of the European Parliament.
National Parliaments and European Parliament are merely called to organize and promote a
conference of the relevant committees representatives in order to discuss budgetary policies and other
issues concerning the Euro Area. This provision is clearly not sufficient to counter-balance the loss of
democratic control by Parliaments over the content of the correction mechanism to be implemented at
a national level.
Ratification of the Fiscal Compact, expected to take place in 2012, may turn out to be problematic
in certain Member States. In any case, notwithstanding ratification, the absence of sufficient
democratic legitimacy in the Euro Area governance system may in the future enhance euro-scepticism
and critics at the National level against the Euro.
5.- In light of the situation briefly described above, I would like to propose some minimal suggestions
for improving the democratic quality of Euro governance. In particular, the following minimal
suggestions are directed at enhancing the role of parliaments and increasing the transparency of the
decision-making process with respect to: (i) the coordination of the Member States’ economies, and
(ii) the excessive deficit procedure.
6.- With respect to the co-ordination of the economic policies of the Member States, the following
measures may be opportune:
a) Granting the European Parliament a voice in the definition of the governance of the Euro
Area.
To this extent, prior distribution to the European Parliament should be granted for: (i) the
draft for the broad guidelines of the economic policies of the Member States and of the
Union formulated by the Council and submitted to the European Council pursuant to art.
121 TFEU, (ii) the agenda and preparatory materials concerning each Euro Summit
meeting to be convened in accordance with the Fiscal Compact, and (iii) the Commission’s
proposal to the Council for the granting of financial assistance to States facing severe
difficulties.
This prior distribution would enhance the transparency of the decision-making process and
would allow the European Parliament to have a voice in the definition of the measures
intended to ensure budgetary discipline. No amendment of the Treaties would be necessary
to this respect.
In addition, the European Parliament should be granted a co-decision power with respect to
the fundamental decisions concerning the governance of the Euro Area. To this extent,
however, a Treaty amendment would be necessary.
*
b) Involvement of the European Parliament in the appointment of the President of the euro
summit. To this extent, at least a hearing before the Parliaments for the candidates to the
presidency of the Euro Summit should be provided.
*
c) Participation in euro summits by the President of the European Parliament should not be
subject to a specific invitation by the Council. Participation of the President of the
European Commission should be granted.
7.- With respect to the excessive deficit procedure, the following measures may be opportune:
a) Granting the European parliament a voice in the main decisions regarding the excessive
deficit procedure.
Filippo Donati
26
To this extent, prior distribution to the European Parliament should be provided for: (i)
recommendations addressed by the Council to the Member State pursuant Art. 122(7)
TFEU, (ii) measures for the deficit reduction imposed by the Council pursuant Art. 122(9)
TFEU, (iii) sanctions imposed by the Council pursuant to Art. 122(9) TFEU, (iv) decision
on the time-frame for the convergence towards the medium-term budgetary objectives,
adopted by the Commission pursuant to Art. 3.1 b) of the Fiscal Compact, (v) common
principles for the correction mechanism to be put in place at national level, established by
the Commission according to Art. 3.2 of the Fiscal Compact, (vi) endorsement and
monitoring activity carried out by the Council and by the Commission with respect to the
budgetary and economic partnership program for the correction of its excessive deficit,
pursuant to Art. 5 of the Fiscal Compact, (vii) sanctioning proposals or recommendations
made by the Commission according to Art. 7 of the Fiscal Compact.
This prior distribution would enhance the transparency of the decision-making process
regarding the fundamental measures intended to ensure budgetary discipline, and would
allow the European Parliament to have a voice in these matters. No amendment of the
Treaties would be necessary to this respect.
In addition, the European Parliament should be granted a co-decision power with respect to
the fundamental measures intended to ensure budgetary discipline in the governance of the
Euro Area. To this extent, however, a Treaty amendment would be necessary.
*
b) Commission’s sanctioning proposals or recommendations should be presented to the
National parliament of the concerned contracting State. The hearing of the President of the
European Commission (or of a Commissioner representing the Commission) before the
National Parliament would allow a public parliamentary debate at the national level and
would allow national Parliaments to have a voice in the sanctioning procedure.
27
The Democratic Governance of the Euro
Comments by Sergio Fabbrini
Premise
The financial crisis of the euro has shown the inadequacy of the intergovernmental method, formalized
in the Lisbon Treaty, for dealing with economic and social issues. A crisis in the outskirts of the EU
has become a systemic crisis of the EU. The decision-making mechanisms did not operate as required
by the situation. The intergovernmental decisions of the European Council arrived too late and were
not sufficient to calm the markets. Strategic divisions for dealing with the crisis between the larger
member states of the euro-area and radical divergences in the domestic electoral interests of the
incumbent governments made the decision-making process within the European Council particularly
burdensome. Indeed, the European Council was pressured to meet continuously, between 2010 and
2011, hoping each meeting was the ‘last one’. But it was not. None came out as decisive. Certainly, in
those meetings of the European Council were taken decisions that have thus radically transformed the
economic governance regime of the EU. Some of those decisions remained within the supranational
logic of the EU as the Six Pack which was approved mainly through the ordinary legislative
procedure. However, with the deepening of the crisis and the difficulty to find an unanimous
agreement within the European Council on the measures to be taken, the pressure to go beyond the
supranational EU brought to the setting up of two new organizations for economic governance outside
the Lisbon Treaty. First, the European Stability Mechanism (ESM), establishing a new treaty among
the euro-area member states, with its own institutions, “as an intergovernmental organisation under
public international law, justified by an amendment proposal to TFEU, Art. 136. And second, the so
called Fiscal Compact Treaty, with its own governance structure signed by all the 17 euro-area
member states plus those non-euro area states (all of them, apart from the UK and the Czech Republic)
interested in participating in the treaty. Thus, two years after the approval of the Lisbon Treaty, the
latter was considered de facto and de jure out of date. Why this outcome? Is this outcome satisfactory
from the perspective of democratic legitimacy? I will organize my answer to each question in the form
of a sequence of arguments.
Why? The meagre balance of intergovernmentalism
First argument: the institutional dilemma
Intergovernmentalism as a decision-making method based on voluntary policy coordination did not
work because it was unable to solve the basic dilemmas of collective action in conditions of existential
crisis (as is the euro crisis). In particular it could not resolve three dilemmas. The first is the
institutional dilemma: how to neutralize veto positions in a decision-making process requiring
intergovernmental consent? This dilemma accompanied the entire evolution of the euro crisis. For
neutralizing the British veto on the fiscal compact, it was necessary to move outside of the Lisbon
Treaty itself. Or, to avoid jeopardizing the entire project by the possible rejection of one or another
intergovernmental treaty by few of their contracting parties, the Fiscal Compact Treaty (Title VI, Art.
14.2) states that it “shall enter to force on 1 January 2013, provided that twelve Contracting Parties
whose currency is the euro have deposited their instrument of ratification”. If this decision has
eliminated unanimity as a barrier to activating the new treaty (a very important step forward in the EU
institutional history), it will nevertheless reveal more new problems than it solves old ones. What will
the consequences be for the euro area as a coherent monetary system if some euro area member states

LUISS Guido Carli University.
Sergio Fabbrini
28
approve the treaty and other euro area member states will not? Will those that approved the treaty
continue in their fiscal integration while those that did not play a free-riding role? Indeed, anticipating
plausible rejection of the Fiscal Compact Treaty, the ESM Treaty states (Point 5) that “the granting of
financial assistance…will be conditional, as of 1 March 2013, on the ratification of Fiscal Compact
Treaty by the ESM Member concerned”. Will this threat be sufficient to cool the euro-sceptical mood
of Irish voters or the anti-European mood of Greek voters? At the same time, majority voting is
extended even in the ESM (Art. 6.5). However, it may be impracticable to recur to majority voting in a
treaty justified by international public law. And, above all, the establishment of new treaties to solve
the contradictions of an old one will probably be the source of legal, technical and political problems
that might constrain the proper functioning of each.
Second argument: the non-compliance dilemma
The second dilemma is the non-compliance dilemma: how to guarantee the respect of rules decided
voluntarily by contracting governments when that respect no longer fits their interests? This dilemma
exploded when it became apparent that Greece cheated the other member states’ governments
(manipulating its statistical data regarding public deficit and debt) to enter and then remain in the euroarea.
However, the same dilemma emerged in 2003, when France and Germany were saved from
sanctions by a decision of the ECOFIN (and in contrast to a Commission’s recommendation)
notwithstanding their disrespect for the SGP’s parameters. The Fiscal Compact Treaty tries to deal
with the non-compliance possibility providing for a binding intervention of the ECJ upon those
contracting parties that do not respect the agreed rules. This also applies when the Commission issues
a report on a contracting party failing to comply with the rules established by the Treaty. In the latter
case, in order to neutralize a recommendation of the Commission to intervene against a member state
breaching a deficit criteria, “a qualified majority of the member states (should be) opposed to the
decision proposed or recommended” (Art. 17).
However, these solutions of the non-compliance dilemma seems problematic. It is problematic, in
fact, that a new organization (set up by the Fiscal Compact Treaty or ESM Treaty) might use an
institution (such as the ECJ) of another organization (the EU set up by the Lisbon Treaty) to bind its
own member states. This may also apply to the technical expertise of the Commission or ECB, upon
which both treaties rely. Certainly, the intervention of the ECJ is justified by TFEU, Art. 273, that
states: “the Court of Justice shall have jurisdiction in any dispute between Member States which
relates to the subject matter of the Treaties if the dispute is submitted to it under a special agreement
between the parties”. However, it is also certain that the ECJ or the Commission are institutions also
composed by the contribution of countries (such as the UK and the Czech Republic) that did not sign
the Fiscal Compact Treaty that utilizes them. Which are the political implications of this discrepancy?
Moreover, it also seems problematic to assume that the procedure of a reversed qualified majority will
finally neutralize discretionary decisions of the Council. In fact, it remains to be seen whether it is so
difficult to build a qualified majority when the member state to save is a large one with its persuasive
resources for affecting the choices of the other small and medium sized member states.
Third argument: the legitimacy dilemma
The third is the legitimacy dilemma: how to guarantee legitimacy to decisions reached by national
executives in the European Council that were never discussed by the institution representing the
European citizens (the EP)? Indeed, this dilemma became evident as the crisis deepened and the
citizens of the indebted member states had to pay high costs for making the structural adjustment of
their country possible. Not only did they have to abide by decisions imposed by impersonal financial
markets, but also by the national executives of the larger member states within the European Council
(and the Council) they never voted. The legitimacy of the intergovernmental decisions cannot be
guaranteed by the ECJ’s involvement in the Fiscal Compact Treaty framework. The intergovernmental
The Democratic Governance of the Euro
29
framework cannot identify a satisfactory solution to this dilemma because it assumes, theoretically and
politically, that the legitimacy of the EU derives from the legitimacy of its member states’
governments. However, as shown by the protests in the streets of many European capitals, the
legitimacy of decisions taken on behalf of the EU cannot be a derivative of the legitimacy enjoyed by
the governments of its member states. Decisions made at the EU level require a legitimizing
mechanism at that level, not at the level of its member states. Without proper involvement of the EP in
those decisions, the latter will lack the justification sufficient to be accepted by the European citizens
affected by those decisions.
The new treaties, for solving the first two dilemmas, have reduced the discretion of the Council (in
particular if compared with the rules concerning the SGP institutionalized in the intergovernmental
side of the Lisbon Treaty), recognizing the need to rely on third actors (the ECJ or the Commission)
for keeping the contracting parties aligned with the agreed aims of the treaty. Even the ESM Treaty
states that, in case of a dispute between an ESM Member and the ESM (Art. 37.2), “the dispute shall
be submitted to the Court of Justice of the European Union. The judgement of the Court of Justice of
the European Union shall be binding on the parties in the procedure, which shall take the necessary
measures to comply with the judgement within a period to be decided by said Court” (Art. 37.3).
However, those treaties are structurally unable to deal with the legitimacy’s dilemma, which implies
necessarily a stronger role for the European Parliament EP).
How? The need to increase the legitimacy of the economic governance regime
First argument: developments towards separation of powers
The Lisbon Treaty has brought to maturity a long process of distinction between the executive and the
legislative branches. Celebrating the codecision procedure as “the ordinary legislative procedure”
(TFEU, Art. 289), the Treaty has institutionalised a two-chamber legislative branch, consisting of a
lower chamber representing the European electorate (the EP) and an upper chamber representing the
governments of the member states (the Council). The Treaty has thus celebrated the growing role
acquired by the EP since its direct election in 1979. The EP has finally become an institution of equal
standing with the Council representing (in its various ministerial formations) the ministers of the EU
member states’ governments. The inter-institutional balance between the EP and the Council has given
legitimacy to the law making process of the EU. At the same time, by recognising the European
Council as the body responsible for setting the general political guidelines and priorities of the EU, the
Treaty has transformed it into a political executive of the Union, while confirming the Commission in
its role of technical executive of the latter. The Lisbon Treaty has therefore built a four-sided
institutional framework for governing the EU policies (on the single market), with a bicameral
legislature and a dual executive branch. This quadrilateral raises two problems: first, how do we
reconcile the European Council’s decision-making role with the decision-making independence of the
Commission, given that both institutions exercise executive functions? Second, because through its
irresistible institutionalization the EP has become a legislature of a separation of powers system rather
than a parliament of a fusion of powers system, which role might it play for checking the dual
executive?
Second argument: the euro crisis has strengthened the role of the European Council
It is not sufficient to bring the new treaties back to the Lisbon Treaty. In fact, the latter has formalized
that economic and monetary policies (and the Economic and Monetary Union or EMU in particular)
should be organized according to new modes of governance. Indeed, since the 1990s, scholars and
practitioners alike have celebrated the virtues of this new approach to policy-making based on ‘open
method of coordination’ (OMC): benchmarking, mainstreaming, peer review and, more generally,
Sergio Fabbrini
30
intergovernmental coordination In economic and financial policy the Lisbon Treaty has formalized a
model of integration through growing coordination between member states’ governments. In this
approach, policy entrepreneurship from some national capitals and the active involvement of the
European Council set the overall direction of policy. It is the European Council which monopolizes,
with the Council, the decision-making process.
For example, regarding excessive deficit procedures of the euro-area member states (annexed as a
Protocol n. 12 to the Lisbon Treaty, the SGP, as regulated by TFEU, Art. 126) in particular, the
Council monopolizes the policy’s decision, although the latter is generally based on reports or
recommendations of the Commission. As stated in TFEU, Art. 126.14, “the Council shall, acting
unanimously in accordance with a special legislative procedure and after consulting the European
Parliament and the European Central Bank, adopt the appropriate provisions” for implementing
agreed-upon economic guidelines. According to the special legislative procedure, the Council, acting
either unanimously or by a qualified majority depending on the issue concerned, can adopt legislation
based on a proposal by the Commission after consulting the EP. However, while being required to
consult the EP on legislative proposals concerning economic and monetary policy, the Council is not
bound by latter's position. Indeed, the Council took frequently decisions without even waiting for the
EP's opinion. The Council (in its configuration as Council on Economic and Financial Affairs
generally known as ECOFIN) is supported in its activities by an Economic and Financial Committee
whose task (TFEU, Art. 134) is to supervise the economic and financial situations of the member
states. It is an advisory body to ECOFIN, to which “the Member states, the Commission and the
European Central Bank shall each appoint no more than two members” (TFEU, Art. 134.2). In sum,
either through recommendations or special legislative procedure, the ECOFIN is the institution with
the power of making decisions concerning the economic and financial policies of the Union. More in
general, the Lisbon Treaty has given a strategic role to the European Council, which is now the real
political head of the Union. Thus, to assume that bringing the new treaties back to Lisbon is sufficient
for giving them democratic legitimacy is not appropriate. It might, indeed, create false illusions.
Third argument: to democratize the European Council
The political dynamics induced by the euro crisis have had both institutional and structural
consequences. Institutionally, the European Council has emerged as the main decision-making body of
the EU and its President as a more influential actor than the Commission’s President. Because the
Commission’s President should pass through the approval of the EP for entering in the office, and
being no prohibitions in this respect in the Lisbon Treaty, the legitimacy’s breaches of
intergovernmentalism might eventually be reduced through a re-composition of the two presidencies
in a single person. However, it is equally plausible to assume that the two presidencies will remain
distinct, with the President of the Commission playing a technical role and the President of the
European Council a political function. Path dependency has its own logic. If the dual executive will
remain, then it is necessary to increase the legitimacy of the European Council, transforming it into a
proper European Presidency of a separated system bound to account to the other separated institutions
of the EU, the EP in particular. If that is the case, then specific measures might follow. First, it is
necessary that the President of the European Council be supported by the administrative structure of
the Commission and no longer by that of the Council’ Secretary General, thus separating properly the
executive and the legislative functions. Second, it is necessary to increase the democratic legitimacy of
the role of the European Council’s President. It is implausible to assume that the legitimacy of the
latter should derive from the legitimacy of the heads of government and state electing him or her. One
might think to an electoral process organized according to the Electoral College’s logic: the heads of
state and government of the European Council will select two candidates for the presidency (the first
two voted candidates); an electoral college constituted by representatives of the national parliaments
will thus vote for one or the other of the candidates, the candidate getting the majority of electoral
college’s votes will become the President of the European Council. At the same time, the President of
The Democratic Governance of the Euro
31
the Commission and the commissioners would still be appointed by the European Council, with the
advice and consent of the two-chamber legislative branch. This would also apply to the High
Representative, who should become an official of the executive and lose his or her role as chair of a
legislative committee as Foreign Affairs Council. Coherently separating the powers is a condition for
making them, not only more effective but also and more accountable, thus more legitimate.
Conclusion
The new treaties have created (for the very fist time) an inner Europe constituted by those member
states adopting the euro currency plus those member states aiming to coordinate their currency with
the euro and an outer Europe constituted by those member states (the UK, the Czech Republic and
probably other few member states) willing to maintain their own domestic sovereignty in monetary
affairs and also to regain that sovereignty in other previously Europeanized policy fields. This
distinction might have two different outcomes. It might reciprocally paralyze the two Europe or might
be helpful in defining two different institutional containers for divergent perspectives on the
integration process. The first outcome would probably lead to the decline of the EU or in any case to a
permanent dissatisfaction of the citizens towards its behaviour (dissatisfaction coming from both those
who think it does too much and those who would like it to do more). The second outcome would
recognize that the two Europe can no longer go along together on all policy issues. Indeed, the inner
Europe might operate according to the logic of reinforced cooperation in a growing number of policy
fields (from fiscal to foreign policy), while the outer Europe might operate according to the
intergovernmental logic of market coordination. The point is that the strategy of reinforced
cooperation does not answer to the question of how to increase effectiveness and legitimacy of the
polity emerging from that cooperation. The latter is justifiable only if it is able to institutionalize a
system of separation of powers across all the policies it will deal with. The logic of separation of
powers should favour a clear distinction between the executive and legislative roles, so that the former
can become more effective and the latter can strengthen its checking and balancing functions so to
increase the accountability of the system. In sum, a discussion on how to democratize the EU should
start again.
33
Lessons for the Euro and its Governance from History
Harold James*
The makers of the Euro, and almost every analyst and commentator, assume that the creation of the
single European currency was a major and novel experiment in building a non-national money, and
thus that there were few if any lessons to be derived from any more remote historical experience.1
That
deduction is not really valid, and there are some important lessons that may be drawn from the vast
laboratory of historical experience, especially in regard to the need for rules, but also of flexibility in
the implementation of monetary policy.
EMU, as discussed in the 1970s and 1980s, stood for Economic and Monetary Union. But the
technical aspects went ahead of the political initiatives on European integration, with the result that
there was imperfect agreement on crucial aspects of the monetary union, in particular fiscal rules and
banking supervision and regulation. Both these issue areas raised political concerns about loss of
national sovereignty and about the redistributional consequences of Europeanizing a fundamental part
of economic policy-making. In consequence, the makers of the settlement looked back on a task that
was only half accomplished. As former EU Commission President Jacques Delors put it in a recent
interview, “the finance ministers did not want to see anything disagreeable which they would be
forced to deal with.”2
The institutional framework for the single European currency was designed by central bankers,
who tried to isolate themselves from political pressures. They gave a great deal of attention to central
bank design, but other elements that would have been needed for the successful and enduring
operation of a durable monetary union were neglected. In the first draft of the European Central Bank
statute produced by the central bankers, Article 2 on the objectives of the European System of Central
Banks stated that it should “support the general economic policy of the Community.” But on the
grounds that there was a multiplicity of national economic policies, at a late stage in the
Intergovernmental Conference that culminated in the Treaty of Maastricht, the Dutch presidency of the
Community substituted the phrase “support the general economic policies in the Community.” In other
words, there was to be no mechanism for making an economic policy to go alongside the new
monetary regime.
There is now a powerful pressure to demand more “democratic accountability” of the ECB, but it is
not at all clear how that accountability would work in practice. The problems arise purely out of the
exceptional crisis measures – that are parallel to those adopted by other central banks – and that
represent a temporary diversion from the central responsibility of the bank in ensuring price stability.
After the crisis is over, there is a legitimate expectation that the central bank should return to that
objective; measures to regulate or supervise the choice of crisis instruments would be fundamentally
superfluous. The often articulated political demand for changes to the ECB’s governance structure
should thus be very firmly resisted.
There are two parallel reasons for concern about the Euro: one is the imperfect realization of the
fiscal concomitants (including the fiscal implications of bank resolution) attached to monetary union;
the second, however, is excessive trust in the integration of the capital market and as a consequence
*
Princeton University and European University Institute
1
There are some exceptions, drawing on the history of monetary unions: Michael D. Bordo and Lars Jonung, The Future
of EMU: What Does the History of Monetary Unions Tell Us? NBER Working Paper No. 7365, September 1999;
Michael D. Bordo and Harold James, A Long Term Perspective on the Euro, NBER Working Paper No. 13815, February
2008.
2
http://www.telegraph.co.uk/finance/financialcrisis/8932640/Jacques-Delors-interview-Euro-would-still-be-strong-if-ithad-been-built-to-my-plan.html
(December 2, 2011)
Harold James
34
inadequate flexibility in monetary policy. For both cases, history offers a rich laboratory of potential
solutions.
Fiscal Rules
European interest in American precedents for federal finance has been whetted in the aftermath of
Europe’s debt crisis. In particular, Alexander Hamilton has become the hero of contemporary Europe.
Specifically Alexander Hamilton’s 1790 negotiation of a federal assumption of the high levels of state
debt in the aftermath of the War of Independence looks like a tempting model for European states
groaning under unbearable debt burdens. It has been cited as a precedent in Thomas Sargent’s Nobel
Prize Acceptance speech. 3
The states had not been responsible for the poor fiscal performance: that
was a consequence of the external circumstances of the war of independence. At least it might be
argued that some of the European debt problems are also not the consequence of bad policies but of a
global financial crisis.
Hamilton argued – against James Madison and Thomas Jefferson - that the war debt accumulated
by the states in the War of Independence should be assumed by the federation. There were two sides to
his case, one practical, the other philosophical. Initially the most appealing argument was that this was
an exercise in providing greater security and thus reducing interest rates, from the 6 percent at which
the states funded their debt to 4 percent. The historical case looks like an attractive precedent for the
Europeans of today. Hamilton emphasized the importance of a commitment to sound finance as a
prerequisite to public economy. “When the credit of a country is in any degree questionable, it never
fails to give an extravagant premium upon all the loans it has occasion to make.” Hamilton also
insisted on a stronger reason for following good principles than merely the pursuit of expediency.
There existed, he stated, “an intimate connection between public virtue and public happiness.” That
virtue considered in honoring commitments. Extended in a political body, it would build solidarity.
Those principles made the fiscal union what he called “the powerful cement of our union.”4
The condition for success in the American case was that the Union raised its own revenue, initially
mostly through federally administered customs houses. The logic of a need for specific revenue
applies also in modern Europe, where a reformed fiscal system might include a common
administration of customs or of value added tax (with the additional benefit in both cases of
eliminating a great deal of cross-border fraud).
In the American case, however, the Union was bought at a price. The exposure to the common
liability of Virginia, the most politically powerful state in the union, was limited with a ceiling. Only
this inducement moved Madison to drop his opposition and agree to the proposal. (The compromise,
which also led to the capital being moved to the new site of Washington, on the border of Virginia and
Maryland, may be a precedent for limiting German liabilities in the case of the creation of a common
European bond or Eurobond.) And some states, such as Georgia, opted out of the assumption.
The U.S. experiment in federalized finance was not immediately successful. Two important parts of
Hamilton’s financial architecture were not realized, or only realized imperfectly. He proposed a model
of joint stock banking on a national scale, which ran into immediate opposition, and which curiously
was much more influential in Canada than in the U.S. Secondly, the proposal for a national central
bank was eventually blocked by political opposition. The charter of the First Bank of the United States
was allowed to lapse in 1811; then, one generation later, the charter of the Second Bank of the United
States was successfully opposed by Andrew Jackson in 1836.
3
Thomas J. Sargent, “United States Then, Europe Now,” December 8, 2011 Nobel Prize speech:
http://www.nobelprize.org/nobel_prizes/economics/laureates/2011/sargent-lecture.html.
4
Alexander Hamilton, Report on Public Credit, January 9, 1790; available as: http://press-
pubs.uchicago.edu/founders/documents/a1_8_2s5.html.
Lessons for the Euro and its Governance from History
35
Neither did the Hamiltonian scheme of federal finance guarantee a peaceful commonwealth. In fact
the fiscal union proved to be explosive rather than cement. As international capital markets developed
in the early nineteenth century, American states used their new reputation to borrow on a large scale,
and promptly ruined their creditor status. In the late 1830s there was a wave of state defaults. In this
case, as in that of for instance contemporary Greece, the problems stemmed from misguided policies,
and cannot be blamed on external circumstance, war or global crisis. One generation later, in the
1860s, the country was torn by Civil War as a result of what was in large part a dispute about states’
rights and about the character of financial burdens. In attempting to end the immoral practice of
slavery, Abraham Lincoln originally proposed that the slaveowners should be compensated by the
public purse. But that was unacceptably expensive. So in the end, the Virginians (and the rest of the
South) were expropriated by the Union – at least that is the way they saw things.
The Hamiltonian assumption was not and could not be on its own a guarantor of political order.
The perspective that debt required a common foundation of morality was central to Hamilton’s
approach; but it foundered on the differences between the different states’ conception of morality.
Europeans today have caught onto the practical side of the argument, that this might be a means to
cheaper credit; but they have not worked out the political institutions that would be needed to give
reality to the union. The consequences of the extended and politicized debate about debt restructuring
– what is termed kicking the can down the road – have been harmful, and have made a Hamiltonian
solution more difficult. The fact is that the credit of the countries has become questionable.
An obvious starting point for a Hamiltonian Europe would be to set some standard limit up to
which national debt would be federalized – perhaps the notorious 60 per cent of GDP from the
Maastricht convergence criteria, perhaps a lower limit. Debt exceeding that amount would be left to
the responsibility of the national states. What can the Europe of tomorrow learn from the American
past? A collective European burden-sharing responsibility is in the long run the only non-catastrophic
way out of the current crisis. Such generalized European burden-sharing requires a substantially
greater dimension of political accountability and control on a European level.
Monetary Flexibility
A common criticism of monetary union is that it requires a single monetary policy, that thus becomes
“one size fits all” and deprives policy-makers of a policy tool in responding to particular national or
regional circumstances. When the EC Committee of Central Bank Governors began to draft the ECB
statute, it took two principles as given: price stability as the primary objective of the central bank; and
the indivisibility and centralization of monetary policy. This would not be “in contradiction with the
principles of federalism and subsidiarity.” But in fact the second assumption was not really justified
either historically or in terms of economic fundamentals.
Think first of the gold standard. Many critics of EMU maintain that looks a lot like the pre-1913
gold standard, which imposed fixed exchange rates on extremely diverse economies. But is that
resemblance as bad as it sounds, or as the euro’s critics insist? The critics should take the goldstandard
analogy more seriously. Like any system in the real world, it was more complex, more
interesting, and also filled with more real policy possibilities than textbook caricatures suggest.
First, there was no automatic deflationary pressure following from some alleged peculiarity of the
adjustment mechanism. The question of overall deflationary – or inflationary – impact depended (and
still depends) on the total quantity of money. Thus, in periods after large new gold discoveries – for
example, following the California Gold Rush of 1849, and again in the 1890’s, when new mining
techniques opened up South African, Alaskan, and Australian reserves – the classical gold standard
had a mild inflationary bias. In an era of paper money, however, the link to a physical stock of some
precious metal – or, indeed, some other commodity – does not exist, and there should be no reason
Harold James
36
why a central bank cannot aim at an overall inflation rate. In fact, almost all modern central banks,
including the European Central Bank, do precisely that.
The second lesson to be learned from the gold standard concerns the extent and limits of capitalmarket
integration. In the early 1990’s, policymakers, market participants, and economists alike
simply assumed that the European Community’s “1992 program” – the legislative framework for the
single market, and thus for a single capital market – would create a new reality, within which the
single currency would work its magic. From this followed an official obligation to treat all types of
risk in the monetary union – bank risk or government risk – as identical.
But the history of the gold standard, and of other large common-currency areas, was more complex.
Despite the theoretical possibility of capital being sent over vast distances to other parts of the world,
much capital remained local. Creditors and banks often preferred to do business with known
borrowers, and where local jurisdictions could settle any disputes.
In particular, a critical part of the gold standard was that individual national central banks set their
own interest rates, with the aim of influencing the direction of capital movements. This became the
central feature of the gold-standard world: a country that was losing gold reserves would tighten
interest rates in order to attract money. Central bank discount rates (the policy rate) in France and
Great Britain, major capital exporters, were constantly lower than in Germany, which had no major
current account surplus, even though there was never any market expectation of a parity alteration.
France and Britain in practice placed a floor under rates, and their choices affected other countries
because of the possibility of arbitrage. Italy, where there were expectations of parity changes in the
1870s and 1880s, needed much higher rates. The gold-standard rules look very different from the
modern practice of monetary union, which relies on a single uniform interest rate. That one-size-fitsall
approach meant that interest rates in southern European countries were too low before 2009, and
too high in northern Europe. A gold-standard rule would have produced higher rates for the southern
European borrowers, which would have attracted funds to where capital might be productively used,
and at the same time acted as a deterrent against purely speculative capital flows.
We can see the same differentiation of interest rates in the early history of the Federal Reserve
System. Individual Reserve Banks set their own discount rates. Under Section 14(b) of the 1913
Federal Reserve Act, these rates were “subject to review and determination of the Federal Reserve
Board.” The Board also (section 13) had the “the right to determine or define the character of the
paper thus eligible for discount.” The individual Reserve Banks had different collateral requirements
and accepted differing kinds of securities. In smooth or normal times, the rates tended to converge.
But in times of shocks, they could move apart. In the summer of 1929, at the height of the credit
boom, New York tightened, while the other banks left rates unchanged; in 1932, New York went
much faster and further in lowering rates than other banks. There was thus a space for big policy
conflicts. In 1919 the Attorney General ruled that the Board could change rates for a Bank; and in
1929 there was an acute conflict when the Board voted 4:3 to impose a reduction on the Chicago
Bank.5
By the late 1930s, the rate differences were disappearing, but they only vanished completely
during the Second World War, for the simple reason that operating with Federal bills (a single
instrument) rather than a multiplicity of differently valued private securities became the primary tool
of U.S. monetary policy. The makers of the ECB took the practice of the postwar Federal Reserve, and
simply assumed that the debt instruments of different member states could fill the monetary policy
role of Federal debt in the case of the Federal Reserve’s open market policy.
Is modern Europe a single capital market in a deeper sense than that of the nineteenth century,
when there were also no formal capital controls between European countries? One guide is the extent
to which securities markets are primarily national. Many countries in the nineteenth century issued
5
See Lester Chandler, Benjamin Strong, Central Banker, Washington D.C.: Brookings, 1958, p. 444; Allan H. Meltzer, A
History of the Federal Reserve I: 1913-1951, Chicago: University of Chicago Press, 2003, pp. 221-223.
Lessons for the Euro and its Governance from History
37
bonds that were mostly held abroad. Since the 2008 financial crisis erupted, there has been something
of a renationalization of financial behavior in Europe. Up to the late 1990’s and the advent of
monetary union, most European Union sovereign debt was domestically held: in 1998, the overall ratio
of foreign-held debt was only one-fifth. That ratio climbed rapidly in the aftermath of the euro’s
introduction.
In 2008, on the eve of the crisis, three-quarters of Portuguese debt, one-half of Spanish and Greek
debt, and more than two-fifths of Italian debt was held by foreigners, with foreign banks holding a
significant proportion, especially in the case of Greece, Portugal, and Italy. One consequence of the
ECB’s large-scale long-term refinancing operation (LTRO) has been that Italian banks are once again
buying Italian government bonds, and Spanish banks are buying Spanish bonds.
German Economics Minister Philipp Rösler has made the fascinating suggestion that members of
the European System of Central Banks should set their own interest rates (though, interestingly, he
made this suggestion explicitly as a party politician, not as a government minister). Autonomous
interest-rate determination would penalize banks that have borrowed in southern Europe from their
national central banks. Meanwhile, the German Bundesbank would have lower rates, but southern
European banks would be unlikely to have access to that credit for use in their own markets. There are
also signs that individual central banks are using the leeway that they have within the existing
framework in order to carry out important policy shifts. The Bundesbank has stated that it will no
longer accept bank securities as collateral from banks that have undergone a government
recapitalization.
The new collateral requirements, together with tentative talk of autonomous interest rates,
represents a remarkable incipient innovation. In the aftermath of the crisis, some policymakers are
beginning to see that a monetary union is not necessarily identical with unfettered capital mobility.
Recognition of diverse credit quality is a step back into the nineteenth-century world, and at the same
time forward to a more market-oriented and less distorting currency policy. Different interest rates in
different countries might open the door to a more stable eurozone.
Even greater monetary flexibility
Europeans can also look to other past episodes, when previous crises produced innovative solutions.
The history of the immediate aftermath of the Maastricht Treaty holds out some lessons. The European
Monetary System (EMS) crises between September 1992 and July 1993 looked as if they would blow
up the whole course of European integration. What was at first seen as a one country problem (then it
was Italy) toppled other currency regimes like dominos: Britain, Spain, Portugal, and by July 1993
even France was vulnerable. Then as now the future of Europe was at stake.
The solution adopted in frantic late night negotiations at a meeting of the EC Monetary Committee
on July 31, 1993, in Brussels at first sight looked counterproductive. The massive widening of the
EMS bands to 15 percent either way of the central rates initially made a single currency seem much
further off. But it also took away the one way bet character of speculative attacks on the vulnerable
currency, and thus removed the fundamental driver of instability. The French franc initially fell
sharply against the Deutschemark (but within the new band), largely recovered by the beginning of
1994, had another bout of weakness around the contested and uncertain presidential election of 1995,
and then rose to a stronger position than in 1992-3 on the eve of the introduction of the single
currency.
The modern equivalent to the band widening of 1993 would be keeping the Euro for all members
of the Eurozone but also allowing some of them (in principle all of them) to issue – if they needed it –
national currencies. The countries that did that would find that their new currencies immediately
trading at what would probably be a heavy discount. California recently adopted a similar approach,
issuing IOUs when faced by the impossibility of access to funding. The success of stabilization efforts
Harold James
38
could then be read off from the price of the new currency. If the objectives were met, and fiscal
stabilization occurred and growth resumed, the discount would disappear. In the same way, after 1993,
in a good policy setting, the French franc initially diverged from its old level the band but then
converged back within the band. Such a course would not require the redenomination of bank assets or
liabilities, and hence would not be subject to the multiple legal challenges that a more radical
alternative would encounter. There would also be the possibility that the convergence did not occur.
The two parallel currencies could then coexist for a very much longer time period. This is not a novel
thought. It was one of the possibilities that was raised in the discussions on monetary union in the
early 1990s, that there might be a common currency but not necessarily a single currency.
Such a state of affairs is not just a theoretical construct in fringe debates in the early 1990s, but a
real historical alternative. There is in fact a rather surprising parallel for such a stable coexistence of
two currencies over a surprisingly long period of time. Before the victory of the gold standard in the
1870s, Europe operated with a bimetallic standard for centuries, not only gold but also silver. Each
metal had its different coinage. One trick that made this regime so successful was that the coins were
used for different purposes. High value gold coins were used as a reference for large value transactions
and for international business. Low value silver coins were used for small day to day transactions, for
the payment of modest wages and rents. Silver was what Shakespeare termed the “pale and common
drudge ‘tween man and man.” A depreciation of silver relative to gold in this system would bring
down real wages and improve competitiveness. Early modern Italian textile workers would find their
pay in silver reduced, while their products still commanded a gold price on an international market for
luxuries.6
Larry Neal describes the operation of the Bank of Amsterdam in the seventeenth century as
providing a flexible exchange rate its management between the bank guilder and the coin guilder, and
thus offering a “shock absorber” for the domestic economy.7
This is one of the reasons why theorists
such as Milton Friedman considered a bimetallic standard inherently more stable than a mono-metallic
(i. e. gold standard) regime.8
In the modern setting, the equivalent of the adjustment mechanism in the early modern world of
bimetallism would be a fall in Greek (or other crisis country) wage costs as the wages were paid in the
national currency, as long as it was traded at a discount. These would be the equivalent of silver
currencies. Meanwhile, the Euro would be the equivalent of the gold standard. It would be kept stable
by the institutions which already exist today, the ECB and the ECSB of those national central banks
who have no new alternative. In this sense the core countries would be the equivalent of eighteenth
and early nineteenth century Britain, which also had no bimetallic standard but simply a gold standard
regime. Adjustment would be an internal matter in countries which would have a greater flexibility as
to domestic wages; and much of the burden would be taken off the central currency mechanism. Now
as then a choice of currencies in a national as well as an international setting seems odd and
counterintuitive: but it can satisfy a demand for stability.
.
6
Richard A. Goldthwaite, The economy of Renaissance Florence, Baltimore : Johns Hopkins University Press, 2008; Tim
Parks, Medici money : banking, metaphysics, and art in fifteenth-century Florence , New York : W. W. Norton & Co.,
2005.
7
Larry Neal, “How it all began: the monetary and financial architecture of Europe during the first global capital markets,
1648–1815,” Financial History Review 7 (2000), pp. 117–140.
8
Milton Friedman, Money mischief : episodes in monetary history, New York : Harcourt Brace Jovanovich, 1992.
39
The European Economic Constitution in Crisis:
Between ‘State of Exception’ and ‘Constitutional Moment’
Christian Joerges*
No task is more urgent for the students of European law than the search for a way out of the present
crisis. It is nevertheless also important, to be aware of the complexities of such efforts. This note is a
reflection on the nature of the difficulties we face. The argument will proceed in three sections. The
first section addresses the responses to the crisis in the interpretation of the Treaty and subsequent
measures (I.1) and those in the judgment of the German constitutional Court of 7 September 2011 on
the aid granted to Greece and the euro rescue package (I.2). The second section will reflect upon the
state of the law in controversial theoretical perspectives, namely the positions of Jürgen Habermas on
the one hand (II.2) and his intimate enemy Carl Schmitt on the other (II.1). On that background section
III will sketch out alternatives.
I. Europe’s Economic Constitution in Crisis
Primary law, secondary law and other measure are developing in unprecedented modes. This note
cannot attempt to document these developments and their by now enormously intensive discussion in
European law scholarship in any systematic way and to evaluate the relative merits of more
affirmative and more critical comments. All that is intended here is to point to three groups of
particularly controversial issues (1). How difficult it is to find convincing answers to these queries will
be so-to-speak confirmed by a look at the German judgment (2)
I.1 Critical legal developments
The critical state of the economic constitution becomes apparent in the extensive interpretation of
primary law, daring provisions in the recent secondary legislation and in the Fiscal Pact.
a) Primary law
Articles 122 (2) TFEU talks about difficulties “caused by natural disasters or exceptional occurrences
beyond” the control of the affected state – it is not evident that the accumulation of sovereign debts fit
into that provision.
Article 125 (1) TFEU provides that the Union shall not be liable for or assume the commitments of
central governments…and that a Member State shall not be liable for or assume such commitments. –
Who would have questioned that the no-bail-out-clause was meant to discipline the Member States?
At the beginning of the crisis the objectives of that provision were hardly controversial and informed
the understanding of the non-bail-out-clause.
b) Secondary law
Suffice it here to single out from the Six Pack of November 2011 Regulation 1174/2011, which
empowers the Council to sanction with the help of the Commission non-compliance of a state with
recommendations concerning macro-economic imbalances. This is very difficult to reconcile with the
European order of competences.
*
Research Professor at the Collaborative Research Center 'Transformations of the State' and the Centre for European Law
and Politics (ZERP) at the University of Bremen.
Christian Joerges
40
c) The Fiscal Pact as it was signed on 2 March 2012:
Controversies abound. Two issues deserve particular importance. One concerns the constitutional
importance of budgetary powers which are the basis for political choices. A second one is the
empowerment of the European Council and the Commission to define the corrective measures that
have to be taken in case of budgetary imbalances.
I.2 The judgment of the Bundesverfassungsgericht of 7 September 2011
So far Germany’s Federal Constitutional Court (FTC) is the only judicial forum in which the crisis has
been examined. The Court was confronted with complaints by a group of 5 professors against the aid
granted to Greece and of Dr Gauweiler, Member of the Bundestag, against the euro rescue package.
The technicalities cannot be discussed here. The principles, however, which the Court has established
are instructive – and so are the limits of these principles, which the court indicated in the yes-butstructure
of the judgement.
Principle 1: The budgetary responsibility of the Bundestag is a constitutional essential. The
Bundestag must “retain control of fundamental budgetary decisions even in a system of
intergovernmental administration (p. 48).
But: “The FCT must restrict itself to manifest violations… it must respect a latitude of assessment” of
parliament ( p. 51).
Principle 2: Germany will not comply with European legislative act where the order of
competences was not respected (‘ausbrechende Rechtsakte’); the pertinent pages from the Maastricht
judgment are referred to (p. 50). The bail-out clause (Article 125) is binding and needs to be respected.
Was it respected? The FCT does not examine that query, let alone refer it to the ECJ (p. 50).
Principle 3 is the most challenging: Can the governments operate outside the Treaty framework in
intergovernmental mode characterised by the German Chancellor as ‘Union Method’.
a) The Basic Law protects the citizens against “a less of substance of their power to rule by
far-reaching …transfers of duties and powers of the Bundestag to supranational
institutions.
b) The same applies to comparable commitments entered into by treaties (p. 39).
But: The application of these principles remains then somewhat enigmatic:
a) The FCT controls German legislative bodies. Whether they complied with their integration
responsibility is left undecided because the complaints did not substantiate such violations
(p 43, para. 109).
b) Decisions taken in intergovernmental meetings are not acts of German state authority
which may be challenged –‘notwithstanding other possibilities of review’.
How poor is that reasoning? Is there a kernel of truth in Joseph Weiler’s remark on ‘the dog that barks
and then never bites?’ One may conclude that the court avoid a discussion of queries it is not prepared
to answer. Or is precisely this apparent inability to hand down a conclusive judgement revealing and
instructive? The Court simply could not comply with the letter of the law because that law is
misconceived; the German Court also acknowledges that it is not the guardian of the whole of Europe.
If this is so, Karlsruhe was even well advised not to refer the matter to the ECJ. It seems inconceivable
that the ECJ could hand down a judgment of the whole of Europe’s economic constitution.
What, then, are the law’s options? My provisional conclusion: The controversies generated by the
crisis are beyond the law’s limits. At that point I turn to Jürgen Habermas and his favourite enemy – in
a chronological order for reasons that will become apparent.
The European Economic Constitution in Crisis: Between ‘State of Exception’ and ‘Constitutional Moment’
41
II. State of Exception or Constitutional Moment? Carl Schmitt v. Jürgen Habermas
1. Carl Schmitt
Carl Schmitt has famously and with good reasons been called the crown jurist of the Third Reich. He
was thereafter neither exposed to criminal prosecution and his past may even have contributed to the
fascination with his work, even or in particular among Anglo-Saxon theorists.
Reasons abound. In the present context a whole range of his notions are worth to be revisited: His
understanding of the state of exception as a constitutional concept; his critique of parliamentary
democracy; the theory of commissarial dictatorship, his diagnosis of the rise of the executive. Most
pertinent, however, seems his theory of the European Großraum.
a) In the spring of 1939, i.e., after the Anschluß of Austria and the invasion of Bohemia and
Moravia, but before the war against Poland, the ‘Reichsgruppe Hochschullehrer des
Nationalsozialistischen Rechtswahrer-Bundes’ [Reich section of professors in the National Socialist
Association of Lawyers] met in Kiel. This was the setting in which Carl Schmitt presented his new
theory of international ‘law’: the ‘Großraum order in international law, with a ban on intervention for
spatially foreign powers. A contribution on the concept of the Reich in international law.’
The core argument of his key: The jus publicum europaeum, which had made the sovereign state its
central concept, was no longer in line with the de facto spatial order of Europe. A specific
‘sphere/space’ (the Raum) had to become the conceptual basis for international law, with the Reich
constituting the order of that space. Schmitt underlined that his notion of Großraum was a ‘concrete,
historical and politically contemporary concept’ [konkreten geschichtlich-politischen
Gegenwartsbegriff] rooted ‘essentially not in the state but in the technical, industrial and economic
sphere’ (my italics). In a later edition of his Kiel speech, Schmitt referred to debates and theorems on
the erosion of the territorial state as the harbingers of the necessity to adapt international law to the
factual re-structuring of international relations and the replacement of classical international law by
norm systems which one would call governance structures today. He underlined specifically two
phenomena, namely, the economic inter-dependencies beyond state frontiers [an emerging ‘Großraum
economy’] and the valueless rationality of technology-driven developments, which further the
dictatorship of ‘technicity’ [Technizität].1
b) Beyond these pronouncements, Schmitt remained silent about the inner ordering of the European
Großraum. And indeed there was not much to say at the turning point of the war beyond the claim for
German leadership. However, Schmitt’s remarks are quite instructive when read together with his
references to his pre-1933 theory of dictatorship and the quest for commissarial powers in the state of
emergency and also a post-1933 essay on ‘legislative delegations’ which was published only shortly
before the Kiel conference. In that comparative analysis, Schmitt observes a blurring of the
demarcations between legislative and executive powers in all of the leading democratic states and an
apparently irresistible resort to ‘simplified’ legislative techniques. Legislation, so he concludes, has
become essentially a governmental activity.
c) What should all this have to do with the present state of the European Union. Ernst-Wolfgang
Böckenförde, formerly a renowned judge of the Bundesverfassungsgericht and a great connaisseur of
Schmitt’s oeuvre, was among the first to characterise the crisis of the Euro and of Monetary Union as
an ‘Ausnahmezustand’ (‘state of emergency’) which would suspend the rule of law.2
This was by no
means meant as a complacent acceptance of the crisis management on which Böckenförde commented
in the spring of 2010, let alone of the disregard of the bail-out clause and the provisions on the
1
I leave aside here what he added in a later edition of his essay about German leadership and what may be simply
opportunistic concessions to his Schmitt’s opponents in the Nazi party
Christian Joerges
42
mandate of the ECB or of the more euphemistic readings prevailing in pertinent comments. The
implicit, albeit clear, references to Schmitt, in Böckenförde, have in the meanwhile been more widely
noted.
d) Who governs in the state of exception? Schmitt discussed this query famously from 1921
onwards. ‘Commissarial Dictatorship’ was the notion he came up when suggesting that the state of
exception is not one of permanent disorder. The commissarial dictator is empowerment to restore
order and in that sense committed to constitutionalism. On the road to that restoration, however, there
are no legal constraints, no objections against ‘Maßnahmen’ -- actions or arrangements necessary to
overcome the circumstances at hand.
The topicality of the substance of Schmittian notions is intensive and alarming. It seems all the
more important to listen to Jürgen Habermas.
2. Jürgen Habermas
One cannot be more passionately committed to the European project than Jürgen Habermas. His
writing on Europe started shortly before the publication in 1992 of his magnum opus on the ‘Discourse
Theory of Law and Democracy’ – and there is coherence between his constitutional theory of the
nation state and his work on the postnational, European and extra-European constellation. In all of his
writing the European project is presented as an indispensible prerequisite for the survival of
democracy and social justice. His quest for ‘more Europe’ was never simply affirmative. The tone of
his interventions, however is getting ever more intense, and shifting in its emphasis from institutional
deficits to the failure of the institutional personal and politicians: He sees Europe on the road to
‘executive federalism’ driven by a ‘technological (mis-)management’, which is threatening
democracy, the rule of law and the legitimacy of the European project.
Habermas the political citizen, however, is always accompanied and supervised by Habermas the
theoretical analyst and political philosopher. The crisis has provoked both the citizen and the theorist.
The citizen complains: What the rulers of Europe envisage is in essence an intergovernmental form of
cooperation, that is, a politically inconspicuous step toward further integration of the states, not of the
citizens. The heads of state of the seventeen euro countries assembled in the European Council are
supposed to remain firmly in control. In pursuing this course, however, they would be equipped with
competences of economic governance that annul the budgetary prerogative of the national parliaments.
We would then have to reckon with a post-democratic empowerment of the executive on an
unprecedented scale. The unavoidable protest of the parliaments stripped of their powers will at least
reveal a legitimacy gap in that can be closed only through democratic reform of the interplay among
the EU bodies.
The theorist continues his search for the proper constitutional framing of a democratic Union. In a
recent essay which will be available in English very soon, Habermas re-defines his perspectives.
Nation states, so the argument goes, are no longer in a position to accomplish what their constituencies
expect from democratic rule. The erosion of their power is due to both growing inter-dependence and
the dynamics of globalisation. Both aspects are compelling reasons to co-operate transnationally and
to transfer competences to supranational institutions. As long as this transfer does not damage
democratic procedures, it can operate to rescue democratic constitutionalism. The Union represents
this potential. The European project can then be re-constructed as a rescue of democratic
constitutionalism which is respectful of the democratic credentials of its Member States while, at the
same time, institutionalising supranational rule. The peoples of Europe are supposed to understand this
supranationalism as a democratic command because it would enable them to accomplish what their
nation states are unable to achieve. Once more, Habermas operates with the construct of co-originality
in order to reconcile what is usually understood as a dichotomy or antagonism. In his vision, we are
citizens of the Union and of the respective Member States . The Union is therefore neither a state nor a
federation, but a Verfassungsverbund. The construction is certainly fascinating, in particular, because
The European Economic Constitution in Crisis: Between ‘State of Exception’ and ‘Constitutional Moment’
43
it provides good reasons for a bond of solidarity among the peoples of Europe. It also provides critical
yardsticks. Habermas not only criticises a broad range of practices and omissions passionately but, in
addition, identifies design defects in the European institutional architecture. His prime target is the
establishment of a monetary union which lacks the powers to govern the economy effectively.
I am impressed as I always was ever since I attended for the first time a Habermas seminar back in
the late 1960s. However, I am not really convinced, neither by the theorist nor by the political citizen.
The parallel or analogy between the Janus-faced national and European citizen and Habermas’ cooriginality
theory of private and public autonomy in constitutional democracies seems to underestimate
the non-formal prerequisites of the functioning of democracies, the weight of historical
experience, and the social embeddedness of institutions. European governance cannot substitute these
conditions in the foreseeable future.
These reserves affect the plausibility of Habermas political hopes, which I share. What is so
difficult to see is the potential for the organisation of such a democratic turn, and sensitivity for
steadily increasing socio-economic diversity of the Union, the differences of interests and political
orientations and the political readiness of European leaders and European citizens to exercise
solidarity?
III. Is the Alternative really ‘alternativlos’
In the shadow of the sketched-out scenarios, it may appear naïve indeed to reflect upon alternatives to
the nightmares of commissarial dictatorship on the one hand and the somewhat desperate hope for a
bold democratisation move. And yet, it would seem somewhat irresponsible not to do precisely that.
At that point I should finally engage with our assignment.
This, however, I cannot do outside the perspectives on which I have been working for quite some time
now – and I would have to discuss how the crisis affects them. A few remarks must suffice here:
a) I believe that we have to depart from some of our fundamental premises in two important respects:
 We have to re-consider the integration project in the light of Europe’s ever growing diversity.
 We should hence re-orient Europe’s agenda from harmonisation and unity to the management of
complex conflict constellations.
b) ‘Conflicts-law constitutionalism’ is my perhaps not so fortunate title of such efforts. Two of its core
messages seem worth to be defended in principle:
 European law should derive its legitimacy from its potential to correct democracy deficits of
nation states, in particular their failure to include those affected by their policies into their
decision-making processes.
 European law should also organise a co-operative solution of problems which the member States
cannot resolve autonomously.
c) ‘Conflicts-law constitutionalism’ as a critical exercise
 My claim until recently was that conflicts-law-constitutionalism is to a large degree a
reconstructive project, a re-interpretation and re-conceptualisation of really existing European
law: European law does compensate external effects of parochial policy-making; it does organise
cooperative regulation and governance.
 After the crisis the gap between my normative suggestions and the operation of European
politics is widening, not just in the strive for economic governance or government, but also in
fields which seemed well consolidated.
I refrain from any generalisation and even more so from any predictions. What I cannot imagine is
even under the impact of a deepening crisis, that we will experience all-encompassing comprehensive
transformations. ‘Executive federalism’ is not to be equated with Schmitt’s commissarial dictatorship.
Christian Joerges
44
The management of the crisis is unfortunate but will not re-vitalise the hostility of the past. The
European machinery continues to function well in numerous fields. Pragmatic, patient and fair conflict
management is a source of European legitimacy – and a more cautious and modest Europe may indeed
be a sustainable vision.
45
The European Stability Mechanism: a constitutional authority in disguise
Giulio Napolitano*
The establishment of the European Stability Mechanism represents a turning point in European
integration process. Its permanent nature transforms the Union into a community of risks, not only of
benefits. As a collective insurance device against future damages that could affect a country or a
people, it assumes an intimate constitutional nature.
The legal status and some fundamental rules of the Esm, unfortunately, seem unable to meet the
challenges raised by such an ambitious program. Transparency and accountability needs are not
satisfied. And the day by day effectiveness of the Mechanism could be seriously undermined by
compromises, ambiguities and perhaps mistakes in the institutional design.
Firstly, the Treaty defines the Esm an “international financial institution”. Such a definition doesn’t
fit its authentic nature. On one side, it’s not truly international. Even if established by a specific
Treaty, its birth is covered by an amendment to the Treaty on the functioning of the European Union.
Its dimension is European and its tasks are complementary to the European economic governance. On
the other side, the Mechanism is not merely a financial institution, like a commercial bank. Its
subscribers are Member States of the Union. The governance is in the hands of ministries of finances.
Its purpose is to give aid to Member States, not to earn money or raise revenues. The definition as an
international financial institution is not only misleading. It also produces undue legal effects, creating
an obstacle to the proper application of general rules on transparency and accountability referred to
E.U. public institutions.
Secondly, procedures to grant financial assistance are ill conceived. On one side, they are too much
complicated and long lasting. On the other side, they depend on the request advanced by a needing
Member State. But if it doesn’t issue the request – for internal political reasons – the financial stability
of all the Eurozone could be threatened. That’s why it could be extremely useful to introduce a third
party kick off. The power to start the procedure should be conferred also to a qualified number of
other Member States, or to the European Systemic Risk Board.
Thirdly, too much discretion is given to the Board of Governors. The Board has been vested with
the power to grant support to a member State. In order to foster the efficiency of the financial
assistance, it can also allow Member States to allot the subsidy to the re-capitalisation of a financial
institution. Finally, it can decide to purchase bonds of a Member State both on the primary and the
secondary market. While adopting such measures, the Board of Governors seems to enjoy a broad
discretion, as suggested by the fact that it “may decide” to adopt the measures mentioned above.
Indeed, the Treaty does not set any general goal or primary interest for exercising such powers.
Although the appraisal by the Commission shall be taken into account, it is not binding on the Board.
The problem is that the Board is not even compelled to give reasons. It seems, however, that a
motivation would be utterly necessary, especially whenever the Board sets aside the advice of a
European institution. It is highly recommendable also the introduction of the dissenting opinion:
representatives of Member States exercising de facto a veto power should be obliged to give reasons,
from the perspective of the European interest and not only of the national one.
Fourthly, the rules on dispute resolution violate the principle of “nemo iudex in causa propria”. In
fact, the Treaty entrusts the Board of Governors itself with the settlement of disputes arising on the
interpretation and application of the Ems Treaty between the Ems and an Ems member State. Thus,
dispute resolution is mainly “political”, as it belongs to the same body that leads the Ems and
represents national Governments, with the non negligible effect of rendering the Board of Governors a
*
Roma Tre University.
Giulio Napolitano
46
sort of iudex in causa propria. In this regard, the set up of an independent Board of Appeal – like
those of some European agencies – would be more appropriate.
Fifthly, the Treaty does not envisage any of the accountability tools that are usually made available
towards European agencies. There are no consultation procedures, neither with general stakeholders,
nor with “qualified” parties, such as institutional investors and creditors. There are no transparency
duties, nor is it possible to have access to the files. Moreover, the Board of Governors does not report
to the European Parliament and there are no procedures to assess Esm's efficiency. Only the financial
administration of Esm is subject to a specific set of rules. Every four months, the Member States shall
receive a report on financial administration. Moreover, the Treaty provides for two levels of audit,
internal and external. In this view, the Board of Governors also appoints a Board of Auditors, which,
nonetheless, shall be independent. The only document released by the Board of Auditors is its annual
report. The latter is submitted to the Board of Governors, that makes it accessible to the national
parliaments and supreme audit institutions of the members States, as well as to the European Court of
Auditors. Oddly enough, the report is not accessible to the European Parliament. In order to increase
the legitimacy and the accountability of the Esm, it’s highly recommendable to set up a regular
consultation process, to increase transparency, allowing access to data and records, to introduce
reporting obligations in favor of the European Parliament.
Notwithstanding the complex legal and institutional frame of the Esm, for the very first time the
European Union has accepted to set up a common fund in order to support ailing member States and
citizens in need. As matter of fact, the European Union is getting a constitutional feature under the
dress of facing the emergency of financial and sovereign debt crises.
Apparently, it may look curious that such an extraordinary step towards European integration leans
on the tools international law and that it is not endorsed by all member States. However, the whole
history of monetary integration has been characterized by the relationship between further integration
and further differentiation, so that there is no surprise if the same happens while building the stairway
for fiscal union and co-insurance among the member States.
Nevertheless, the possible outcomes of this constitutional process are still unclear. In fact, on the
one hand, the Fiscal Compact Treaty deeply affects national political-institutional balance. Therefore,
its ratification process will have to overcome several oppositions, especially if it will be faced to
national political changes and unpopular referendums. On the other hand, the destiny of Esm will also
depend on other unforeseeable events: in case of an ease of the sovereign debt crisis (e.g., because of a
slack in financial speculation or thanks to the proper functioning of the new public finance provisions),
the Mechanism will remain “dormant” in the backstage. However, further speculative attacks against
sovereign debt could require an immediate intervention in order to prevent contagion. It will then be
necessary to foster Esm, by increasing the resources at its disposal and by solving the institutional
problems of its legal framework.