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This chapter begins by reviewing the literature on the politics and economics of EMU, asking to what extent the explanations put forward regarding the establishment and the design of EMU might have explanatory power with reference to the establishment and the design of Banking Union. The chapter then reviews the literature on Banking Union, which, with some notable exceptions, so far has mainly focused on the economic and legal aspects of the Union’s main components. The chapter elucidates the two-step analytical framework underpinning our study—namely, the concept of the trilemma, which explains the functional drive towards Banking Union; the main features of national financial systems, which, together with the concern for moral hazard, account for the preferences of the member states on the Union’s main components and the asymmetric distribution of bargaining power—which resulted in an asymmetric design of Banking Union.

This chapter looks at the division of power and accountability structures in the European Banking Union, the principal emphasis being on political accountability. Other types of accountability are also examined where appropriate (e.g. budgetary, administrative, or legal accountability). The discussion begins with the division of competence between the national and EU authorities in the Banking Union. This is followed by examination of the role of the European and national parliaments, as well as the Council and Eurogroup, in holding the European Central Bank, the Single Resolution Board, and the national supervisory and resolution authorities to account for their actions in this area. The focus then shifts to the intra-institutional balance of power and the emerging patterns of geographical fragmentation. The penultimate section of the chapter focuses on access to information, which is crucial for all forms of accountability. The final section of this chapter offers a snapshot of some of the features of the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM) which may hamper the effectiveness of the Banking Union and place its output legitimacy in jeopardy. The chapter concludes with proposals on how to strengthen accountability and transparency in the Banking Union.

Discourse concerning Economic and Monetary Union (EMU) reform is complex. This is in part because of the inherent complexity of the subject matter, and in part because the outcome, whatsoever that might be, will not be determined purely by economics. The European Union (EU) is quintessentially the art of the possible, and politics is of considerable importance in determining the parameters in this respect. There is, moreover, a temporal dimension to discussion of EMU reform, which in this context signifies the fact that the likely direction of change emerges over time, with successive high-level reports operating incrementally to lay the groundwork for change. Thus, the key staging posts for the next stage of EMU reform include the Four Presidents’ Report, the Five Presidents’ Report, the Commission’s Reflection Paper, and its 2017 Roadmap for completion of EMU.

If post-communist countries realized marketized bank–state ties through transition and international pressure to privatize their banks with foreign capital, western Eurozone states have more recently come under pressure to follow suit. European Banking Union centralized bank supervision and introduced a single resolution board at the expense of national authority. Thus under banking union, national regulatory and supervisory forbearance was curbed; barriers to banking market entry were no longer the purview of national authorities; disproportionate bank lending to one’s own sovereign would be discouraged; and bank bondholders, creditors and depositors—i.e. market actors—paid the price for bank failures first, before governments and taxpayers. While European Banking Union put the euro on stronger foundations, it also curbed national economic policy discretion and limited tools for adjustment. Taking Italy, Portugal, Spain and Germany as examples, this chapter explains why and in what policy areas Eurozone states’ sovereignty clashed with banking union.

The introduction explains the relevance of our study, whereby the establishment of Banking Union represents a major development in European economic governance and European integration history more generally. The introduction teases out the empirical questions that inform the study, namely: why has the move to Banking Union been undertaken only now, over twenty years after the agreement on (E)MU? And why has a certain design for Banking Union been agreed and some elements of this design prioritized over others? The chapter also outlines the analytical framework of the book, its overall argument, and its limitations. Finally, it summaries the structure of the volume and provides a short chapter-by-chapter synopsis.

European states have a long history of banking sector nationalism. Control over credit allocation is believed to contribute to economic development and competitiveness, insulation from external economic shocks, and control over monetary policy. We demonstrate the dramatic loss in domestic control over banks created by European Banking Union and explain the sudden shift from national to supranational banking supervision as follows. In the background, ongoing economic liberalization has made banking sector protectionism more costly, and because many large banks have internationalized, they now prefer centralized European regulation and supervision. In the foreground, we find it is primarily the European Commission and the European Central Bank that have pushed European Banking Union (EBU) ahead. Contrary to accepted wisdom, Germany has not been able to limit EBU to a great extent. Moreover, the Commission and the ECB have managed at critical junctures to isolate Germany to secure that country’s assent to controversial measures.

This chapter discusses the various combinations of regulatory capacity in the EU and the US, as well as the sequencing effects in the development of domestic regulatory capacity (at the national or regional level) and international standard-setting. Alternative or complementary explanations for the politics of international standard-setting are examined, in particular market size and lobbying from the financial industry. It explains the development of regulatory capacity in the EU, pointing out the role of the Commission, which often acted as policy entrepreneur, and the preferences of the member states, whose support was needed for the adoption of new regulatory templates. In turn, member states’ preferences were mostly rooted in their domestic political economy. The last section discusses the proposal for Banking Union, elaborating its implications for the EU and international financial regulation.

Directive 2001/17/EC on the reorganisation and winding up of insurance undertakings (IWUD) had to be implemented in the laws of the Member States before 20 April 2003 (Article 31 IWUD). In recital (2) it states that: ‘The insurance directives providing a single authorisation with a Community scope for insurance undertakings do not contain coordination rules in the event of winding-up proceedings’. It continues:

This chapter draws together the implications of the Euro crisis for the EU and its Member States and critically evaluates the shortcomings of the Treaty schema in terms of transparency and accountability. The discussion begins with the measures intended to ‘complete’ and ‘deepen’ the Economic and Monetary Union (EMU). It sets out the author’s own view regarding the key reforms that would be necessary, albeit one that is informed by the proposals made by the EU institutions. These include a reform of the EU fiscal rules; the provision of technical assistance to Member States implementing structural reforms; establishing a Euro area stabilization function; completing the Banking Union and making progress towards a Capital Markets Union; and strengthening the role of EU financial watchdogs. This chapter further puts forward a number of concrete proposals on how to bolster transparency and accountability in the area of EMU, the dividing line being between those proposals that could be implemented without a Treaty amendment and those reforms that would require a Treaty revision. It further addresses separately accountability (and transparency) in the Banking Union, as well as the role of EU courts in the EMU.

This chapter examines the causes and consequence of two interconnected crises—the international financial crisis (2007–9) and the euro area’s sovereign debt crisis (from 2010)—which formed the background to the intergovernmental negotiations on Banking Union, and which largely explain its timing. The chapter also outlines the framework for financial stability in the EU before and after the crises. It is argued that the sovereign debt crisis created a doom loop between the instability of national banking systems, which needed to be bailed out in many countries, and the fragility of public finances, which were becoming unsustainable in some countries. Moreover, the crisis brought to the fore the financial trilemma between financial stability, financial market integration, and national regulation, supervision, and resolution—this trilemma was made particularly acute by Economic and Monetary Union (EMU) and became untenable in the euro area.

This chapter outlines the scope and key arguments of the book. It further set outs the analytical framework that will inform the discussion on the accountability arrangements in the area of Economic and Monetary Union, including the Banking Union.

This chapter provides the first account of IMF commentary on and interventions in the French economic policy debate following the crash to analyse how the Fund has sought to inflect French policy settings and approaches. It also situates French macroeconomic policy developments in the context of the European policy debate to demonstrate how the IMF has worked to influence reforms to the Eurozone’s architecture. Drawing on interviews with French policy elites and advisors, as well as members of Fund missions to France, it demonstrates how the French government, alongside the IMF, sought a less pro-cyclical approach and to open up ‘fiscal space’ for growth-oriented policies within European economic and monetary arrangements. However, key centres of power, notably the German government, the European Commission, and the European Central Bank prioritized ‘moral hazard’ and the ‘crisis of debt’ narratives, whose policy corollaries were ever-tighter fiscal discipline and ramped-up austerity.

In Part I, Chapter 1 at paras 1.22 ff, we set out the context in which the Bank Recovery and Resolution Directive (BRRD) was drafted and how it aims to harmonize, in short, substantive bank insolvency law. Together with the Single Resolution Mechanism Regulation (SRMR), the BRRD forms the second pillar of the Banking Union and intends ‘[t]‌o provide authorities with a credible set of tools to intervene sufficiently early and quickly in an unsound or failing institution as to ensure the continuity of the institution’s critical financial and economic functions, while minimising the impact of the institution’s failure on the economy and financial system’ (recital (15)). The BRRD had to be implemented into national law by 31 December 2014.

The study’s findings from Europe have implications for other major powers, including that: (1) banking sector protectionism became increasingly costly given other liberalizing trends; (2) foreign-owned bank subsidiaries can provide more stable funding in crises than alternative foreign or even domestic bank activity; (3) foreign domination in finance limited catching up in the global economy, but in fact few states showed the capacity to exploit domestic banks for national goals; and (4) centralized bank governance through European Banking Union weakened bank–state ties in Europe, and elevated the role of markets there. This chapter analyzes the relevance of the findings for the BRICS (Brazil, Russia, India, China, and South Africa). China is perhaps the clearest case of a country struggling to both liberalize and retain the economic policy autonomy associated with a largely state-controlled financial system. The conclusion specifies the broader transformation in bank–state ties, but also its limits.

Looking ahead, the legacy of the crisis years shapes fiscal policy coordination. The two main aspects of change considered in this chapter are purview and pliancy. First, fiscal policy has ceased to be defined in narrow ‘low-deficit’ targets and instead is set to encompass a twin notion of free riding: growth free riding and stability free riding. Second, fiscal policy coordination has become more flexible and as a result more adaptive to the challenges of sound public finances in the twenty-first century. While the institutional architecture for collective action has been strengthened, there is little reason to be optimistic as to the containment of endemic second-order free riding. Member states, this chapter argues, are continuing to rely on market discipline as the erratic enforcer of rules they are unable to bring to bear amongst themselves.

Creditor responses to sovereign debt crises suggest that they view such crises as problems of debt management on the part of the countries facing debt repayment difficulties. Thus, for example, debt relief and restructuring mechanisms coordinated by the international financial institutions place emphasis on correcting perceived imprudent debt management through a series of economic adjustment measures. Little attention, if any, is paid to addressing the underlying causes of the debt crises. This chapter examines the various causes of sovereign debt crises and the role that debt management plays in their eruption or in addressing them in a sustainable manner.