The Selection of Three Cases

Among these new initiatives and strategies of the EU to deal with the post-2008 global financial crisis era themed by the eurozone sovereign debt crisis, three new measures are selected as cases for the research in this dissertation:

(1) The “European Semester”, implemented from 1 January 2011;

Prior to 2011, EU member states would coordinate their economic policy plans after adopting their national budgets, and at that time, the existing procedures of policy coordination were carried out independently from each other. The economic recession in the wake of the 2008 global financial crisis and the outbreak of the Greek sovereign debt crisis in autumn 2009 have illustrated the importance and urgency of achieving better economic policy coordination and bringing broader macro-economic policies under surveillance. Accordingly, the European Semester was created to synchronize and streamline the procedures of coordinating national budgets, economic growth and employment plans in line with the Union’s objectives as well as to prevent excessive macro-economic imbalances. The European Semester is one of the earliest initiatives put forward by the Task Force chaired by Herman Van Rompuy, which was established by the European Council meeting decision on 25-26 March 2010 during the height of the Greek sovereign debt crisis with the purpose of exploring all possible legal options to boost EU economic governance. On 17 June 2010, the European Council agreed on introducing the European Semester from 2011 onwards, and accordingly as follow-ups to this European Council decision, the Ecofin Council (i.e. Council of Ministers of Economics and Finance) on 13 July 2010 exchanged views on putting member states’ budgetary and structural policies under the European Semester’s surveillance; in September 2010, the Ecofin Council adopted the Commission’s proposal on the issue concerned, and consequently, the European Semester became effective on 1 January 2011. This new mechanism prescribes a clear timetable to coordinate individual national policies from the beginning of each year for

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a six-month period (the so-called “European semester”) before member states adopt their next year’s budgets in the second half of the year (the so-called “national semester”): the time when member states receive EU-level advice and guidance (i.e. Annual Growth Survey (AGS)), when they submit their policy plans (i.e. Stability and Convergence Programmes (SCPs) and National Reform Programmes (NRPs)) to be assessed at the EU level, when they are given individual recommendations (i.e. country-specific recommendations (CSRs)) on their national budgetary and reform policies, and when, if necessary, they receive recommendations to correct macroeconomic imbalances. As a result, under this new policy coordination and surveillance mechanism, during the first six months annually from 2011 onwards, EU member state fiscal situations and economic policies are reviewed, based on which any incoordination and newly emerging imbalanced situations will be detected and relevant recommendations will be given and then taken into account before member states finalize their budgets and reform programmes; in such a way, the EU dimension gets embedded in national policy-making.23 To summarize, the European Semester means “[a] six-month period each year when EU Member States’ budgetary, macro-economic and structural policies are coordinated so as to allow these countries to translate EU considerations into their national budgetary processes and into other aspects of their economic policymaking” (“Glossary”, ESM).

(2) The ESRB, starting from 1 January 2011;

The global financial crisis in 2008 exposes that the EU urgently needs an EU-wide financial supervision system to assess and prevent potential systemic risks so as to keep financial stability within the EU and to mitigate negative impacts of financial turmoil on the EU’s internal market and real economy (see ESRB Regulation (i.e. Regulation (EU) No 1092/2010) (10) and Article 3; also see Council Regulation (EU) No 1096/2010, (1)). In November 2008, European Commission President José Manuel Barroso requested a group of high level experts, chaired by Mr Jacques de Larosière (the former Managing Director of the IMF), to make recommendations to establish a more efficient, integrated and sustainable financial supervisory framework. On 25 February 2009, the de Larosière group submitted its final report, proposing two key recommendations: to establish a European Systemic Risk Council (ESRC) for

See, for example, “The European Semester” (European Commission) and “Special Reports, the European Semester” (Council of the European Union).

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macro-prudential supervision and to establish a European System of Financial Supervision (ESFS) for micro-prudential supervision. The first one shall supervise EU macro-economic aspects and give early risk warnings and directions to EU supervisors, while the second one shall provide complete and accurate information of micro-prudential developments to the first (see de Larosière Report 25 February 2009, 57; also see ESRB Regulation (24)).24 Based on these two suggestions, the European Systemic Risk Board (ESRB) for EU macro-prudential supervision and the European System of Financial Supervisors (ESFS) for micro-prudential supervision are established.25 The de Larosière Report (39) highlighted that “[t]he present EU supervisory arrangements place too much emphasis on the supervision of individual firms, and too little on the macro-prudential side”, and also “too little […] on inter-linkages between developments in the broader macroeconomic environment and the financial system” (ESRB Regulation, (11)), so the ESRB, created as a Union level body, means to make up those weak points by carrying out macro-prudential oversight of the EU financial system as a whole with the objectives of “avoid(ing) periods of widespread financial distress” and “contribut(ing) to the prevention or mitigation of

In contrast to micro-prudential supervision whose main objective “is to supervise and limit the distress of individual financial institutions, thus protecting the customers of the institution in question”, macro-prudential supervision means to “limit the distress of the financial system as a whole in order to protect the overall economy from significant losses in real output” (de Larosière Report, 38).

25

When firstly mentioned in the de Larosière Report(57), the acronym ESFS stood for “European

System of Financial Supervision”; later on 23 September 2009 in the legislative draft put forward by

the Commission, the ESFS represented the “European System of Financial Supervisors”, and it was

agreed that the ESFS, consisting of a network of national financial supervisors working in tandem with the three new European supervisory authorities (i.e. ESAs of the EBA, the EIOPA and the ESMA), should be responsible for micro-prudential supervision of national firms (see COM(2009)

499 Final 23 September 2009, 2). In both the de Larosière Reportand the Commission’s proposal, the

ESFS refers to national financial supervisors together with the three new EU-level micro-prudential

supervisory authorities, but later when the Ecofin Council adopted the Financial Supervision: Council

Adopts Legal Texts Establishing the European Systemic Risk Board and Three New Supervisory Authorities, the term ESFS referred to the whole EU financial framework, as it is clearly stated: “[t]he four new bodies (i.e. the ESRB and the three ESAs) will be part of a European system of financial supervisors, which will include the supervisory authorities of the member states” (Council of the European Union-16452/10 PRESSE 303, 17 November 2010, 1). So in a broad sense, the ESFS, which originally only stood for the micro-prudential supervision framework parallel to the ESRB (or the ESRC), is used to indicate both the macro and micro supervisory authorities within the EU; consequently, the ESFS subsumes the ESRB, as ESRB Regulation (14) also prescribes that “[a] European System of Financial Supervision (ESFS) should be established, bringing together the actors of financial supervision at national level and at the level of the Union, to act as a network”, which “should comprise the ESRB and three micro-supervisory authorities […] (hereinafter collectively referred to as the ‘ESAs’)” (see also ESRB Regulation Article 1; “Establishment of the ESRB”, ESRB). As a result, an EU-wide financial supervision system has gradually been formed.

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systemic risks to financial stability in the Union” as well as “to the smooth functioning of the internal market and thereby ensur(ing) a sustainable contribution of the financial sector to economic growth” (ESRB Regulation Article 3 (1)). On 16 December 2010, two legislations establishing the ESRB entered into force: (a) Regulation (EU) No 1092/2010 (ESRB Regulation — legislative acts) and (b) Council Regulation (EU) No 1096/2010 (“Conferring Specific Tasks upon the ECB” — non-legislative acts)26. Moreover, on 20 January 2011, the ESRB adopted ESRB Decision 2011/C 58/04 to specify the ESRB rules of procedure.

(3) The ESM, becoming effective as of 8 October 2012;

Developed after the temporary European Stabilization Mechanism (i.e. the EFSM and the EFSF) established in May 2010, the European Stability Mechanism (ESM), with its main features built on the EFSF, is a permanent crisis resolution mechanism providing loans and other forms of financial assistance for the euro countries via different debt instruments, so as to ensure financial stability of the euro area as well as the EU. On 17 December 2010, the European Council agreed to create a permanent stability mechanism. On 25 March 2011, the European Council adopted Decision-2011/199/EU to amend Article 136 TFEU so as to lay down the legal basis for the creation of the permanent stability mechanism for the euro states. The Treaty revision naturally requires all EU members’ national ratification with different constitutional requirements. On 11 July 2011, the finance ministers of 17 euro countries signed the Treaty establishing the European Stability Mechanism (ESM Treaty). Later, on 2 February 2012, the ESM Treaty got amended and signed again. On 27 September 2012, the ESM Treaty, after national ratification by the euro area states, entered into force. On 8 October 2012, the ESM was inaugurated.27 The financial assistance provided by the ESM does not mean fiscal transfers, but shall function as “a liquidity bridge that allows euro area countries in distress to ‘buy time’ to take the necessary

See “Establishment of the ESRB” (ESRB).

27

See “About the ESM” (ESM), “European Stability Mechanism Treaty Signed” (Council of the European Union 2 February 2012), and the ESM Treaty. The modifications to the original version of the ESM Treaty are about incorporating the decisions taken by the Heads of State and Government of the euro countries on 21 July and 9 December 2011 aiming at improving ESM effectiveness. For the main changes made by the amended ESM treaty, see ESM Treaty Factsheet (2 February 2012). Though the establishment of the ESM was conditional upon the amendment of Article 136 (3) TFEU, which was subject to national ratification and finally entered into force on 1st May 2013 after the Czech Republic’s completion of ratification on 3 April 2013, the European Court of Justice (ECJ) clarified that “the ratification of the ESM treaty can be concluded before the entry into force of the 136(3) amendment” (Novak 15 January 2014, 4).

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measures to restore fiscal sustainability and competitiveness in the medium term” (ECB

Monthly Bulletin July 2011, 71).

The reasons to choose these three are as follows:

First, as the classification of Tables 1.2 and 1.3 suggests, each of the three comes from the three different distinguishable categories, representing the EU’s intentions to address the effects of the 2008 crisis from three different rationales and approaches respectively: (a) strengthening fiscal and economic surveillance and coordination among EU member states while promoting economic growth and job creation via the European Semester, (b) establishing the ESRB responsible for EU-wide macro-prudential oversight to repair one of the loopholes of the financial sector so as to keep the financial stability, and (c) setting up the permanent crisis management mechanism ESM to provide direct financial assistance to the troubled euro states so as to ease the liquidity problems and boost investors’ confidence in EU financial markets. Obviously, the three types of policies are mutually supportive and reinforcing, as approach (c) also contributes to maintaining financial stability (approach b) and the recovery of the economy (approach a). Clearly standing for three different policy dimensions of distinctive rationales — fiscal and economic policy, financial supervision, and the practical crisis assistance mechanism, the three selected cases, therefore, bear enough variations for theory tests so far as their nature, purposes and functions are concerned, and such variance “is valuable because the theoretical scope of models is more thoroughly challenged and ascertained on diverse settings” (Niemann 2006, 4). Besides, the three cases ensure variation of the dependent variables, which is important to minimize the bias of case selection.

Second, representing the EU’s new developments after the global financial crisis, the three themselves are typical in their own categories as being the EU’s responses to the external and internal challenges. To begin with, the European Semester is a newly invented mechanism of the EU to supervise and coordinate national government economic and fiscal policy planning, by which policy guidance at the EU level gets embedded in national policy-making through the SCPs and the NRPs; besides, it possesses another two distinct characteristics: (a) it was born from the adoption and implementation of one of the earliest proposals put forward by the Task Force chaired by European Council President Van Rompuy, so the selection of this case also provides an opportunity to examine the functioning of the newly established post by the Lisbon Treaty; (b) stressing both fiscal supervision and economic growth, the European

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Semester is an inclusive policy coordination and supervision framework, under which Europe 2020, the Euro Plus Pact, the preventive arms of the SGP and the MIP,28 and the country-specific minimum benchmark figure demanded by the “balanced budget rule” of the TSCG, all have been integrated under the same umbrella (see Table 8.4). As a result, this new policy supervision and coordination mechanism covers national fiscal policy, growth-enhancing economic reforms, macroeconomic imbalance problems and financial sector issues, implying a more inclusive and comprehensive study of EU economic governance. As for the case of the ESRB which is constructed as a macro-prudential financial supervision system for the whole EU, compared with the micro-prudential supervision framework composed of national supervisory authorities and the three ESAs — the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA), and the European Securities and Markets Authority (ESMA), which replace the former three supervisory committees at the EU level: the Committee of European Banking Supervisors (CEBS), the Committee of European Insurance and Occupational Pensions Committee (CEIOPS), the Committee of European Securities Regulators (CESR), respectively,29 the ESRB is a totally novel institution placed under the leadership of the President of the ECB and located at the ECB. The ESRB is supposed to cooperate closely with the micro-prudential supervisory bodies of the ESAs and national supervisory authorities, international financial organizations (e.g. the IMF and the Financial Stability Board (FSB)) and other macro-prudential oversight bodies in other countries.30 With regard

As Table 5.3, footnote 123 and Appendix 1 of this dissertation suggest, the European Semester was created on the basis of the preventive arm of the SGP, but it operates separately from the preventive and corrective sanction mechanisms of the SGP. As a consequence, the Commission clearly explains that member states cannot be fined or taken to court if they fail to implement the European Semester’s recommendations, see European Commission-MEMO/12/386 (30 May 2012). For an overview of the origins and recent developments of the SGP, see, for example, Hosli and Pan (2014).

29

The ESFS and its relations with the ESRB are defined by ESRB Regulation Article 1(2) as follows: “The ESRB shall be part of the European System of Financial Supervision (ESFS), the purpose of which is to ensure the supervision of the Union’s financial system”, and Article 1(3) states the composition of the ESFS: (a) the ESRB; (b) the EBA established by Regulation (EU) No 1093/2010; (c) the EIOPA established by Regulation (EU) No 1094/2010; (d) the ESMA established by Regulation (EU) No 1095/2010; (e) the Joint Committee of the European Supervisory Authorities (i.e. the EBA, the EIOPA and the ESMA) provided for by Article 54 of Regulation (EU) No 1093/2010, of Regulation (EU) No 1094/2010 and of Regulation (EU) No 1095/2010; (f) the competent or supervisory authorities in the Member States as specified in the Union acts referred to in Article 1(2) of Regulation (EU) No 1093/2010, of Regulation (EU) No 1094/2010 and of Regulation (EU) No 1095/2010.

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to the third case, the creation of the permanent ESM involves Treaty revisions and national ratification for the Treaty revisions by all EU member states and for the ESM Treaty by all euro member states. The permanent ESM fulfills the vacuum of crisis resolution mechanisms in the EU/EMU project. All in all, as Cœuré (23 September 2012), a member of the executive board of the ECB, points out, Europe is “experiencing an institutional transformation”, and thus an intensive study of the institutional changes in each of the three categories offers sharp insights into the developing EU and its future.

Finally, to resolve the on-going sovereign debt crisis — the dominant thematic topic of EU economic governance after the 2008 global financial crisis — requires efforts from both EU institutions at the macro-level and member states at the micro-level. The three selected cases, like other new EU measures to deal with the crisis, reflect a demand of mutual communication and cooperation between the EU and its member states. A close analysis of them will reveal the interactions among various actors at different levels within the EU, and thus enable us to have a better understanding of the daily working mechanisms and institutional procedures of the EU.