The Euro Area Crises, Shifting Power Relations and Institutional Change in the European Union1

Abstract

Abstract This article studies recent governance dynamics in the euro area under the pressure of the sovereign debt crisis from 2009 to the end of 2011 from an institutionalist perspective. It investigates five cases of implicit or explicit institutional change which reveal the pace and the scope of explicit and implicit institutional change in the monetary union under crisis conditions. It argues that key steps of crisis management have actually created path dependencies for further institutional change. It also argues that incoherent responses from multiple actors in the face of immediate crisis management needs, new policy challenges and coordination difficulties in the crisis have strengthened the case for more substantial institutional change. An institutional set-up that continues to adapt only incrementally to the inner and outer challenges by not impacting more strongly on national sovereignty and by not strengthening supranational policy-making based on its own sources of legitimacy will not be able to solve the collective action problems inherent in the European Monetary Union (EMU)’s architecture with a centralized monetary policy and insufficient integration in the fields of economic, budgetary and financial policy coordination. Policy Implications • The adaptability of the institutional framework of the euro area should not be underestimated. • Substantial adjustment to its governance have occured and will happen below the level of Treaty change. • In the medium-term, a more fundamental reform may be required in order to account for problems of governance efficiency and, increasingly, problems of legitimacy. • An institutional set-up that continues to adapt only incrementally to the inner and outer challenges by not impacting more strongly on national sovereignty and by not strengthening supranational policy-making based on its own sources of legitimacy will not be able to solve the collective action problems inherent in the Euro area’s asymmetry; namely, a centralized monetary policy and insufficient integration in the fields of economic, budgetary and financial policy coordination.