The (Il-)Legitimacy of the EU Post-Crisis Bailout System

Abstract

Despite the strong political rhetoric against taxpayer-funded bailouts, in reality the government will always intervene when the distributional effects of a pre-determined loss allocation regime are deemed to be unacceptable. A number of commentators have argued for the development of a structured bailout framework that ensures the political legitimacy and efficiency of bailouts whilst minimizing their potentially harmful effects. The recent Treasury Report to the President on Orderly Liquidation Authority and Bankruptcy Reform embraces a similar approach. Unlike OLA, the EU post-crisis bailout system has already been tested. This system consists of three elements: the BRRD/SRM resolution framework reflecting the post-crisis reform effort; national corporate insolvency law as the default option; and the overarching and non-sectorial EU State aid regime. Combining system analysis and the concept of regulatory legitimacy, this article examines the complex trifurcated EU post-crisis bailout system. Its central claim is that the current system calibration invites bailout decisions that are lacking in legitimacy because the system is unlikely to produce outputs that match the system’s goal of limiting bailouts to those that are likely to be ‘pie-increasing’ and desirable. These shortcomings should be addressed primarily through re-calibrating interconnections in a way that would elevate the BRRD/SRM resolution framework’s status and transform it into the EU’s Bank Resolution and Insolvency Code; with national corporate insolvency law and the EU State aid regime resigned to supporting roles within the resolution framework. The modification of system elements, notably through the appropriate setting of MREL, could further enhance overall output legitimacy.