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date: 20 September 2019

Economic and Monetary Union (EMU)

Summary and Keywords

Economic and Monetary Union (EMU) is one of the most important policy areas of the European Union (EU). Academic research on EMU in political science is well-established and ever-evolving, like EMU itself. There are three main “waves” of research on EMU, which have mostly proceeded in a chronological order. The first wave of scholarly work has focused on the “road” to EMU, from the setting up of the European Monetary System in 1979 to the third and final stage of EMU in 1999. This literature has explained why and how EMU was set up and took the “asymmetric” shape it did, that is to say, a full “monetary union,” whereby monetary policy was conducted by a single monetary authority, the European Central Bank (ECB), but “economic union” was not fully fledged. The second wave of research has discussed the functioning of EMU in the 2000s, its effects and defects. EMU brought about significant changes in the member states of the euro area, even though these effects varied across macroeconomic policies and across countries. The third wave of research on EMU has concerned the establishment of Banking Union from 2012 onward. This literature has explained why and how Banking Union was set up and took the “asymmetric” shape it did, whereby banking supervision was transferred to the ECB, but banking resolution partly remained at the national level, while other components of Banking Union, namely a common deposit guarantee scheme and a common fiscal backstop, were not set up. Subsequently, the research has begun to explore the functioning of Banking Union and its effects on the participating member states.

Keywords: Economic and Monetary Union (EMU), European monetary integration, euro, single currency, euro area, European Central Bank (ECB), Banking Union, European Union politics

Introduction

Economic and Monetary Union (EMU), which began functioning in 1999, is one of the most important policy areas of the European Union (EU). Indeed, the introduction of the single currency, the euro, could be regarded as a key step in European economic and political integration. The establishment of EMU was agreed on in the Treaty on European Union (also known as the Maastricht Treaty) in 1992, after heated intergovernmental negotiations and following a protracted, at times “bumpy,” process of European monetary integration, which dated back to the early 1970s (for an overview, see Dyson & Featherstone, 1999). EMU is represented by a full “monetary union,” whereby monetary policy is conducted by a single monetary authority, the European Central Bank (ECB), in the euro area, that is to say, in the EU member states that have adopted the euro. However, “economic union” is not fully fledged: it does not encompass a fiscal union, it only sets some upper limits to and loose coordination of national fiscal policies (Dyson, 2000; Hodson & Maher, 2002; Verdun, 1996). This asymmetric institutional design of EMU and its incomplete nature substantially contributed to the sovereign debt crisis in the euro area from 2010 onward, following the international financial crisis that broke out in 2008. One of the main responses of the EU to the sovereign debt crisis was the establishment of Banking Union, which was intended to contribute to the completion of EMU. Yet, the institutional design of Banking Union was asymmetric, resulting in an incomplete Banking Union.

Academic research on EMU in political science is well-established. This article discusses it by outlining the key questions addressed by various bodies of work, the theoretical approaches used, the causes and outcomes, and the main findings. The material is organized mostly in chronological order because research on EMU has proceeded in “waves.” Hence, one section examines the research concerning the establishment of EMU, beginning from the early 1980s to the third and final stage of EMU in the late 1990s. Another section discusses the research on the effects and defects of the functioning of EMU in the 2000s. A separate section outlines the research concerning the establishment of Banking Union and its functioning. Another section sums up the main themes that can be teased out from the literature reviewed and puts forward proposals for further research.

The Establishment of EMU

In political science, the research on the process of postwar European monetary integration in the 1980s and the establishment of EMU in the 1990s aimed to answer three key sets of questions: what were the main drivers of and obstacles to European monetary integration over time? Why and how was EMU agreed? And why did EMU take the shape it did? The answers to these important questions were sought by making use of some of the most well-established theories of European integration, namely: neofunctionalism, intergovernmentalism, and constructivism. Moreover, there were political economy approaches that investigated the preferences of EU member states on the main components of EMU—namely, monetary policy, exchange rate policy, and fiscal policy—as well as the “winners” and “losers” from EMU. Thus, the early research on EMU in the 1980s and 1990s regarded EMU as the outcome, that is to say, the phenomenon explained by a variety of (potential) causes—which can broadly be grouped under the headings of institutions, interests, and ideas—at the national level and the EU level.

A neofunctionalist or supranational governance view of the establishment of EMU has been taken by a small number of academic works (see, e.g., Sandholtz, 1993; Jabko, 1999; Verdun, 1999), which focused on explaining shifts in member states preferences on EMU due to spillovers from previous integration, first and foremost, the single market and past European monetary integration. Thus, the turning point was the establishment of the European Monetary System (EMS), specifically the Exchange Rate Mechanism (ERM) in 1979, which set in place a system of semi-fixed exchange rates among the participating countries. Furthermore, the EU supranational authorities, especially the European Commission, played a strategic role in driving the project forward (see Jabko, 1999), acting as policy entrepreneurs, with the support of big business. Economic spillovers were indeed the core element of the official justification of the Commission for EMU. The Commission and a number of federalist-minded economists insisted that the gains of the single market could not be optimized without a single currency: notably in the influential publication One Market, One Money (European Commission, 1990). Following a similar reasoning, some federalist-leaning economists, building on the Mundell-Fleming “unholy trinity” of fixed exchange rates, full capital mobility, and national monetary policies, added the single market to the trinity, which then became an “inconsistent quartet” in the EU, in the words of Tommaso Padoa-Schioppa (1994), who much later became a member of the Executive Board of the ECB. Like the Commission, a number of economists also stressed the instability of the ERM of the EMS—especially given currency speculation—and the functional need to move from the ERM’s semi-fixed exchange rate to EMU (Giavazzi, Micossi, & Miller, 1989; De Grauwe, 1990).

The vast majority of research investigating the establishment and the design of EMU has adopted explicitly (Moravcsik, 1998; Howarth, 2001) or implicitly (Dyson & Featherstone, 1999; Heisenberg, 1999; Kaltenthaler, 1998; Loedel, 1999) an intergovernmentalist approach. There are various versions of intergovernmentalism; their common denominator is the focus on national interests and the decision-making power of national governments negotiating in intergovernmental forums. Specifically, liberal intergovernmentalism focuses on (i) preference formation based on domestic producer interests, impacted by interdependence, (ii) intergovernmental bargaining based on power asymmetries, (iii) institutional choice based on the preferences of the member states. Intergovernmental accounts of EMU have investigated the (often competing) interests of the member states that had to be reconciled in EU negotiations, which often resulted in convoluted compromises. Intergovernmentalist accounts have also considered the different bargaining power of the member states, generally focusing on the main member states, notably Germany and, to a lesser extent, France.

The basic intergovernmentalist argument for the establishment of EMU mostly built on economic analyses of the functioning of the EMS, suggesting some cross-fertilization between the literature on this topic in political science and in economics. In the ERM, the German currency (the deutschmark) was the “anchor” of the system and the German central bank (the Bundesbank) could freely set its monetary policy objectives. The other participating countries had to “adjust” their monetary policy by following the policy decisions of the Bundesbank (Heisenberg, 1999; Kaltenthaler, 1998; Loedel, 1999). According to intergovernmentalist explanations, the establishment of EMU was a way for “follower countries” (especially France and Italy) to end the German dominance of the ERM. In EMU, the policymakers of these countries would have a say in the making of a single monetary policy and have a seat at the ECB (Moravcsik, 1998; Howarth, 2001). The German political elite agreed to EMU, mainly for political (rather than economic) reasons, and despite the opposition of the economic elite, notably, the Bundesbank, and the reluctance of public opinion in Germany. However, German policymakers imposed most of the EMU design, centered on an independent central bank located in Frankfurt and stability-oriented macroeconomic policies.

A third approach that has been used to explain the establishment and the design of EMU is constructivism (MacNamara, 1998; Verdun, 1999; see also Verdun, 2000). There are several variations of constructivism, but what they all have in common is the explanatory power assigned to ideas, defined as a set of causal beliefs concerning a certain policy area, rather than material (mostly economic) interests. Idea-based constructivist accounts contrast with the interest-based approach of intergovernmental explanations. Thus, constructivist approaches generally emphasize the importance of socialization in international or EU forums as a way to facilitate ideational convergence toward EMU. Some ideational approaches to the establishment and design of EMU have focused on the role of central bankers as an epistemic community supporting a stability-oriented design for EMU, based on central bank independence and anti-inflationary goals (Verdun, 1999; Marcussen, 2000). Other works have considered a broader set of actors, not only central bankers, in the ideational convergence toward EMU. McNamara (1998) traces the “currency of ideas,” that is, the spread of the stability-oriented macroeconomic paradigm from Germany to other member states. Thus, ideational convergence among macroeconomic elites across the EU explains why it was possible to reach an agreement on EMU as well as the specific “sound money” and “sound public finance” (Dyson, 2000) design chosen for EMU.

A fourth approach taken in the research on the establishment and design of EMU is firmly rooted in the domestic political economy of EMU in the main member states (Frieden, 1996; Hefeker, 1997; Oatley, 1997; Talani, 2000; Walsh, 2000), teasing out the main “winners” and “losers” from EMU among national economic and socioeconomic interests, and hence identifying the main supporters of and opponents to the project. By focusing on the preferences of domestic interest groups regarding the main components of EMU (monetary policy, fiscal policy, and exchange rate policy), these studies have uncovered the social bases underpinning (or in certain cases, undermining) EMU, complementing the elite-focused account of the intergovernmentalist approaches previously summarized.

By combining the main findings of this first wave of research on EMU, one gets a multifaceted picture of the making of EMU—what Dyson and Featherstone (1999) called a “multi-dimensional chess game.” The main driving forces in the process of European monetary integration were functional dynamics resulting from increasing economic and monetary interdependence in Europe; the entrepreneurship of supranational actors, notably, the Commission, and its energetic president, Jacques Delors; and the mobilization of policymakers in the member states that followed Germany’s monetary policy in the EMS, and regarded EMU as an institutional device to pool monetary sovereignty, rather than de facto ceding it to the Bundesbank. However, member states were internally divided on EMU, the establishment of which would generate winners and losers at the domestic level. The main obstacles to be overcome in the construction of EMU were the reluctance of German policymakers, which had considerable bargaining power because of the economic size of the country and because it was the “hegemon” in the EMS. Consequently, German policymakers were very influential in shaping the institutional design of EMU. Beside material interests, ideas were also important in the making of EMU, facilitating an agreement among the national elites of the member states and in promoting the German-inspired stability-oriented economic paradigm at the core of EMU.

Eventually, the institutional design of EMU agreed on in Maastricht was asymmetric, whereby full monetary union was not coupled with full economic union (Dyson, 2000; Hodson & Maher, 2002; Verdun, 1996). Fiscal union was notably missing and had deliberately been left out principally (but not exclusively) because of the opposition of German policymakers (Dyson & Featherstone, 1999), and despite the half-hearted calls of French policymakers for a government economique (Howarth, 2001) in the euro area. Moreover, there was some debate as to whether the ECB should be responsible (or not) for banking supervision in the euro area. Partly (but not exclusively) due to opposition of German policymakers, the supervision of banks was left at the national level (Dyson & Featherstone, 1999). On several issues, compromises among the member states were needed in order to move the project forward. For example, the initial formulation of the so-called convergence criteria for the member states to be allowed to join the third and final stage of EMU was softened during the negotiations of the Maastrict Treaty.

The Functioning of EMU in the 2000s

The third and final stage of EMU began in 1999, when 11 member states joined it and the ECB became operative. The United Kingdom, Sweden, and Denmark decided not to join EMU. In 2002, the single currency, the euro, was physically introduced and Greece joined EMU. Once EMU was established, the research on EMU in political science asked a new set of questions: how did EMU work and why? What were the effects of EMU? How did it affect the member states, their institutions, and policies? These questions concerning the functioning of EMU and its domestic effects chimed well with then burgeoning literature on Europeanization in EU studies. Other works have focused on the new institutions at the center of EMU, namely, the Eurogroup, investigating its internal deliberation, and, to a much greater extent, the ECB, speaking to theories of bureaucratic politics and technocratic governance in public policy and public administration. Finally, following the onset of the sovereign debt crisis in the euro area, scholars began interpreting the crisis partly as an effect of EMU. This “second generation” research on EMU has considered it as the cause that explains a variety of outcomes concerning changes at the national level in the member states as well as EU policy developments, including the sovereign debt crisis.

EMU had far reaching implications, especially concerning the coordination (or lack of it) between monetary, fiscal, and economic policies in the euro area (Chang, 2009; Hodson, 2004; Hodson & Maher, 2002; Hodson, 2011; Mabbett & Schelkle, 2007; Schelkle, 2005). Some of the effects of EMU were examined by making reference to the conceptual frameworks developed by the literature on Europeanization, in particular the “top-down” approach (Featherstone & Radaelli, 2003; Graziano & Vink, 2008), which examined the impact of EU “output” on the institutions and policies of the member states. Thus, several authors examined the effects of EMU on the participating member states (Dyson, 2002; Dyson, 2010; Donnelly, 2004). The change of domestic institutions as a consequence of EMU were overall limited and sector-specific. For example, the provisions concerning EMU contained in the Maastricht Treaty (the Treaty on European Union), and in subsequent EU legislation, prescribed a high degree of independence for the central banks of the member states of the euro area. Hence, the legislation of many central banks had to be amended for them to become members of the euro system. However, EMU had very limited or no effects on other national institutions (e.g., political institutions) that were outside the scope of EMU. As for effects of EMU on national policies, there was formal transformation in monetary policy and exchange rate policy, which were transferred from the national level to the euro area level. This was coupled with hasty and relatively unstable adjustments of national fiscal policies, in order, first to meet to the fiscal convergence criteria to join EMU, and later to comply with the Stability and Growth Pact in EMU (Heipertz & Verdun, 2010). Policy inertia predominated in financial services supervision, whereby banking supervision remained at the national level with some loose coordination at the euro area level. Finally, “smuggled-through adjustments”—as side-effects of EMU—were carried out in national welfare and labor policies.

EMU produced differentiated effects not only across policy areas but also across the member states, as suggested by the contributions to two volumes edited by Kenenth Dyson (2002, 2010). The first volume (Dyson, 2002) examined how the member states managed to comply (at times, in creative ways) with the convergence criteria set by the Maastrict Treaty. Thus, how they were able to join the third and final stage of EMU, often embracing fiscal retrenchment. The second volume (Dyson 2010), took stock of the functioning of EMU and the changes that EMU had produced in the member states. The domestic effects of EMU varied across countries and tended to be more pronounced in the member states where institutional and policy “misfit” between EMU and the national context was greater. Consequently, the domestic changes resulting from EMU membership were stronger in southern Europe (Featherstone & Kazamias, 2001; Donnelly, 2004). This is because the stability-oriented economic paradigm embedded into EMU as well as the asymmetric institutional design of EMU were close to the German economic model, but were very different from the southern European economic model. This body of work also explored the connection between EMU and varieties of capitalism in the EU/euro area, in particular the difference between the German coordinated ordo-liberal market economy and the statist capitalism of southern Europe, which was put heavily under pressure by EMU. Following the enlargement of the EU in 2004, an important topic of research concerned the challenges of euro area enlargement (Dyson, 2006; Dandashly & Verdun, 2018). Of particular interest was how the prolonged process of accession to EMU affected the domestic economic policies of the new member states of Central and Eastern Europe. As in the case of southern Europe, this body of work meshed well with the literature on Europeanization in EU studies and varieties of capitalism in political economy.

Finally, EMU relaunched the completion of the single financial market in the EU. This meant that the most competitive part of the national financial industry had potentially something to gain from further market integration and the opening up of national financial systems. Consequently, certain private-sector actors, notably, large financial companies, supported the removal of national barriers to financial integration throughout the EU (Müegge, 2010). Thus, there were economic and political spillovers (or inter-linkages) between the establishment of EMU and the relaunch of financial market integration and harmonization in the EU in the early 2000s, which in turn generated a burgeoning body of scholarly research (e.g., Donnelly, 2010; Müegge, 2010; Quaglia, 2010).

The new organizations at the center of EMU, namely the Eurogroup (Puetter, 2006, 2004) and to a much great extent the ECB (Elgie, 2002; Howarth & Loedel, 2005; Kaltenthaler, 2006; Chang, 2009), attracted considerable academic attention, for example, comparing the ECB to national central banks in the EU (Dyson & Marcussen, 2009; Quaglia, 2008). The literature on the ECB, described by some as the “new Leviathan” (Howarth & Loedel, 2005) or “the masters of Europe’s money” (Kaltenthaler, 2006), often spoke to the broader literature on bureaucratic politics and technocratic governance (Radaelli, 1999) in public policy and public administration. It also spoke to the literature on central bank independence, accountability, and economic performances in economics (Cukierman, 1992; De haan, Eijffinger, & Waller, 2005) and law (Amtenbrink, 1999).

Overall, works on the ECB by political scientists were critical not so much of the ECB’s performance, which was generally assessed as positive, but rather of its limited political accountability and democratic legitimacy. Albeit these criticisms were also directed toward national central banks (Dyson & Marcussen, 2009; Elgie & Thompson, 1998), including the Federal Reserve in the United States, it was particularly acute in the case of the ECB, which was “the” most independent central bank in the world because its independence was guaranteed by an international treaty (the Maastricht Treaty). Yet, policymakers at the ECB often lamented the lack of a political union.

The Establishment of Banking Union

Since the sovereign debt crisis in the euro area broke up from 2010 onward, the research on EMU has spilled over into the research concerning the playing out of and the EU’s response to the crisis, discussing the different narratives of the causes of the crisis, the management of the crisis, for example, the setting up of the European Stability Mechanism, the intervention of the troika (including the International Monetary Fund) in the euro area periphery, and euro area reforms in other areas, like fiscal policy. Moreover, considerable academic interest has switched to the new project of Banking Union, which was the main response of EU—to be precise, the euro area—to the sovereign crisis in the euro area periphery (Donnelly, 2014; De Rynck, 2015; Epstein & Rhodes, 2016; Howarth & Quaglia, 2016; Schafer, 2016; Schimmelfennig, 2016). Banking Union was intended to contribute to the completion of EMU and, as initially proposed by the so-called “Four Presidents Report” in 2012, was to be based on four pillars: single banking supervision, single banking resolution, common deposit guarantee scheme, and common fiscal backstop. Subsequently, Banking Union was established in timely fashion between 2012 and 2015. The Single Supervisory Mechanism (SSM) was agreed on in 2012 and became operative in 2014, under the aegis of the ECB, which became the supervisor of all the banks in the euro area. The Single Resolution Mechanism (SRM) was agreed on in 2013 and became operative in 2015, under the aegis of the Single Resolution Board (SRB). However, the SRB was not responsible for the resolution of all the banks in the euro area. The common deposit guarantee scheme and the common fiscal backstop were not agreed on and thus never materialized. The result was an incomplete and asymmetric Banking Union, which was rather different from the one initially envisaged: out of the four pillars initially proposed, only one and a half were set in place (supervision and resolution, respectively).

Similar to what happed with reference to the establishment of EMU, research on Banking Union in political science has asked why and how Banking Union was set up and why it took the shape it did. Hence, Banking Union has been the outcome to be explained by a variety of factors related to institutions, interests, and ideas at the EU level and national level. Mirroring the explanations that have been put forward with reference to the establishment of EMU, several theoretical approaches have been used to account for the establishment of Banking Union.

Some authors have implicitly or explicitly used a neo-functionalist explanation, arguing that Banking Union was intended to address the “financial trilemma,” breaking the “vicious circle” between ailing banks and fiscally weak sovereigns (Pisani Ferry, 2012). The trilemma, which was highlighted by the economics literature, examined the interplay of financial stability, cross-border banking, and national financial policies, arguing that any two of the three objectives could be combined, but not all three: one had to give way (Schoenmaker, 2013). The establishment of EMU had made the financial trilemma more acute and ultimately untenable in the euro area. The introduction of the euro and the Financial Services Action Plan substantially increased financial integration in the EU—especially cross-border banking in the euro area—but banking supervision and resolution remained at the national level. The international banking crisis was an external shock to financial stability of the euro area, but the member states no longer had all the instruments to deal effectively with crisis at the national level, nor had these instruments been set up at the EU/euro area level. Banking Union was supposed to address this institutional shortcoming by transferring these policies from the national level to the euro area (to be precise, Banking Union) level (Howarth & Quaglia, 2016). On the one hand, these functionalist dynamics contribute to explaining the rationale for Banking Union. On the other hand, they do not shed light on the distinctive shape that Banking Union took.

Most research on Banking Union has adopted an intergovernmentalist approach in order to explain the establishment and the shape of Banking Union, focusing on the material interests and the relative power of the main member states (Fabbrini, 2013; Howarth & Quaglia, 2016; Schimmelfennig, 2015). French policymakers unsuccessfully pushed for the construction of massive support mechanisms—what David Cameron called the “Big Bazooka”—able to purchase debt directly from euro area member states and engage in bank recapitalization. Similarly, policymakers in the countries of the euro area periphery hit by the sovereign debt crisis sought an EU/euro area financial support mechanism that would enable them to deal with the crisis. In return for that, they were willing to accept the supranationalization of banking supervision. Thus, the interests of French and southern European policymakers in Banking Union stemmed from a desire to establish a kind of financial backstop to the euro area via a lender-of-last-resort-style support for banks rather than governments per se.

German policymakers sought to establish clear limits to their financial assistance to ailing banks and governments in countries hit by the sovereign debt crisis. They also made clear that the acceptance of joint liabilities in the euro area should be preceded by joint controls through the supranationalization of banking supervision. Effectively, this debate on Banking Union paralleled long-standing debates on euro area governance and the quest for solutions to the sovereign debt crisis. The French-led coalition, which included southern European countries, sought support mechanisms. The German-led coalition, which included Austria, the Netherlands, and Finland, sought reinforced fiscal policy commitments (sustainable member state budgets). These different preferences among member states generated distributional conflicts that had to be reconciled through intergovernmental bargaining. The outcomes of the negotiations were the result of compromises between the different positions of the member states but were often closer to the preferences of the most powerful player, Germany, which held a “constrained veto power.” Such power resulted from the size and stability of its economy and its banking system. It was, however, constrained because Germany, like the other euro area member states, had a clear interest in avoiding disruptions to EMU and breaking up of the euro area.

A third stream of research on Banking Union has pointed out the pace-setting roles of EU supranational institutions, namely the European Central Bank (ECB) and the European Commission (Epstein & Rhodes, 2016), or “collaborative leadership” between the main EU supranational institutions (Nielsen & Smeets, 2018). Carstensen and Schmidt (2018) argue that these supranational actors were able to exert “institutional and ideational power” in the second stage of the sovereign debt crisis (i.e., from 2012 onward), which led to the establishment of Banking Union. Works that stress the role of supranational actors in the establishment of Banking Union often point out the importance of institutions and ideas. Thus, some authors draw attention to the path-dependency created by previous “differentiated integration” concerning EMU (Schimmelfennig, 2016) and the “incompleteness” (or “asymmetry”) of EMU. Schafer (2016, p. 962) stresses the “constitutive and strategic role of ideas” in the making of Banking Union, arguing that ordoliberal ideas were constitutive for German preferences. At the same time, ideas were used as “strategic resources” by policymakers at the Commission, the ECB, and the euro area periphery in order to extract concessions from Germany. Finally, some authors have combined various theories, such as liberal intergovernmentalism and neofunctionalism, in order to account for the establishment of Banking Union (Boerzel & Risse, 2018). For example, Jones, Kelemen, and Meunier (2016) used a two-step approach, arguing that negative spillovers from previous incomplete integration in EMU triggered the sovereign debt crisis. This was followed by intergovernmental negotiations, which paved the way to the establishment of Banking Union.

By combining the main findings of this first wave of research on Banking Union, one gets a good understanding of the factors and dynamics at play in the making of the project—all this bears considerable similarities to the making of EMU. The main drivers toward Banking Union were spillovers of various types from previous integration, first and foremost, EMU, but also the single market in finance. This was combined with the entrepreneurship of supranational actors, such as the Commission and the ECB. Finally, Banking Union was advocated by policymakers in the member states hit by (or most exposed to) the sovereign debt crisis in the euro area. The main obstacle to be overcome in the construction of Banking Union was the initial reluctance of German policymakers, who had considerable bargaining power, given the size of the German economy and its sound economic and fiscal position. Most of the intergovernmental negotiations basically boiled down to distributional conflicts on two dimensions: the centralization of decision-making and the allocation of costs via risk-sharing in Banking Union (Howarth & Quaglia, 2016). The discussions pitted countries expected to make net contributions to common rescue funds—either from taxpayers or from banks—against those that expected to be the principal recipients. Thus, compromises between the two coalitions were sought during the negotiations. The institutional design eventually agreed to for Banking Union was closer to the preferences of the German led-coalition as far as risk sharing is concerned, whereas German policymakers had to make concession concerning the transfer of decision-making to the EU/euro area level (Epstein & Rhodes, 2016; Schaeffer, 2016).

Banking Union can be seen as a response to the asymmetric design of EMU (a monetary union with a limited form of economic union) and to the fragmentation of the single financial market. It can also be seen as a crisis-driven attempt to address several important issues that were sidestepped or papered over during the negotiations leading to the Maastricht Treaty—principally the allocation of supervisory responsibilities to the ECB and the creation of a fiscal backstop in the eurozone. Other issues (notably the need for a single rule book and the harmonization of deposit guarantee schemes) stemmed from the incomplete nature of the single financial market—despite its heralded relaunch in the early 2000s. The limited integration of financial services markets (and, notably, banking markets), even after more than a decade of EMU, was a major weakness in the single market. Finally, other issues, such as the need for a common deposit guarantee and a resolution fund/authority for the eurozone, were highlighted by the global financial crisis and the sovereign debt crisis. These crises fragmented the single financial market: banks reduced their cross-border activities and the cost of money (e.g., the interest rate paid on bank loans) also varied considerably across the member states of the euro area. In turn, this disrupted the conduct of the single monetary policy of the ECB. The setting up of Banking Union was a direct response to market fragmentation and thus should be seen as much in terms of reinforcing the single market as stabilizing banks and EMU.

Given the recent establishment of Banking Union, scholars in political science have not yet started investigating its functioning and its effects in the member states, especially on their banking systems. Hence, mirroring the research agenda on EMU, it is reasonable to expect that the next wave of research on Banking Union will consider it as the cause that produces effects in the member states as well as on other EU policies. Given the more limited scope of Banking Union as compared to EMU, one would expect more self-contained domestic effects, which are also likely to take time to unfold. These domestic effects are likely to concern the configuration of national banking systems, including the closing down or the recovery of banks in unhealthy financial conditions. However, the most important changes, from a political science perspective, are likely to involve business-government relations, specifically, the relations between banks and the national authorities (banking supervisors, central banks, and treasury ministries).

In this respect, the institutional design of Banking Union seems to suffer from a significant “disjuncture.” Some legal competences and powers no longer belong to the national authorities; they have been transferred to different authorities at the euro area level, and these authorities sometimes act in a poorly coordinated way. In a nutshell, the ECB decides whether a bank under its direct supervision is “failing or likely to fail.” The Single Resolution Board in the SRM is in charge of resolving banks whose resolution is in the “public interest.” Other failing banks are liquidated by the national authorities according to national law. The Commission monitors the use of state aid, its effects on competition, as well as the application of rules on private-sector burden-sharing. Yet, the political responsibility and accountability to deal with ailing banks remains at the national level, and so does the fiscal capacity to bail out banks, subject to EU rules. Timely coordination concerning the management of ailing banks is already difficult at the national level because different authorities with different incentives are involved. The process is even more difficult when competences, powers, responsibility, and accountability are split across levels of governance. This disjuncture generates a power vacuum: the national authorities are weaker—they have fewer powers and competences—following the establishment of Banking Union. Yet, the EU authorities have not been sufficiently strengthened to compensate for the competences lost by the public authorities at the national level.

Conclusion

The research agenda on EMU in political science is vast and ever-growing, highlighting the importance of this policy area for the EU. Academic research on EMU tended to “peak” in the years following major history-making events, such as the signing of the Maastricht Treaty in 1992, the beginning of the final stage of EMU in 1999, the negotiations on Banking Union over the period 2012–2015. Thus, the literature on EMU in political science has mostly been developed in “waves” (a trend quite common across the social sciences), even though it is fair to say that the account provided, especially the division into periods, has partly been streamlined for ease of analysis and stylistic purposes. Research on EMU and Banking Union has considered these projects first as outcomes to be explained, and then as causes producing effects on the member states and the EU system. Several theoretical approaches have been used to shed light on a variety of research questions, which have been analyzed by considering the role and the interplay of institutions, interests, and ideas. There are also interesting similarities concerning the academic research and policy debate on EMU and those on Banking Union, including the quest for institutional symmetry and for the completion of these projects.

The research on EMU in political science has often been interdisciplinary, or, at the very least, has spoken to and drawn on the literature on EMU in law and economics. Interestingly, the opposite has rarely happened, in that economists and law scholars have engaged to a very limited extent with the literature on EMU in political science. From a methodological point of view, the research on EMU in political science has mostly been qualitative, making use of case studies, structured comparisons, and process-tracing. However, sometimes, this literature has not explicitly adopted a research design and consequently it has been somewhat descriptive or narrative, rather than explanatory. Empirically, some countries, notably Germany and to a lesser extent France, have been more extensively studied than others.

Overall, some key themes can be teased out. To begin with, EMU seems to be a textbook example of the so-called “theory of the bicycle” in the EU, whereby the EU has to move forward in order not to fall apart. Thus, there was the economic and political need to move from the “unstable” EMS to EMU, which was, however, incomplete, also leaving banking supervision to the national level, instead of transferring it to the ECB. Then, there was the challenge posed by the asymmetric effects of EMU across and within the member states, which contributed to the building up of the sovereign debt crisis in the euro area periphery. In order to protect financial stability in EMU and address the fragmentation of the single market in finance (especially, in the banking sector of the euro area), euro area policymakers decided to move forward with the completion of EMU by setting up Banking Union, transferring banking supervision and resolution (only in part) to the euro area level. These functional dynamics and path-dependency were often exploited by skillful policy-entrepreneurs, such as the Commission and, later on, the ECB.

The second theme concerns the persisting importance of the member states, their interests, and bargaining power, in an area that has been supranationalized to a large extent (Dehousse, 2016), but which still requires the consent of the national governments of member states (at least, those of the bigger countries) in order to take major steps forward. In turn, the interests of the member states on EMU-related matters need to be decomposed, by looking at domestic winners and losers, as well as the configuration of national political and economic institutions, including varieties of capitalism (Hall, 2014). Domestic politics is also important in determining what is acceptable (or otherwise) by the various member states, especially Germany, whose public opinion was hostile toward EMU and any form of fiscal transfer in Banking Union. Domestic politics also explains why the adjustment to EMU was difficult and half-hearted in southern Europe.

In the construction of EMU, policymakers in several EU member states, with the exception of Germany, could rely on the “permissive consensus” of public opinion. However, this consensus changed once EMU began and its effects were felt domestically and were, at times, strategically manipulated by domestic political forces through blame-shifting. Following the sovereign debt crisis and the fiscal austerity promoted by the EU in the euro area periphery hit by the crisis, public opinion became increasingly Euroskeptic (or, at least, less pro-European) in the euro area periphery but also in core countries, even though the trend was not uniform across the member states. There was an upsurge of Euroskeptic parties across the EU and, sometimes, political parties that called for the withdrawal of their country from EMU experienced considerable electoral success. In turn, this melds well with a relatively new theoretical approach in EU studies, post-functionalism, which explained the move from “permissive consensus” to “constraining dissensus” in the EU. According to this approach, the preferences of public opinion and national political parties strongly influence (mostly constrain) the development of the EU. Identity politics also play a role. Unlike neofunctionalism, which predicts an ever-closer Union, post-functionalism also envisages the disintegration of the EU, or the roll back of EU policies and institutions.

EMU is continuously evolving and so is its research agenda. In October 2015, the president of the European Commission, in close cooperation with the president of the Council, the president of the Eurogroup, the president of the European Central Bank, and the president of the European Parliament, produced what became known as the “Five Presidents’ report” on “Completing Europe’s Economic and Monetary Union.” This report built on “Towards a Genuine Economic and Monetary Union” (the so-called Four Presidents’ Report) of June/December 2012, the Commission’s “Blueprint for a Deep and Genuine EMU” of November 2012, and the Analytical Note “Preparing for Next Steps on Better Economic Governance in the Euro Area” of February 2015. The Five Presidents’ report stated the objectives of a “genuine Economic Union,” a “Financial Union,” a “Fiscal Union,” and a “Political Union,” arguing that these four Unions depended on each other and should therefore be developed in parallel and with the participation of all euro area member states. In the first half of 2017, the election of the French president Macron gave new momentum to the reform of EMU, especially the debate on the establishment of a common euro area budget and a euro area finance mister. However, this issue was moved to the back burner, while waiting for the results of the German elections in the second half of 2017. After the German elections, the inconclusive results of the Italian elections in early 2018 contributed to the impasse on the reform of EMU.

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