Smoke with fire: Financial crises and the demand for parliamentary oversight in the European Union

Abstract

The handling of the 2008 financial crisis has reinforced the conviction that the European Union (EU) is undemocratic and that member states are forced to delegate overwhelming power to a supranational technocracy. However, European countries have engaged with this alleged power drift differently, with only a few member states demanding more parliamentary scrutiny of EU institutions. This article develops a political economy explanation for why only some states have enforced mechanisms to monitor the EU more closely. Our theory focuses on the role of the crisis and the impact of fiscal autonomy in countries outside and inside currency arrangements such as the European Economic and Monetary Union (EMU). We argue that, in the aftermath of a severe economic shock, member states outside the EMU possess more monetary and fiscal resources to handle the crisis. These would then demand oversight of EU decision-making if their fiscal sustainability depends on the Union. By contrast, Eurozone states that need policy changes cannot address the crisis independently or initiate reforms to scrutinize the EU. Hence, we argue that during the heated moments of severe economic downturns, parliaments in Eurozone countries discuss supranational supervision rarely. As these legislatures have nevertheless to give in to the popular demand for EU control, they express support for more EU supervision in the infrequent times of debate. We provide evidence for our theory with a cross-national analysis of EU oversight institutions, and a new original dataset of parliamentary debates during the Eurozone crisis. Our findings highlight the political consequences that financial nosedives have across the diverse membership of a supranational organization.

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Notes

  1. 1.

    We refer to an increase in EU oversight as an expansion of institutional measures to oblige more reporting from Brussels. We use Winzen (2012)‘s definition of oversight institutions, which cover parliamentary information rights including the right to receive Explanatory Memorandums, the basic institutional infrastructure for the processing of EU information (committee involvement and scrutiny reserve) as well as rights related to the enforcement of parliamentary positions (i.e. mandating rights).

  2. 2.

    It is common in the literature to treat parliaments as unitary actors; see Winzen (2017) and Hallerberg et al. (2018).

  3. 3.

    In a sense, our angle departs from those that focus, for example, on the role of the executive (Auel and Hönig 2014) and the varying flexibility of policy action across EU member states (Rauh and de Wilde 2018).

  4. 4.

    This should also be true at the EU level, where supranational elections are still far from equivalent to their national counterparts.

  5. 5.

    European Council, 2013, Rules for the organisation of the proceedings of the Euro Summits. https://www.consilium.europa.eu/media/20377/qc3013400enc_web.pdf. A similar understanding of the cross-secting pressure of technocratic and delegation reforms in the EU and the varying role of economic structures can be drawn from data on national positions on the Euro and EU power delegation as measured via the Euromanifesto Project. The Appendix available on the journal’s website shows multidimensional scaling (MDS) plots of country-aggregate party platforms of past European Parliament elections. The graphs indicate that the countries at the ‘periphery’ of the MDS map have consistently been non-Euro countries, while that the position of at least one of the financially troubled countries in the Union (e.g. Portugal in the 1990s, Greece multiple times) was furthest from the position of monetarily sovereign countries (e.g. Denmark, Sweden, Czech Republic and Hungary).

  6. 6.

    Financial crises may also incentivize the creation of currency unions in the first place. In the EU, for example, the decision to create the common currency was also driven by the concern of recurrent financial shocks in Spain and Italy in the 1970s (Moravcsik 2012).

  7. 7.

    In EMU member states, expenditure adjustments were made following the Maastricht convergence criteria that allowed ‘moderate’ levels of debt up to 60% of GDP.

  8. 8.

    While we refrain from concentrating on how economic constraints affect individual members of parliament or their parties, our intuition is that in a time of crisis European political parties experience on average a weakening capacity to bridge responsiveness between the electorate and the EU. In line with the mechanisms of “constrained choices” in the Eurozone delineated in Laffan (2014), we argue that the constraints of the monetary union create a gap between the electorates and members of parliament, forcing the latter to be very strategic about the timing of their demands for EU oversight. Similarly, we follow studies that claim that this declining capacity is consistent across most parties in a country affected by a crisis (Mair 2009; Wonka 2016).

  9. 9.

    The states under analysis are Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Netherlands, Poland, Portugal, Romania, Slovenia, Slovakia, Spain, Sweden, and the UK. Our data frame starts in 1950 based on the availability of macroeconomic data, so for Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Portugal, Spain, Sweden, and the UK our series starts in the 1950s. For Cyprus and Romania it starts in 1961. For the rest, it starts in 1970. This implies that many countries were included in the analysis before they formally joined the EU (even if several were linked with the EU via an association agreement). In these cases, oversight institutions are assumed to not exist and take the value of zero. Coding them instead as missing, however, does not significantly change the qualitative results of our analysis.

  10. 10.

    Winzen (2012) describes the weighting of the different ‘dimensions’ that he identifies across all the procedures and rules. Substantively, the index has a minimum of zero and a maximum of 3.

  11. 11.

    We illustrate the complete data captured by the Winzen variable in the online Appendix.

  12. 12.

    We prefer crises in the banking sectors over currency depreciations because EU discussions on the unitary peg have to some extent anticipated weak currency moments. Moreover, commercial banks behave as independent international agents, so banking crises represent a more strictly exogenous type of crises.

  13. 13.

    According to Laeven and Valencia (2012), a banking crisis needs to be ‘systemic’ to enter their dataset. This means that issues of liquidity from subsidiaries of a multinational bank or issues specific to domestic financial regulations do not constitute an observation, at least not directly. We decided to conservatively treat France, Slovenia and Sweden as “non-obvious” crisis cases because of the information reported in Laeven and Valencia (Table 3; Table A2). That said, further analyses that include these cases show results consistent with our findings.

  14. 14.

    For example, in 2012 the Bulgarian Committee on European Affairs and Oversight of the European Funds prepared a work program that included parliamentary observation and control of European financial instruments, humanitarian aid and crisis response. This was not a response to a national crisis but to the overall EU crisis.

  15. 15.

    Countries are coded as EMU member states in the year they agree to the currency unification, which varies and does not necessarily correspond to the official 1999 introduction of the Euro. Austria, Belgium, Finland, France, Germany, Ireland, Italy, Netherlands, Portugal and Spain agreed to currency unification and Euro peg in 1995 (the year that marks EMU integration after the ratification of the Maastricht Treaty). Greece became EMU member in 1998. Cyprus entered in 2004, followed by Slovenia in 2006, Slovakia in 2008, and Estonia in 2010. It is reinsuring that the results for the EMU countries are similar if we use 1993 (the signing year of the Maastricht Treaty) or 1999 (the establishing year of the ECB).

  16. 16.

    Evidently, the observed crises in this latter group of countries refer mostly to the 2008 crisis. However, this series also include separate crises, such as the Finnish banking crisis.

  17. 17.

    To construct the CBI variable, for the years between 1950 and 1973 we leverage the classic Cukierman index. For 1973 to 2010, we use data from Bodea and Hicks (2015). The indicator goes from 0 for ‘perfect dependence’ to 100 for ‘perfect independence.’

  18. 18.

    Countries that adopted a peg to the Euro in 1999–2000 were Austria, Belgium, Finland, France, Germany, Ireland, Italy, Netherlands, Portugal and Spain. Greece joined in 2001, Slovenia in 2007, Cyprus in 2008, and Slovakia in 2009. Denmark adopted the European Exchange Rate Mechanism but not the currency. Bulgaria, Czech Republic, Hungary, Poland, Romania, Sweden and the UK are not part of the EMU.

  19. 19.

    These results fit the case of Portugal in the 1970s, when economic hardship led to a crawling peg to the Sterling, which eventually decreased the central bank autonomy.

  20. 20.

    In the online Appendix we also show that our models adequately control for spillovers between states and are not sensitive to Winzen’s alternate indicators of oversight.

  21. 21.

    We are aware three countries are not fully representative of the Eurozone, and that the country selection limits the inferential capacity of our analyses. That said, we think these countries’ parliamentary debates are reasonably comparable, as per other scholarly work (e.g. Maatsch 2017). We also believe that the case of Germany, however ‘special’ in the context of EU politics, is “an important case to study politicisation during the Euro crisis due to the country’s current economic and financial weight and its strong political influence on the political dynamics and the course taken by the EU during the Euro crisis” (Wonka 2016:127).

  22. 22.

    We downloaded the debates from the following pages: https://www.bundestag.de/service/suche for the Bundestag; http://archives.assemblee-nationale.fr/ for the Assembĺee Nationale; and http://leg.camera.it/ for the Camera dei Deputati. We looked for texts that included combinations of following key words: “financial crisis”, “European Union”, “European Commission”, “European Central Bank”, and “European policy”. This means that debates mentioning the EU, the Commission and European policy but not crisis were selected as well, but were screened for relevance (and given the temporal window taken in consideration, most often they did involve a discussion on the crisis). In the online Appendix, we report the full list of the identified debates per each country. Research assistants looked at a random selection of the debates when deciding their ultimate relevance for our study.

  23. 23.

    It needs to be noted that each protocol in Germany covers a whole plenary meeting, each usually covering several very different agenda topics. This is an important caveat that may have consequences for the comparability with France and Italy. We also realize that the parliamentary systems of the three countries allow for slightly different roles to each lower chambers. Still, we focus on lower parliamentary houses only, following Rauh and de Wilde (2018).

  24. 24.

    See online Appendix for the full list of words in the dictionary. Note that our results are not sensitive to any specific term (see below discussion on German debates).

  25. 25.

    The coding was supervised: three research assistants read through the paragraphs where the selected words appeared, to make sure they had the meaning set by the authors in their codebook. We did worry about coding observations that were unrepresentative or unconnected to the goal of the dictionary, so we interpreted the words in context. We also had cross-checks and allowed for occasional deliberation among the coders when in doubt. Evidently, these strategies are not a perfect guarantee against errors and false positives, as suggested by Rauh (2018). We come back to this in the discussion of robustness below.

  26. 26.

    See a summary of the new pro-scrutiny indicator and the number of debates focused on EU institutions during the crisis broken down by country in the online Appendix.

  27. 27.

    Other studies have pointed out that some Eurozone parliaments did indeed gain additional participation rights, but they did so after 2010, for example in the in new rescue mechanisms. Indeed a number of publications emphasize the increase in power of especially the German Bundestag. These reforms may have lagged some time, and probably were affected by other important factors, e.g. prospects of new EU accession, new treaties or the changing forms of partnership with Brussels. Our study does not seek to rival these alternative explanations nor to make inference on long-term political trends.

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Genovese, F., Schneider, G. Smoke with fire: Financial crises and the demand for parliamentary oversight in the European Union. Rev Int Organ 15, 633–665 (2020). https://doi.org/10.1007/s11558-020-09383-0

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Keywords

  • EU politics
  • Financial crises
  • Euro crisis
  • National parliaments
  • Parliamentary scrutiny