Behind the scenes of establishing the European banking union:

Power guiding capital or capital guiding power?

Master Thesis Student: Rosalinde Kranenburg Supervisor: Dr. P.W. Zuidhof Student number: 10440542 Contents

List of abbreviations p.2 Chapter 1: Introducing the puzzle of a European banking union p.3 1.1 Introduction to the establishment of the banking union p.3 1.2 Methodology p.6 1.3 Relevance p.8 Chapter 2: Theorizing the origins of power at the basis of p.10 2.1 Introduction – Selection of the European integration theories p.10 2.2 The liberal intergovernmental perspective p.11 2.3 The critical political economy perspective p.14 2.4 Liberal intergovernmentalism versus the critical political economy p.17 Chapter 3: On the road to the banking union: an intergovernmental perspective p.20 3.1 Introduction – Member State interests in a banking union p.20 3.2 The road towards the banking union p.20 3.3 Debating the SSM and SRM p.24 3.3.1 Rushing the SRM and negotiating the ESM as backstop p.25 3.3.2 Outcomes of the negotiations over the SSM and ESM p.28 3.3.3 The complex negotiations over the SRM and SRF p.29 3.3.4 Outcomes of the negotiations over the SRM and SRF p.32 3.4 Liberal intergovernmentalism and the banking union p.34 Chapter 4: Back to the future: a critical political economy perspective p.38 4.1 Introduction – The socioeconomic context of the banking union p.38 4.2 Shifts in class, paradigm and the hegemonic system from the 1970s p.39 4.3 Financial regulatory reforms in Europe p.42 4.4 Sector interests in a European banking union p.48 4.5 The critical political economy and the banking union p.53 Chapter 5: Conclusion p.58 Reference list p.63

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List of abbreviations:

AFME Association of Financial Markets in Europe BCBS Basel Committee on Banking Supervision BRRD Bank Resolution and Recovery Directive CESR Committee of European Securities Regulators CRD IV Capital Requirements Directive IV CRR Capital Requirements Regulation EBF European Banking Federation ECB ESC European Securities Committee ESM European Stability Mechanism GEBI Group of Experts in Banking Issues IIF Institute of International Finance ISD International Services Directive MiFID Markets in Financial Instruments Directive SRB Single Resolution Board SRF Single Resolution Fund SRM Single Resolution Mechanism SSM Single Supervisory Mechanism TFEU Treaty on the Functioning of the

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Chapter 1 – Introducing the puzzle of a European banking union

1.1 Introduction to the establishment of the banking union In 2012, the door was opened towards the most ambitious European integration project since the introduction of the in 1999. At the Euro area summit on 29 June 2012 in Brussels, the heads of states and governments agreed to establishing a European banking union as part of a series of measures in reaction to the banking crisis in 2008 and the sovereign debt crisis in 2011 (, 2012a). The crucial elements of this project would be a strict centralized supervision and regulation of the banks within the Eurozone and, in addition, a European resolution mechanism supported by a fund to decide over the faith of ailing banks. This was deemed necessary since the crisis revealed the problematic narrow interrelatedness of banks and government finances. When the financial crisis spread from the United States to Europe, a number of banks within the Eurozone faced bankruptcy. Since many of these domestic banks held on their balance sheets a large share of state debt posing a financial stability risk within the Eurozone, states were left with no other feasible solution than to save their large financial institutions with public funds. However, when the sovereign debt crisis followed in 2011, this led to backlash on the domestic banks. Doubts about the solvency of several Member States negatively affected the position of the banks saved with public funds, leading towards a loss of trust of investors in the banking sector (Merler and Pisani-Ferry, 2012, p.2). The non-beneficial situation of banking problems spreading to sovereigns, and in return sovereign problems spreading to banks was referred to as the ‘doom-loop’ between banks and sovereigns. Moreover, the interdependence of states within the Eurozone sharing a single currency, the insolvency of some of the Eurozone members, such as Greece and Spain, and an accompanying variety in risk premiums for the European funding and lending markets put great pressure on the euro-system. Due to the interconnectedness of the Eurozone economies the large failing banks were seen as causing systemic risk for the stability of the Eurozone as a whole (ECB, 2013a). In spite of the size of cross-border banking systems within the Eurozone, rescuing a bank would still be the individual responsibility of the home country, potentially having large fiscal consequences for the other Member States. Indeed, rescuing the banks in the Eurozone had cost 4,5 trillion euro’s of tax payers money (, 2012a), and moreover, stimulus measures from governments in response to the banking crisis led to an increase in national debt of 520 billion euro in the Eurozone, and 690 billion euro in the EU as a whole by 2012 (Breuss, 2014, p.4). The main goal of the proposed European banking union is to break the close link between banks and states in order to prevent tax-payers bearing the costs of big bank failures. The sector itself has to be made accountable for its actions and financial problems. Moreover, systemic risks for

3 the Eurozone is argued to be avoided by installing a central supervisory and a resolution mechanism for the banks in the Eurozone with a common backstop, based on a single rulebook for all banks within the EU. The mechanism places the banks under central supervision to make sure they act according to the regulatory framework and to signal potential problems at an early stage. Furthermore, the banks need to have a sufficient amount of capital and liquid assets on their balance sheets as a buffer for financial problems. When a bank would find itself in a troubled position it is not able to solve itself, a resolution mechanism agreed between the central and the national supervisory authorities provides for a scheme to resolve the financial institution in an orderly manner. An important part of this mechanism is that banks no longer have to be bailed out with public funds when facing difficulties, because a bail-in mechanism of creditors and shareholders of the bank is agreed upon. In the worst case that this bail-in mechanism proves to be insufficient to cover the costs of resolution, a resolution fund filled by the banking sector itself has to provide for the funding to resolve the ailing bank (European Commission, 2012a). In very last instance, the European Stability Mechanism (ESM) will serve as a backstop to recapitalize a bank under resolution when Member States are not able to finance this resolution. The newly installed mechanisms serve to regain the trust in the banking sector, which has been regarded crucial for financing the real economy, and moreover, for saving the Eurozone (Véron, 2013, p.6-7). Although the Member States have agreed to the establishing of a banking union, the project has far-reaching implications. A centralized system means that, first, Member States lose part of their national sovereignty over their capital providing institutions to a European regulator. Secondly, the European institutions gain influence by setting up a new supranational institution, and thirdly, the banking sector is subject to stricter central regulation and supervision curbing its activities. An additional fourth implication for some of the Member States is that to regain the trustworthiness of national state finances, budgetary rules and austerity measures have been set as precondition for access to the common mechanisms under the banking union. The Commission and the ECB, as main promoters of the banking union, have put many efforts in consulting the sector involved, drafting the proposals and advocating for more integration regarding the supervision and regulation of the banking sector. In contrast with the assumed natural support of the European institutions for more supranational governance, it is more interesting to look at the agreement of the Member States and the banking sector to the proposal. The agreement of both the Member States and the sector to the establishing of the banking union poses two related puzzles. Firstly, the banking union removes part of the national discretion over and supervision from the Eurozone Member States. One would not have expected sovereigns to surrender autonomy over their national credit-providing institutions, while these are perceived as an important basis for the functioning of the real economy and for providing

4 national prosperity. Agreeing to a banking union means less power for states to benefit their national economies by balancing banks’ risks and returns, by assisting in competitive banking or by preventing the winding-down of preferred national financial institutions and avoiding foreign banks to absorb national banking assets (Epstein and Rhodes, 2014, p.3). The power of Member State governments over their national financial institutions will decrease with a European banking union. Although the crisis and its effects have provided a pressing imperative towards installing a more prudent supervision of financial institutions and resolution mechanisms, the banking union is a very ambitious integration project while also including access of failing banks to common European funds. An interesting question is therefore why national governments have agreed to transfer an important share of sovereign power over their financial institutions towards a supranational level. Secondly, when looking at the financial sector usually in favor of deregulation, one would expect major objections to a strict supervisory mechanism, a resolution mechanism including a fund filled by the banks themselves, and enhanced requirements for the banks to adhere to. Paradoxically, this has not been the case in practice. Throughout the negotiations over the establishment of the banking union the main part of the Eurozone banking sector has supported the project and a European banking sector lobby in Brussels has even actively backed the proposals of the Commission and the ECB. In many instances the sector has voiced its support for a European banking union which is in its core meant to restrict banks in their operations and make them adhere to supranational prudential rules, instead of remaining subject to domestic regulators, which have been able to apply some measure of discretionary space to support the banks based within their borders. The two puzzling issues regarding the establishment of the banking union therefore require further explanation. These issues are, first, that Member States are largely surrendering national sovereignty over their large cross-border banks which they before regarded as crucial to keep within their national power reach and, secondly, the heterogeneous stance of the big banks within the Eurozone in favor of a banking union which is meant to install a stricter supranational regulatory and supervisory authority to avoid imprudent behavior of the banks in their pursuit of capital. This thesis aims to understand the motives for further integration by explaining why the Member States as well as the sector have agreed to a banking union which appears not to be in the direct interest of either of them. Could the banking union be construed as a rational choice of Member States to overcome the negative domestic effects of the banking crisis and sovereign debt crisis? Or is there more to it, and should we take into account the heterogeneous position of the European banking sector as a signal of the presence of other motives outside the national realm in support of more integration? More importantly, if there are indeed other influential non-democratic powers surrounding the decision makers, will the effects of the banking union then ultimately be in the general interest or does the project pose a legitimacy issue for being based on sector interests instead?

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Based on the above, the main question we will try to answer in this thesis, is whether we can explain the establishment of the banking union as following from rational considerations of national Member States based on their domestic preferences shaped within a national realm, or if we should look for the origins of these national preferences in a broader context in which financial powers have been guiding the choice for more European integration. In order to answer this question we will explore the motives of the Member States and the banking sector regarding the pursuing of a European banking union and the processes leading towards its establishment to identify the origins of the power determining European integration. More importantly, exploring the power base and the consequences of the establishing of the banking union for the people in the Eurozone enables us to draw a normative conclusion about the legitimacy of this European integration project.

1.2 Methodology In order to explain the establishment of the banking union, this thesis will provide a closer look at the process of European integration and whose preferences and interests are guiding its outcomes. Based on the research question of this thesis, in the second chapter the theoretical framework provides two contrasting approaches for understanding European integration. Both theories focus on different explanations of European integration regarding the role and place of the actors involved in the integration process, and in this they form a mutual criticism. The first theory is the liberal intergovernmental approach described elaborately by Andrew Moravcsik, which roughly presents a revision of the classical debate between the neofunctionalist and neorealist accounts. This theory explains the European integration process as based on national states’ preferences and their relative power positions in an intergovernmental negotiation process. Moravcsik claims that European integration only occurs when governments see it in their interest to give up sovereignty, based on rational arguments in favour of their domestic economies. These rational choices are based on a given ‘state of the world,’ upon which the Member States are claimed to act rationally in pursuit of their domestic interests (Moravcsik, 1998, p.20). Contrastingly, the second theory applied to the case argues that we have to dig deeper to find the origins of European integration, by claiming that it is in fact the context that determines the national preferences of the Member States. This theory is the critical political economy as described by Bastiaan van Apeldoorn, Henk Overbeek and Magnus Ryner, which is part of the constructivist approaches within the theoretical field of European integration. The vantage point of the theory is that in order to study European integration we cannot assume a certain context within which policy is shaped as given. It claims there is a socioeconomic context constituting Member State preferences and their opinions regarding European integration (Van Apeldoorn et al, 2003, p.20). The theory

6 argues that this socioeconomic context is guided by dominant capitalist structural powers in society other than the official decision making powers. It is assumed that these powers are able to shape the national preferences while having the power to insert a dominant economic system into society which is perceived as the best method for creating welfare. Decisions based on supporting this system are therefore regarded legitimate, although these might in fact be guided by narrow capitalist class interests (Ibid). Moreover, this structural power exceeds the different levels of decision making, while forming a transnational network within Europe widely voicing arguments in favour of more integration when this suits their interests. The theory criticizes the mainstream integration theories, among which the theories in the classical debate, for these do not take into account such a socioeconomic context guiding formal decision making powers (Ibid, p.18). Chapter three and chapter four will assess these claims by respectively looking at the negotiation process based on the Member States national preferences and by identifying potential capitalist class structures shaping these national preferences. Chapter three reviews the intergovernmental negotiation process and its outcomes based on Moravcsiks liberal intergovernmentalism perspective. In the case of the banking union this would mean that the Member States saw it in their national interest to support central supervisory and resolution mechanisms while the perverse effects of the interconnectedness between the Eurozone members and their large banks and the risks of contagiousness were revealed during the crisis. More integration would create a stronger banking sector subject to prudent supervision regarded necessary to counter the negative effects of the crisis on financial stability within the Eurozone. The chapter argues that the banking union in this regard serves the stronger economies within the Eurozone by limiting the negative effects of the narrow interconnectedness between its members, and moreover, it makes governments and banks less dependent on their mutual welfare. Although the system includes access to common funds, in return austerity measures and economic reforms have been imposed on the indebted Member States. The sovereigns have seen it in their interest in the current economically integrated system with its large banks to agree to a banking union in order to manage the risk of bank failure and its consequences for the Eurozone in the future. This approach implies that Member States national preferences and their relative power positions explain the process of more integration. The outcomes are accepted by the Member States for they are assumed to follow from rational choices by national leaders to serve the domestic interests in a given context. Moreover, the effects of the banking union and accompanying crisis measures are accepted as legitimate for stabilizing the Eurozone financial system, although they have far-reaching effects on the lives of individuals within the Eurozone. The interests and powers at a European level and previous integration tendencies are regarded subordinate to the national preferences of the Member States in the negotiation process.

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However, the Eurozone contains a large cross-border banking sector and the governance over this sector has over the past decades increasingly been moved towards a central level. When not taking into account the historical and socioeconomic context in explaining the decision towards more integration, it is argued that the chapter might overlook an important explanatory part of European integration. The fourth chapter attempts to fill this gap by exploring the context factors surrounding the establishment of the banking union. The critical political economy approach regards the establishment of the banking union as indeed promoted in the benefit of the Eurozone system, however it argues that this system is rooted in a neoliberal paradigm based on the preferences of a financial capitalist class. It sees the banking union as fitting in a tendency towards more integration, enabling the financial capitalist class to further pursue their capital accumulation strategies. This approach implies that national Member States do not hold the decisive power over European integration, because their perceived national preferences and rational choices are actually based within a dominant economic system shaped by a transnational capitalist class. Nevertheless, the Member States are still regarded relevant for socializing the system within the national realm through which it is legitimized and sustained (Van Apeldoorn et al, 2003, p.36). Elaborating this view, the chapter first assesses the origins of the economic order in society to identify a dominant economic system guiding European integration decisions, and furthermore, how and by whom this system has been constituted. Subsequently, it reviews the development of financial regulation within the EU based on the economic system and whether the preferences of the Member States have changed due to these developments. Finally, several aspects of the banking union are highlighted to assess the claim that the banking union is rather sustaining the capital accumulation strategies of a capitalist class instead of tackling the potential risks of the system for the Eurozone Member States. Based on these chapters, the establishment of the banking union will serve as an example of how European integration occurs and whose preferences best explain its outcomes. This will allow us to critically assess the project regarding its power base and its effects for the Eurozone.

1.3 Relevance Researching the establishment of the banking union according to the above briefly described European integration theories is relevant, while both theories reach different conclusions about the legitimacy of more European integration and the need to challenge the system in which this integration occurs. If Member States are the leading actors deciding whether or not integration is necessary and in what direction, this can be legitimized for they are democratically chosen representatives of the national interests in the negotiations at a European level. The liberal intergovernmental approach would not see the transnational and European actors as significantly

8 influential, because it argues all decisions at the European level can be traced back to the national preferences of states based on their relative power positions within the negotiations (Moravcsik, 1998, p.51). This implies that the consequences of democratic decisions are accepted as legitimate, even though these might have far-reaching effects on the lives of people living within the EU. Contrastingly, the critical political economy theory claims that the context on which the national preferences of Member States are based is shaped by a transnational dominant capitalist power in society (Van Apeldoorn et al., 2003, p.32). This second approach poses a problem for the legitimacy of European integration. When the occurrence of European integration is guided by a non- democratic dominant power in society shaping decisions with far-reaching effects on the lives of the constituents within European society, this would mean that the constituents are subject to the preferences of the dominant structural power. They do not live their lives in a realm of freedom, but are instead subject to a dominant capitalist system structuring their lives and guiding national decision makers (Van Apeldoorn et al, 2003, p.34). If such a claim is indeed identifiable, this would make us wonder whether the effects of the banking union and its accompanying crisis measures on the lives of individuals within the Eurozone can be democratically justified. Moreover, another important distinction between the two approaches is that the first implies that the European integration project would be unable to change its direction, while involving loose negotiations in reaction to a given state of the world, the context, which would be unpredictable (Moravcsik, 1998, p.20, 76). The approach does not take into account tendencies over time based on societal economic power structures. When such tendencies are indeed present, this would enable us to identify the elements in society guiding the way in which European integration takes place. More importantly, when a certain conventional economic system guided by dominant capitalist powers in society and directing European integration could be identified, the second approach argues that such a system should be challenged rather than taken as given when proving incapable of addressing the challenges posed by this system. When a system appears to be dysfunctional, identifying the dominant source of power in society would enable us to challenge the system at its basics. The relevance of researching the claims made by the critical political economy approach is that these are focusing on the changeability of a system by identifying tendencies and socioeconomic powers guiding the context surrounding the official decision makers, rather than explaining European integration as reaction to the context without actually understanding it.

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Chapter 2 – Theorizing the origins of power at the basis of European integration

2.1 Introduction – Selection of the European integration theories In chapter one we were puzzled by the observations that in the case of the banking union the Member States have agreed to surrender autonomy over an essential part of their economies and moreover, that a European banking sector has been supporting proposals in favor of a centralized stricter supervision and regulation. The main question of this chapter is how we can approach these paradoxical observations from a theoretical point of view. What we are trying to find out is whether the establishment of the banking union can be explained by looking at the Member State negotiations based on their national economic imperatives in response to the context within which the negotiations have evolved, or if we have to dig deeper by exploring the context surrounding the official decision makers and the influence of other powerful actors within it. It is therefore relevant to look at the process of European integration from a Member State centered perspective in contrast to a perspective focused on exploring the context in which the decision making has taken place. In delimiting the theoretical broad research field, while at the same time trying to gain a better understanding of European integration, the following of this chapter highlights two contrasting theories. As mentioned in the introduction of this thesis, these are Andrew Moravcsiks liberal intergovernmentalism (LI) and the critical political economy (CPE) approach of Bastiaan Van Apeldoorn, Magnus Ryner and Henk Overbeek. The liberal intergovernmental approach mainly covers the classical debate between neo-functionalism and neo-realism by focusing on the power division between the Member States and the European institutions. However, it also adds a more explanatory element by looking at national preference formation within the Member States before entering the negotiations. By doing this, it sheds light not only on the process, but also on the motives of the decision making actors. The conclusion of Moravcsiks observations is that the power determining European integration is rather situated with the Member States in the intergovernmental negotiations based on their national preferences, than with supranational powers trying to influence the process (Moravcsik, 1998, p.18). Moravcsik provides both for an explanation of the European integration process and for an analysis of the Member State preferences, however, his analysis is mainly focused on loose decision making moments and it finds the base of power foremost at the national level. The CPE tries to overcome the focus on one level of decision making and puts emphasis on the socioeconomic context of decision-making by focusing on a transnational dominant class in society which is directing the policy preferences of the formal decision making actors and is present on all levels of decision making. By focusing on this omnipresent context, the theory transcends the distinction between levels of decision making and finds a different dominant

10 source of power in the EU, other than the formal decision making power at the national and supranational level (Van Apeldoorn et al, 2003, p.20). Moreover, this theory identifies certain integration tendencies over time and discovers patterns related to the preferences of a dominant capitalist class in society. The former theory focuses on events where the one nation state prevails over the other based on their relative power positions, while the latter explores the historical socioeconomic context surrounding European integration which it sees as determining the direction of it. The main focus of this chapter is thus to gain a better understanding of the two contrasting approaches in order to grasp their diverging views and how they criticize one another’s basic premises regarding ‘who’ or ‘what’ determines European integration. Applying the contrasting explanations for European integration to the case helps us explore the relationship between the actors involved in the process of European integration by placing the dominant power with different groups of actors. In order to provide for a theoretical base, this chapter sets out the main claims of both theories and finally, it highlights the contrasting claims of the two approaches.

2.2 The liberal intergovernmental perspective Andrew Moravcsik provides us with ‘a rationalist framework of international cooperation,’ based on his findings that national governments are the key actors to determine European integration (1998, p.18). According to him the occurrence of integration depends on whether or not this is in the interest of national governments. The central argument in this approach is that ‘European integration can best be explained as a series of rational choices made by national leaders’ (Ibid). Moravcsik assumes that states act rationally in pursuit of their interests at any given point in time. Following this assumption, he explains European integration as the outcome of interstate bargaining between national states in major intergovernmental negotiations based on their domestic preferences. Moravcsik approaches European integration as a three-stage process, of which each round is treated separately based on several competing theories. First, the sovereign states form their national preferences, which are based on geopolitical or economic interests. The geopolitical interests would mainly stem from perceived threats to national sovereignty or territorial integrity, whereas the economic imperatives would be shaped by increased opportunities for profitable cross- border trade or the control of capital movements (Ibid, p.26). A very important assumption in this first stage is that the theory appoints the nation-state as the primary political instrument by which international negotiations are influenced. Mainly in this stage Moravcsik has attention for individuals and groups in civil society pursuing certain interests. He claims these groups will foremost emerge in

11 the national context, in which they will try to influence the national preference formation in the first stage of the process (Ibid, p.35). After this internal process, the national states are assumed to act externally as unitary and rational actors in international negotiations (Ibid, p.22). This rationalism also entails that, even though preferences are supposed to be stable, the states decide on their preferences in response to given ‘states of the world’, meaning that preferences can change over time due to exogenous changes in economic, ideological and geopolitical situations (Ibid, p.23). In short, the national preferences are the leitmotiv of the Member States in the interstate negotiations, which brings us to the next stage. This second interstate bargaining stage serves to explain the role of Member States and European Union institutions in the negotiation process. In this stage Moravcsik poses the problem whether European integration decisions stem from the effective advocacy of European institutions – thus a supranationalist view –, or from the relative power of Member States to steer negotiations in their preferred direction – an intergovernmental approach (Ibid, p.51). These approaches are highly contrasting since the supranational view assumes that supranational leadership and its supply of information is necessary to overcome inefficient bargaining and to influence the outcomes, while the intergovernmental view claims that patterns of state preferences and power are determining the bargaining process and states have their own resources of information (Ibid, p.55). The intergovernmental theory moreover assumes that Member States are able to be their own political entrepreneurs and to apply their power instruments, such as exiting or vetoing negotiations, linking issues or providing side-payments in order to gain the highest possible benefits (Ibid, p.52). Although the description of this second stage extensively gives attention to the neofunctionalist supranational bargaining theory, Moravcsik tends to find a more satisfying explanation in the intergovernmental bargaining theory. Supranational bodies could be of importance to interstate bargaining, however, only in their attempts to propose initiatives, to mediate between governments and to mobilize societal groups. They can even attract governments’ attention by initiating policy proposals and providing a range of potential solutions (Ibid, p.56). Neofunctionalists would argue that interstate bargains are not intentionally chosen by the Member States, but are the unforeseen consequences of ‘package deals’ or former large negotiations, and thus can be seen as a process of spillover (Ibid, p.54). Moreover, they argue that the entrepreneurship of supranational officials is necessary to move beyond the lowest common denominator of narrow national or group interests (Ibid). Supranational officials are argued to have essential access to all available information due to a central position in networks of technical, political and legal information to overcome inefficient bargaining (Ibid, p.58). Moravcsik, on the other hand, does not regard it proven yet that the supranational actors are indeed essential in the process of interstate bargaining. Intergovernmental bargaining theory states

12 that it is not the entrepreneurship of supranational institutions, but the asymmetrical interdependence caused by different preferences of the Member States that determines the outcomes of the bargaining process. This asymmetrical relationship means that every state assigns value to a certain agreement and this value determines their bargaining space and the extent to which they are prepared to do concessions (Ibid, p.60). Information asymmetry between the Member States is ascribed to the variation in preferences, while they do not need the same information when their preferences lie elsewhere (Ibid, p.57). Moravcsik has mainly found proof for the occurrence of European integration based on intergovernmental arguments and deems supranational influences not of essential relevance. The third stage of the integration process explains why en when governments decide to give up part of their sovereignty and delegate to, or pool decision-making power in supranational institutions (Ibid). The pooling of sovereignty entails that governments agree to voting procedures which are other than unanimity, whereas delegation means that supranational actors receive the permission to take decisions in some areas autonomously (Ibid). Three possible explanations for national governments to give up sovereignty are an ideological, an informational and a political aspect. First there can be the strongly held belief in a federalist ideology on the part of national actors stemming from historical memories or geopolitical calculations. Germany for example has traditionally been in favor of federalism due to World War memories (Ibid, p.70). A second explanation is the need for centralized technocratic planning, required because the economy becomes more complex, modern and transnational (Ibid, p.71). A third explanation Moravcsik provides us with is the need for credible commitments, which has a political character. This is a strategy to pre-commit governments to a stream of future decisions outside unilateral control, which might be inconvenient at the time being, but which eventually is required to sustain the benefits of European integration. Through pooling or delegation, states commit themselves to enforcing legislation, proving their own credibility or to anticipate on future decisions which are assumed to raise domestic opposition (Ibid, p.73). These solid commitments are preferred over setting precise rules in advance, because the future is uncertain. They might also be used to bind governments to certain decisions before the precise costs and benefits become clear and opposition arises. Institutional circumstances, such as certain norms, principles and procedures are then already set to ease agreements (Ibid, p.74). These commitments also have a political component in the sense that national politicians can scapegoat the supranational institutions or other governments domestically, when unpopular but pre-committed decisions have to be made. However, the national governments have to comply, while the commitment also means that the supranational institutions can easily damage the country’s reputation internationally in the case of non-compliance (Ibid). Governments give up part of their unilateral options to for example veto some proposals, in order to make sure

13 that all governments will coordinate their behavior in their particular preferred ways and while it reduces the bargaining power of potential opponents of future decisions linked to it (Ibid, p.75). As said before, Moravcsik has a clear preference to explain the process towards European integration as coming from state preferences in a process of interstate bargaining. He sees states as being able to form their own stable preferences and to generate all the information they need in the deliberations. Accordingly, he argues that decisive events in European integration history have taken place in an intergovernmental setting, while the motives of governments in favor of integration can be seen as strategies towards realizing domestically based preferences (Moravcsik, 1998, 472). Less power and ability is therefore assigned to supranational institutions in the move towards integration. In the above, the most relevant elements of Moravcsiks liberal intergovernmentalism are discussed. The next section will do the same in giving an overview of the theory of the critical political economy.

2.3 The critical political economy perspective The CPE theoretical perspective follows from the Marxist thinking that the economy forms an important part of the social whole and links economic, political and social developments (Browning and Kilmister, 2006, p.2). It takes the embedded status of the economy even further by asking the question what actually constitutes the economic order in society. The ‘critical’ element of this approach adds to the analysis that the economic aspect embedded in society should be regarded revisable when it proves inadequate in dealing with challenges that the conventional economic system is not able to solve (Ibid, p.3). This claim that a certain dominant economic principle guiding European integration should be challenged rather than taken as given is an essential element of the CPE framework of Bastiaan van Apeldoorn, Henk Overbeek and Magnus Ryner. The scholars criticize the mainstream theories of European integration based on their inability to understand actual social power relations in European integration (Van Apeldoorn et al, 2003, p.18). According to the scholars, dominant powers in society have constituted capitalist market structures, which the mainstream theories, such as LI, take as given. All theories ranging from the classical supranationalist versus intergovernmentalist debate to theories of multi-level governance are argued to fail in explaining the social origins of the current system and to ignore the assumption that there are conditions under which the system can change (Ibid, p.17). The scholars criticize taking for granted the capitalist constructs lying at the basis of society, which would imply that these structures follow from human rational considerations agreeing to the system for the realization of their social lives and that actions from decision makers accordingly would be legitimate (Ibid, p.34-36). However, if these structures are shaped by non-democratic social powers in society, basing the political authority on these would

14 actually pose legitimacy issues. In contrast with the liberal intergovernmental theory for example, the CPE would argue that state preferences do not form a legitimate basis for negotiating European integration, because these perceived national interests stem from transnational dominant power structures instead of being based on the constituents’ individual interests (Ibid, p.32). Consequently, Van Apeldoorn, Overbeek and Ryner are trying to identify these social powers, where they come from and how they constitute the dominant principles within society (Ibid, p.18). The scholars attempt to unravel which powers in society lie at the basis of our dominant economic thinking, and are therefore deciding the guiding context in which European integration evolves. CPE is based on (1) a transnational historical materialist argument, (2) a Neo-Gramscian constructivist argument and (3) a neoliberal hegemony argument (Ibid, p.32). To take off with transnational historical materialism, this is rooted in the work of Karl Marx, who focuses on the social relations of production. Historical materialism accordingly has to be understood as ‘the way in which humans have organized the reproduction of their material lives’ (Ibid, p.33). It is foremost based on the claim that we have to look at decision-making in a historical context in which the dominant structural powers in society have been able to secure and pursue their material interests. These processes are embedded in long-term tendencies of the capitalist production mode (Ibid). Important here is that the dominant capitalist class is able to shift from certain groups in society towards other groups. This shift in class is also guiding changes in the hegemonic system, which means that changes in dominant paradigms over time are also influenced by the form class takes on (Ibid, p.32-33). Another important aspect here is transnationalism. This means that the process of integration is not confined to taking place within national boundaries. The scholars refer to the world systems theory of Andre Gunder Frank and Immanuel Wallerstein, who introduce the contradictory argument that capitalism and capitalist class relations are located in a global context, while the political power socializing these capitalist structures is located within national states (Ibid, p.36). This claim highlights the ongoing importance of national states to promote the capitalist class’s preferred ideology (Ibid, p.36). The structural power is identified as a dominant capitalist class in society pursuing their materialist capital accumulation strategies. The form this dominant class takes on can be explained by historical developments in society enabling a certain class to prevail and gain dominance. More European integration is argued to occur when this is in the interest of the dominant transnationally operating capitalist class, which has been able to insert dominant views into society requiring more centralized policies (Van Apeldoorn et al., 2003, p.32). As argued before, the distinctive premise in the theory of CPE is the notion of ‘critical’. The social criticism implies that when the conventional economic paradigm promoted by the dominant class is not able to meet the challenges in contemporary society, it should be revised, even against the will of the capitalist class in order to safeguard the needs of individuals in society (Browning and

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Kilmister, 2006, p.3). When the social powers in society are withholding human beings from expressing themselves and realizing their needs from their preferred strategies, the system has to be challenged. Moreover, for the ideals of democracy and equality in our current European society, the freedom of individuals should indeed be protected, instead of being constrained by the dominant capitalist markets inserting their views in society (Van Apeldoorn et al, 2003, p.34). The second central premise in the theory is the neo-Gramscian dimension which explains how a hegemonic order in society is promoted and constituted by the agency of a dominant class. Gramsci has developed Marx’ notion of class rule, by assuming that power is rather situated in society with the dominant classes than with the state. The order in society is based on economic structures created by the capitalist class, which are accompanied by a dominant paradigm directing politics. The paradigm is likely to contain ideological and moral elements to justify its dominant economic direction (Ibid, p.37). Kees van der Pijl, who explains this as the processes of commodification and socialization. The point of these terms is that commodification is seen as an individualist process, putting social lives in terms of market relations of accumulation. This, however, threatens social interdependencies in society. Therefore, social regulations have to be put in place by decision makers to regulate the market forces (Van der Pijl, 1998, p.22). For the realization of these elements the power of the state serves as legitimizing to form a hegemonic system, also in the case of European integration. This hegemony requires popular consent, so narrow class interests have to be shaped into the general interest (Van Apeldoorn et al, 2003, p.37). For the spreading of these paradigmatic ideas agency of the dominant social group is of crucial importance. This agency formulates and spreads the intellectual and moral ideas, which leads to them being transformed into a ‘universal paradigm’ binding the subordinate groups into the order shaped by the capitalist block (Ibid). In the integration process, it should be possible to identify decision makers and a capitalist agency promoting ideological ideas in support of the interests of the capitalist class. Van Apeldoorn, Overbeek and Ryner also take into account some propositions about the neoliberal hegemony in Europe. First the scholars make a point about reaching this neoliberal hegemony, which has been a dynamic process of struggle in which the control of the capitalist class is realized. The scholars refer to André Drainville, arguing that creating a neoliberal system is a process of restructuring by negotiating concessions to the former dominant system (Ibid, p.38). Moreover, this installing of the hegemonic neoliberal system involves three phases, while first deconstructing other ways to structure the economy, secondly, installing neoliberal ideas of liberalization, deregulation and privatization as valid and legitimate and thirdly, consolidating neoliberalism by which the global capitalist system becomes naturalized (Ibid). Regarding the transnational claim of neoliberalism, the transnational and transatlantic class formation have to be taken into account as important context factors for the process of European

16 integration. The scholars however highlight that, although a transatlantic link to the dynamic of American capital influences European integration, it does not determine it. Central to the transnational claim is that the transnational processes are understood as simultaneously taking place on a subnational, national and international level within Europe. This has implications for the understanding of sovereignty, governance and statehood in the EU, which are undermined by this transnational capitalist class guiding European integration by penetrating society as a whole with their capitalist structures (Ibid, p.39). Taken together, the theory claims that we are currently finding ourselves in a neoliberal system, which has gained dominance while fitting with the preferences of a dominant class in society which has been promoting the values of the system as of general importance to benefit the society as a whole. In the process of European integration the Member States therefore base their preferences on this system dictating the way in which the economy and society function.

2.4 Liberal intergovernmentalism versus the critical political economy The sections above display the two contrasting views used to approach European integration in the case of the banking union. Most striking of the theories is their entirely different focus on the origins of the motives for European integration. In the introduction we identified the support of both the Member States and a European banking sector for a European banking union as puzzling features. The theories are proposing different claims about the role and the place of national and transnational official and non-official powers within the process of European integration. LI puts the Member States at the center in explaining the process of European integration. In the case of the banking union, this would imply that the Member States have based their motives for pursuing more integration on the effects this likely has on their national economies in response to the challenges posed by the current situation. By arguing that the decisions of the Member States are rational responses to given states of the world, LI sees the Member States as dominant and primary actors to decide whether or not European integration occurs. The Member States take into account their national sector interests and the effects the proposed integration has in support of the national economy. The relative power positions of the Member States account for the fact that the Member States with a larger bargaining space have a bigger say in the negotiations and are able to set requirements. Moreover, by viewing the motives for integration according to the context at given moments in time, LI sees European integration as a series of loose negotiations and does not agree with theories arguing that integration tendencies take place outside national control, for being based on preferences outside the national realm and developments over time. It does not view the influence of supranational officials and other powers exceeding the national level as essential in the

17 process leading towards integration, while the theory argues that national preferences are formed within the national realm before entering the negotiations at the European level while remaining stable during the process. The establishment of the banking union would be explained as a process of Member State negotiations, of which the outcomes are distributed according to the relative power positions of the Member States involved. CPE has a different view on the role and place of the actors involved in the establishment of the banking union. The theory focuses on identifying a transnational dominant capitalist power, which has been able to shape an economic order in society and to guide an understanding of how the system works while placing their interests at the center of its functioning. By guiding the economic paradigms within society and the relation between the economy and social lives, this dominant social power shapes the context in which official decision makers decide whether to support further integration or not. Instead of focusing on the power of the national Member States, the CPE places a transnational dominant capitalist power at the origins of explaining the Member States attitude towards European integration. Yet, the theory sees the Member States as continuously relevant for socializing the global capitalist structures in society and legitimizing the preferred policies of the dominant societal powers. Regarding the establishment of the banking union, CPE would probably argue that the idea for more integration in a banking union fits in a tendency towards more integration, while this support the capital accumulation strategies of a transnational financial class. Following the theory, to justify the dominant economic direction, this capitalist class has accomplished to shape its narrow interests into a conventional economic paradigm containing ideological and moral elements for the common good. In the neoliberal order this justifying element would be a concept of free market policies to support the freedom of individual expression and development without too much state intervention (Harvey, 2005, p.7). The Member State negotiations over the banking union would be explained as a process of legitimizing more economic integration on a domestic level, since all Eurozone members have either been striving to maintain the means to provide for social goods within the national realm or to have access to common means. Popular consent is indeed required to sustain the economic order in support of the strategies of a capitalist class. CPE therefore does not see the Member States as the basic source of power in society, but rather as the legitimizing power for the underlying capitalist structures, which are actually determining the direction of integration (Van Apeldoorn, 2003, p.37-39). As already argued in the introduction of this thesis, the most important consequence of explaining European integration based on one of the two approaches lies in a legitimacy aspect. When Member States take into account their national positions to either strive for European integration or not, this can be legitimized because they operate as democratic representatives of their constituents. The CPE however would undermine this legitimacy stance, for claiming that non-

18 representative informal actors shape the economic order in society guiding these democratic powers. While LI would legitimize a banking union for its perceived beneficial effects for the economic welfare of the Eurozone and to avoid future crises, the CPE would rather question the proposed solutions for solving the challenges which have been posed by the system itself. It claims that instead of responding to these challenges within the context of the dominant system guiding our conception of how the economy works, we should challenge the system when it proves unfit to provide solutions in the benefit of all EU constituents. By exploring the basics and power structures of the system instead of merely the Member States responses to it, CPE attempts to provide for a deeper explanation of European integration and a critical assessment of its consequences. To assess the claims of both theories, the following chapters will in fact look at the process and the context of the establishment of the banking union. Following LI we will be able to identify the national interests as basis for the banking union and the outcomes of the negotiations should reflect the interests of the stronger Member States as prevailing over the interests of the Member States which have more to gain from the integration project. It should be observable that the reason why the Member States have agreed to a banking union would be that they found themselves in a situation in which more integration would be a rational choice, based on the perceived positive effects on their national welfare. By identifying these elements the theory would reject the assumption that there are guiding influences on the outcomes of European integration outside the national realm. For approaching the banking union from a CPE perspective, the development towards the actual negotiation process over the project and other powers involved in it are taken into account. Based on the CPE approach, several aspects should be identifiable regarding the establishment of the banking union. The approach focuses on a capitalist construct directing the economic rationality of formal decision makers, for which we should be able to identify a dominant capitalist class pursuing their capital accumulation strategies and an economic system supporting these strategies based on arguments for the general good to justify this system. Furthermore, the change in preferences of national Member States regarding whether or not to agree to European integration should then also be reflected in the strategies of the capitalist class over time, although this might seem to contradict national Member States’ preferences. Reviewing both the negotiation process and the constitution of the context surrounding it will be relevant to explore how the processes and varying interests have led to the establishment of the banking union and if we can value this development as legitimate.

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Chapter 3: On the road to the banking union: an intergovernmental perspective

3.1 Introduction – Member States’ interests in a banking union The former chapter explained that one classical view to approach European integration is to view each and every integration step as the result of national interests and interstate bargaining. This theory therefore focuses on explaining the establishing of the banking union in terms of national interests. To what extent can the establishing of the banking union be construed as the outcome of national preferences and interstate bargaining? In this chapter we are examining the establishment of the banking union based on a liberal intergovernmental perspective. For applying this theory we will first look at the situation in 2012 that led the Member States to initially agree on installing prudent mechanisms to control the banking sector and to break the link between banks and sovereign debt. It was argued that this doom-loop could be solved with supervisory and resolution mechanisms, which would limit national control over large banks and avoid big bank bail-outs with public funds in case of crisis (European Commission, 2012a). The chapter assesses whether the domestic preferences of the Member States have indeed decided the eventual outcomes of the intergovernmental negotiations over the elements of a banking union and how the negotiation process has evolved. We will explore the concerns of the Member States which seem to have led to compromises over the elements of the banking union in combination with an allover crisis approach based on arguments of economic growth to restore stability in the Eurozone, and domestic reforms to solve the sovereign debt crisis. Based on Moravcsik’s LI this chapter therefore attempts to provide an explanation according to which Member States have apparently made rational choices to tackle the problems within the Eurozone revealed by the crisis. It shows the outcomes of the negotiations and moreover sheds light on its consequences. The chapter finishes by evaluating this explanation by highlighting its blind spots in prospect to the next chapter in which the CPE focus will be dominant.

3.2 The road towards the banking union Already during the negotiations about the a European banking supervisory system was proposed, however, the allocation of supervisory responsibilities to the ECB and the creation of an EU fiscal backstop were not feasible at the time (Howarth and Quaglia, 2013a, p.120). Yet, the idea for more integration in the European banking sector remained present in the EU. Then from 2008, following the global financial crisis that started in the United States with the bursting of the housing bubble and the collapse of Lehman Brothers, Europe has successively suffered a current

20 account crisis, a banking crisis and a sovereign debt crisis. The bankruptcy of Lehman Brothers in 2008 caused a series of events which made the interbank market collapse and consequentially had disadvantageous effect on its lending to the real economy (Tridico, 2012, p.17). In the Eurozone, the crisis had a large impact because of the interconnectedness between the countries sharing a common currency. The banking crisis led to stimulus measures from the governments in the form of direct aid, monetary policy operations, overall fiscal support measures and the nationalization of banks. National governments got the role of ‘lender of last resort’ through bank bail-out programmes, which led to an increase in national debt of 520 billion euro in the Eurozone and 690 billion euro in the whole EU by 2012 (Breuss, 2014, p.4). The banking crisis affected public debt to a large extent and especially Eurozone countries such as Spain and Greece had to be saved with European support instruments in order to preserve the common currency. The countries were put under rescue programs and had to agree to austerity measures to rebuild their economies (Ibid, p.1). The global financial and economic crisis highlighted the need for prudential rules and supervision of the financial sector, after which the European Commission started drafting several sets of rules for all Member States. Already in 2009 the Council of the European Union proposed to establish a Single Rulebook for all financial institutions within the 28 Member States of the EU following from global pressures. As a response to the financial crisis, the G20 countries decided that stricter financial regulation was needed by reforming the global Basel II framework containing banking standards in order to prevent risky investments, bankruptcy and insolvency of banks by setting stricter capital and liquidity requirements. A Basel III was negotiated, which regionally had to be implemented (Atik, 2014, p.297). The Basel frameworks focus on more harmonization and transposed into EU law they have been constraining the power from national discretionary authorities. The rules of Basel III were transposed into a capital requirements regulation and a directive, together known as the CRR and the CRD IV package, which were agreed upon in 2011 and entered into force in July 2013 (European Commission, 2013a). Most important in the legislation were enhanced capital requirements and new liquidity rules. However, because of the variety in national banking sectors within the EU, the tightened rules would have different implications for the Member States (Howarth and Quaglia, 2013b, p.334). When the global capital requirements would be implemented as a minimum requirement, this would mean that better capitalized banks could hold higher reserves, creating a loss of competitiveness on the interbank market for the countries with less well capitalised banks. Although the UK promoted to allow the banks to hold higher reserves, mainly Germany and France were opposed to this idea. In these two core EU countries, David Howarth and Lucia Quaglia found that the German mainly national banking landscape would not be benefitted by the higher requirements and that its large banks were less well capitalized, while the French banks applied

21 different counting methods which would be banned under Basel III leading to a lower valuation of their capital reserves. For both countries tighter requirements would pose competitiveness issues for the banks based within their borders (Ibid, p.338-339). The countries have exerted their influence on the negotiations over the CRD IV package, and it seems the rules from Basel III have indeed appeared into EU law in a watered down version, because the capital requirements were set at a maximum standard avoiding banks to hold higher reserves, whereas liquidity requirements hardly appeared at all (Atik, 2014, p.319, 327). So far, the Member States had been able to keep their national discretionary space, while being reluctant to accept measures which could harm their national economies. It was however doubted that the effects of this watered down version of the capital requirements would have the desired effects regarding creating the public good of financial stability and to satisfy markets, for the balance sheets in the EU remained uncertain and an EU-wide resolution arrangement including a unified fiscal backstop lacked (Howarth and Quaglia, 2013b, p.337). Yet, the incentives for the Member States to solve these issues were not pressing until the sovereign debt crisis arose in 2011, highlighting the interconnectedness of the Eurozone for which deeper integration was voiced as the solution. Since the banking crisis had shown the systemic dangers of failing large cross-border operating banks, it seemed irrational to still continue a system of (then) 27 different regulatory authorities with national rules, supervision and rescue measures (Capriglione, 2013, p.7-8). Indeed, after the occurrence of the Eurozone crisis ‘the need for a better governed and deeper economic and monetary union’ was identified by the Commission (European Commission, 2013b). After agreeing to a new economic architecture with the ‘six-pack’ as an instrument to solve the current account and the sovereign debt crises, in 2012 the idea of a banking union to get a grip on the banking crisis gained ground in the Eurozone (Breuss, 2014, p.2). This was a reaction to the identified vicious circle between banks and sovereigns, mainly within the Eurozone for its negative effects on the confidence in the common currency. In 2012 the Eurozone leaders agreed to establish a banking union to restore confidence in the Eurozone banking system and to regain financial stability. Three reasons were set forth for this banking union. First, to break the ‘doom-loop’ between sovereign governments and the banking sector, while rescuing banks during the crisis had cost 4,5 trillion of tax payers money (European Commission, 2012a); secondly, to overcome financial market fragmentation with one common regulatory system and to avoid a national bias in supervision (ECB, 2013a); and thirdly, as promoted by former Council president , ‘to complete economic and monetary union, thus saving the euro and protecting it from future shocks’ (Howarth and Quaglia, 2014, p.125). The European Commission under the guidance of President Barosso further developed this vision when it published a ‘Blueprint for a deep and genuine economic and monetary union’ in November 2012 (Breuss, 2014, p.7).

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An argument often used by supranational officials1 in favour of centralised banking regulation and supervision has been the logic of the financial trilemma as observed by Dirk Schoenmaker in 2011. In a discussion paper he describes the elements needed to preserve the public good of financial stability. His key question is how financial stability can be reached in a world of cross-border banking. Schoenmaker identifies a tension of governments still trying to provide this financial stability public good on a national level, while dealing with a globalised financial market. The financial trilemma claims that financial stability, financial integration and national financial policies cannot be reached at the same time (Schoenmaker, 2011, p.1). Financial stability will thus be absent when on the one hand having more financial integration, while on the other hand maintaining diverging national policies. Schoenmaker argues that ‘financial stability is closely related to systemic risk, which is the risk that an event will trigger a loss of economic value or confidence in a substantial portion of the financial system that is serious enough to have significant adverse effects on the real economy’ (Ibid, p.2). He argues that the more financial integration increases through the spread of activities abroad, the less effective national policies become, for which a logical solution would be to move power over financial policies, i.e. regulation, supervision and stability, increasingly towards a central level. Furthermore, to maintain this financial stability, crisis management operations should also be moved to a central European system (Ibid, p.4). Based on this logic, the banking union was supposed to consist of three major pillars and was mainly set up for the Eurozone, however, it would be open to all EU Member States willing to participate. The three pillars entail (1) surveillance within the ‘Single Supervisory Mechanism’ (SSM), (2) resolution in the ‘Single Resolution Mechanism’(SRM) and (3) deposit guarantee with a Single Deposit Guarantee Mechanism (SDGM). These pillars are based on the Single Rulebook, which directly applies to all 28 Member States in the European Union (Ibid, p.15). In September 2012, a Commission regulation was proposed for installing the Single Supervisory Mechanism (SSM) (European Commission, 2012c), which, after being amended, was agreed by the Council in December of that same year (European Council, 2012b), and was adopted by the Council and Parliament in October 2013 (European Commission, 2013c). The next step was the single resolution mechanism (SRM) for which a regulation was proposed by the Commission in July 2013 (European Commission, 2013d) and which was eventually agreed upon by government leaders in December 2013 (Council of the European Union, 2013a) and adopted by the Council and Parliament in March 2014 (European Commission, 2014a). The sections below will elaborate the negotiation process over the elements of

1 ECB-officials have on several occasions promoted this view in their support for the banking union. For instance, in 2013 Executive Board Member of the ECB Benoît Coeuré used the financial trilemma as argument for the banking union in his speech at a conference of the Banco de España (Coeuré, 2013) and also ECB Vice- President Vitor Constâncio highlighted the financial trilemma in his speech at the OeNB Economics Conference in Vienna in May 2014 (Constâncio, 2014). 23 the banking union, in which the ongoing reluctance of the Member States to surrender autonomy over their banking sectors can be identified while fearing a loss of competitiveness and autonomy. However, for arguments of preserving the single market, the Eurozone and financial stability as preconditions for growth and welfare, the Member States have come to an agreement over the elements of the banking union. The sections below display this negotiation process, the underlying varying motives of the Member States to agree to more integration and their relative power positions regarding pushing compromises and setting conditions in exchange for support.

3.3 Debating the SSM and SRM Several important decision making moments can be identified in the debate following the agreement to establish a banking union at the Council in 2012. When applying Moravcsiks LI framework to the case of the banking union, we should be able to identify the national preference formation of the Member States before entering the negotiations. As mentioned in the previous section, the generally accepted objectives for the banking union were to break the doom-loop between sovereign governments and the banking union, to overcome financial market fragmentation and to complete economic and monetary union. This was deemed necessary for restoring confidence in the European banking system and for regaining financial stability. However, the banking union has been supported by the Member States for different reasons based on their national circumstances, which has led to disagreements about the way in which it should be established. Germany mainly focused on reforming the weak performing members within the Eurozone and not becoming a target of moral hazard, while the indebted members promoted measures gaining them access to resources to back their national economies (Howarth and Quaglia, 2014, p.129). The latter group of countries hoped for easy access to funds and minimal reforms to their economies, while Germany has been reluctant to give access to funds when reforms and austerity measures were not set as a precondition, as we shall see in the negotiations below. Through its strong economic performance, Germany’s bargaining space could be seen as relatively large, although it is constrained by its dependency on the welfare of the weaker Member States for sharing a single currency. This economic interconnectedness has somewhat enlarged the negotiation space of the weaker Eurozone members, requesting access to funds in order for them to stabilize their economies. Moreover, it has been in the German interest to promote a system of separating state activities from banking activities, while the strong link between sovereign debt and banks holding large proportions of this debt were deemed non-beneficial and causing the doom-loop which proved detrimental to the functioning of the Eurozone. In order to provide financing for the real economy instead of being linked to state debt, the confidence in the banking sector had to be regained. This was an important reason to move banking governance

24 towards a central level instead of keeping it within the discretionary power reach of national supervisors (Atik, 2014, 330). Although the crisis provided for the pressing incentive to upgrade the common system, we will be able to continuously identify that during the negotiations the stronger Eurozone members led by Germany were striving to limit the negative effects of the money and power transferring elements on their national economies by imposing conditions on the weaker Eurozone members. These conditions moreover highlight the side-effects of installing a banking union on the weaker Member States. Accordingly, a recurrent feature in the negotiations is that in exchange for accepting elements of the banking union which could potentially weaken the German position, it has required that thick strings were attached and that conditions were imposed on the Member States directly receiving the benefits of the common system. In the following sections we will look at three important decision making moments in the negotiations over the establishment of the banking union based on the Member States national preferences. Firstly, we will look at the negotiations regarding the centralization of banking supervision in the Single Supervisory Mechanism (SSM), including its pace and scope. Secondly, we focus on the controversial issue of using European Stability Mechanism (ESM) funds to finance the bail-out of banks and their recapitalization. The third and final moment is the debate regarding the Single Resolution Mechanism (SRM), in which the most salient issues again were the scope of the mechanism, the level of authority of the Single Resolution Board (SRB) and the financing from the accompanying Single Resolution Fund (SRF).

3.3.1 Rushing the SRM and negotiating the ESM as financial backstop In the negotiations over the banking union, the diverging views of Germany and France on how to move forward have been characteristic for the course of the process. In 2012 the negotiations over the supervisory mechanism as first pillar of the banking union evolved. As expected, France supported a quick set up of all mechanisms of the banking union, especially the instruments for financial support and recapitalizing ailing banks, while Germany promoted a slower process which would be thought through thoroughly, starting with a prudent supervisory mechanism (Euractiv, 2014). For Germany, financial support could be acceptable, but only in the last instance and based on strong conditionality. Characterizing for these national interests was the chronology promoted by the blocks. Germany was not opposed to more integration, however as stated by German Chancellor Merkel, as long as more political and fiscal convergence are achieved first to guide national budgets (Bloomberg, 2012). In contrast, French President Hollande stated in an interview with several newspapers that solidarity and social union had to be in place first, and swiftly, before a was built (Kauffmann, 2012). More than merely having access to common funds, David Howarth and

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Lucia Quaglia argue that the French support for a banking union was mainly to counter market worries about the unstable banks in the Eurozone, because these held large amounts of the governments’ sovereign debt (Howarth and Quaglia, 2013a, p.111). The French quest to accelerate the process to achieve this was therefore backed by the indebted Member States and the supranational leaders striving to regain the trust of investors to stimulate economic growth within the Eurozone. Council President Van Rompuy for instance stated regarding the banking union as crisis measure: “The rest of the world is looking at us. They are not asking for new debates, they are asking for decisions” (Ruando and Rinke, 2012). Also, European Commission President Barosso wished to quickly move forwards and proposed a roadmap for more European integration to ensure fiscal discipline and to stimulate growth, thereby promoting a banking union with an integrated financial supervision and a resolution mechanism (Barosso, 2012). An important issue concerning banking supervision was whether the ECB should be made responsible for the supervision of all Eurozone banks or just the cross-border banks (Ruding, 2012, p.4). Again there was a clash between Germany and the French block backed by the supranational officials. Regarding this issue the specific banking landscapes within the EU have played an important role. Although the largest cross-border banks in the Eurozone are located in Belgium, France, Germany, Ireland, Italy, the and Spain, the size of these banks is relative to the size of the entire banking sectors in these countries. In the Netherlands and in Spain, cross-border banks make up the largest part of their sectors, while this does not apply to Germany, France and Italy. The main part of the German banking sector consists of nationally operating Sparkassen and co-operative banks (Schoenmaker and Siegman, 2013). For Germany, a supervisory system with a scope of all Eurozone banks, which was taken up in the initial proposal, implied a risk that the EU would have the direct power to decide over all the smaller banks, which would mean a major transfer of sovereignty for Germany. The national banks were deemed of crucial importance by Germany to back the German economy, especially its small and medium sized enterprises, for which Germany preferred them to be subject to national supervision (Howarth and Quaglia, 2013a, p.112). The French government and the Commission promoted the supervision of all 6,000 banks in the Eurozone, arguing that the small Spanish banks had together formed a systemic risk for the entire banking sector as well. Also, France argued that unequal treatment of the different banking sectors would disadvantage the French, since their banking system contains five large cross-border banks (Ibid). These banks would all fall under the direct supervision of the ECB. To keep the supervision of all 6,000 banks manageable for the ECB, the French argued to install a ‘licencing system’ to enable national supervisors to act on behalf of the ECB, which would still give them national power over their banks (Pop, 2012a). This plan, also backed by European Economic and Financial Affairs Commissioner Michel Barnier, was however not supported by Germany, since it would delegate the

26 power to national supervisors enabling them to cover up national banking problems (Pop, 2012b). The Germans wished for the ECB to have real investigatory and auditing powers, and advocated to start such a system with the biggest banks in the Eurozone (Pop, 2012a). This would be beneficial for Germany, while excluding the numerous small German banks from such supervision and imposing strict supervision on the weak large banks within the Eurozone. Being one of the most financially and economically stable Member States, Germany feared to become a net-contributor in case all banks within the Eurozone would have to contribute to a common fund. Although France and Italy would also supposedly be net-contributors to the banking union, for them the benefits of regaining market confidence and common financial backstops included in this union would outweigh the costs (Howarth and Quaglia, 2014, p.128). Furthermore, several countries were worried about the major transfer of power to the ECB, because this would give them a double mandate; to conduct monetary policy within the EU and to supervise the banking system. It was feared that this would lead to a conflict of interests (Ruding, 2012, p.4). Germany was even internally divided over this issue. The Bundesbank requested a treaty change for transferring powers to the ECB, while the German government accepted basing the powers on article 127 (6) of the Treaty on the Functioning of the EU (TFEU). The Bundesbank, even after the compromise was agreed, remained critical about the treaty base and the double mandate of the ECB (Epstein and Rhodes, 2014, p.23). It was said that German Chancellor Merkel agreed to an intergovernmental arrangement under the current treaties and ignored problems with the legal basis, because a debate about the EU illegally taking part of Germany’s sovereignty might have negatively influenced the position of Merkel’s Christian democratic pro-European party in the national elections in Germany in September 2013 (Engelen, 2014, p.31). Finally, in addition to the supervisory arrangements, the proposal also included the controversial issue of using funds of the European Stability Mechanism (ESM) as a common fiscal backstop. The initial set-up of the ESM as crisis mechanism was limited under German pressure to purchase government debt only in secondary markets and not until the country receiving the support had first ratified the fiscal compact (Epstein and Rhodes, 2014, p.23). In November 2012, however, Council President Herman van Rompuy requested direct bank recapitalization from the ESM in his paper ‘Towards a genuine Economic and Monetary Union’ starting in 2013. As expected, this proposal was unfeasible for Germany, and the Netherlands, who argued that the centralized supervisory and resolution mechanisms had to be in place beforehand and that these would have to be accompanied by fiscal policy rules before recapitalization from the ESM would be an option. They argued that until the mechanism would be operational, financing the debts would have to be the responsibility of the national Member States themselves (Howarth and Quaglia, 2013a, p.113).

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3.3.2 Outcomes of the negotiations over the SSM and ESM An agreement over the SSM and access to the ESM was reached at the Council of Finance Ministers on the 13th of December 2012. A provisional deal on the Single Supervisory Mechanism was agreed, which established the ECB as the single banking supervisor starting in 2014 (European Council, 2012b). Although many countries wished for it to enter into force as soon as possible, German Finance Minister Schäuble stressed that the start date of the supervisory mechanism would not be before January 2014, which eventually became March 2014 (Marini, 2012). The Cypriot EU presidency drafted a compromise that all cross-border banks with assets worth over 30 billion , and/or 20 percent of national GDP would fall under direct ECB-supervision, and that while remaining under national supervision, the ECB would be ultimately responsible for the remaining banks (Epstein and Rhodes, 2014, 22). This supervision would be exercised in close cooperation with the national supervisors, however, these would not be allowed to act on behalf of the ECB, as proposed by France. The direct supervision would include 150 large banks in the Eurozone with a 30 billion threshold (Véron, 2012). Moreover, the Finance Ministers of the Eurozone decided that when an effective SSM had been established, the ESM “could, following a regular decision, have the possibility to recapitalise banks directly” (Council of the European Union, 2012b). At the Council of heads of states and governments on the 13th and 14th of December 2012, Merkel again emphasized that before granting support to the ESM, the ECB would have to be fully established in its supervisory role (Euractiv, 2012c). A single supervisory mechanism would thus be established and for the use of the ESM thick strings were attached requiring that the countries requesting support would comply with EU budget discipline rules, sign a memorandum of understanding setting out policy commitments and agreeing on a timetable (Euractiv, 2012b). Even though the German conditionality was taken up in the proposal for bank recapitalization from the ESM, Germany had to be forced by Italy and Spain to actually agree to the proposal, while the two countries threatened in return not to agree to the long- term growth package wished for by Germany (Ibid). In October 2013 the European Council requested the to finalize the possibility for the ESM to recapitalize banks directly. The finance ministers agreed on 5 May 2014 that direct bank recapitalization from the ESM would be allowed to start in 2015 in case, after the Asset Quality Review all banks had to pass before entering the banking union, national funds would be insufficient to strengthen a bank. This would be possible even before the foreseen Single Resolution Fund would become operable at the beginning of 2016 (Epstein and Rhodes, 2014, p.27). Although this was faster than the Germans proposed, allowing the ESM to be used as a backstop has not had the effect of quick access to the funds which the European officials and the Southern block had advocated for (Ibid). Despite the constraining conditions attached to it,

28 the ESM as fiscal backstop of last resort does have the effect of a common public backing to regain confidence in the European banking sector, which was wished for by the French-led block. Judging by the outcome of the negotiations, it seems that Germany has been successful in advocating for a strict supervisory mechanism for the largest problematic banks within the Eurozone, while limiting the transfer of sovereignty over the major part of its own banking sector. Although Germany gave in on recapitalization from the ESM, this has lost much of its attractiveness anyway because of the rules surrounding it. Moreover, in return for access to funds, the Member States will have to pass economic reforms promoted by the German-led block. Yet, the access to common funds and the increased pace of putting the mechanism into effect do serve to regain the trust in the Eurozone banking sector and financial market.

3.3.3 The complex negotiations over the SRM and SRF Following the heads of state and governments agreement at the former mentioned EU leaders summit on December 13th and 14th of 2012, in July 2013 a draft regulation to establish the SRM was proposed by the Commission. The Commission stated that an EU framework for bank recovery and resolution would be necessary to avoid the rescue of ‘too-big-to-fail’ banks with tax payers’ money. To preserve a stable functioning of financial markets and support for the real economy in the future the financial system would have to be stabilized and banks should be permitted to fail in an orderly manner to avoid bank bail-outs (European Commission, 2014b). The risk of financial instability would be caused by a loss of confidence in banks leading depositors and creditors to withdraw their money from these institutions. Moreover, as we have witnessed during the Eurozone banking crisis, the failure of one large bank could undermine the confidence in other banks affecting their finances and leading to instability across the financial sector (Ibid). As Michel Barnier stated regarding the proposal:

We have seen how bank crises can quickly spread across borders, sending confidence into a downward spiral throughout the euro area. We also have seen how the collapse of a major cross-border bank can lead to a complex and confusing situation […] We need a system which can deliver decisions quickly and efficiently, avoiding doubts on the impact on public finances, and with rules that create certainty in the market. That is the point of today's proposal for a Single Resolution Mechanism: by ensuring that supervision and resolution are aligned at a central level, whilst involving all relevant national players, and backed by an appropriate resolution funding arrangement, it will allow bank crises to be managed more

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effectively in the banking union and contribute to breaking the link between sovereign crises and ailing banks (European Commission, 2013e).

Even though the rationale for a Single Resolution Mechanism was acknowledged by the Member States, the Commission proposal contained many issues for debate regarding its sovereignty surrendering and money transferring elements. Moreover, the initial draft included far-reaching powers for the Commission. Since an independent decision-making Single Resolution Board (SRB) would require a treaty change, the Commission proposed that the SRB would in close cooperation with national resolution authorities draft resolution plans, after which the Commission itself would decide whether or not to put the bank into resolution. The Treaty after all required that only an established EU institution could make far-reaching decisions at a European level (Micossi et al, 2013, p.16). In response to the proposal, the German government initially expressed its reluctance to setting up a system that would imply a significant transfer of national sovereignty and funds from the national banks (Kefalakos, 2013). Although the German government was in favour of a prudent mechanism to resolve banks, it expressed its reluctance to transferring major powers over the national banks to the Commission and pooling funds (Howarth and Quaglia, 2014, 21-22). ECB officials including , replied firmly in April 2013 by publicly backing the swift creation of the mechanism, arguing that the doom-loop between banks and sovereigns had to be broken. Draghi argued that in order to create a credible and convincing banking supervision, this had to be accompanied by a resolution mechanism and a common fund (Kefalakos, 2013). Germany, however, stressed that the decision to take a bank into resolution would have to be taken by the European Council, thus by an intergovernmental decision, instead of a supranational one. Also, Germany promoted a network of national resolution authorities, which would be centralized when the treaties had been changed which would grant an independent Single Resolution Board (SRB) the legitimate power to decide over resolving an ailing bank (Howarth and Quaglia, 2014, 130). Another controversial issue was the scope of the resolution mechanism. The Commission proposed that all banks within the Eurozone would fall under the mechanism, while Germany preferred a mechanism similar to the SSM, which included only a direct involvement in the 150 major cross-border banks within the Eurozone and involvement in the remaining banks when this was decided by a majority vote in the SRB, which would enable the Member States to exert influence on these decisions (Ibid, p.133). In addition, the legal basis of transferring significant powers to the Commission and the ECB were questioned by Germany. Michel Barnier advocated for the Treaty base in article 114 of the TFEU regarding functioning of the single market and ECB-president Mario Draghi stressed the earlier commitments of the heads of states to setting up national backstops before the start of the review of banks assets as condition for entering the

30 mechanism (Epstein and Rhodes, 2014, p.27). Although Germany agreed to this, Chancellor Merkel stated in a speech at the EU Summit held in October 2013 that in exchange for the single resolution mechanism, certain requirements would have to be met: “The economic coordination system we have developed is not enough. We want quality surveillance, tighter coordination of economic policies and more binding agreements on reform” (De Felice, 2013). Furthermore, the European Council in October 2013 concluded that the SRM would have to be established quickly. Two months after this in December the and the Council reached agreement over the content of the Bank Recovery and Resolution Directive (BRRD) as part of the Single Rulebook, which formed the basis of the SRM. This directive included the setting up of national funds, which had to be in effect in 2016 (Howarth and Quaglia, 2014, p.125). This BRRD contained strict clauses for the bail- in of bank creditors and thereby would limit the risk of moral hazard for the stronger Member States. The Member States advocating for this tight system, including Germany and the Netherlands, enforced a bail-in chronology that would initially address the bank and its shareholders and creditors and only in last instance would have access to common funds (Barker, 2013). Regarding the Resolution Fund, the Commission, the ECB, France and the southern and periphery European Member States supported a common fund filled by the banks to finance the resolution of failing banks. Germany however, favoured a network of national resolution funds, arguing that the countries involved in the resolution of a particular bank would have to finance this out of their combined national funds instead of from a common fund to which all banks had contributed (Howarth and Quaglia, 2014, p.136). Germany already organized its own bank restructuring plans and national backstop, and encouraged other governments to do the same. As expected, Germany encountered reluctance from France and several other Member States fearing that the setting up of national mechanisms would in fact lead to the risk of moral hazard from the banks on a national level. Germany therefore insisted that not only the strict bail-in rules as already agreed in the BRRD would be in place for private sector bond- and shareholders, but moreover, that for access to the fund, a long and complex voting procedure would have to be completed (Ibid, p.129). The proposal furthermore held that contributions to the common fund would be based on the extent to which a bank was funded by deposits and the amount of risk activities undertaken by it (Ibid, 133). In relation to this issue, the question was moreover if there would be a European backstop in case the resources in the fund would prove insufficient for the resolution process of a bank. Again, the division between the two blocks became clear: the French block called for the ESM to serve as a backstop, while the German block argued that in this situation national Member State governments would have to be responsible for carrying the burden. In an internal debate even before the final negotiations started, the German government decided to support a unified European resolution fund, even though it had first objected such a fund. The condition however was that until

31 the fund would be operational, which would not be the case before the other mechanisms were implemented, national funds would be responsible for financing their own banks resolution (Christie et al, 2013a). This would lower the risk that before a prudent system was installed in which only the banks that had passed the Asset Quality Review could participate, money would already be requested from the fund. Lastly, the proposed voting procedures within the Single Resolution Board were questioned by Germany, which suggested a heavier vote for the larger Member States. ECB President Mario Draghi responded that the required quick action would be undermined when voting procedures would become too complicated. The French Minister of Finance Moscovici moreover stated that the SRM “needs to be efficient and quick” and ministers “need to specify what will be the backstop, how it will function” (Christie et al, 2013b). The main goal of the mechanism would be to reassure financial markets and heads of states and governments within the EU that the Eurozone block is able to take swift action when their biggest banks face bankruptcy with the risk of contagion throughout the Eurozone (Christie and Brundsen, 2013b).

3.3.4 Outcomes of the negotiations over the SRM and SRF On December 18 2013 an agreement between the Eurozone Finance ministers was reached after a meeting of over nine hours in Brussels. As proposed by Dutch Finance Minister Jeroen Dijsselbloem, the SRM was split into two parts: on the one hand the Resolution Board for managing bank failures and on the other hand a common fund to finance the resolution operations (Christie et al, 2013a). The ministers reached agreement over the decision making power of the SRB, which resembled the German stance in the debate to place more power with the Council instead of with the Commission. The SRB could on its own initiative, or after notification by the ECB, adopt a bank resolution scheme. However, the Council would have the power to within 24 hours object to the resolution scheme or to call for changes based on a simple majority vote. Regarding the decision making about the common fund, it was decided to proceed through an intergovernmental agreement based on unanimity. The initial agreement was that within a period of 10 years, national funds would be mutualised into a common fund. Also, a safeguard was built in, that the bail-in rules for banks were adopted beforehand on January 1 2016 (European Council, 2013). This safeguard was installed in response to German concerns. Moreover, the ESM would again serve as a back-stop, however, this was argued to be only in the highly unlikely event that the resolution of a bank would request more money than the bank fund contained. In addition, the conditionality in return for support was emphasized by German Finance Minister Schäuble, who stated: “We will have two financing circles: the ESM, as the solidarity fund, under agreed

32 conditionality, and on the other hand the European resolution fund” (Christie and Brundsen, 2013b). Lastly, the German call for the SRM to have a similar scope of action as the SSM was also agreed at the meeting. The SRB would only be directly involved in adopting resolution plans for the 150 major cross-border banks, while leaving the day-to-day decisions of the other banks to the national authorities. Nonetheless, it was again granted the power to step in under extraordinary circumstances (Christie and Brundsen, 2013a). The Board would include an Executive Director and four permanent members under supervision of the Commission and the ECB. Furthermore, the decision regarding the use of the Single Resolution Fund was given a more intergovernmental character, while support from the Fund for the resolution of ailing banks will be decided over by the Board including representatives from the countries in which the bank operates (Howarth and Quaglia, 2014, p.20). As mentioned above, the initial compromise was to mutualise the Fund by 2025, which was agreeable for Germany. However, in April 2014, the European Parliament threatened not to adopt the proposal were it not put in effect more speedily. The final compromise between the Council and the European Parliament was that 40 percent of the Fund would be mutualised in the first year, twenty percent in the second year and the remaining 40 percent equally over a period of six more years (Epstein and Rhodes, 2013, p.30). Although Germany had to agree to increase the pace in which the mechanism would come into effect, we can still argue that it has accomplished to move the negotiations in its preferred direction. The final compromise reflected a more intergovernmental character and moreover, conditions were again set limiting the moral hazard feared by the stronger Members within the EU by setting strict bail-in rules for the banks under resolution. Before having access to public funds, first bank creditors would suffer a part of the costs. Further costs of financing the resolution would be paid from the resolution fund and in last instance, support could be sought from the ESM, although again with thick strings attached. Moreover, Germany’s demand to only directly include the largest banks within the Eurozone, instead of covering all Eurozone banks was taken up in the SRM. The eventual outcomes seem to a larger extent guided by the stronger Member States preferences, although part of the French and the supranational demands to put the system into effect more speedily and to pool funds were also agreed upon, with the effect that a credible backstop for the Eurozone banking sector will be achieved on short notice. The German-led block was able to agree to this due to the strict rules and conditions taken up in the SRM.

3.4 Liberal intergovernmentalism and the banking union If we look at the abovementioned negotiation process, it seems we can indeed identify that the outcomes reflect Member States’ national preferences and their relative power positions. The

33 motives of the individual Member States for more integration and the resulting decisions and compromises, support Moravcsiks claim that we can explain European integration as a series of rational choices made by national leaders. Given the crisis situation and its effects on the Eurozone, the Member States were pushed to take measures in order to counter the negative effects of the weak performing Member States and the weakened banking sector for the benefit of the interconnected national economies within the Eurozone. Although the European institutions have drafted the proposals for the banking union as crisis measure and have been advocating for its rapid and full establishment, Moravcsik would probably argue that the eventual outcomes are rather the result of Member States exercising their relative power to steer the negotiations in their preferred direction than of an effective supranational advocacy. Supranational officials from the Commission and the ECB have indeed been active in promoting more integration and have continuously been stressing the importance of agreeing over the proposals for a banking union, but these do not seem to move beyond proposing initiatives, mediating between governments and mobilizing societal groups which Moravcsik does not regard essential for the process leading towards European integration. Although the supranational institutions have provided rational arguments in favour of establishing a European banking union in the benefit of the entire Eurozone, the Member States seem to have mainly acted out of self-interest. Indeed, there was an initial agreement that something had to be done to save the interconnected Eurozone, however, the eventual outcomes clearly reflect the national power positions of the Member States, which seem to be rather focused on stabilizing domestic economies than on applying solidarity to indebted fellow Member States. Moreover, based on Moravcsiks claim of Member States making choices in response to a given state of the world, we could argue that the establishment of the banking union can be regarded a rational choice in response to a crisis situation, rather than a consequence of former large negotiations which neo-functionalists would refer to as processes of spill-over. The crisis did indeed require far-going measures including surrendering sovereignty over national banks, which before was unfeasible for the Member States. Still, the preferences of the Member States in the interest of the national economy have remained stable, since the eventual Member State choices seem to be rational decisions given the situation. Preferences during the negotiation process, mainly the German ones, can be argued to have remained relatively stable while Germany was continuously striving to install a prudent mechanism while limiting the negative effects of moral hazard. Deviations from this stable position would be the effect of a crisis situation requiring Germany to do concessions in order to save the common currency and regain the trust in the Eurozone, which would eventually be in its own interest. The weaker Member States preferences could also be assumed stable, while they have been continuously striving for common support mechanisms and a limited loss of autonomy over their banking sectors. Although they have not achieved the latter, they are granted access to

34 common funds to regain confidence in their weakened banking sectors. This supports the LI claim that the involvement of supranational officials is not crucial for the Member States to move beyond a lowest common denominator. Although the largest part of the German banking sector is characterized by nationally operating banks, the interconnectedness with the weaker members of the Eurozone has necessitated them to look at the functioning of the Eurozone economy as well in benefit of their domestic economy. Moreover, a neofunctional argument that the Member States were not able to negotiate effectively while not having access to all information in contrast with the overview position of the Commission, would according to the LI approach likely not be relevant here. Because of specific domestic preferences, especially the information supporting the national positions of the Member States would be important in the negotiation process, to which they do have access. Moravcsik would probably argue that Germany has fully used its negotiation space leading towards a system limiting the effects of the banking union by excluding the largest part of its own banking sector from the power of the supranational institutions, maintaining intergovernmental mechanisms and demanding economic reforms and austerity in return for support. The outcomes of the debate could be explained as an exchange between asymmetrical interests on different issues. Neo-functionalists would probably argue that Germany has had to give in on issues such as the pace of the process, access to common funds and more centralized power, which could indicate the power of the supranational level supporting the French-led block. However, Moravcsik would likely argue that in order to keep the Eurozone stable, the German-led block has secured the Member States’ commitments towards achieving reforms and installing prudent mechanisms in exchange for support mechanisms. More integration has been accepted as the solution for the flaws within the Eurozone, since the benefits of the internal market for the national Member States would be sustained. At the same time, the negative effects of the weaker governments on the stronger ones would be limited. Although this meant surrendering sovereignty and granting access to common funds, the benefits are still seen as outweighing the concessions. According to the LI approach, we can therefore argue that the negotiations over the banking union are explicable as a series of rational choices made by national decision makers. This would mean that the decision makers have found themselves in a given situation which has provided the imperative for them to see more integration as the best alternative for recovery and to sustain the competitive positions of the core Member States. According to this explanation, the outcomes of the intergovernmental negotiation process seem to be mainly based on national preferences stemming from domestic interests. The outcomes could be regarded as based within the national realm, because the power of the national Member States to pursue their domestic preferences has been leading for the decision towards more European integration. The Member States had their own reasons for supporting the banking union and have

35 set the conditions for agreeing to the proposal. The outcomes rather seem to reflect the relative power position of the Member States than a decisive influence of a supranational power. Neo- functional claims about the instability of state preferences, states’ limited access to information and their inability to mobilize support would probably not be acknowledged by Moravcsik as weakening their ability to negotiate their preferred policies, since the negotiations over the banking union seem to have been led by Member States interests based on their domestic economic situations. Recalling the CPE criticism on the mainstream theories of European integration, CPE would disagree that approaching the decision towards establishing the banking union from a Member State perspective is sufficient for explaining the origins of European integration. The domestic situations of the Member States do seem to account for explaining their attitude towards the Commission proposal for the banking union and the outcomes of the negotiations based on the relative power of the Member States. However, according to the CPE there are some crucial elements which might be overlooked in this chapter and which could lead to different conclusions regarding the apparent rationality of the choices of the Member States and the national realm of freedom within which these choices are presumably made. Recalling the CPE approach, the theory argues that the national preferences at the basis of the rational choices of Member States are guided by a context which is shaped by a transnational capitalist class (Van Apeldoorn et al., 2003, p.32). It sees the national preferences as following from the logic of the economic system perceived as creating welfare in society, which it however claims to be constituted by a dominant transnational socioeconomic class in support of their capital accumulation strategies (Ibid, p.34). Especially the transnational element provides for a significant divergence from the perspective used in this chapter since it focuses on dominant powers exceeding the national realm, which are not acknowledged by the LI framework. By isolating the decision making process, liberal intergovernmentalism indeed seems to explain why the Member States were either reluctant or in favour of establishing a banking union, and how this has affected the outcomes of the process. Germany was reluctant based on its own nationally oriented banking sector and the fear of moral hazard, indebted member states were in favour to regain confidence in their weakened banks, and other members were in favour because of their specific banking landscapes characterized by cross-border activities. However, more basically the project was regarded necessary to sustain the system assumed to lead to welfare and growth. The banking union does not involve far-reaching reforms of the banking sector, as we will see in the next chapter, and in response to the crisis policies have been adopted to further integrate the system under which this unfavourable situation had been able to occur. The reforms seem to be based on the logic that more market integration forms the solution for the problems in the Eurozone, meaning that the system regains its functioning when the market is completed and confidence is restored. However, LI does not explain where this focus on the market stems from and whose motives lie at

36 the basis of this economic context within which the Member States have shaped their national preferences. It looks at a given decision making moment, which is seen apart from former developments towards more integration. The negotiations seem to have mainly focused on the economic consequences for the national Member States, instead of on achieving the welfare of all individuals within the Eurozone. Based on the assumption that all Member States were able to exert their influence in a democratic negotiation process, austerity measures and reforms have been accepted by the Member States, although these measures have touched upon social provisions and labour arrangements affecting Eurozone constituents. When applying an LI approach we would likely evaluate these consequences as stemming from rational and democratically justified decisions from the Member States. The CPE approach in the next chapter, however, raises doubt over the justification of these consequences regarding the power structures at the basis of the national Member States preferences. As we have mentioned before, the European banking sector has voiced its support for the banking union and more integration, which might imply that they are benefitted by the system. Therefore, in the case of the banking union, in the next chapter we will explore the socioeconomic context the critical political economy approach describes for which we will look at the origins of the system and the potential influence of a transnational financial capitalist class supporting the current economic system. Moreover, we will investigate whether the capital accumulation strategies of this class can be related to the establishment of the banking union. This will allow us to gain a better understanding of the role and place of the actors in the decision making process. Returning to the central questions of this thesis, can we explain the establishment of the banking union as a rational decision of the Member States based on their national economies? Or should we search for an explanation outside the national realm and explore the influence of the cross-border financial sector? Moreover, can we then see the intergovernmental negotiations as a process started by the Member States to secure their national interests with the banking union as its outcome? Or should we see the banking union as part of a tendency towards more integration in support of a capitalist class? The next chapter will shed light on these questions after which we will also be able to address the legitimacy issue described earlier.

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Chapter 4 – Back to the future: a critical political economy perspective

4.1 Introduction – the socioeconomic context of the banking union The former chapter has addressed the establishment of the banking union from a Member State centered perspective. It has argued that the change in Member State preferences leading to surrendering sovereignty in a banking union was caused by the deteriorating situation in the Eurozone after the crises. More integration was regarded necessary to solve the negative effects on the national economies within the Member States. Since the domestic preferences are based within the national context and the Member States have had different interests regarding establishing a banking union, the theory would reject viewing the decision making process towards more integration as determined by actors outside the national realm. At the end of the previous chapter however the apparent power of the Member States was called into question by bringing in the CPE approach. This theory would prefer to explore whether the origins of the Member State preferences for a banking union were guided by other influences outside the national realm. It argues that studying the banking union from the part where the Member State negotiations come into the picture might not sufficiently serve to explain the choice for more integration, for which we should also take into account the context in which Member States preferences have been constituted, and moreover, what power structures lie at the basis of this context. This implies that national choices are not as rational as assumed in the liberal intergovernmental perspective. Instead, they are argued to be guided by a socioeconomic power in society exceeding the national context which has constituted the economic order as we know it in our contemporary society. Chapter four starts by looking at the origins of this economic order and it attempts to identify the powers that have influenced the dominant system. After exploring the economic system and the powers lying at its basis, the chapter assesses what this has meant for the development of financial regulation and integration within the EU. It argues we can discover a European integration tendency based on the strategies of the dominant capitalist class, in which the banking union also seems to fit. This tendency also includes the installing of the common currency that has largely affected the Eurozone and of which the effects have become visible during the crisis. After sketching the context, the chapter further explores the sector interests and their advocacy for a banking union. It ends with assessing the value of the CPE approach for explaining the establishment of the banking union, and it moreover evaluates the LI approach in light of the CPE explanation.

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4.2 Shift in class, paradigms and hegemonic system from the 1970s In order to study the origins of the economic order in society, which the CPE approach claims to be currently dominated by neoliberalism, this section will explore the onset of this system. One of the important features of the CPE is that state power is based on a structural power in society guiding the socioeconomic context of decision making within the EU. In order to identify this class we have to understand the changing nature of class based on their capital accumulation strategies and the economic paradigms in support of these within a hegemonic system. This context is regarded to be steering the direction of European integration. To explain the change in capitalist class from a historical perspective and as shaping the character of European integration, we will look at the most recent shift from a system of ‘embedded liberalism’ to the current system of neoliberalism (Gill, 2003, 62). Before the 1970s, embedded liberalism was dominated by a production capitalist class supported by labor unions and social democratic political parties based on an economic paradigm of state intervention to achieve economic growth and jobs (Gill, 2003, p.61-62). This post-war system to restore global economic activity was supported by the setting up of the Bretton Woods system, which entailed fixed exchange rates anchored to the US dollar and backed by the US gold reserves (Harvey, 2005, p.10). A free market in international capital would be controversial in this system, because a free move of capital would allow investors to withdraw their money from nations that were intervening in the economy in order to apply redistributive policies to support employment, which was one of the main features of the system of embedded liberalism (Epstein and Rhodes, 2014, p.8). Corporate activities were controlled by a regulatory system constraining them from operating freely, which enabled states to balance the capitalist power by installing social and moral elements of the economy in society through interventionist practices (Harvey, 2005, p.11). However, by the end of the 1960s the system began to break down. At the beginning of the 1970s the Bretton Woods system collapsed, caused by the loss of trust in the US dollar after the country suffered from the high costs of the Vietnam War and increased domestic spending due to the decision of the US government to print an additional amount of dollars. This led to inflation and a current account deficit, and the US gold reserves were no longer sufficient to cover the US dollars flooding the market (Ibid, p.12). To overcome a run of countries exchanging their dollars for gold, in 1971 US president Nixon abandoned the pegging of the dollar to gold. In this period, neoliberal ideas of liberalization, deregulation and privatization for economic recovery gradually gained dominance over the former system of embedded liberalism. More solutions to solve the ailing system were proposed, however, these were not very different from former interventionist social democratic policies that had proven insufficient to accumulate capital in the 1970s affecting society through rising inflation and unemployment (Ibid, p.12-13). Neoliberal policies with a focus on market rationality were chosen as best alternative (Ibid, p.14).

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David Harvey argues that rather than being a utopian project of reorganizing international capitalism, installing neoliberalism has been a political project to re-establish the conditions for capital accumulation and to restore the power of economic elites by discrediting the other economic systems (Ibid, p.19). The neoliberal paradigm is based on reaching objectives of growth and employment through free market policies in all areas of society guiding all human action (Ibid, p.3). Moreover, the assumption that the freedom of individuals is guaranteed by market freedom is of essential importance in the neoliberal ideology (Ibid, p.7). This neoliberal ideology, however, has according to Harvey only served to justify and legitimize the strategies of the capitalist class. Neoliberal ideas mainly tend to be used to justify market policies, instead of ideologically striving to support the free development of individuals (Ibid, p.19). The focus on free market policies meant that firstly, restrictions on the global movement of capital were removed, secondly, currency values were permitted to float and to be led by the market and thirdly, a monetarist focus on lowering inflation rates became dominant instead of the Keynesian focus on full employment (Harvey, 2005, p. 12, 66; Wigger and Buch-Hansen, 2012, p.29, Gill, 2003, p.64). A new capitalist class focused on international investment and finance in which capital accumulation would take place through virtual financial industries. An important trend was that during the 1970s large corporations became increasingly financially orientated. The world of finance became stronger and more powerful, since it was freed from the regulatory constraints of the former system. Advanced global interconnections were constructed and new financial market products were created (Harvey, 2005, p.33). This is also indicated as the globalization of finance. According to Harvey, the neoliberal transformation has therefore led to a deepening of the control of finance over all areas of the economy including the state apparatus (Ibid, p.28). The rise of incomes after installing the neoliberal policies led to the financial sector becoming of central importance to the states having installed the neoliberal system, such as the G7 comprising the world’s richest economies (Ibid, p.33). Banks have been forming an important part of the leading powers within this new financial class and gained more dominance, because of their perceived value for welfare creation in the national states under the neoliberal system (Mügge, 2010, p.26). Installing this neoliberal system has according to Stephen Gill led to the current situation in which the social and political order are dominated by the power of capital (Gill, 2003, p.55). Gill highlights Antonio Gramsci’s ‘relations of force’ in which a hegemony reflects the social structures of consent between economic, political and cultural elements in society. This consent means that the interests of subordinate classes must be included in the interests of the capitalist class, for which policies reflecting a certain amount of solidarity are required (Ibid, p.52). A hegemony occurs when the subordinate classes accept the dominant ideas of the ruling class as legitimate (Ibid, p.53). Applied to our current neoliberal system, Gill identifies a problem with this notion of hegemony. He indicates

40 that a compromise between market discipline, public goods provision, and welfare state elements seemed to be reached in the 1980’s when market discipline was combined with social provisions (Ibid, p.67). In the years following this form of compromise, however, the protectionist attitude of the Member States providing for the social welfare elements within the national realm seems to have diminished and more integration was pursued, which supported the capitalist class preferences of creating a fully harmonized level playing field based on profit maximization. Angela Wigger and Hubert Buch-Hansen argue that a homogeneous single market was promoted to enjoy the benefits of an economy of scale (2012, p.30). Capital had to be freed from regulatory constraints and especially from the 1990s onwards, financial markets including new financial instruments became leading at the expense of more socially embedded capital structures (Ibid, p.31). Based on these developments, instead of a neoliberal hegemony, which would imply a legitimate system in which there is consent between the economy, politics and civil society, the current neoliberal order is according to Gill better termed as a neoliberal supremacy. By supremacy Gill means ‘a non-hegemonic block that exercises dominance for a period over apparently fragmented populations until a coherent form of opposition emerges’ (Gill, 1995, p.400). This fragmentation seems to be highlighted by the still protectionist attitude of the Eurozone Member States within a more integrated system, in which there is reluctance to the solidarity aspect because of the perceived ill-governance in the indebted Member States as we have seen in the previous chapter. The next section will however further elaborate how this situation has in fact been able to occur under influence of more integration based on the capitalist strategies and with consent of the Member States. Later on in this chapter we will return to the consequences and implications of these developments. When looking at the character of European cooperation in relation to the above, it can be identified that under the former system European integration in the post-war years was characterized by the autonomy of national states and it was highlighted by installing mechanisms of national veto and intergovernmentalism in the legislative procedures within European international cooperation, for instance in the (1951), the European Coal and Steel Community (1952) and the (1957) (Gill, 2003, p.62). Characterizing for the neoliberal dominance is the unlimited pursuit of profit, in which policies seem to have placed society under the dominance of market forces by pursuing a principle of international market discipline (Ibid, p.63). Important in this shift is the paradigmatic change regarding the policies promoted within the EU roughly from the 1980’s onwards. In order to open markets to foreign competition, national socioeconomic objectives were replaced by an idea of a European ‘market justice’, because more competition was believed to eventually benefit the European consumer (Wigger and Buch-Hansen, 2012, 32). This started with a re-launching of European integration with the adoption of the (SEA) in 1986, in which the neoliberal international market discipline made a first step towards consolidation (Ibid). In

41 the agreement the principle of mutual recognition of trade and capital mobility were institutionalized and qualified majority voting on issues related to single market realization was adopted in 1992 (Ibid). These developments mark the beginning of a shift from the former dominant national autonomy to a more integrated European Union in which intergovernmentalism started to make room for supranational decision making based within this neoliberal system, which will be elaborated on in the next section. The above section has identified how a financial capitalist class was able to gain dominance in society and how this class has been supported by a neoliberal system containing a dominant paradigm that supports more integrated market policies in order to create economic growth and welfare. This historical section serves to describe the background against which the financial sector has evolved as focal point for decision makers. The following section focuses on the effects of this shift in structural power on the developments within the financial regulatory system in Europe and the shift from national protectionist policies towards a more centralized regulation.

4.3 Financial regulatory reforms in Europe For exploring the establishment of the banking union from a CPE perspective, we will look at the financial regulatory developments in the EU over the past decades and the changing preferences of the financial capitalist class geared towards more centralization instead of being subject to national powers. Moreover, this section explores the effects these changing class preferences had on the motives of the Member States to accept more integration. From the initial agreement in the Council in June 2012 to establish a European banking union as credible institution to control the Eurozone banking sector, it was argued that a banking union would not only accomplish a strong supervisory system and resolution mechanism to avoid the public bail-out of banks, but it would also mean a more complete economic and monetary union (EMU). A harmonized regulatory system for credit institutions would accordingly serve as an important precondition for the stable functioning of the single market and the financial sector, leading to a common good of financial stability (Van Rompuy, 2012, p.3). This was required to maintain investors trust in the Eurozone economy. As European internal market Commissioner Michel Barnier once again argued in December 2013 after the first two pillars of the banking union were agreed upon in the Council, the establishment of a banking union would lead towards a long-lasting financial stability, which would be necessary for banks to lend to the real economy. This would lead to economic recovery and sustainable jobs and growth (Barnier, 2013). Over the recent decades monetary policy has become more and more integrated. During the 1980s the integration of financial markets was already advocated by the Commission, highlighting its

42 advantages for the single market. It was argued that financial services have an important influence on capital flows and investments in the EU, and increasing efficiency in the capital markets was linked to higher economic growth (Mügge, 2011, p.2). More measures to integrate the market for financial services and its institutions were therefore over the past decades sought by European regulators. However, since banks are regarded vital for credit provision to the national economy, Member States have long attempted to protect the banks based within their borders from losing ground to foreign competitors. Several attempts to create a more integrated system and to agree European supervisory arrangements were already made during the negotiations over the Maastricht Treaty in 1991 and the Nice Treaty in 2000. In these treaties, the power remained with the national Member States, for important decisions would be made in the Council (Epstein and Rhodes, 2014, p.2). Even though the attempts to install a fully harmonised system were not always successful, a large amount of capital market regulation has yet been decided through EU rules and policy-making institutions (Ibid, p.1). Smaller financial market regulations were adopted, such as allowing banks and investment banks to provide investment and capital market services across the border. In 1993 for example, the investment services directive (ISD) was adopted, which was supposed to grant banks EU wide access with a ‘single passport’ based on the principle of mutual recognition. Banks that were regulated in their home countries would be able to operate in host countries without complying with the national regulations in those Member States (Moussis, 2011, p.106). However, through intergovernmental negotiations an article was taken up in the ISD undermining this principle, and cross border operating banks were still subject to the local rules in the country in which they provided their services (Mügge, 2008, p.5). Banking sector nationalism remained dominant within the EU, which meant relatively higher costs for banks to provide their services and products across the border, and accordingly a loss of competitiveness compared to purely domestically operating banks (Epstein and Rhodes, p.6). Daniel Mügge argues that financial liberalization has been relevant regarding the creation of an integrated European financial market over the past decades. According to Mügge, market liberalization and governance integration are both part of the same project; the creation of an integrated European financial market, which primarily benefits European financial service providers (Mügge, 2006, p.992-993). Through the continuing influence of the Member States, however, the financial liberalization has not evolved equally within the EU. The European Commission already addressed this issue in its Internal Market Review in 1996. It argued that the removal of barriers to trade in capital may improve overall welfare in the EU, however, the distribution of gains may be uneven. These distributional effects provide for an explanation of why sovereigns have been pursuing several barriers, although these tend to reduce the overall welfare (European Commission, 1996). Both private and public actors called for further harmonization of regulation, which intensified

43 after the introduction of the euro and the growth of capital markets in Europe (Mügge, 2008, p.6). In 1999 the Commission issued the Financial Services Action Plan, which was requested by the European Council in 1998. This report resulted in the Markets in Financial Instruments Directive (MiFID) which replaced the earlier mentioned ISD and was adopted in 2004. The MiFID had to overcome the national discretion the Member States still maintained under the ISD. The new regulatory framework consisted of 43 measures to harmonize financial regulation within the EU and to intensify EU financial market integration (Ibid). In 2006, the European rules for banks and other financial institutions were further strengthened in the 2006/48/EC Directive for regulations ‘relating to the taking up and pursuit of the business of credit institutions’. In this Directive, the principle of mutual recognition and the single passport mentioned earlier were implemented (Moussis, 2011, p.106). Yet again, the Directive contained a clause preserving bank protectionism. Article 19 of the Directive indeed allows national authorities to block mergers and acquisitions of banks to ‘ensure sound and prudent management of the credit institution’ (Grossman and Leblond, 2008, p.5). Rachel Epstein and Martin Rhodes confirm this claim of ongoing bank protectionism of national governments by arguing that Western European Member States have been very active in maintaining national bank champions within their borders in two ways. Firstly, national governments limited the licences given to foreign banks to operate within their borders, and secondly, they supported cross border expansion of their national banks in order to make them less of a target for foreign take-overs. The governments valued banks as crucial to the competitiveness of their national economies and therefore tried to consolidate their domestic banks (Epstein and Rhodes, 2014, p.11). This bank protectionism is clear in many instances. Michel Goyer and Rocio Valdivielso del Real have identified the ability of French and German banks to avoid take- overs, especially by foreign competing banks. They however also signalled the building up of too-big- too-fail banks carrying systemic risk as a result of the protectionist policies (Goyer and Valdivielso del Real, 2014, p.293-94). Mauro Guillén and Adrian Tschoegl have identified a similar tendency in Spain, where an executive of Spanish bank Santander stated that in order to avoid being a takeover target, the Santander bank needed to grow (2008, p.74). Paradoxically, this increase in cross border activities of banks has diverted their domestic focus and made them advocating for a more harmonized regulation of cross-border activities towards a European level and out of the influence of national governments (Epstein and Rhodes, 2014, p.13). This paradox is significant for the case of the banking union. It explains the motives for the shift of governance in the EU’s financial regulation towards the European level, because for transnationally operating big financial firms harmonized regulation would be beneficial for pursuing their shifted capital accumulation strategies. This created conflicts between the national state governments and the financial sector (Epstein and Rhodes, 2014, p.14).

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Mügge argues that through the initial support for financial regulation from the Member States to maintain their competitiveness, the influence of supranational actors has increased, while the influence of national governments has decreased. The explanation for this, as Mügge claims, is that the interests of large banks as the major actors in financial markets have been central to the choice for supranational governance. He has found that banks enjoy an insider position in policy making circles within national states and to a high degree in Brussels, which has enabled them to make clear their preferences (Mügge, 2008, p.20). The reason why banks enjoy this privileged access to decision makers is that their functioning is regarded as a precondition for welfare for the national economies since they are providing financial instruments and credit flows for businesses, households and the state, which are seen as crucial for economic development (Mügge, 2008, p.275-276). Moreover, the close ties between governments and the banking sector have given banks a privileged position, which was even enhanced by their size. Currently, a little over twenty large financial firms within Europe control more than 90 per cent of the EU capital market business (Mügge, 2010, p.8). The relatively large share of these transnational banks opposed to smaller domestic banks has led them to form a consensus position for more integration of financial regulation in Europe (Ibid, p.9). The firms in favor of more integration moreover seem to naturally share an agenda with the supranational institutions, such as the Commission. The Commission has in turn searched for powerful allies to support its stances in favour of more integration in other EU bodies, i.e. the European Council and the European Parliament (Mügge, 2008, p.23). According to Mügge, the Commission has been the central European body promoting capital market integration proposals, backed by the financial sector having important weight in domestic as well as in European politics (Mügge, 2010, p.9). This competition among the large players within European capital markets seems to be reflected in the way the governance of these markets has evolved. Lastly, it would be expected that national governments are reluctant to give up the power over their national financial institutions in a European banking union, because this would mean giving up part of their sovereignty to stimulate national banks, which includes assisting banks in competitive banking, preventing the nationally unwanted winding down of national financial institutions, balancing banks risks and returns and preventing foreign banks from absorbing large shares of a country’s banking assets (Epstein and Rhodes, 2014, p.3). Epstein and Rhodes however argue that through the above described developments within the financial sector, governments have come to face higher costs of maintaining their national autonomy. The economic crisis from which the EU has suffered for the past six years has served as an imperative to reconsider the trade-offs of more integration for European economic stability versus the costs of giving up sovereignty (Ibid). The rise of international capital mobility has empowered bond traders to influence the returns on bonds, which is able to change the economic position of banks from one day to another. Due to high stakes

45 of the governments in the banks based within their borders, the effects of international capital mobility could easily affect sovereign finances (Ibid, p.7). This would imply that the national Member States have themselves contributed to the perverse effects of the crisis by becoming interconnected with their banks and in several instances allowing them to outgrow state finances. Especially Western European countries have through national regulations encouraged nationally controlled banks to finance them (Atik, 2014, p.335). Another reason for the far-reaching effects of the crisis within the Eurozone is the introduction of the euro. The EMU has facilitated an increased foreign borrowing. Before the common currency, the interest rates of the Eurozone periphery states were much higher than those of the core countries such as Germany and France. When joining the common currency, it was argued that investments would no longer be subject to devaluation of national currencies, and the interest rates throughout the Eurozone were set at an equal level. However, instead of investing this capital in increasing productivity it was used to boost domestic consumption and housing booms (Higgins and Klitgaard, 2011, p.1). Although easy credit conditions after the introduction of the common currency benefitted the economy on the short term (Baber and Zahoor, 2013, p.74), the euro has removed the option for states to increase their competitiveness by devaluating their currencies. Removing the option for states to increase their competitiveness in combination with the strong sovereign-bank connection and an increased capital mobility allowing cross-border expansion have contributed to the doom-loop between banks and states during the crisis (Epstein and Rhodes, 2014, p.8). We could argue that apart from the unlimited pursuit of capital by the banking sector, the perverse effects of the crisis in the Eurozone were also caused by the Member States agreeing to more integration in an economically uneven performing Eurozone and allowing the weaker economies to fund their domestic spending with loans. The unlimited growth of banks in a European Union where the political justification for an effective Eurozone risk-sharing lacked, has led to the unfavorable situation of countries with small economies and big weak banks not being able to rescue their banks and still remain solvent. The troubled banks lacked the ability to make credit available with adverse effects for the real economy (Atik, 2014, p.329). Many of the Eurozone banks were maintaining large holdings of euro-denominated obligations issued by their home countries. Since the value of state obligations in the indebted countries had fallen as a result of the crisis, this created a gap regarding the value of bonds within the stronger economies, leading to large pressures on the euro and the risk that it would collapse (Ibid, p.330). Moreover, the contagiousness of vulnerable sovereigns was highlighted during the crisis, while transnationally operating banks retreated their lending to foreign markets, highlighting the interconnectedness of the European financial market. This forced the ECB to provide the European interbank market with its own liquidity (Speyer, 2013, p.3). Until 2012, the ECB even assisted in

46 banking sector nationalism by enabling periphery states to borrow money at lower costs in order to take the pressure of the euro, which led to ‘zombie banks’2 lending even more money to their already weak sovereigns (Epstein and Rhodes, 2014, p.9). The convulsive tendency of sovereigns to maintain their power seems to have led to higher costs, while more supranationalization would imply lower costs, however a loss of sovereignty for the national governments. These high costs for keeping the system under national control seem to be the effect of more integration within the Eurozone, which has led to the increasing interconnectedness within the Eurozone and the contagiousness of weak states and failing large banks forming a systemic risk. The globalization of finance within a neoliberal system has had a large impact on the developments within the Eurozone. The focus on values of financial stability and more financial integration in a fully single European harmonized capital market was argued to have the effect that capital could move freely throughout the European Union creating more benefit for the European Union as a whole. However, the capital would go to the areas where most profit could be made, which would lead to a redistribution of gains among the Member States (European Commission, 1996). Since the Member States are responsible for the social policies within their borders, and social and political integration within the EU has not yet been achieved, the Member States seem to have sustained the national control over their credit providing institutions as highlighted before. The crisis however showed that within the more integrated system, national control is untenable. We can link this unfavorable situation to the financial trilemma of Dirk Schoenmaker who argued in favor of establishing a banking union, that national policies in combination with cross-border banking activities cannot lead to financial stability (Schoenmaker, 2011, p.1). The Member States did not accept this logic, until the crisis showed the effects of an incomplete union. If we look at the developments of financial sector governance and integration over the past decades, we could argue that Member State economies as well as the financial sector have supported whatever policies best suited their interests based on the important role of finance within society. As argued above, this seems to have caused the perverse effects of the Eurozone crisis on the Member States. The financial sector has supported the growth of its banks while benefitting from national policies and becoming interconnected with government finance. However, this unlimited pursuit of profit has born great risk for the stability of Europe and the Eurozone, which had a large impact on the European tax payers eventually carrying the burden. In response to the sovereign debt crisis, instead of reforming the system at its basics, austerity measures including more liberalization have been imposed on the Member States to install prudent economic and fiscal reforms, because of the assumption that the indebted economies have worsened the effects of the crisis and that installing more market policies

2 Financial institutions worth less than zero, but continuing their practices trough government credit support enabling it to repay their debts 47 will lead towards economic growth. In exchange for support, Spain for example had to agree to a national reform programme including increasing the cost-effectiveness of the health care sector, pension reforms, labour market reforms and reforms to public transport (European Council, 2013b). The main concern of this section is thus the apparent incompatibility of more European integration within economic and financial areas, while on political and social aspects there is still a national focus. Far-reaching economic integration seems to have been the beginning of an awkward cooperation on some terrains while the political justification for solidarity aspects seems to lack within the Eurozone. A banking union perceived as necessary to correct the flaws of the cross border bank market has been agreed upon while accompanied by economic reforms and austerity policies demanded by the stronger economies. According to economist John Quiggin, instead of placing the burden of the crisis on the financial markets and the regulators that were supposed to control them, it has been placed on the ordinary people. Moreover, he characterizes the austerity policies in response to the indebtedness of several member states rather as ‘a political strategy of class war’ than as an ideological economic idea (Quiggin, 2012, p.233). A study of Caritas Europe addresses the negative effects of the austerity measures. It has found that cuts to public services, as has been the case in severely indebted Member States, disproportionally affect the people with lower incomes who are unable to compensate for the falling away of social state expenditures (Caritas, 2014, p.15). This has especially been the case in countries such as Greece, Italy, Portugal and Spain, where vulnerable groups suffering unemployment and poverty lack the opportunity to fully develop themselves. This raises doubts about the social justification of the reforms. Moreover, apart from these social considerations, we can wonder whether the banking union will actually lead towards a system in which Member States and the sector are controlled on a supranational level, or if this more integrated system is increasingly focused on financial values and still bears a risk of failure with its consequences on the lives of individuals within the Eurozone while lacking solidarity. The next section will focus on the sector advocacy, its motives to promote the banking union and the likely effects of the banking union on the sector.

4.4 Sector interests in a European banking union In the former chapters we already mentioned the homogeneous position of the large Eurozone banks in favor of the banking union. This consensus could be seen as an illustration of the way in which the banking union fits the tendency towards more integration in support of the capital accumulation strategies of large cross-border operating banks. The banking sector has supported the establishment of the banking union as in the general interest of the Eurozone for creating a stable functioning

48 financial market. More integration and harmonized rules were promoted as necessary, since this would contribute to welfare in society, which is based on the funding of the real economy provided by the financial sector. In the section below we will identify both the way in which the sector has advocated for a banking union, and moreover, how their capital accumulation strategies are continuously supported within the banking union. After the crisis, especially the necessity to reform banking sector regulation and supervision was voiced within and outside the EU. The argument for more integration to accomplish these reforms was already put forth by the sector in 2009, when a group of sector experts was brought together by former Commission President José Manuel Barosso in the form of a High Level Expert Group. This group presented a report to the Commission containing proposals for a mechanism to strengthen European supervisory arrangements for the financial sector. The so-called De Larosière Group promoted the establishment of a more efficient, integrated and sustainable European system of supervision and also of reinforcing cooperation between European supervisors and their counterparts (European Commission, 2008). At a European Commission conference in May 2009, Ariane Obolensky, former Chair of the European Banking Federation (EBF) executive committee, supported this stance by arguing in a speech that ‘some of the main objectives of the European Banking Federation are to support policies to promote the single market in financial services, to advocate free and fair competition and to promote better regulation and win support for the EU regulatory model abroad’ and ‘In this respect, EBF thinks that the fragmentation of banking supervision at the national level is one of the main obstacles to the integration of the European banking markets. Moreover, the financial crisis has clearly revealed the need for a supervisory framework that can accommodate the size of pan-European groups and that can address financial stability issues’ (Obolensky, 2009). In addition she endorsed the De Larosière Report promoting a ‘pro-stability’ and ‘pro-integration’ framework and the effective and efficient supervision with a crucial set of consistent rules (Ibid). As already argued in the former chapter, the Member States were by then still reluctant to giving up power, which changed after the occurrence of the sovereign debt crisis in 2011. Yet, the Commission and the sector had already been discussing new supervisory arrangements which were reflected in the proposals of the Commission after the agreement of the heads of states and governments in 2012 to establish a banking union. Since 2009, the solution to solve the crisis was sought in strengthening regulation and supervision and moving towards more integration to overcome fragmentation of the interbank market. The banking union seems to be based on the idea that the failure of banks is fixable by stricter regulation at a centralized level to overcome national fragmentation in supervisory and resolution structures. The banking union was therefore strongly supported by the sector. In an article in the Financial Times on 4 September 2012, global economist at the Italian bank UniCredit Erik F.

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Nielsen promoted the quick move towards a banking union. He supported the necessity to break the link between sovereigns and banks, while ‘investors charge a premium on banks’ funding costs, which reflects the sovereign risk of the individual bank’s home country’ and ‘several national supervisors now restrict capital movements to the periphery, occasionally forcing repatriation of capital and exacerbating the differences in monetary conditions between the Eurozone countries’ (Nielsen, 2012). Nielsen criticized the protectionist attitude of sovereigns while constraining the banks’ activities throughout the EU, for which a banking union would provide the solution. A similar concern was voiced by Emilio Botin, Chairman of Spanish , who argued in the Financial Times on 5 September 2012: ‘there is no single banking market, Santander has met innumerable barriers to its attempts to expand in Europe. […] Banking union is an ambitious, complex and difficult process, both operationally and politically, but we cannot afford to postpone it’ (Botin, 2012). Moreover, Simon Lewis, Chief Executive of the Association for Financial Markets in Europe – an organization of large US and European banks – stated in a press release on 18 October 2012: “AFME believes banking union is a vital project for Europe, which should advance market integration, strengthen financial markets and enhance confidence in the EU economy” and furthermore “It is therefore essential that Europe’s leaders reach agreement as soon as possible on key aspects; that they get the detail right on vital areas like supervisory arrangements; and that they establish a clear roadmap to deal with the other integral components of banking union including the single resolution mechanism” (AFME, 2012). The AFME supported a swift establishment of the banking union alongside the single rulebook to stimulate the working of the single market. These opinions match the formerly elaborated argument that when the same rules would be applied uniformly within the EU and obstacles for expansion would be removed, this might have beneficial effects for banks consolidating in the European markets and would lead towards enhanced competition within and outside Europe. Moreover, the necessity of this project is stressed by the sector in favour of financial stability and completing the market. Salient in the proposals for the banking union, however, is that they rather contain stricter regulation and better supervision solutions, than addressing the structural problems of banks too- big-to-fail and causing systemic risk. The European Banking Federation in 2014 for example expressed its reluctance regarding the Banking Structural Reform proposal, stating that ‘its added value has not been proven, and it would contradict the European Commission’s aim to achieve growth and ensure long-term financing of the European economy’ and also ‘regulatory concerns around the ‘too-big-to-fail’ and implicit subsidy have already been addressed in Europe by reforms such as CRD/CRR, BRRD, Banking Union’ (EBF, 2014). Reluctant to measures constraining banks operations, the sector has voiced its support for the measures regarding stricter regulation and supervision, without having to change their structures and activities. As Finance Watch identified in a

50 report in 2013, no measures have been taken in the system to resolve the problem of systemically important financial institutions that are ‘too-big-to-fail’, ‘too-interconnected-to-fail’, or ‘too- complex-to-resolve’ (Finance Watch, 2013a, p.18-23). The report furthermore stated that ‘focusing only on crisis management is not enough: if banks are not reformed as such that they pose less of a systemic risk they will simply block the mechanisms designed to resolve them. In order to safeguard depositors, governments will, once again, be obliged to turn to their citizens as taxpayers’ (Finance Watch, 2013a, p.7). Below we will look at some examples of how the rules at the basis of the banking union and the mechanisms included in it rather seem to sustain the risks than to solve them. Already regarding the single rulebook as guiding framework for the banking union clear sector interests can be identified. In the process of internationally reforming the Basel II capital requirements and transposing these into EU legislation, the banks have continuously used arguments to promote more flexible capital and liquidity requirements as necessary to achieve growth. In Basel, the banks under guidance of the Institute of International Finance (IIF) used the effective rhetoric that a too strict regulation would lead to stagnated growth and unemployment. This was a highly sensitive point for the negotiators of the central banks mandated by their governments, who as a result of the crisis were mainly focused on immediate growth and employment. Many agents of the banking lobby put forth this argument, in the form of reports and studies conducted by big banks, such as Morgan Stanley (CEO, 2014). For example in September 2009 Joseph Ackermann, Chief President of Deutsche Bank and Chair of the IIF highlighted the ‘very real risk that regulatory reforms come into force that could undermine global recovery and job creation’ (Slater, 2009). Similar concerns over the risk of too strict capital requirements for economic growth were for example voiced by Jacques de Larosière, chair of the before mentioned ‘De Larosière Group’ (Delarosière, 2009) and by head of BNP Paribas, Jean-Laurent Bonnafé (Daneshku, 2010). Although several experts argued that capital requirements for banks should be enhanced up to twenty per cent of risk weighed assets (Miles et al, 2010, p.38) and former head of the US federal Reserve Alan Greenspan suggested buffers of at least 13 to 14 per cent, the eventual agreement on Basel III in October 2010 included a total capital ratio of still only 8 per cent of risk weighed assets (CEO, 2014). Moreover, in EU regulation, Basel III has been watered down even further. In a letter to Commissioner Michel Barnier, Deutsche Bank Chief Director Joseph Ackermann stressed the importance of harmonization of capital requirements within the EU, stating that the Basel III requirements of 8 per cent should serve as a fixed rate, not as a minimum requirement, while different national standards on capital buffers within the EU could have a negative effect on the workings of the single market. National initiatives stemming from national political pressures should be avoided (CEO, 2014). This argument was shared by the Group of Experts in Banking Issues (GEBI), advising the Commission on how to implement the Basel III rules (European Commission, 2011a, p.1).

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The major part of the GEBI, however, was identified as coming from banks and investment firms, while over half of it was also a member of the earlier mentioned IIF, lobbying against too much of an increase in capital requirements (CEO, 2014). The problem with the eight percent capital buffer, although including 5 per cent of higher quality Tier 1 capital, would be that this is no guarantee that a bank has enough capital in store to stand crises (Ibid). Lehman Brothers for instance had a Tier 1 capital ratio of eleven per cent only five days before it collapsed (The Economist, 2010) and the European bank Dexia had a Tier 1 capital of 10,3 per cent and emerged from stress tests as one of the safest banks in Europe only a few months before its collapse in October 2011 (De Groen, 2011, p.4). Also regarding the watering down of liquidity requirements, sector interests can be identified. Michael Pébereau of BNP Paribas as a member of ‘The European Banking Group’ of 11 major European banks3 warned the Commission in a letter on 8 April 2011 for ‘the potential negative impacts the Basel III liquidity standards would have on the financing of the European economy when introduced in their current form’ (CEO, 2014). The big banks suggested to not clearly define the parameters for liquidity in the proposal until after an observation period. Christian Clausen of the European Banking Federation (EBF) (Ibid) and the advisers from the GEBI group promoted a similar message (European Commission, 2010, p.5). Both the 8 per cent capital requirement as a maximum and the unclear definition of liquidity parameters have appeared in the eventually agreed CRR and CRDIV (Atik, 2014, p.319, 327). Although we have argued in the third chapter that Germany and France had their domestic interests in watering down the rules, they found support of the sector scaremongering the Member States that too strict rules would have negative effects on growth and employment. The supervisory arrangements under the banking union are based on these watered down requirements in the single rulebook reflecting the benefits of the system for the large banks. Furthermore, several instruments in the banking union mechanisms are even identified as supporting the further expansion of banks, especially within the Single Resolution Mechanism. One example is the ‘sale of business tool.’ The process of resolving an ailing bank includes selling off parts of the bank to other banks, which under the banking union can no longer be prevented by national authorities through harmonized rules and a centralized governance (Finance Watch, 2013a, p.16-17). This would be a beneficial practice for big banks to consolidate in the Eurozone. Jean Laurent Bonnafé, CEO of the French bank BNP Paribas, justified consolidation in an interview in October 2013 stating: “In the end, consolidation will just take out the weaker players who were unable to strengthen their positions either because of their own situation or because of their jurisdiction” (Fildes, 2013).

3 Deutsche Bank, BNP Paribas, Credit Agricole, , Credit Suisse, HSBC, UniCredit, BBVA, Royal Bank of Scotland, ING and Banco Santander 52

Another report from Finance Watch in 2013 identified an additional beneficial opportunity for banks to increase in size. In the new centralized system under the banner of resolution of an ailing bank, the European Commission drafted a ‘preliminary valuation’ of the bank assessing the market value of the assets and liabilities of the institution. The expectation is that the asset prices will decrease significantly. This is however based on a market valuation in crisis-situation instead of on the long term performance of the bank’s assets. The ‘sale of business’ tool under the resolution mechanism will allow assets of the bank under resolution to be sold at this market-value price. The centralization of the banking resolution restrains the individual states from protecting their national banks against foreign buyers, which will allow large international banks to buy low-priced assets across the border further increasing their businesses (Finance Watch, 2013b, p.26). This cross-border growth of banks potentially sustains the risk of too large banks carrying systemic risks, which the banking union was ought to solve. The section above shows that although measures to strengthen the banking sector are taken, there are still doubts on whether these will have the desired effects. Capital requirements are enhanced and strict bail-in rules are in order, however, the requirements might not be strong enough and moreover, the structure of the large banks bearing systemic risk has not been addressed. Although measures to diminish the risk of future crisis and tax payers bearing the costs are taken, the question remains whether these measures are a cure for the actual problem, or rather for its effects. Decision makers have been backed by the financial sector to agree to more integration in order to stimulate the financial stability within the Eurozone, argued to lead to economic growth. The banking sector seems to have strategically voiced its support for a banking union based on financial values which it has promoted as in the general benefit of the Eurozone by continuously highlighting the importance of more integration and not too strict rules as preconditions for growth and welfare. This seems to be reflected in both the proposals and their outcomes.

4.5 The critical political economy and the banking union In chapter three we have looked at the establishment of the banking union from a Member State perspective, arguing that the Member States have made the initial decision to proceed with the proposal. It was argued that they were the dominant actors determining the outcomes of the banking union based on their domestic preferences. In the sections above, however, we have explored the establishment of the banking union based on the critical political economy approach, which argues that we cannot explain the establishment of the banking union by approaching it solely from a national state-centred perspective, for it claims that the preferences of the Member States have been shaped within a socioeconomic context exceeding the national level. In the first section

53 we have explored the rise of a transnational financial capitalist class that was able to gain dominance roughly after the 1970s with the collapse of the Bretton Woods system. Because this class has provided a way to accumulate capital necessary for financing the stagnated economy, a neoliberal system supporting this class was chosen. Moreover, the former socially embedded system was discredited for its inability to create economic growth, which was argued by Harvey to be an attempt to restore the power of the economic elites (Harvey, 2005, p.19). This supports the claim made in the theoretical chapter that discrediting a previous system is required to install and consolidate a new hegemony. In the above, it was argued that under influence of the shift in capitalist class focused on international investment and finance, restrictions on the free movement of capital had to be banned and gradually more integration was required. The neoliberal economic system supported the capitalist class strategies based on the paradigm that sustainable growth and employment are reached through free market policies in all areas of society. Also, a common good of long lasting financial stability was promoted focused on lowering inflation rates, which would support the capital accumulation necessary to lend to the real economy and to lead to economic recovery, jobs and growth. As Daniel Mügge has argued, this focus on financial values and the financial capitalist class has granted financial institutions including the banking sector a dominant position in society and in decision making circles (Mügge, 2010, p.20-21). Importantly, by installing the neoliberal paradigm, according to Harvey free market policies in all areas of society are guiding human action (2005, p.3), which would be legitimate because neoliberalism regards the freedom of individuals as guaranteed by market freedom (Ibid, p.7). However, Harvey argues that the neoliberal paradigm rather serves to justify market policies, than as an ideological quest to guarantee free individual development (Ibid, p.19). The financial focus of the neoliberal system rather aiming to support the powerful capitalist class than the individuals in society is an important factor for assessing the legitimacy of the establishment of the banking union. At the end of the first section the shift towards more integration and central governance was already briefly mentioned in relation to the preferences of the financial capitalist class. The second section argues that the neoliberal system based on the dominant economic paradigm and its underlying class powers has determined the direction of financial regulation and integration within the EU. Although Moravcsik claims that the decisions of the Member States for more integration are based on negotiation moments within a given context subject to changes over time – implying its randomness –, the CPE theory allows us to argue that instead there is a tendency towards more integration based on capitalist class preferences. States’ support for their domestic banks to grow across the border while maintaining national protectionist policies has made the banks grow to such an extent that the sector started to feel constrained by national diverging policies and shifted its preferences towards banking governance at a European level in order to further expand and

54 consolidate their businesses. This required concessions to the former national protectionist policies of the Member States, while more integration has been regarded inevitable to maintain the system based on the capital accumulation strategies of the financial sector. The capitalist class preferences seem to be related to the extent to which the Member States have accepted more European integration. Under influence of the cross-border development of the banking sector the more intergovernmental character of banking sector governance – under which the Member States enjoyed discretionary space to protect their domestic sectors – had to make room for more centralized governance. The development towards the banking union seems to be guided by the preferences of the sector to first expand under national policies, after which centralized governance was preferred to consolidate. Neo-functionalists might identify the tendency towards more integration as a process of spill-over of former integration projects. Although we can identify a tendency towards more integration, according to the CPE we could argue that it rather seems to indicate that European integration reflects capitalist interests than merely because one integration move will likely lead to another in a process of spill-over. The latter again does not take into account the socioeconomic context and would be criticized by the CPE for not being able to grasp the actual power relations within the EU. CPE would not see more integration as a supranational socialization process, but as guided by the dominant capitalist class preferences (Van Apeldoorn et al., 2003, p.21-22). Moreover, the contradictory argument proposed in chapter two that capitalism and capitalist class relations are located in a global context, while the political power socializing these capitalist structures is located within national states (Van Apeldoorn et al., 2003, p.36) seems identifiable when looking at the developments towards the establishment of the banking union. The global context is highlighted by the influence of the globalisation of finance and the interconnectedness of the global financial markets through which the banking crisis in the US had been able to spread over the European continent. In the previous sections we saw that the financial sector is aided by more integration to ease the free move of capital across the border and to support cross border expansion outside constraining national influence. The policies supported by the sector are however still subject to the consent of the Member States. The chapter has shown that the sector as well as the European officials promoted more integration, by claiming this would have a beneficial effect for the national economies within the EU. Since the sovereigns have to provide for ways to finance state expenses for which a well functioning economy is required, they seem to have been guided by the arguments for more growth and have as such legitimized the policies based on capitalist class preferences within the national border. Mügge and Epstein and Rhodes have indeed argued that more integration should rather be regarded as based on political and competition grounds than that it is absolutely necessary to save the economy (Mügge, 2010, p.1-2, Epstein and Rhodes, 2014, p.6). The narrow

55 class interests of the sector to expand and consolidate seem to have shaped the preferences of the national Member States to agree to more integration for this is promoted as leading towards more economic growth and welfare within the Eurozone. This would contradict Moravcsiks claim that the motives for European integration are initially based within the national realm. Rather than being the basic source of power in society, the Member States could be regarded as legitimizing power for the underlying transnational capitalist class structures guiding the direction of integration. The Member States have supported the cross-border strategies of the banking sector, however, for socializing these policies within the national realm they have been trying to keep the benefits of more integration within their borders. I would like to argue that the LI approach used in chapter three could be regarded as explanatory for how the Member States attempt to gain the highest possible benefits from the negotiations to support their national development. This does not explain the actual power base in the EU, but it does account for the way in which the negotiation process has evolved based on the national Member States domestic economic interests. The perceived necessity of more integration to maintain the system which was believed to lead to welfare has led the Member States to agree to surrendering autonomy towards a centralized level. In the third section of this chapter we have identified the sector advocacy for a European banking union and how a banking union might serve to support their capital accumulation strategies. This context of capitalist actors and a dominant economic paradigm has influenced the Member States preferences focused on domestic welfare. Especially after the crisis, we can see that the banks have argued regulation should not be too strict for its negative effects on economic growth. This matched with powerful German and French interests to not disadvantage their national banks with too strict rules. Moreover, the sector promoted more centralized governance, while stressing that the banking union and a more complete EMU would lead to economic recovery and growth. This argument is reflected in the arguments of the supranational institutions, as well as on a national level while more integration has been regarded as eventually beneficial for the Eurozone and the national economies. The capitalist class seems to have been able to shape their narrow class interests into general arguments in favour of more integration which have been accepted as necessary by the Member States. When the capitalist class succeeds in providing arguments to match their interests with those of the core Member States they seem to be able to achieve their policy preferences. This can be identified in the rhetoric of the sector and the supranational decision makers that the establishment of the banking union was required to counter the negative crisis effects, while in fact it also sustains the capital accumulation strategies of the financial sector. This chapter therefore argues that explaining the establishment of the banking union from a socioeconomic context perspective serves better to understand the power relations leading to European integration, instead of explaining it from a Member States centric approach. I would like to

56 argue that we could regard the banking union as fitting within the tendency focused on the cross- border activities of the banking sector, instead of arguing that its establishment is merely the result of Member States negotiations in an isolated decision making moment in a given context. The banking union more likely seems to follow from the dominant neoliberal system based on the globalisation of finance which has granted the financial sector an insider position in the policy making process for their central role in funding the economy. Instead of claiming the decision towards more integration stems from Member States rational choices, the chapter argues that the Member State preferences are based on the context shaped by a capitalist class exceeding the national realm. The negative effects of the measures adopted in and surrounding the banking union proposals have been accepted in order to sustain the neoliberal economic order embedded in the Eurozone governance structures. Before, it was already argued that austerity measures and economic reforms are having a great impact on the lives of individuals in several Member States who do not have (sufficient) access to social provisions. This chapter has argued that the banking union and the crisis measures included in it do seem to fit within the neoliberal system which still is regarded as a precondition for welfare. In the conclusion of this thesis following in the next chapter, the complex puzzle of the establishment of the banking union will shortly be summarized, after which the final and most important conclusion can be drawn; whether or not we have to challenge the system based on its inability to address the challenges facing the Eurozone.

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Chapter 5 – Conclusion

Throughout this thesis we have explored the main source of power directing European integration in the case of the establishment of the banking union. The main question we have examined in this thesis is whether the banking union was established as a rational choice of national Member States based on their domestic preferences and decided within a national realm, or if we should look for the origins of these national preferences in a broader context in which financial powers have guided the choice for European integration. Chapter three provided a review of the negotiation process in which Member States appeared to be the main actors making the rational decision to pursue the banking union and shaping the outcomes of it. Chapter four, however, has taken into account the socioeconomic context surrounding decision making as important power actually guided the Member States´ preferences from their narrow capitalist interests. Exploring the case from these two different perspectives allows us to answer the main question. Although the establishment of the banking union seems a rational choice of the Member States based on their national economic positions within the Eurozone, this thesis prefers to explain the national preferences as stemming from a neoliberal economic system installed to support the capital accumulation strategies of a transnational financial capitalist class. Instead of identifying the Member States as dominant national actors deciding whether or not to surrender sovereignty over a large part of their banking sectors, the choice for a banking union rather seems to reflect the motives of a transnational socioeconomic power outside the national realm. The answer to the main question is based on the findings of approaching the establishment of the banking union from a CPE perspective. Exploring the CPE claim that the economic order in society is guided by a transnational capitalist class striving to realise its capital accumulation strategies over time has put the role of the Member States in the process in a different perspective. Firstly, the financial sector gained dominance because of its ability to create funding for the economy after the collapse of the former system. This class was accompanied by a neoliberal system supporting the strategies of the financial sector. Under the influence of the globalization of finance, the system has focused on free market policies, such as liberalization, deregulation and privatization in all areas of society arguing that more market is the solution for the challenges faced by society. This system has structured the way in which we perceive economic growth as based on the flourishing of free markets. Indeed, this market focus is reflected in the way more neoliberal market integration has been pursued within the Eurozone and again in the crisis approach focused on the stable functioning of the market which was assumed to eventually lead towards employment and

58 growth. Secondly, we have found that the dominant financial sector has developed itself based on the unrestricted movement of capital under the new system, which has allowed the sector to operate across borders. This increasing cross-border activity of the large banks supported by more integration explains their heterogeneous preference for breaking down national barriers after these started to constrain their expansion. Thirdly, in relation to the second argument, exploring the ways in which the banking sector has over time realised its capital accumulation strategies, has allowed us to discover a pattern in European integration, for the extent to which surrendering national autonomy has been accepted by the Member States seems to reflect the varying sector strategies over time. Chapter four indeed identified the shift in sector preferences towards a centralized governance as corresponding with the development of more supranational Eurozone governance. Fourthly, the focus on the banking sector as capital providing entity in society has granted the sector a privileged access to decision makers at all levels of decision-making. This central importance of the sector is reflected in the protectionist attitude of the Member States benefitting the large banks based within their borders. However, after the sector attention shifted towards a central level, its arguments for the necessity of more integration to achieve economic growth were adopted by the Member States as valid arguments for a banking union. Moreover, we have seen that the banking sector was involved in preparing the proposals at a European level. These findings support the claim that the capitalist accumulation strategies of the sector embedded in a neoliberal global system have been constituting the socioeconomic context guiding the Member States preferences and the direction of European integration. Although the banking union was promoted as a rational response to the crisis and was accepted by the Member States as such, the policies seem to foremost stem from neoliberal arguments of more economic integration to stimulate economic growth by allowing the sector to operate freely, while the interests of the Member States populations became subordinated. The fifth and crucial finding bringing together the Member State attitudes in the negotiations and the influence of the socioeconomic context, is the identification of the CPE claim that the Member States are still relevant in the process of European integration for socializing the global capitalist structures on a domestic level. Although liberal intergovernmentalism seems incapable of identifying the actual power structures in the EU, its focus on the Member State negotiation process as determining the outcomes of European integration is valuable for the extent to which it explains the attitudes and preferences of the Member States within the negotiations over the banking union. Their focus on keeping national resources within their borders to finance their social expenditures in fact seems to be the crux of the challenges within the Eurozone. The gap between on the one hand more economic integration motivated by the global developments under the neoliberal system, while on the other hand the lack of social and political integration within the Eurozone seems to be

59 the reason for the severity of the Eurozone crisis. In fact, we have seen that exactly the protectionist national attitude has allowed the banks within the Eurozone to initially become too big and too interconnected to fail in reaction to the removal of restrictions on the free move of capital. As a result the banks shifted their attention towards more economic centralization under the neoliberal system, without also achieving more integration on a social and a political level. In addition, installing the euro to stimulate the market has meant removing the option for states to devaluate their currencies. These developments have led to a rise in debt and the interconnectedness between banks and their sovereigns to keep financing national social expenditures which has even further fragmented the Eurozone. Finally, based on these arguments in support of the claim that national Member States preferences are guided by a structural power in society outside the national realm, we arrive at the social criticism as distinctive element of the CPE approach. Recalling, this criticism entails that the dominant economic system in society should be revised when the social powers in society are withholding human beings from expressing themselves and realizing their needs. When the system is not able to face the challenges in contemporary society, it should be challenged (Van Apeldoorn et al, 2003, p.34). This thesis has argued that the establishment of the banking union fits in a tendency towards more integration based on transnational sector preferences, and moreover, that the neoliberal system supporting these strategies is determining the economic structure in society. The crisis approach within the Eurozone has mainly focused on austerity measures and regaining confidence in the banking sector to boost investment and to regain economic growth. These choices are both motivated by the neoliberal ideology to find market solutions for the challenges facing society, however, they have had far-reaching consequences for the lives of individuals in the Eurozone. Nobel-prize winning economist Joseph Stiglitz has also addressed the consequences of the focus on austerity and the lack of social integration in the Eurozone. In an article in the Guardian in October 2014, he claims that the ongoing effects of a lack of solidarity characterize the Member States’ response to the Eurozone crisis. But, instead of the promised prospect that in a few years time the economy would recover through the crisis approach, the strongest hit countries, Spain and Greece, are facing depression. About 25% of the population is unemployed, and this involves more than half of the young people. Even in Germany there is a very slow growth rate. According to Stiglitz we face the risk of a loss of potential growth in Europe, while many young people do not have the opportunity to develop their skills (Stiglitz, 2014). Another economist, David Rowe, also argues that the main problem in the Eurozone is that it does not enjoy the basic solidarity of a nation state. According to him, the fundamental issue is that although the Eurozone is treated as an optimum currency area, it lacks several basic requirements such as a trans-European solidarity and an optimally functioning capital mobility and labor mobility because of, for example, language barriers

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(Rowe, 2014). The neoliberal approach to the crisis focused on strengthening the market instead of applying solidarity has not been able to counter the negative effects on economic growth, and has in some heavily indebted Member States had devastating effects on the lives of individuals in these countries, which was identified on several occasions in this thesis. Instead of reforming the financial sector at the basis of the crisis, the system with its neoliberal focus still holds on to the rhetoric that when the markets regain their functioning – and confidence in the banking sector is restored – social welfare will return. The banking sector still has the opportunity to expand further and to keep performing its risky activities, which sustains the risk of failure, although better manageable under the banking union. The banks and the neoliberal system are consolidating further, even though this might be not in the benefit of the Eurozone constituents. Based on the effects of the crisis as explained above, in this thesis I would indeed argue that the neoliberal system with its market solutions for societal problems should be challenged, for the economic order directing the lives of people within the Eurozone seems to be unfit to realize their individual needs. The problems of a loss of human potential identified earlier correspond with the argument of Stephen Gill in chapter four that instead of a neoliberal hegemony in which the general interest is incorporated in the narrow class interests, we currently seem to find ourselves in a neoliberal supremacy. The ongoing focus on the market and neoliberal austerity policies in a Eurozone characterized by nationally oriented and economically fragmented Member States has led to a situation in which the individuals in the Eurozone are not able to fully and freely develop themselves. According to Gill, the supremacy of a non-hegemonic block lasts until a coherent form of opposition emerges (Gill, 1995, p.400). This opposition could emerge by indeed identifying the problems within the system and challenging these. I would like to argue in line with Stiglitz that the Eurozone has two options diverging from the current Eurozone system. Either we have to dismantle the Eurozone, or we have to move towards more Europe including social and political union. Stiglitz argues that neither the banking union, nor austerity measures alone will be able to solve the problems in the Eurozone (Stiglitz, 2014). Instead of austerity, we need to stimulate the economy and apply mechanisms of mutualising debt. The other option would be to dismantle the Eurozone, by breaking up the currency union to make the sovereigns able to regain their competitiveness within the Eurozone. This would however go against the interests of the financial sector, because it means higher costs of exchange rates and less economic integration. Both solutions to the negative economic situation within the Eurozone are focused on challenging the neoliberal system, because solving the crisis with market solutions in a fragmented Eurozone with a lack of solidarity will not bring the Eurozone back to a prosperous economic entity without harming individual development of the people within it. Finding solutions to make the Eurozone function as a hegemonic system requires bold choices by the Eurozone leaders and heads of states to either pursue a working

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Eurozone, meaning surrendering autonomy and installing solidarity measures, or scaling back economic union for its inability to reach sustainable economic and individual development in a fragmented Eurozone without solidarity. Instead of being guided by the power of capital, the Member States should instead guide the transnational capitalist powers and make choices that are in the general interest of the entire Eurozone.

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