Paradigm Shifts – Europe’s New Financial Architecture

In the wake of the Euro Area crisis, Europe’s financial architecture has been fundamentally redesigned. These institutional as well as conceptual innovations amount to a paradigm shift. Banking supervision will be Europeanized (Single Supervisory Mechanism). This was not even conceivable in 2009 when the de Larosière Report sketched the blueprint for the then new system of European Supervisory Authorities. Most importantly, a Single Resolution Mechanism, in charge of restructuring troubled banks, was established. The new philosophy – reflecting the destabilizing consequences of public bank bailouts – turns now around bailing-in. Shareholders and creditors stand first in line when it comes to restructuring or recapitalization – and not the taxpayer. Deposit insurance, however, will remain on the national level but harmonized. 

There’s a second paradigm shift, concerning regulatory principles. The need for a systemic perspective – macro-prudential – is meanwhile acknowledged and institutionalized. It became evident, that a purely micro-oriented approach, focused on the safety and soundness of individual banks, was deeply flawed. However, while there is consensus on the principle, this does not hold for tools to be wielded (Baker, 2013).

The goal of this inter-disciplinary roundtable is to assess the institutional and conceptual innovations adopted in the Euro-Zone. Important areas of policy have been Europeanized or de-nationalized (Kotz 2014). This makes for a new political economic environment, raising issues of effectiveness (can the new approach deliver?) as well as legitimacy (concerning the implicit mutualisation through common backstop facilities). Is this blueprint consistent? Can it work? What are its politics?