Tangled Governance: International
Regime Complexity in the Euro Crisis
C. Randall Henning
American University
Presented to the International Relations Faculty Colloquium, sponsored by the
Department of Politics, Niehaus Center for Globalization and Governance and
European Union Program, Princeton University, November 3, 2014
C. Randall Henning, November 2014
Questions
1. What explains the institutional form of the financial rescue?
2. How do states strategize the complex of institutions?
3. Is the regime complex for crisis finance fragmenting?
C. Randall Henning, November 2014
0
12/25/13
10/30/13
09/04/13
07/10/13
05/15/13
03/20/13
01/23/13
11/28/12
10/03/12
08/08/12
06/13/12
04/18/12
02/21/12
12/27/11
11/01/11
09/06/11
07/12/11
05/17/11
03/22/11
01/25/11
11/30/10
Ireland
10/05/10
08/10/10
06/15/10
04/20/10
02/23/10
12/29/09
Greece
11/03/09
09/08/09
07/14/09
05/19/09
03/24/09
01/27/09
40
12/02/08
10/07/08
08/12/08
06/17/08
04/22/08
02/26/08
01/01/08
Sovereign 10 year bonds spreads over German Bunds
50
45
Portugal
35
30
25
20
15
10
5
C. Randall Henning, November 2014
6
0
01/01/08
02/26/08
04/22/08
06/17/08
08/12/08
10/07/08
12/02/08
01/27/09
03/24/09
05/19/09
07/14/09
09/08/09
11/03/09
12/29/09
02/23/10
04/20/10
06/15/10
08/10/10
10/05/10
11/30/10
01/25/11
03/22/11
05/17/11
07/12/11
09/06/11
11/01/11
12/27/11
02/21/12
04/18/12
06/13/12
08/08/12
10/03/12
11/28/12
01/23/13
03/20/13
05/15/13
07/10/13
09/04/13
10/30/13
12/25/13
Sovereign 10 year bonds spreads over German Bunds
7
France
Spain
Italy
Netherlands
Finland
5
4
3
2
1
C. Randall Henning, November 2014
Opposition to IMF Involvement
“We don’t need to call in the IMF. We have more than enough instruments in the
treaty to tackle a situation like the one we’re faced with at the moment in
Greece.”
Joaquín Almunia, Commissioner for Economic and Monetary Affairs, February 9th,
2010.
“I do not believe that it would be appropriate to introduce the IMF as a supplier
of help through standby arrangements or through any such kind of help.”
Jean-Claude Trichet, President, European Central Bank, March 4th, 2010.
. . . “absurd” . . . “It’s not a matter of having the IMF designing the exit strategy as
far as public finances are concerned.”
Jean-Claude Juncker, President, Eurogroup, February 16th, 2010.
C. Randall Henning, November 2014
Opposition to IMF (cont.)
“What’s clear is that this is a matter for the Europeans. There is no doubt that
Greece is not a question for the International Monetary Fund.”
Wolfgang Schäuble, Minister of Finance, Germany, February 9th, 2010.
“Nous ne sommes pas….. en situation de faire appel au Fonds monétaire
international. On en est pas là du tout.”
Christine Lagarde, Minister of Finance, France, February 12th, 2010.
C. Randall Henning, November 2014
IMF Inclusion is Over-determined
The reasons adduced for euro area leaders to include the Fund:
1. Expertise and credibility in designing, negotiating and
monitoring programs;
2. Financial resources;
3. Skeptical of the European Commission, faith in IMF (to be
tough);
4. Deflection of political backlash against austerity.
C. Randall Henning, November 2014
Troika and Member States – Complex Indeed
Euro Area Member States
BE
AT
FR
DE
ES
IT
Non-European and
non-Euro States
US
...
Eurogroup and
Euro Summit
J
UK
EL
PRC
...
European
Commission
International
Monetary Fund
European
Stability
Mechanism
European
Central Bank
Program
Negotiations
Finance Minister and Central Bank
Governor of Borrowing Country
C. Randall Henning, November 2014
Summary of Troika Programs 2010-2014
Greece
May 2010
European
€80bn through
Commission Greek Loan Facility
European
Central Bank
International
Monetary
Fund
Notes
“In liaison with"
European
Commission (and
UMP)
€30bn SBA
Ireland
November 2010
Portugal
May 2011
Greece
March 2012
Spain Financial
Sector Program
July 2012
Cyprus
May 2013
€22.5bn EFSM,
€17.7bn EFSF
€26bn EFSM,
€26bn EFSF
€144.7bn EFSF in
conjunction with
PSI
€100bn EFSF and
ESM
€9bn ESM
In liaison with
European
Commission (and
UMP)
In liaison with
European
Commission (and
UMP)
In liaison with EC
Technical assistance In liaison with EC
(ELA, eventually
(restores regular
in liaison with EC
restores regular
and EBA (financial
access to
access to
refinancing)
assistance via UMP)
refinancing)
€26bn EFF
Technical
assistance,
monitoring and
informal input on
program design
€1bn EFF
Exits in January
2014
Exits in May 2016
€22.5bn EFF
Replaced by second
program in 2012 Exits in December
after disbursing
2013 without a
€73bn (Eurozone
precautionary
share €52.9bn; IMF
program
€20.9bn)
€28bn EFF
Exits in June 2014
Exits European
without a
program in
precautionary
December 2014,
program
IMF in March 2016
Source: IMF and European Commission program documents
C. Randall Henning, November 2014
Spanish Banking Sector Program
Included among these cases because:
a) Spain’s access to the capital markets was endogenous
to the institutional solution;
b) Program was in reality “full”: fiscal, structural as well
as banking. Administered through a decentralized, but
coordinated, variation on the troika.
C. Randall Henning, November 2014
Spain (cont.)
This mix was chosen owing to:
a)
Size, which
i.
ii.
b)
Placed a premium on ECB putting its balance sheet in play
Made euro-area-wide policy (e.g., monetary policy, banking union)
critical to success of any IMF program, prompting demands for
adjustments
Domestic party politics
i.
ii.
Rajoy replaced Zapatero prior to the program
Merkel had confidence, Spanish officials orthodox
Key creditors thus maximized preferences by keeping the IMF as a shadow
member of the troika.
C. Randall Henning, November 2014
Cyprus
1) IMF contributes only 1/10th of the financing
2) Program does not cover the financing gap
3) IMF insists on closing insolvent banks
4) Prevails because it is backed by the most powerful
euro area member state
C. Randall Henning, November 2014
Underlying Explanation
1. Expertise and credibility in designing, negotiating and
monitoring programs;
2. Financial resources;
3. Skeptical of the Commission, faith in IMF;
4. Deflection of political backlash against austerity;
Preference heterogeneity and intergovernmentalism.
C. Randall Henning, November 2014
Prediction
Preference heterogeneity + unanimity = IMF involvement
As long as EAMS take decisions on financial assistance to
sovereigns by unanimity, the euro area will continue to
request that the IMF participate in crisis resolution.
The Spanish program could be a template for future
programs. But complete exclusion of the IMF from a
sovereign rescue by unanimity would falsify this
prediction.
C. Randall Henning, November 2014
Germany
1. Economic preferences rooted in international position,
remarkably consistent over the decades
2. Abiding fear of the costs of mistakes of others, overshadowing
benefits from monetary union
3. Anticipated cases being brought to the Federal Constitutional
Court, which insisted on Bundestag review and votes (adept
two-level strategy)
4. IMF protected the government’s right flank, maintaining a
working legislative majority for programs
C. Randall Henning, November 2014
United States
Caught between two imperatives:
1) Stabilize the euro crisis to prevent contagion across the Atlantic
and a double-dip recession
2) Force euro area member states to bear the cost of fighting the
crisis and completing the institutional architecture to stabilize
the monetary union.
These were sometimes at odds: US sometimes withholds support
to prod EAMS to pony up; but ultimately prioritizes stabilization.
C. Randall Henning, November 2014
Unexpected Outcomes
1) U.S. official position shifts from moral support with private
skepticism of Europe’s monetary union to firm endorsement of
completing the project.
A lurching shift, not gradual
b) Motivated by financial spillover
c) Abandons concerns about balance of payments constraints or
currency competition; weakness of the euro area a greater threat
a)
2) IMF supports creation of the ESM and completion of the euro
project
Against its narrow bureaucratic interest
b) In deference to its non-European members
a)
C. Randall Henning, November 2014
Cooperation mixed with conflict
1) Troika cooperates on financial assistance while competing on
economic analysis, simultaneously.
2) Awkward for troika officials, but explained by states’ incentives.
3) Lending function contains distinctly negative spillovers, while
competition on analysis carries positive spillover, from the
standpoint of states.
4) Resonates with Johnson and Urpelainen (2012) thesis re regime
separation and integration.
C. Randall Henning, November 2014
Strategizing Complexity
1) States can use complexity to manage agency drift.
2) Especially when they are the arbiters of institutional conflict.
3) Germany tolerated disagreements with the Fund because it was
in such a position, along with other key creditors.
4) Inter-institutional conflict does not necessarily portend
breakdown in the troika; it is integral to the control mechanism.
C. Randall Henning, November 2014
Is the regime complex fragmenting?
1) Yes, but less than meets the eye
2) Informal coordination sustains cooperation despite an
increasing number of institutions
3) States’ control strategies ensure that informal mediation of
institutional deadlock will continue to be necessary
4) The effectiveness of informal coordination hinges on
convergence of preferences among key states
5) Which cannot be taken for granted, especially in contingencies
outside Europe, in the future
C. Randall Henning, November 2014
Thank you
C. Randall Henning, November 2014