ABSTRACT
The Eurozone governance reflects its complex institutional framework which combines a centralization of competences in certain policy area — such as monetary, competition, state aid, external trade, now banking supervision — with a form of ‘constrained’ decentralization in other areas — such as fiscal, structural policies. The number of centralized competences has evolved over time, as a result of the Union having to tackle the new challenges resulting from the incompleteness of the institutional framework. On the other hand, it is an illusion to think that the Eurozone governance could have been perfect
from the very start — if there is anything as perfect governance. It is also illusory to assume that the Eurozone governance could simply be copied from other existing systems, like the US, because Europe is different and the historical and political contexts are different. This article focuses on conditionality within the European policy frame-
work. Conditionality — which implies setting conditions in order for certain decisions to be implemented, typically by other institutions or countries, in a form of quid pro quo — is a way to coordinate or bind the behavior of institutions which are independent from each other or respond to different layers of government. For instance, budgetary transfers or financial assistance from the Eurozone to the member states are conditional on the latter meeting some parameters or abiding to specific behavior. Within a fully fledged fiscal union, conditionality would not be as relevant because fiscal transfers are decided within an integrated political system in a quasi-automatic way, for instance, through the progressive tax system or the nation-wide unemployment compensation scheme. Another example is the intervention by the central bank in the financial market, which in Europe is conditional on specific actions taken by the Union or the member states’ authorities, which derives from the fact that the latter have retained several competencies. In sum, conditionality derives from the need to bind the behavior of separate authorities into agreements that improve the overall policy result. This is the way in which several European institutions, like the European
Stability Mechanism (ESM) and the Outright Monetary Transaction (OMT) have been designed. The ESM defines the conditions that countries experiencing difficulties in accessing capital markets must satisfy in order to receive financial assistance, in particular concerning the policy measures that the country commits to implement within a program agreed with the European Union and/or the IMF. The OMT specifies that the ECB can intervene, even for unlimited amounts, to counter destabilizing forces in financial markets which may put at risk the ability of a country to stay in the euro. But this can happen only if that country adheres to an adjustment program with the ESM. Conditionality is needed because the implementation of the ‘federal’
policy — monetary or financial assistance — requires an assessment about the appropriateness of the actions undertaken by the non-federal level of government (fiscal, structural policies). Given that these policies are still in the hands of national institutions, and likely to remain so long as the Union makes a more decisive move toward political integration, conditionality will remain an important component of the European policy framework. This concept of conditionality is different from the one which is used in
other contexts, to characterize relations between independent countries, or with institutions. It is different, for instance, from the conditionality which is used in the EU when assessing the possible entry of a new country, which characterizes the Maastricht criteria or the Copenhagen criteria that precede the transfer of economic or political sovereignty, and represents a fundamental step in the change in governance (Schimmelfenning and Sedelmeier 2004). It is also different from the conditionality used by
756 Lorenzo Bini Smaghi
international institutions, such as the IMF, to induce member states to implement specific adjustment policies. In the latter, the conditions are attached to the adjustment program implemented by a country in exchange for receiving financial support. In the Eurozone, conditionality is a broader concept, as it embraces not only specific measures but also the acceptance of the rules governing the monetary union as a whole. Just to give an example, when the negotiations between Greece and ‘the Institutions’ (which replaced the so-called Troika, composed of the IMF, European Commission in liaison with the ECB) broke up at the end of June 2015, other policies, which were not directly under the control of the country, such as the access of Greek banks to the refinancing window of the Eurosystem were also impacted. When the Greek government called for a referendum, which implicitly questioned Greece’s permanence in the euro, the whole conditionality was affected. In summary, conditionality in the Eurozone is an over-encompassing concept, which applies not only to specific policies but to the whole membership of the Union. On the other hand, conditionality is not a unique feature of monetary
union and does not apply only in case of financial crises. It also applies within political unions and when monetary policy adopts specific policy actions. In Chapter 1, Giavazzi and Wyplosz celebrate the ECB’s decision to act as lender of last resort, in particular through the OMT, but the OMT is not unconditional, as mentioned above. More generally, the lender of last resort function is always conditional on the solvency of the financial institutions that receive emergency lending assistance (ELA), independently of who is responsible for assessing solvency, and on the country’s determination to be a member of the union. The separation between the supervisory authority and monetary policy prevailing in several countries before the crisis proved to be quite problematic, for instance, in the UK. When the ECB granted ELA to banks in countries under program, the solvency of the banks could be assessed only by the national supervisor. Only by joining the Troika could the ECB make its own direct assessment of banks’ solvency. Since November 2014, with the creation of banking union, the ECB has become directly in charge of supervision, and is therefore able to assess banks’ eligibility to ELA, which does not mean — however — that ELA is without conditions. This article assesses the evolving nature of conditionality in the Eurozone
since the start of the crisis. It has been suggested (see for instance, De Grauwe and Ji, Chapter 2)
that even with conditionality, a decentralized policy framework is not sustainable. Unless the European Union moves rapidly to political integration, it risks imploding. For instance, a system of financial assistance to countries that have lost market access — similar to the one created with the ESM — while being a step forward compared to the pre-crisis situation is still inefficient. In a fully fledged fiscal union, in particular, the difficulties experienced by local authorities do not create widespread contagion to the whole union. In the EU, instead, as long as the fiscal responsibility remains with the member states, the risk of contagion from a local crisis will remain high. Furthermore, the risk of not meeting the requirements for being
Governance and Conditionality 757
eligible to the ECB’s OMT remains, which can thus not exclude that a country can exit from the euro, thus producing highly disruptive contagion effects. In the current political environment, it is utopian to imagine a quick
move to full fiscal union. This is the reason why over the coming years policy makers should concentrate on improving the current model of conditionality, making it more sustainable, rather than assuming unrealistic steps forward toward full political integration. The issue of conditionality has been discussed in the past mainly in the
context of IMF financial assistance (see Dreher 2009). Conditionality is constantly discussed and revised by the IMF (2012). After the Asian crisis, in particular, the Washington consensus moved toward a streamlining of conditionality, reducing the emphasis on micro-policies and focusing more on macroeconomic adjustment, in particular with respect to monetary and fiscal policies. The need to strengthen surveillance also emerged as a main priority, although it turned out to be much more difficult to implement in practice. This framework has inspired the actions of the Troika in program coun-
tries during the euro crisis and the creation of the ESM. The experience has been assessed ex post, in particular with respect to the Greek program (IMF 2013). Based on this experience, and these assessments, one might ask what should be changed in the structure and management of conditionality within the Eurozone. This is particularly relevant in the context of the 2015 discussions about a possible extension or a new Greek adjustment program, and the margins for maneuver for changing conditionality, or even eliminating it as requested by the Greek government. I will address four issues which characterize a conditionality framework,
in particular in a European context: (a) Adjustment vs. financing; (b) decision-making process; (c) financing conditions; (d) contents of conditionality. Before concluding, I would also raise a fundamental issue which underli-
nes any conditionality framework, which relates to the asymmetry of adjustment in a monetary union.
