Institutional Implications of the Rise of a Debt‐Based Monetary Regime in Europe

Date01 November 2016
Published date01 November 2016
Institutional Implications of the Rise of a
Debt-Based Monetary Regime in Europe
Fernando Losada*
Abstract: This article de als with the institution al implications for the E uropean Union
resulting from debt relat ions. It suggests that despi te original efforts to tame t hem, as a
consequence of a series of events both in theinternational monetary order and theEuropean
integration process, power games lying behind debt relations have nally sprouted with
special virulence after the great recession. Although the causes have been brewing for a long
time (in this regard the end of the monetary order established at Bretton Woods and the
liberalisation of capital movements have been key factors), it is only in the post-economic
crisis context that concr ete examples of debt-based po wer games are observable in t he
institutional system. In hindsight, a line can actually be drawn tracing a transformation in
the principle underlying EU constitutional law and its institutions: from promoting equality
among its Member States to reecti ng their (now persistent and increasi ngly divergent)
economic power.
I Introduction
It is common knowledgethat money is a means of exchange, a unit of value and a store of
wealth. But as economic historians and sociologists have shown, monetary orders tend
bothtoreect power relations while being a maj or factor in shaping their
In a nutshell, monetary orders are a key lever of power. This is so not
only of national, but also international and cross-national monetary orders. Despite the
implicit and sometimes explicit assumptions of most EU scholars, European integration
is no exception to this rule.
Awareness of howdebt shapes relations among EU states has increasedsince 2007, but
confusion still abounds in terms of the dynamics of debtrelations and their impact on the
structural and substantive constitutional law of the European Union. This article focuses
on the relationship between the international monetary order and European integration.
In particular, it considers how as a result of a series of events on these two fronts, debt
relations and their ass ociated underlying powe r asymmetries have nally come to
explicitly pervade the institutional system of the European Union, originally inspired by
the principle of formal equality between sta tes but presently reecting Member States
economic power. Two deeply interconnected dimensions, the politico-economic and the
institutional,are therefore examined in parallel alongthe process of integration, although
special attention is devoted to post-crisis institutional developments.
* University of Helsinki.This research forms partof the European Bonds:The Moral Economy of Debt research
project, funded by the Universityof Helsinki and the Academyof Finland.
M. de Cecco, Money andEmpire: The International Gold Standard18701914 (Blackwell, 1974);M. Aglietta
and A. Orléan,La Violence de la Monnaie(Presses Universitairesde France,1982); D. Graeber, Debt:The First
5000 Years (Melville House, 2011).
European La w Journal, Vol. 22, No. 6 , November 2016, pp. 8 22837.
© 2017 John Wiley & SonsLtd. 9600 Garsington Road, Oxford,OX4 2DQ, UK
and 350 Main Street, Malden, MA02148, USA
To a considerableextent, debt owed to creditorsestablished in other states, regardless of
it being public or private(what in economic terms is known as externaldebt), determines
relationshipsbetween states.
Thus, not only publicdebt, but also private debt is relevant,
if only because the risk associated with private cross-border debt relation s may end up
involving states, as guarantors of last resort of debtor and creditor nancial institutions.
In these debt relationships the balance in the power game between creditor and debto r
depends on the degree to whic h the given state keeps cont rol over trade in goods and
services, over capital movements, over the currency and over the terms of indebtedness.
In what follows, three different (even if deeply interrelated) types of external debt are
distinguished: (1) debt stemming from commercial, non-nancial cross-border activities;
(2) debt resultingfrom cross-border nancial ows;and (3) obligations between or among
states (resultingfrom loans or reparations).Quite clearly, the rst and the secondtype tend
to be deeply intertwined in present p ractice. However, it is imp ortant to distinguish
between them,if only because the power associatedwith external debt is heavily dependent
on the extent to which st ates can effectively cont rol and steer cross-bor der capital
movements and retain monetary sovereignty. Combining free movem ent in goods and
services with controls on capit al and coexisting national curren cies, as was the case in
the original EuropeanCommunities, in the long run tends to level off thevery same trade
in goods and services.This is so because of the impact that a decitora surpluswillhave
on the exchange rateof the national currency, and of the difculty in perpetuating decits
or surpluses in the absence of freedom to provide loans across borders. Persistent trade
decits over many years are only possible if they come hand in hand with cross-border
nancial ows, thus creating long-term debt relationships. In addition, states may opt to
seek external funding when issuing their sovereign bonds. As long as states retain control
over the legal status of their bonds (issuing debt governed by national law) and over the
issuance of money, an element of balance remains in relationships between creditors and
debtors. Even so, creditors may require a state to renounce those elements as a condition
for the issuance ofcredit. Finally, debts between states were characteristically the product
of reparations, of militar y alliances, or of quasi-colo nial relationships. The p ost-war
Bretton Woods order env isaged a multilateral fra mework that aimed impli citly at
rebalancing the position of c reditors and debtors (as part of the transformation of the
terms of international t rade). However, in a very ma rked fashion since the 197 0s,
international practice has resulted in the conditionality attached to ofcial loans turning
into a massive instrument to suspend the capacity of the debtor state for self-government.
This article, while trac ing the development and ex pansion of debt relatio ns during
European integration, will lead to the conclusionthat a similar evolution has taken place
in the European context.
II The Original Treaties: A Design Neutralising Debt Relations
During the rstdecades of integration,international monetary stabilitywas guaranteed by
the Bretton Woods system, according to which t he dollar was directly convertible into
gold while exchange rates between all other currencies were xed, although revisable if
For a longer-termhistorical account,see K. Dyson, States, Debt,and Power: Saintsand SinnersinEuropean
History and Integration (Oxford Un iversity Press, 2014), at 99126; for a shorter-term twentie th-century
explanation, see K. Dyson, Normans Lament: TheGreek and Euro Area Crisis in Historical Perspective,
(2010) 15 New Political Economy,597608, at 600603.
European Law Journal Volume 22
©2017JohnWiley&SonsLtd. 823

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