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

• Date: 01 November 2016
• DOI: http://doi.org/10.1111/eulj.12223
• Published date: 01 November 2016
• Author: Fernando Losada

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 finally 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 reflecti 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

bothtoreflect power relations while being a maj or factor in shaping their

transformation.

1

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 finally come to

explicitly pervade the institutional system of the European Union, originally inspired by

the principle of formal equality between sta tes but presently reflecting 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.

1

M. de Cecco, Money andEmpire: The International Gold Standard1870–1914 (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 22–837.

© 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.

2

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 financial 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-financial cross-border activities;

(2) debt resultingfrom cross-border financial flows;and (3) obligations between or among

states (resultingfrom loans or reparations).Quite clearly, the first 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 deficitora surpluswillhave

on the exchange rateof the national currency, and of the difficulty in perpetuating deficits

or surpluses in the absence of freedom to provide loans across borders. Persistent trade

deficits over many years are only possible if they come hand in hand with cross-border

financial flows, 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 official 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 firstdecades 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 fixed, although revisable if

2

For a longer-termhistorical account,see K. Dyson, States, Debt,and Power: ‘Saints’and ‘Sinners’inEuropean

History and Integration (Oxford Un iversity Press, 2014), at 99–126; for a shorter-term twentie th-century

explanation, see K. Dyson, ‘Norman’s Lament: TheGreek and Euro Area Crisis in Historical Perspective’,

(2010) 15 New Political Economy,597–608, at 600–603.

European Law Journal Volume 22

©2017JohnWiley&SonsLtd. 823