Legal ‘Elasticity’ and ‘Sidestepping’ in European Crisis Management of Financial Markets

• DOI: http://doi.org/10.1111/eulj.12154
• Author: Nicholas Dorn
• Date: 01 November 2015
• Published date: 01 November 2015

Legal ‘Elasticity’and ‘Sidestepping’in

European Crisis Management of Financial

Markets

Nicholas Dorn*

Abstract: This paper explores the roles played by law in crisis management of financial

markets and some possible consequences. Three questions are raised –about the ‘elastic’

use of law, about ‘sidestepping’existing legal order by invention of new structures and

about redistributive consequences. These questions are appraised empirically in relation

to three areas of financial market law: public support given to banking from 2008 on-

wards; English case law concerning derivatives contracts when confronted with Lehman-

style insolvencies; and the European Stability Mechanism, which during summer 2015

was being primed in relation to Greece. On the first two case studies, law, having been

mightily stretched, did not break. Likewise, legal sidestepping, as epitomised by the

European Stability Mechanism, may result in a less coherent legal structure; however

such incoherence may be not be fatal to the ensemble. On all three fronts, redistributive

questions remain controversial, but controversy in itself does not undermine legal

structures. A particular form of theory, the Legal Theory of Finance, is discussed in light

of the case studies. Such theory may have an unfulfilled longing to discern law-like

regularities (ironically chasing economics).

I Introduction

This paper explores the roles played by law in crisis management of financial markets

and some possible consequences, for law itself and for stakeholders. Three questions

are explored here, the first two being structural and the third redistributive. First, does

the ‘elastic’application of law—defined here as addressing short-term problems most

directly affecting those at the apex of markets—weaken law in the longer term (intro-

ducing uncertainty) or strengthen law (so that it stretches and adapts rather than break-

ing)? Second, does the elite strategy of ‘sidestepping’existing legal orders—by

constructing new ones that supplant the foregoing or sit adjacent to the latter (as we

see in the Eurozone)—result in a shoring up or destabilisation of the resulting ensemble?

Third, do either or both of those elite strategies result in redistributive consequences

that are visible and unpalatable to the extent that both the legal order and the political

order with which it is intertwined are called into question? We need to make it clear at

this early point that there is no supposition here that economic elites necessarily ‘know

what they are doing’, as regards the longer-term consequences of elasticising or

* Institute of Advanced Legal Studies. London and Erasmus School of Law, Rotterdam. The author thanks

the three referees and the editor for their useful comments.

European Law Journal, Vol. 21, No. 6, November 2015, pp. 787–802.

© 2015 John Wiley & Sons Ltd., 9600 Garsington Road, Oxford, OX4 2DQ, UK

and 350 Main Street, Malden, MA 02148, USA

sidestepping law; rather, they think that they know their interests and that they are rel-

atively well placed to advance legal strategies accordingly. The papers asks with what

effects on legal and redistributive consequences.

These three questions—about elasticity, sidestepping and redistribution—are

appraised empirically here in relation to three areas of financial market law: public

support given to banking and other forms of finance from 2008 onwards; English case

law concerning derivatives contracts when confronted with Lehman-style insolvencies;

and the European Stability Mechanism (ESM). To avoid possible misunderstandings,

the focus here is upon contemporary crisis management in each of these areas, not upon

origins of crisis. These specific areas are chosen because in each, there has been

scholarly commentary, amounting to controversy, along the lines that short-term ‘fixes’

may undermine longer-term legal certainty.

Finally, these questions about elasticity, sidestepping and redistribution are brought

into contact with the recently developed ‘Legal Theory of Finance’(henceforth LTF),

1

in an attempt to see if some of the regularities implied by that theory hold up in prac-

tice. The conclusions are that they do not in any uniform sense and that, whilst a theo-

retical drive to discern regularities in the nexus of law and finance nexus is

understandable in professional/academic terms, redistributive effects and their political

visibility (see above) mediate between legal elasticity and legal robustness.

II Bank Bailouts

Following the emergence of financial market crisis in the US and Europe, the socio-

political assumptions, theoretical framing, forms of discourse and technical models of

financial markets and their regulation have been subjected to much criticism. Alterna-

tive bases for knowledge are demanded. The failure of ‘western’knowledge potentially

allows regulatory thinking in other regions and countries to distance itself from the for-

mer.

2

In western financial and regulatory circles, a disembodied financial economics—

which took stability for granted, as arising from rational market participants and effi-

cient markets—has partially yielded to an acceptance that markets are characterised

by herding, sentiment and psychology, as espoused for example in behavioural econom-

ics. Thirdly, there has been a turn to sociology and law, under rubrics including socio-

legal studies, social studies of finance, sociology of finance and law and finance. Such

work is by no means new, having been developed before the advent of the financial cri-

sis.

3

However, the crisis has reinvigorated such work and brought it more to the fore in

terms of its perceived relevance for academics, financial market participants and public

policy and regulation. The bringing together of social and legal analyses of markets is of

particular interest here because it offers the potential to deepen scholarly crossovers be-

tween European law and studies of financial markets and regulation, a deepening that is

all the more urgent following the Eurozone crisis and volatile political mood arising

throughout the EU.

1

K. Pistor, ‘A Legal Theory of Finance’(2013) 41 Journal of Comparative Economics, 315–330. See also

other papers in that issue and in Columbia Law Schools ‘clear blue skies’blog commencing at http://

clsbluesky.law.columbia.edu/2013/07/18/the-marketplace-of-ideas-kathryn-judge-takes-on-katharina-pistors-

legal-theory-of-finance

2

E. Helleiner and S. Pagliari, ‘The End of an Era in International Financial Regulation? A Postcrisis Re-

search Agenda’, (2011) 65 International Organization, 169-200.

3

For a comprehensive review, see J. Black, ‘Reconceiving Financial Markets—from the economic to the so-

cial’(2013) 13 Journal of Corporate Law Studies, 401–442.

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