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

DOIhttp://doi.org/10.1111/eulj.12154
AuthorNicholas Dorn
Date01 November 2015
Published date01 November 2015
Legal Elasticityand Sidesteppingin
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 sidesteppingexisting 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 elasticapplication of lawdef‌ined here as addressing short-term problems most
directly affecting those at the apex of marketsweaken 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 sidesteppingexisting legal ordersby
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. 787802.
© 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 questionsabout elasticity, sidestepping and redistributionare
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 westernknowledge 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 marketshas 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, 315330. See also
other papers in that issue and in Columbia Law Schools clear blue skiesblog 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 Marketsfrom the economic to the so-
cial(2013) 13 Journal of Corporate Law Studies, 401442.
European Law Journal Volume 21
© 2015 John Wiley & Sons Ltd.788

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