Law, Governance, and the Eurozone

Law, Governance, and the Eurozone

The eurozone is on the verge of meltdown, taking whole economies and banking systems with it, and spreading to the US through the systemic interwiring of the international financial system.  Or not.  European meetings to avert disaster are coming unglued and the moment when the markets simply stop turning over debt and re-lending is finally at hand, with a tipping point reached against one or another of the economies beyond Greece.  Or not.

I’m reasonably sophisticated in international economic law, and pay close attention to these things.  I require my students to follow the European debt crisis closely, and I make a point of engaging in discussions with colleagues and friends in the economics, business and finance worlds to try and understand what’s going on.  But if you are like me, as a business law professor you are never quite sure what to make of the reports that come from political economy on what is happening.  And even more, you are not quite sure where to locate the role of lawyers and law in this discussion.  I don’t mean the role of lawyers in the sense of sophisticated finance people who start in law but gradually take on interdisciplinary expertise; that describes a lot of the players in this world, including lots of law professors.

I mean the role of lawyer and law in the questions of governance, structures of governance, the constitutional arrangements of the the EU, the eurozone, the law of the central banks, and down from the supranational to the national.  The economists and most of the political types I speak with do not believe that law is decisive in decisionmaking in this kind of urgent situation; it is epiphenomenal on what the politicians and markets do, and law will be rewritten, reinterpreted, reconfigured either in the event or afterwards to express the new political reality.  At most, there are hiccups – such as the German Constitutional Court decision in September that, if I understood it correctly, both grudgingly blessed the bailouts already taken but put serious new national law-based constraints on future ones.  But, say my political economist friends, that’s just the occasional roadbump.  The hurdles are not legal ones in the EU, however much it appears to be a creature of treaty, law, and regulation.  It is a discretionary regime in its most important economic crises – as perhaps are all large democratic economies and common markets, including the US (Cf. Hank Paulson’s handful-of-paragraphs trillion dollars in 2008).  (The questions of sovereign debt covenant interpretation, or the triggering events in credit default swaps, or other private contract issues have always been understood to be about law and lawyers.)

I keep wondering whether law is quite so beside the point, even in what some would call a Schmittian moment of crisis.  (That would be a mistaken characterization, in my view, but a tempting one, and I don’t mean necessarily mean Posner and Vermeule, but Schmitt’s direct intellectual heirs and students in Europe.)  Even without reaching to Schmitt, however, from a governance and constitutional standpoint, one could argue that the discretionary elements of the system turned out not to establish the best of all possible worlds – apparently rule-governed, but actually highly discretionary – but instead the worst.  (This is, by the way, a distinctly legal issue, by contrast to the best-v-worst observations made about the economics of optimal and unoptimal currency zones.)

It’s not so much that I want to stake out a claim, but to raise once again the question of what the implications of this are for the constitutional theory of the EU, and for the economic governance of the eurozone, where governance means something that has to be written down in the law and regulation of the European Central Bank and other institutions.  Germany and others are saying that the rules have to mean what they say; others say not so much that the rules aren’t clear as that, or that they are revisable in a crisis.

This looks as much to be a governance and constitutional crisis as an economic one, in other words, and a crisis in which law will play a part before and after.  The rules, at least to an outsider, on such things as fiscal transfers, the legal mandate of the ECB, seem pretty clear.  Maybe there is a jurisprudence that paves a plausible path to what the politicians contemplate, but it doesn’t seem so easy, at least to important constituencies in the eurozone.  When the newspapers report that, well, the proposal was to leverage the bailout fund in various ways – but that the lawyers advised that this violated various EU laws, that seems to be law playing a pretty independent  precipitating role.  And what about the aftermath, if the discretionary revisions prevail to rules that important players assumed were not subject to revision?  What is the constitutional rule that obtains here, and is it a rule on which markets and national leaders can use to make stable predictions?

I realize the moment of crisis is not the right moment to rewrite constitutional theory, but surely there is more discussion going on somewhere, not just of the specific laws at issue, but of the underlying principles of constitutional decision and action at issue here.  It doesn’t seem sufficient to merely read a note in the Financial Times or the German newspapers that political leadership had been advised by lawyers that the bailout fund can’t be leveraged, or that common issuance of eurozone debt is harder as a legal matter than it looks.  But I’m not a European Union lawyer, and I’d welcome comments from knowledgeable readers, or links to articles, blogs, or other discussion points that seek to undertake the legal and governance issues.

Update: Here’s an example of what I mean by the sense that in the eurozone crisis, law is a follower, not a leader, and at most a negotiable hold-up. This is drawn from one of my favorite economists, the Very Great Tyler Cowen, on how to exit the eurozone.  From the end of his post (emphasis added):

Let’s sum up which problems have been addressed and which not.  The domestic banking system is saved, at least provided the new conversion rate is credible enough that no one expects a repeat of the depreciation.  It’s key to make that first announcement a real surprise, good luck!  A negative wealth shock will come anyway and my plan has accelerated the arrival of that shock; the best one can do is to combine it with monetary expansion and the positive export shock from devaluation.  To fix the external banks, the wealthier countries will need to exercise and perhaps improve their LOLR [Lender of Last Resort] powers, but that is the case under any plan, not just this one.

Admittedly this plan makes the wealth loss in Ruritania quite transparent, which may be politically unpopular, but that transparency eases the economics of the transition.

Voila!  Rinse and repeat as necessary.  A lot of this would be eased by high inflation from the eurozone itself but a) that would involve collateral costs on the healthier economies, and b) in any case it doesn’t look like it will happen.  I’m sticking with what a small country can do on its own.

No need to write in the comments section that this is “illegal.”  Breaking the three percent deficit rule, as France and Germany did, was illegal too.  Ruritania will not be hauled before a court of law and I also predict Ruritania will not be ejected from EU per se. Maybe their agricultural subsidies will be cut, let them eat floating exchange rates I say.

This is drafted, from my international contracts lawyer point of view, the way that a business person would draft a term sheet – a roadmap through the practicalities of business, finance, and some political considerations.  But the legal and regulatory issues are essentially treated as revisable or else some form of negotiable hold-up.  They act as constraints on this account – but not truly “constitutional” ones.

I mean by that, constraints in law that are more than just “hard” to change, but which are hard to change because they are part of a constitutional order, in which the constraints carry important legitimacy all their own that arise because they are, well, constitutive.  Built into the structure in a way that is hard to change because people wanted it that way, to tie their hands into the future in a mutual undertaking in which people came together to tie not just each other’s hands but their genuinely collective hands, people together – and to tie the hands of the people who would come after.  This idea of the independent power of legitimacy, and the function of constitutionalism as more than just a “really big holdup” is, in my experience, very hard to convey to economists, mostly because their world-view doesn’t make room for the underlying concept.  At most, there’s some handwaving in the direction of “Oh, you mean institutional economics.”  Actually, I mean more than that.  I mean “constitutional law.”

But then Tyler Cowen points to a rather serious problem for my argument above.  For years, we have been told in endless academic papers, books, symposia – mostly funded, however, by the EU in its one-way ratchet of ideological integration – that the EU is indeed a constitutional order, but of a special kind, a new phenomenon in the world, one that has the best of all possible worlds – polis creating its own demos, simultaneously a supranational order but also a merely multilateral collection of sovereignties, etc., etc.  My reaction as an academic was, well, maybe, let’s wait and see; I understand that political leaders can’t wait on academic history but must make their choices and act.  But when push comes to shove, the constitutive rules didn’t prove to bind even the leading principals, as Cowen points out, and discretionary political leadership prevailed instead.  And apparently it prevails now.

So this is a problem for my argument that constitutional hurdles in the EU are more than just hard-to-negotiate-away rules, but instead have the legitimacy of constitutive rules.  Maybe in the EU they don’t.  They are hard to get around, but they can be got around with enough political finesse and cover.  In that case, however, a core “strategic ambiguity” at the heart of the EU project – no bailouts, revisable rule or constitutive constitutional norm? – is suddenly forced to a choice.  I suppose one can say these are just “growing pains” for a new constitutional order, which will take decades and decades to consolidate around genuinely constitutive rules; I have my doubts that this is how it works, in the absence of a genuine demos, but I’m an American and have a different view of sovereignty (Lincoln: “a political community, without a political superior.”)  But still, if on a matter of crucial economic relations, the “rules” are revisable from moment to moment – is there still a “constitution” at the heart of Europe?

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Dan Davenport MD
Dan Davenport MD

Response…No legal expertise here, but I read a great article this past week that translated the “political code words” used by Europe’s officials. The problem is simply that there is no answer to this. Dishonest money created from thin air led to massive debt creation that can never be repayed. It will collapse one way or the other as it always has. The law has been trashed. (by the lawyers?)  Good article!


[…] As much a governance and constitutional crisis as an economic […]

Celia Hampton
Celia Hampton

EU constitutional law may be complex and unfamiliar, but it is not impenetrable. The EU is not a full federal state but a collection of sovereign states that have ceded sovereignty over a wide range of issues. This is closely watched over by the European Court, so law is at the very heart of EU governance. Direct taxation is not one of the issues that has been ceded to the centre, so centrally directed fiscal transfers are impossible as a matter of law. The central bank (ECB) is explicitly denied the power to lend to any national government. Its purchase of Italian bonds squeaks past this prohibition because the ECB is only buying them on the secondary market, not direct from the Italian government. The German court ruled that the German government cannot agree to make any substantial transfer of funds to the EU or eurozone without the specific authority of German taxpayers for each payment. This is an old principle – no taxation without representation. Here is a piece I recently wrote about this for Financial World magazine, for what it is worth – Where political discretion enters the equation is outside the confines of the EU constitution. EU… Read more »

Kirk T. Hartley

As to the role of lawyers and law, you may find of interest the pots linked below – and others – from the blog of The Epicurean Dealmaker.

Also, a smart friend moves at the upper end of financial firms. His view is that regulators are hopelessly outgunned and never will catch up because litigation takes too long. I’d say he’s right.

Dr Tobias Wahl
Dr Tobias Wahl

The point is that there is a natural law (see for example and anything beyond that is excerted by the tyrany of Governments. As such even democratic states never really are bound to its own rules and essentially do what they like. Thus the question of a constitutional crisis is futile as there never really was the constitution that all politicians confessed to in good times. Why not simply legalize everybody’s right to their own person, body and property rather than using lawyers to enforce the despotic regime that governments necessarily bring about?

One more point to the author’s comments on trying to find out what really is going on: In addition to trying to understand the details it is also advisable to make oneself familiar with the principles of Austrian Economics which has predicted all the major crises of the past 100 years as well as predicts exactly what the fate of all our fiat currencies is…one could also look at Hayek’s road to serfdom which very clearly explains what the author understands as a ‘constitutional crisis’.


I think this endless last minute shuffling of decisions, which should be part of significant public debate does not only destroy the impression of law, but also of long term general morale.
If people get away with not paying their debt, and overthrowing strict clauses like “no bailout” through the backdoor, it is severe moral hazard.

I wish (EU) law professors would be more vocal on the (constitutional) lawyers perspective on all this

Martin Holterman

@Genauer: Like Celia Hampton explained above, EU law is simply silent on the Member States’ behaviour unless the Treaties positively mandate or forbid it. In the US, the states may not make interstate compacts without the consent of Congress, but in the EU there is no such rule. More specifically on this topic, banking is only to some extent an EU competence. (It is part of the internal market, so in that sense it can be regulated, but given that the EU has not done so, but has only partially harmonised some aspects of the industry, the Member States retain significant freedom. In US terms, the EU lawmaker has not “occupied the field”.) Moreover, anything the EU lawmaker has done, can be undone. Everything that is written into the Treaties can be unwritten, just like the US Constitution can be amended. Just like there’s no such thing as an unconstitutional Amendment to the US Constitution (except one that takes away the States’ equal suffrage, but that’s another story), EU law is silent on the permissibility of amendments to the Treaties. This crisis is being dealt with by “The Masters of the Treaties”, the EU Member States as represented by their… Read more »


You can barely sneeze on the internet these days without running into trolling from Austrian economics aficionados. It’s pretty sad. The great irony of the situation is that for all their big talk about the prescient perspective of the Austrian school, it is methodologically opposed to exactly the kind of rigorous empiricism (testing and econometrics) across institutional contexts and history that is a necessary precondition for making real predictions. This fundamental aversion to the paradigm of falsification makes it fundamentally illegible as a mainstream discipline in economics.
Austrian economics has almost nothing sensible to say about the current crisis except for narrow epiphenomenonalism about government and fiat money. Its approach is to completely shun the liquidity trap problem, lament the absence of bond vigilantes and simply double down on its tired morality play about supply shocks and hangover therapy in substitute for any kind of real analysis.


You mention a Polis without a Demos, as if this were an intractable problem. History has shown us that in many cases (not least in the case of the US), the Polis creates the Demos, or, the yearning of many for a better Polis can create the Polis and the Demos simultaneously. I do not believe a European People exists, hence to say “THE People of the united States” would be a fallacy. The Germans had the following expression (Weimar Republic): “the German People, united in its ‘tribes'”. I would rather speak of a “European Nation, united in its peoples”. I would use the traditional and rather abstract French definition of Nation, which is a community of fates willing to defend past common experiences. That Nation does not exist yet, but it can come about if there is a European public opinion that can formulate a “general will” of what needs to be done in Europe, and what Polis is needed for that.

Benjamin Davis
Benjamin Davis

Europe is always on the verge of collapse.  Europe is an idea that is always in the process of being made.  Writing from Paris today, Europe is vital and beautiful. On to Hungary at the end of the week.