SOCIAL-DEMOCRACY, DEBT AND EUROPEAN LENDER OF LAST RESORT

Policy Study

“The current European crisis underlines that the issues related to the status of the European Central Bank (ECB) are not only technical and monetary but also political and organisational. This article, written for FEPS by Frédéric Ménager-Aranyi, EuroCité’s General Secretary, aims at defining what concrete and realistic measures could be taken to reform the EU’s financial architecture to endow it with a structure that would limit and prevent the consequences of recent crises. To do so, it first studies historical and theoretical evolutions that affect the notion of lender of last resort and then, underlines its key evolutions and epistemic turnarounds.”

The current European crisis underlines that the issues related to the status of the European Central Bank (ECB) are not only technical and monetary but also political and organisational.
Therefore, since models are chosen on political and ideological grounds the theoretical issues at stake must be analysed based on the specificities of the current situation. In contemporary economics, these choices appear non-existent, although room for manoeuvre as well as innovation and proposition capacities exist. Our objective is to demonstrate that a divide between progressive and liberal thinking is possible. While the first believe that Member States should socialise the losses, the latter think a European institution should hold the function of a safety net for a system which is becoming increasingly uncontrollable.

This article aims at defining what concrete and realistic measures could be taken to reform the EU’s financial architecture to endow it with a structure that would limit and prevent the consequences of recent crises. To do so, we will first study historical and theoretical evolutions that affect the notion of lender of last resort and then, we will underline its key evolutions and epistemic turnarounds.

However, it is important to acknowledge the political and symbolic meanings of this crisis that raises two kinds of problems for social-democracy: a doctrinal one and a strategic one. The public debt issue is not in favour of the European left wing since it has for long relied on Keynesian principles.

Keynesianism remains left parties’ prerogative while public debt issues make it hard to believe its budgetary postulates. If the crisis does not theoretically invalidate the idea that, in such times, a policy-mix needs to be dynamic and proactive, it does make this position hard to translate in electoral terms.
Within European left parties, we observe more and more Ricardian-inspired points of views. These views may be dangerous if they converge towards radical Ricardism. The second risk, beyond theoretical draining and cultural defeat, that threatens left parties would then be in the absence of economic and social room for manoeuvre, to only concentrate on societal divisions and not be able to articulate a thinking, in break with that of conservatives on economic grounds.

THE CRUCIAL QUESTION OF LENDER OF LAST RESORT

In order to follow a certain degree of financial discipline, the authors of the Lisbon Treaty decided both to omit deliberately any reference to the concept of lender of last resort (in article 123 of the Treaty on the Functioning of the European Union) and not to anticipate any upstream decision-making mechanism and to let empirical data set a legal precedent.
This gap resulted in the institution of a non-cooperative process between the ECB, the European executive power and major decision-maker states. This in turn led to a lack of reactivity that aggravated the speculative period which subsequently transformed into a self-fulfilling crisis.

Yet, the recognition of a European lender of last resort would constitute a further step towards increased financial integration. The systemic safety of the zone would then rely on a truly European institution and this would reinforce the political purpose of the Economic and Monetary Union.

You could download this executive summary below or read the full article but only available in French