Graduate School of Social Sciences
Master Thesis: Political Science Track: European Union in Global Order
Student: Albert T. Faber Student number: 11067357
Supervisor: Prof. Dr. J. W. J. Harrod Second Reader: Dr. F. Boussaid
Date: 24 June 2016, Amsterdam
WHO’S IN CHARGE OF RESCUING
THE EUROPEAN UNION?
A
P
RINCIPAL
–
S
UPERVISOR
–
A
GENT
A
NALYSIS OF THE
E
UROPEAN
Abstract
Prior to the financial crisis of 2008, the European Union (EU) and the International Monetary Fund (IMF) appeared to live in parallel universes. Up until that moment, both institutions were separated by their own rules, operating procedures and interests. This changed once the financial crisis started in 2008 and European Area Member States (EAMSs) were forced to seek external financial support from the IMF. This thesis investigates whether the involvement of the IMF in the European sovereign debt crisis constitutes a ‘de facto agency’ relationship. In spite of the fact that the involvement of the IMF was front page news, it was less conspicuous why EU leaders agreed to let the IMF play such an important role – working alongside the European Commission – in negotiating and monitoring the conditions that were attached to rescue loans. Having used the Principal – Supervisor – Agent theory, this thesis has argued that the involvement of the IMF was intended to avoid setting a precedent of delegating fiscal and budgetary policy authorities to the European Commission. The temporary delegation of authority to the IMF would ensure the availability of financial support necessary to assist ailing EU Member States as well as provide the technical and supervisory expertise required to ensure the compliance of insolvent EU members.
Key Words
European Union (EU); International Monetary Fund (IMF); Principal – Supervisor – Agent (P-S-A); European Stability Mechanism (ESM); Austerity; Financial Crisis.
Acknowledgements
Similar to some EU Member States in this thesis, I too am deeply ‘indebted’ to my amazing parents who have supported me throughout this long and challenging process of writing this thesis. And because knowledge is a treasure you never spend, I will be forever grateful for the opportunities they have given me. I also owe much thanks to my supervisor, Prof. Dr. J. W. J. Harrod, for his patience and his feedback. It has been a valuable and motivating experience for which I am very thankful. Lastly, I want to thank my cheerful housemates Rutger and Koen, my great friend Roderik and many many others for letting life not get too serious.
Table of Contents
Abstract ii Acknowledgements iii Table of Contents iv Abbreviations vi I. Introduction 11.1. Introduction of the Research Question 1
1.2. Social Relevance and Scientific Discourse 3
1.3. Theoretical Framework 5
1.4. Sources and Methodology 5
1.5. Thesis Structure 7
II. Dynamics of Authority: the Principal – Supervisor – Agent Theory 8
2.1. Introduction 8
2.2. Contextualizing the Theoretical Perspective 9
2.2.1. The First Wave of Grand Theory 9
2.2.2. Second Wave of Mid-Range Theory 11
2.2.3. Third Wave New Institutionalism 11
2.3. Principal-Agent Theory 13
2.3.1. Why use Agency? 17
2.3.2. Principal – Supervisor – Agent 17
2.4. Concluding Remarks 19
III. Merging Universes 20
3.1. Introduction 20
3.2. Exploring the Parameters of IMF-EU Agency 21
3.3. Pre-Crisis Economic Policy Coordination and Compliance Mechanisms 23
3.3.1. Multilateral Surveillance Mechanisms 23
3.3.2. Balance of Payments Facility 26
3.3.3. Parallel Universes 27
3.4. Merging parallel Universes 29
3.4.1. First Steps towards IMF Agency 29
3.4.2. The Greek Rescue Pact 31
3.4.3. European Financial Stabilization Mechanism 32
3.4.4. European Financial Stability Facility 33
3.4.5. European Stability Mechanism 35
3.5. Concluding Remarks 38
IV. Principal ‘Shirking’ Towards an Intergovernmental Union 40
4.1. Introduction 40
4.2. Incomplete Contracting and Collusion 40
4.2.1. Incomplete Contracting 41
4.2.2. Collusion 41
4.3. Conflict of Interest and Temporary Delegation 42
4.3.1. Conflict of Interest 42
V. Austerity and Orthodoxy 46
5.1. Introduction 46
5.2. The Basis for the Austerity Measures Imposed by the 46
Providers of Rescue Funds’
5.2.1. Economic Necessity 46
5.2.2. Affected Membership 48
5.2.3. The ‘Washington Consensus’ 49
5.3. Temporary Assistance over Structural Interference 51
5.3.1. EU Contributions to the IMF 51
5.4. Concluding Remarks 57
VI. Concluding Remarks 58
6.1. Presentation of Main Findings and Discussion 58
6.1.1. Primary Research Question, ‘how’ 58
6.1.2. Secondary Research Question, ‘why’ 59
6.1.3. Austerity Measures and Social Impact 60
6.2. Theoretical Implications and Future Research 61
Abbreviations
BEPG Broad Economic Policy GuidelinesBoP Balance of Payments CEE Central Eastern European EAMS European Area Member State EB Executive Board
EC European Commission ECB European Central Bank
ECHR European Court of Human Rights
ECOFIN Economic and Financial Affairs Committee (European Council) ECFIN Economic and Financial Affairs (European Commission) EEC European Economic Community
EFC Economic and Financial Committee EFF Extended Facility Fund
EFSF European Financial Stability Facility EFSM European Financial Stability Mechanism EMU European Monetary Union
ESM European Stability Mechanism EU European Union
G-20 Group of Twenty GDP Gross Domestic Product IMF International Monetary Fund MoU Memorandum of Understanding OCM Open Community Method PA Principal – Agent
P-S-A Principal – Supervisor – Agent QMV Qualitative Majority Voting SBA Stand-By Arrangement
SAP Structural Adjustment Program SDR Special Drawing Rights SGP Stability and Growth Pact SPV Special Purpose Vehicle TEU Treaty on the European Union
TFEU Treaty on the Functioning of the European Union VAT Value Added Tax
I. Introduction
1.1. Introduction of the Research Question
Up until the financial crisis of 2008, the International Monetary Fund (IMF) and the European Union (EU) seemed to live in parallel universes. Whereas prior to the financial crisis the EU seemed to have outgrown the need for IMF assistance, it soon became clear that even the EU was not immune from the effects of the global financial crisis. Government debts went up sharply when the governments of a number of EU countries had to borrow large amounts to finance the bail-out of their domestic ‘too big to fail banks’.1 As the global financial crisis quickly spilled over into other areas of economic activity, the revenues of these governments fell, whereas their expenditures rose. The budget deficits that ensued led some countries to the brink of default. They were forced to turn to the IMF and the EU for financial assistance.2 This brought the IMF back on the European scene as a lender of last resort where it had last been active in the nineteen seventies when it provided financial assistance to the UK and Italy.3
Hungary and Iceland were the first countries to solicit financial assistance from the IMF in early 2008.4 Soon thereafter, countries from within the European Monetary Union (EMU) would follow. Greece was the first Eurozone country that was facing default in 2010, followed by Ireland and Portugal, while Spain and Italy each grappled with difficulties of their own. The other Euro members felt compelled to provide rescue loans to the Euro members in need to keep them from going bankrupt. The bankruptcy (or default) of one Eurozone member could, it was feared, trigger the default of more financially weak Eurozone countries and would probably cause a break-up of the EMU.
While this was front page news, what was less conspicuous was that the EU heads of government had agreed that the IMF should play an important role – working alongside the European Commission (EC) – in negotiating and monitoring the conditions that were to be attached to the rescue loans to the would-be borrowers. The terms and conditions of this cooperative crisis lending were going well beyond the clauses dealing with the interest due and
1 European Central Bank, ‘The Seize and Composition of Government Debt in the Euro Area’, Occasional Paper Series No.
132. (October, 2011) pp. 6 – 7, 15 – 17.
2 C. Seabury, ‘Can the IMF Solve Global Economic Problems?’, Investopedia (Accessed: 04-05-2016). URL:
http://www.investopedia.com/articles/economics/09/international-monetary-fund-imf.asp
3 D. Hodson, ‘The IMF as a de Facto Institution of the EU: a Multiple Supervisor Approach’, Review of International Political
Economy Vol. 22. No. 3 (2015) pp. 5.
4 Independent Evaluation Office, ‘A Review of Crisis Management Programs Supported by IMF Stand-By Arrangements,
2008 – 2011’, Background Paper: By: S. Takagi, C. De Resende, J. Prieur, F. Loyola and T. Nguyen (Washington D.C., 2014) pp. 7.
the repayment dates of the loans: they also spelled out which structural measures each of the borrowing countries would have to take domestically, ranging from public spending cuts and tax reforms to cuts in welfare benefits and pensions paid to civil servants.5 The European sovereign debt crisis thus marked an important transformation in the relationship between the EU and the IMF. One could say the relationship went from limited Article IV Consultation meetings that were held once every now and then, to a structural broadening and deepening of their cooperation and consultation.
The transformed relationship between the EU and the IMF forms the heart of this thesis. The research questions this thesis will seek to answer are the following.
1. The main research question focusses on how this relationship changed and what impact the involvement of the IMF had on the relationship between the EC and the European Council. The main research question of this thesis therefore reads as follows: ‘did the involvement of the IMF during the bail-out of insolvent EU Member States between 2008 and 2012, result in the IMF becoming a ‘de facto agent’ of the EU, and if so, how did this come about?’
2. Irrespective of the outcome of the main research question, the involvement of the IMF in EU affairs was unmistakable. Therefore, the second question to be addressed in this thesis is why the EU leaders chose to involve the IMF so closely in the negotiation of the conditions of rescue loans that were to be funded by the EU Member States.
3. The third and last research question is why the IMF required would-be borrowing states to implement austerity measures as a condition for receiving financial assistance, a policy that was also adopted by the EU in the rescue loans to its insolvent Member States since 2008. This sub-question is relevant not only because these measures have harsh social effects on ordinary people in the borrowing states, but also because they have been criticized in academic circles on the grounds that they allegedly conflict with the IMF’s mandate.6
The workings of the European institutions – the European Commission (EC), the European Council and the European Central Bank (ECB) – and their interactions with the EU
5 European Commission, Memorandum of Understanding between The European Community and the Republic of Latvia
(Brussels, 2009) pp. 1 – 12.
6 S. Babb, ‘The IMF in Sociological Perspective: A Tale of Organizational Slippage’, Comparative International Development
Member States and the IMF will therefore be the main focus of this thesis. To date limited scholarly attention has been given to the manner in which IMF involvement has changed the institutional balance of power within the EU.7 Hence, the answer to this research question consists of two main components. The first component concentrates on ‘how’ the financial crisis changed the institutional framework of the EU. The second component seeks to answer the ‘why’. The findings presented in this thesis are intended to contribute to creating a new lens through which the internal dynamics of the EU in the development of its relationship with the IMF can be understood.
1.2. Social Relevance and Scientific Discourse
Many believe that the sovereign debt crisis has weakened the credibility of the Euro zone and the EU as a whole both domestically and abroad.8 The various bail-out plans for Greece, Ireland and Portugal have received a lot of press coverage and have become notoriously unpopular among the citizens of Eurozone countries.9 Among citizens of the countries that supplied the rescue funds, the sentiment prevailed that their taxpayers’ money was given to spendthrift countries, whereas the citizens of the bailed-out countries were displeased because they were feeling the pain of the austerity measures imposed by the providers of the rescue funds.10 In this thesis, one of the questions I will attempt to answer is why austerity measures were a key condition to which the would-be borrowers had to agree before receiving any rescue loans under a bail-out package (see §5.2.1.).
From an academic point of view, the research question of this thesis may be relevant because, while the IMF and the EU are both controversial institutions whose activities have been scrutinized by scholars over the years, only limited ground has been broken on the topic of the institutional interaction between the European Council, the European Commission (EC) and the IMF. There are of course a few exceptions. Rogers published a book in 2012 on the
7 S. Lütz, M. Kranke, ‘The European Rescue of the Washington Consensus? EU and IMF Lending to Central and Eastern
Countries’, Review of International Political Economy Vol. 21. No. 2 (2014). And: C. Rogers, The IMF and European Economies: Crisis and Conditionality (Palgrave MacMillen, 2012).
8 K. Featherstone, ‘The Greek Sovereign Debt Crisis and EMU: A Failing State in a Skewed Regime’, Journal of Common
Market Studies Vol. 49. No. 2 (2011) pp. 193 – 217. And: G. Majone, Rethinking the Union of Europe Post-Crisis: Has Integration gone too far? (Cambridge University Press, 2014).
9 ‘Greek Farmers and Riot Police Clash in Athens’, The Guardian (12 February, 2016). (Sourced: 05-06-2016). URL:
https://www.theguardian.com/world/2016/feb/12/greek-farmers-and-riot-police-clash-in-athens
10 P. Carrel, ‘German Law Makers Back Greek Bail Out Talks Despite Rebellion’, Reuters (17 July, 2015). (Accessed:
interaction of the IMF with European economies since the 1970s.11 He argues that the European
countries concerned used the IMF involvement to pursue austerity measures while deflecting blame for the ensuing social hardships. More importantly, Rogers argues that the EU lacked credibility as a ‘lender of last resort’ due to political and legal constraints that would prevent it from lending to member states and from imposing and enforcing compliance with the conditions on such loans. Rogers argues exclusively from a state-centric perspective, barring non-legal factors from playing a role in his analysis. Lütz and Kranke also looked into the IMF involvement with the EU. They argue that the EU has been less lenient than the IMF when it came to imposing austerity measures on countries in need of financial assistance.12 They regard the IMF as a more flexible. Lütz and Kranke ascribe the IMF’s more lenient loan conditions to its extensive crisis lending experiences and expertise. They believe that the IMF’s involvement by EU heads of state or government originated from political necessity – as opposed to a luxury of choice – due to a presumed lack of expertise and experience in the eyes of these EU leaders.13
Lastly, the involvement of the IMF in EU politics is a new area of research, because prior to the financial crisis of 2008, the IMF had only provided financial support to Italy and the United Kingdom in de 1970’s and this support was on a smaller scale with no cross-cutting institutional commitments attached to this financial support.14 The extent of the delegation of responsibilities to the IMF by the European Council during the European sovereign debt crisis has prompted some commentators to conclude that the IMF has become a “de facto agent” of the EU member lender-states.15 These commentators have noted that the EU leaders could have
solely tasked the EC – the executive arm of the EU – with the negotiation and enforcement job, but instead chose to delegate these tasks jointly to the IMF and the EC. The current role of the IMF in the European sovereign debt crisis presents a new opportunity to take stock of the state of affairs of the European project and of areas where improvement is required.
11 C. Rogers, The IMF and European Economies: Crisis and Conditionality (Palgrave MacMillen, 2012) pp. 186.
12 S. Lütz, M. Kranke, ‘The European Rescue of the Washington Consensus? EU and IMF Lending to Central and Eastern
Countries’, Review of International Political Economy Vol. 21. No. 2 (2014) pp. 315, 317 – 322.
13 Ibid, pp. 327 – 328.
14 International Monetary Fund, ‘Annual Report of the Executive Directors For the Fiscal Year Ended April 30, 1975’,
(Washington D.C., 1975) pp. 14.
15 D. Hodson, ‘The IMF as a de Facto Institution of the EU: a Multiple Supervisor Approach’, Review of International Political
1.3. Theoretical Framework
In this thesis I will apply the Principal – Supervisor – Agent (P-S-A) theory. This is a mid-range theory that is derived from rational choice institutionalism.16 This is an approach that is used to understand the relationship between different organizations or organs of the same organization. It is therefore an appropriate approach to study the involvement of the IMF in EU crisis lending, because it provides a framework through which the delegation and/or transfer of authorities from the principal to the agent can be studied.17
There are three reasons for using this theoretical approach instead of using any other theoretical framework. First of all, P-S-A theory is best suited to analyze the transfer or delegation of powers from one institutional entity to another. Secondly, it helps to pinpoint which incentives drive the actors in their roles as principal or agent to behave in a certain way. Thirdly, the P-S-A theory retains the flexibility to entertain constructivist avenues of analysis, such as the role and importance of social learning, institutional entrepreneurs, the impact of norms, ideas and values without turning actors into straw men.18
1.4. Sources and Methodology
Policy briefs produced by the EU, ECB and IMF as well as other materials in the public domain, such as press releases, government statistics and expert publications serve as primary evidence in this thesis. Furthermore, speeches and documents from institutional archives served as a rich source of information. The IMF database in particular included invaluable documents such as the Memoranda of Understanding (MoU’s) that were signed for each loan agreement. Apart from these documents, I have performed an extensive secondary literature review, which includes a variety of academic papers as well as newspaper articles and books by experts in the field of International Political Economy (IPE).
Based on the sources available, this thesis has taken a grounded theoretical approach. A grounded theoretical approach tries to explain the underlying reasons behind events by
16 J. Tallberg, ‘Executive Politics’ in: K. E. Jørgensen, M. A. Pollack and B. Rosamond, Handbook of European Union Politics
(London, 2005) pp. 3 – 7.
17 M. A. Pollack, ‘Principal-Agent Analysis and International Delegation: Red Herrings, Theoretical Clarifications, and
Empirical Disputes’, Bruges Political Research Papers No. 2 (Brugges, 2007).
18 M. A. Pollack, ‘Principal-Agent Analysis and International Delegation: Red Herrings, Theoretical Clarifications, and
Empirical Disputes’, Bruges Political Research Papers No. 2 (Brugges, 2007). And: J. Tallberg, ‘Executive Politics’ in: K. E. Jørgensen, M. A. Pollack and B. Rosamond, Handbook of European Union Politics (London, 2005).
formulating and testing hypotheses and performing textual analyses on the documents available. Based on this approach, two observations can be made. The first is that despite the severity of the financial crisis in 2008, the solvent EU Member States have been categorically unwilling to relinquish their policy autonomy in national fiscal and budgetary matters.19 The second observation is that the IMF has become more influential in EU affairs and to this day is still heavily involved in EU fiscal and budgetary governance.20 These two observations lead to the finding that throughout the financial crisis, the EC has lost influence over some of its core competences and policy responsibilities to other actors.21 This is remarkable because the EC, like no other institution within the EU, would be expected to spearhead reforms, implement new regulations and safeguard the stability of the EU. The diminished role of the EC would appear to prevent the EU from acting effectively and decisively.
Hence, in light of these observations, the broader purpose of this thesis needs to be defined as an indicative case study of impact of the Eurozone crisis on the relative distribution of power between the European Council and the EC with a particular focus on the question: is the EU drifting towards more intergovernmental governance – and has the financial crisis erased the prospect of enhanced supranational integration? Though some would argue that fiscal and budgetary policies have traditionally been the policies most resilient to supranational interference, the financial crisis presented an opportunity for the EC to unite its members behind the obvious necessity of joint action and joint regulatory controls. This thesis will demonstrate, based on textual analysis of two hypotheses, that the European Council has assumed that role instead.
Besides the broadest function of this thesis, the research question formulated earlier attempts to establish whether, and if so, why the IMF became a de facto agent of the EU. If not for the need of financial support, what motivated the EU to involve the IMF?
19 European Council, Statement by the Heads of State or Government of the European Union, (Brussels, 11 February 2010). 20 Treaty Establishing the European Stability Mechanism, ‘Whereas no. 8’, (Brussels, 2012) pp. 5.
21 European Council, ‘Council Regulation (EC) No 431/2009 of 18 May 2009 amending Regulation (EC) No 332/2002
Establishing a Facility Providing Medium-Term Financial Assistance for Member States’ Balances of Payments’, Official Journal of the European Union (Brussels, 2009) pp. 1 – 2.
1.5. Structure of the Thesis
The first Chapter will be followed by the introduction of the theoretical framework in Chapter II. Because theories are ever changing constructs, I will start with the core foundation from which the ‘principal-supervisor-agent’ (P-S-A) theory eventually emerged. This theory is used in this thesis. In addition to discussing the historical context from which the P-S-A theory emerged, this theory also serves to demonstrate the ontological restrictions of other theoretical approaches that are inherently more biased in their approach to this field of research.
Chapter III will subsequently set out the European fiscal and budgetary stabilization mechanisms. This chapter will present evidence that is relevant for the main research question: is it possible for an autonomous international financial organization to become an agent of another institution? Moreover, this chapter will demonstrate that the IMF became deeply embedded in the European crisis stability mechanisms. It will contrast the pre-crisis stability mechanisms and compliance procedures of the EU with those that were used during the financial crisis of 2008 – 2012. In short, Chapter III seeks to answer ‘how’ the parallel universes of the EU and IMF merged into a shared universe.
Chapter IV will answer what drove the European Council to involve the IMF. Two hypotheses will be formulated, followed by a discussion that should serve to determine which one offers the best explanation for the behavior of the European Council.
Chapter V will subsequently explain the rationale for the austerity measures and why these measures do not breach the IMF’s mandate as some scholars have claimed. Moreover, the cost of involving the IMF and areas of cooperative tension will be discussed.
Chapter VI will summarize the findings of this thesis and restate the answers to the questions this thesis has set out to answer.
II. Dynamics of Authority: the Principal – Supervisor – Agent Theory
2.1. Introduction
The Principal-Agent (PA) theory is a mid-range theory that has evolved from a broader tradition of integration theories. The PA theory has to be viewed in light of its predecessors. The theoretical context is not only useful to get a sense in which direction theoretical inquiries within the field of European politics and economics are going to, it also helps in pointing out the strengths and weaknesses of other theoretical approaches. This justifies the use of a PA theoretical approach in this thesis.
Jonas Tallberg divided the development of theoretical discourse into three ‘waves’ of research.22 The first wave constituted the development of grand theories like Neofunctionalism and Intergovernmentalism. Each branch sought to capture the European integration process in one grand all-encompassing idea. The question that dominated this debate, focused on how one could best explain the process of state integration. Looked at from a different point of view, scholars also wondered how a supranational institution like the EC acquired and used its influence during this process to facilitate Member State integration.23
The second wave of theoretical pondering zoomed in on the role of the EC as the executive arm of the EU and employed mid-range comparative theories in order to determine whether the EC was a policy entrepreneur or a policy manager.24 In other words: did the EC initiate the process of policy formation on its own, following a separate policy agenda? Or was the EC a tamed political animal that did its master’s bidding? At the time of these debates – i.e. during the 1980s and early 1990’s – the EC was still the only executive branch within European politics. This meant that Member States could only channel their policy preferences through one supranational institution: the EC. Hence, the implementation of policies and the right of initiative was the monopoly of the EC. This placed the EC in a unique position to guide the process of further integration. However, in 1999 the EC lost its status as the only supranational executive. From then onward it had to share this status with the European Central Bank (ECB).25 Though the role of the ECB was (and is) confined to monetary policy making
22 J. Tallberg, ‘Executive Politics’ in: K. E. Jørgensen, M. A. Pollack and B. Rosamond, Handbook of European Union Politics
(London, 2005)
23 Ibid., pp. 3 – 4. 24 Ibid., pp. 5 – 7.
25 M. A. Pollack, ‘Delegation, Agency and Agenda Setting in the Treaty of Amsterdam’, European Integration Online Papers
and monitoring, it did ignite a debate amongst scholars and politicians whether the EU should be classified as a supranational organization or as an intergovernmental society.
The third wave marked the completion of secondary mid-range theories that focused on the inner workings of executive bodies within the EU as well as on the relationship between these actors. Due to their newly established prominence in European affairs, questions concerning the delegation of authority between entities, the level of democratic accountability and agency became the newest area of scientific research.26 The following sections will discuss each wave and its weaknesses and appropriateness for the study of contemporary executive politics in the EU, and it will explain why the P-S-A theory is more suitable to explain the involvement of the IMF in the European sovereign debt crisis than other theories.
2.2. Contextualizing the Theoretical Perspective
2.2.1. The First Wave of Grand Theory
The Treaty of Rome sparked the first wave of European integration theory. Its signing signified the start of a long-term political commitment to the elimination of political and economic barriers through the creation of the European Economic Community (EEC) .27 Its members Belgium, France, Italy, Luxembourg, the Netherlands and West-Germany, agreed to delegate certain authorities to a supranational entity we since know as the EC.28 In an attempt to explain
this process and to determine the level of influence of the EC in the integration process, two dominant theoretical approaches were developed.
The first one was neofunctionalism. Proponents of this theoretical approach, like Ernst Haas, argued that the EC functioned as the crucial motivator and driver of continued European integration.29 Neofunctionalists argued that due to EC’s ability to develop transnational coalitions and its technical expertise, beneficial spillovers into adjacent policy areas would be conducive to further integration. The EC was therefore considered to be the best positioned actor to coordinate the process of integration. The key take-away here is that neofunctionalists
26 J. Tallberg, ‘Executive Politics’ in: K. E. Jørgensen, M. A. Pollack and B. Rosamond, Handbook of European Union Politics
(London, 2005) pp. 17 – 24.
27D. Phinnemore, ‘The European Union: Establishment and Development’, in: M. Cini and N. Pérez-Solórzano Borragàn,
European Union Politics Fourth Edition (Oxford University Press, 2013) pp. 27 – 29.
28 Ibid., pp. 28.
29 B. Rosamond, ‘The Uniting of Europe and the Foundation of EU Studies: Revisiting the Neofunctionalism of Ernst B. Haas’,
regarded the supranational institution embodied by the EC as the driver of the integration process.
The second theoretical approach was intergovernmentalism. Intergovernmentalists, by contrast, argued that not the EC, but individual Member States were responsible for European integration. Intergovernmentalists considered the EC to be subject to the will of its members as the main decision-makers behind European integration.30 The space and autonomy of the EC was thus dependent on the usefulness and good behavior to its Member States. If the EC behaved in a way that ran against the interests of its members, intergovernmentalists believed that states would be able to summon sufficient capabilities to restrain or strip the EC of its capabilities. Despite the fact that neofunctionalists and intergovernmentalists identify different drivers for the process of European integration, they share the idea that European institutions are shaped by endogenous forces as opposed to external shocks. In light of that assessment, the involvement or even incorporation of an externally established organization would not have been foreseen by either branch.
There is another reason why the intergovernmentalist position cannot be used to explain the process by which the IMF became a de facto agent of the EU, assuming for a moment that this characterization is correct. (This issue will be addressed in Chapter III). This is for the simple reason that intergovernmentalists overstate the influence and coordinating abilities of EU Member States. If taken to the extreme, intergovernmentalist logic would dictate that EU Member States – who coincidentally are all a member of the IMF – would be able to impose their will upon an autonomous international financial organization to suit their own purposes. Babbs comes to more or less the same conclusion based on the argument that dominant states control the Funds decisions.31 But this has demonstrably not been the case! Not only does the IMF answer to a larger group of members, the evidence suggests that EU Member States are not nearly powerful enough to hold sway over the IMF. In addition, intergovernmentalists, much like neofunctionalists, are unable to influence the direction and flow of authority amongst institutions.
This is not to say that the role of member states and their governments is irrelevant. To the contrary, all joint lending decisions of the IMF and the EU are ultimately made by the intergovernmental body of the European Council. Moreover, all corresponding loan conditions
30A. Moravcsik,‘Liberal Intergovernmentalism and Integration: A Rejoinder’, Journal of Common Market Studies, Vol. 33.
No. 4 (1995) pp. 611 – 628. And: M. Cini, ‘Intergovernmentalism’, in: M. Cini and N. Pérez-Solórzano Borragàn, European Union Politics Fourth Edition (Oxford University Press, 2013) pp. 72 – 74.
31S. Babbs, ‘The IMF in Sociological Perspective: A Tale of Organizational Slippage’, Comparative International
and program details are also approved by this body. The role and influence of Member States is certainly important, but first wave grand theories lack the sophistication to study the intricate power relations between various institutions and institutional levels. Once the significance of such insights became more relevant when the executive powers of the EC increased and the Council of Ministers was incrementally overshadowed, mid-range theoretical approaches sought to understand and explain the political output that resulted from the interaction between institutions at different levels.
2.2.2. Second Wave of Mid-Range Theory
As the political footprint of the EC grew, so did the interest of scholars. Contrary to the grand theoretical ambitions, mid-range theoretical approaches were more focused on explaining smaller pieces of the integration puzzle. Particularly the question of EC policy entrepreneurship versus that of a policy manager gained traction. According to those who viewed the EC as a policy entrepreneur, the EC had gained sufficient autonomy and resources to carve out an independent policy domain. That is to say, the EC gained sufficient capabilities to initiate and monitor policy proposals and legislation.32 Others, however, have argued that the EC has remained a policy manager, only pursuing areas of integration and harmonization where member states were willing to concede policy autonomy.33 The truth, though still contested, appears to lie somewhere in the middle: the EC has taken the initiative in some areas but has remained absent in others. With the benefit of hindsight, the second wave of institutional theory may best be described as an in-between phase. Though it focused on the development and integration of EU institutions in relation to the bigger institutional framework, its analyses remained confined to one of the ontologically irreconcilable schools of integration theory such as Neofunctionalism, Intergovernmentalism or Constructivism which are inherently incompatible with each other.34 The third wave of new institutionalism departs from this confinement and combines ideas from both sides of the theoretical spectrum.
2.2.3. Third Wave New Institutionalism
New wave institutionalism can be divided into three sub-groups: rational choice institutionalism, historical institutionalism and sociological institutionalism. As part of rational
32 H. Grabbe, ‘Europeanisation Goes East: Power and Uncertainty in the EU Accession Process’, Centre for European Reform
(Oxford, 2002).
33 B. Laffan, ‘From Policy Entrepreneur to Policy Manager: the Challenge facing the European Commission’, Journal of
European Public Policy Vol. 4. No. 3 (1997).
34 J. Tallberg, ‘Executive Politics’ in: K. E. Jørgensen, M. A. Pollack and B. Rosamond, Handbook of European Union Politics
choice institutionalism, the principal agent analysis emerged as an analytical tool to study the quality and relationship of power relations between actors. This theoretical approach is less dependent on one single school of grand theory, because it uses elements from all schools wherever it deems these appropriate and in support of enhancing our understanding. It does not immediately reject other theoretical approaches because of their supposed ‘lack of unfalsifiable hypotheses’ and it does not present itself as the only correct approach. New institutionalism may best be defined as:
The core idea that organizations are deeply embedded in social and political environments, suggested that organizational practices and structures are often either reflections of, or responses to rules, beliefs, and conventions built into the wider environment.35
New institutionalism thus embodies a mix of theoretical perspectives from different schools as opposed to just one school.36 The sub-groups mentioned above, support that statement. Each strand takes a different approach to explaining institutional behavior, yet all three share the commitment of furthering the understanding of political outcomes through the study of institutional behavior.
Rational choice institutionalism generally seeks to answer two questions that are of relevance to this thesis. First: how do institutions influence political and economic behavior? And second: how does this affect the institutions themselves?37 Unlike sociological institutionalism, rational choice institutionalism is inherently functionalist in its explanations. It perceives actors to behave according to fixed and strategically formulated preferences, whereas sociological institutionalism would argue that internal institutional norms, commonly held values and legitimacy determines behavioral outcomes. Moreover, rational choice institutionalists would argue that politics is a set of collective action dilemmas. Sub-optimal outcomes are therefore to be expected. The prisoners’ dilemma is the most famous examples of this.
This also assumes that rational actors behave predictably, because they will most likely act strategically. An institution functions as the framework through which actors pursue their interests, process information and enforce action. This implicitly means that institutions
35 W. W. Powell, ‘The New Institutionalism’ in: S. Clegg and R. Bailey (ed.), The International Encyclopedia of Organization
Studies (2007) pp. 1.
36 Ibid, pp. 1 – 2.
37 J. Tallberg, ‘Executive Politics’ in: K. E. Jørgensen, M. A. Pollack and B. Rosamond, Handbook of European Union Politics
themselves are the product of actors that pursue ambitions through them. Hall and Taylor come to the following two conclusions regarding institutions that will guide the research in this thesis:
§ institutions will only survive as long as they provide more benefits than other equivalents or substituting arrangements; and38
§ institutions represent a voluntary agreement between the actors that participate in them.39
In the case of the EU and the IMF, this is particularly interesting, because the IMF cannot be characterized as an extension of the EU, or instance, because the majority of the IMF’s membership consists of non-EU members and, because the IMF is not bound by any of the EU treaties.40
Based on this theoretical survey of institutional theory, one could make the assumption that even prior to the financial crisis, policy distortions within EU institutions and its members were prevalent.41 Once the crisis struck, the disparity between desired and required actions by both the EC and the Member States was amplified. It is therefore not a stretch to assume that the intensified competition between the European Council and the EC during the sovereign debt crisis in the Eurozone was a drag on the decision-making process. The PA theory will serve as the primary analytical tool for the analysis of the interaction between these institutions and the IMF.
2.3. Principal-Agent Theory
The principal-agent (PA) theory was initially used in the study of new institutionalist economics. It calculated the financial costs of institutional monitoring.42 In the 1980’s American political scientists started using this model to study the PA relationship between
38 P. A. Hall and R. C. R. Taylor, ‘Political Science and the Three New Institutionalisms’, Political Studies, Vol. 44. No. 5
(1996) pp. 936.
39 Ibid., pp. 936 – 937.
40 European Council, ‘Consolidated Version of the Treaty on European Union, Provisions on the Institutions Article 13’,
Official Journal of the European Union (2012) pp. 10.
41 M. A. Pollack,‘Delegation, Agency and Agenda Setting in the Treaty of Amsterdam’, European Integration Online Papers
(EIoP) Vol. 3. No. 6 (1999) pp. 11 - 16
42 M. A. Pollack, ‘Delegation, Agency and Agenda Setting in the European Community’, International Organization Vol. 5.
federal and local levels of government. However, in order for the PA theory to be of any use to political scientists, the measuring stick of influence had to be changed. Instead of focusing on economic incentives, political scientists look at sanctions as mechanisms that determine political relationships.43
The PA theory describes the relationship between a principal and an agent. A PA relationship arises when a principal transfers or delegates authority to a third party – the agent – who is hired to act on behalf of his principal and to serve his interests.44 There is an important distinction between the delegation and transfer of authorities. Delegation is a temporary grant of authority from the principal to the agent. This authority can be revoked if the principal so desires. A transfer of authority, however, is more permanent and more difficult to revoke.45 Hence, the ‘temporary’ nature of a task should not be thought of as a unit of time, but the degree of difficulty to overturn a concession. The codification of authorities in EU treaties for example could be such a transfer, whereas the amendable Council Decisions are easier to change.
The institutional architecture of the EU allows for a similar distinction between principals and agents. Member States, acting through the European Council and the Council of Ministers – the principals – have delegated and transferred various responsibilities to the EC – the agent. Ideally, the agent only acts in the interests of its principal. However, it often happens that agents start developing interests of their own that do not always align with those of their principals. The ability of an agent to deviate from the instructions of his principal is called ‘shirking’ – a term used by Sarooshi, Tallberg and Pollack.46 Shirking creates potential
problems for the principal that are rooted in the asymmetrical distribution of information. Hence, principals are at a disadvantage when it comes to gaining full insight in the activities of their agents. To arm themselves against the exploitation by their agents, principals employ ex ante and ex post measures.
Ex ante measures are generally administrative and involve the detailed demarcation of legal competences and procedures. The legal framework thus serves as the operating mandate that defines the instructions of the agent. Nevertheless, the establishment of a legal framework is not sufficient to avoid shirking, because its interpretation is subjective. Several scholars of
43 Ibid., pp. 100 – 101.
44 M. A. Pollack,‘Delegation, Agency and Agenda Setting in the Treaty of Amsterdam’, European Integration Online Papers
(EIoP) Vol. 3. No. 6 (1999) pp. 1 – 4.
45 D. Sarooshi, International Organizations and their Exercise of Sovereign Power (Oxford University Press, 2005). 46 M. A. Pollack,‘Delegation, Agency and Agenda Setting in the Treaty of Amsterdam’, European Integration Online Papers
(EIoP) Vol. 3. No. 6 (1999) pp. 3. And: J. Tallberg, ‘Executive Politics’ in: K. E. Jørgensen, M. A. Pollack and B. Rosamond, Handbook of European Union Politics (London, 2005) pp. 10, 12, 25. And: D. Sarooshi, International Organizations and their Exercise of Sovereign Power (Oxford University Press, 2005).
the IMF and the EU have cited this as a reason for diverging crisis lending approaches.47
Additionally, legal mandates are also subject to amendments over time. The EC and the European Parliament for example gained significant competences during the Treaties of Maastricht, Amsterdam and Lisbon.48 Similarly to the legal scope, procedural obligations do little to assure unconditional compliance by an agent, especially when there are no means to make sure these procedures are followed.
Ex post measures refer to the oversight and monitoring abilities of a principal to assure agent compliance. McCubbins and Schwartz identify two types of control. Police patrol refers to the active monitoring of an agent. These controls are centrally organized by the principal and constitute active checks.49 The intensity of active controls depends on how much assurance the principal needs about the commitment of his agent. This means that the discretion/autonomy of the agent depends on how much a principal is willing to invest in order to secure compliance. Whenever the need for compliance is high, agent autonomy tends to be low. The cost of monitoring, for instance the cost of external supervisors, thus depends on the importance the principal attaches to the outcome desired. Contrary to police patrols, fire alarms constitute a passive monitoring approach. Its effectiveness relies on the reporting of shirking infractions.50 Though the monitoring costs associated with this form of oversight are lower, its effectiveness is arguably lower as well. In order to separate the passive form from the active forms of monitoring, active monitoring will from now on be referred to as ‘surveillance’, whereas fire alarms will be referred to as ‘monitoring’.
47 S. Lütz and M. Kranke, ‘The European Rescue of the Washington Consensus? EU and IMF Lending to Central Eastern
European Countries’, Review of International Political Economy Vol. 21. No. 2 (2014) pp. 316 – 317. And: S. Babb, ‘The IMF in Sociological Perspective: A Tale of Organizational Slippage’, Comparative International Development Vol. 38. No. 2 (2003) pp. 6.
48 M. A. Pollack, ‘Delegation, Agency and Agenda Setting in the Treaty of Amsterdam’, European Integration Online Papers
(EIoP) Vol. 3. No. 6 (1999) pp. 16 – 17.
49 M. D. McCubbins and T. Schwartz, ‘Congressional Oversight Overlooked: Police Patrols versus Fire Alarms’, American
Journal of Political Science Vol. 28. No. 1 (1984) pp. 165 – 179.
50 M. A. Pollack,‘Delegation, Agency and Agenda Setting in the Treaty of Amsterdam’, European Integration Online Papers
Figure: 2.1. Principal – Supervisor – Agent model:
This model demonstrates the different levels of agency as well as the potential vulnerabilities for the principal in terms of accessing informational streams. Distortions in the flow of information to the principal diminish control and influence. This may ultimately affect the policy output and performance.
Source: Composed by the author.51
Figure 2.1. provides a schematic overview of the dual PA relationships between various EU institutions. This duality refers to the double role of representatives in the European Council, because they represent their country’s national interests on the intergovernmental level – a process called uploading – but are also responsible for downloading decisions back down to the national level. This tends to create tensions because, on the one hand the principal representatives hold the EC accountable for monitoring and surveilling timely compliance, whereas on the other hand their country might refuse or procrastinate over the implementation phase as an agent.
51 This figure has been specifically designed for the purpose of this thesis and is based on secondary literature on
2.3.1. Why use Agency?
Viewed from a rational choice institutionalist perspective, the delegation of tasks to agents has several advantages to the principal. It starts with the assumption that the expected benefits of an agent outweigh the potential costs.52 Linking that to the sovereign debt crisis, one could argue that the preservation of the EMU constituted a greater benefit to Eurozone leaders than the costs of the bailout of insolvent Eurozone members.
Establishing or reinforcing credible commitment is another motive for principals to enter into a PA relationship.53 In the case of the EU one could view the relationship between the European Council (of ministers) and the EC as a PA relationship. By assigning executive authorities to the EC, European Member States are able to distance themselves from the perception of national self-interest. Moreover, the insulation of the EC from electoral pressures allows national politicians to retain a degree of policy flexibility.
The technical expertise of an agent in a specific field can also be exploited through a PA partnership. The access to unique expertise helps to narrow informational asymmetries and can improve the efficiency of governance, not merely by speeding up working processes within an organization, but also in the decision making process at the highest levels.54
Lastly, the PA relationship helps to enhance the legitimacy of contested measures, like rescuing Eurozone countries, and ensures a degree of accountability. Accountability, however, is trickier in the dual European PA model, because Member States function both as principals and agents at different levels of governance. In addition to the multiple levels of governance that influence the identity and interests of a principal or agent, post-compliance supervision is not included in the regular PA model. Hence, to conclude this chapter, the principal – supervisor – agent model has to be introduced to deal with that aspect of the EU sovereign debt crisis.
2.3.2. Principal – Supervisor – Agent
The principal – supervisor – agent (P-S-A) theory acts as a supervisory instrument to ensure post-decision compliance by the agent on behalf of the principle. The regular PA model transforms into the P-S-A model once the principal transfers (statutory powers to the supervisor that allows it to monitor the agent.55 Applied to the EU, Member Stats may be characterized
52 J. Tallberg, European Governance and Supranational Institutions – Making States Comply (Routhledge, 2003) pp. 17 – 18
and 21.
53 Ibid., pp. 19 – 20. 54 Ibid., pp. 19. 55 Ibid., pp. 6 – 7.
both as principals and as agents depending on the context in which they operate. They are principals in that they have delegated authority to EU institutions, most notably the EC, to act on their behalf. Yet they become agents once policies adopted by the EU have to be implemented at a national level. The role of the EC then becomes that of a supervisor. The main purpose of this concept is to limit agency shirking. Nevertheless, eliminating agency shirking completely is impossible as Tallberg explains:
Engaging the Commission and the Court as supervisors […] does not solve the problem of shirking per se. Rather, it replaces governments’ concern with one form of shirking – state noncompliance – with another – supranational influence.56
This observation also reveals another area of friction, namely the institutionally built-in potential for a conflict of built-interest between supervisor and prbuilt-incipal turned-agent. In relation to the sovereign debt crisis, it can be argued that the EC, in its roles as executive and supervisor, wears two hats. Whereas the EC is responsible for the initiation and implementation of EU policy, it also carries the burden of supervising the implementation by its members. Throughout the sovereign debt crises in Greece, Ireland and Portugal, the EC has had the difficult task of keeping countries in the EMU, whilst ensuring the implementation of unpopular austerity measures and reforms by their respective national governments. Member state noncompliance, or the inability to meet reform criteria, thus posed a significant threat to the unity of the EMU, placing the EC in a difficult supervisory position, because a negative outcome of an audit could have led to the exit of the country concerned out of the Eurozone, which in turn could have triggered the collapse of the single currency project. It is possible that members on the European Council foresaw and feared this conflict of interest and therefore demanded the involvement of the IMF as external supervisor. This will form an important line of inquiry later on in this thesis.
The last source of potential conflict that the P-S-A model helps to reveal, is that of institutional collusion.57 P-S-A theory acknowledges that both agents and supervisors can have
different agendas that might conflict with the agenda of the principal. In European affairs, the threat of collusion and the ensuing distortion of information flows to the principal is extensive. In addition to the heavy reliance of EU institutions on sub-bodies, the diversity and loyalty of
56 Tallberg, ‘Supranational Influence in EU Enforcement: the ECJ and the Principle of State Liability’, Journal of European
Public Policy Vol. 7. No. 1 (2000) pp. 107.
57 D. Hodson, ‘The IMF as a de facto Institution of the EU: a Multiple Supervisor Approach’, Review of International Political
staff members within these institutions is not bound solely to the EU. Therefore, it is not self-evident that they will, under all circumstances, act in the interest of their institutional principal.
2.4. Concluding Remarks
This chapter started with a brief historic overview of European integration theory and served two purposes. First, it traced the theoretical roots of the P-S-A model, embedding it in the broader context of theoretical discourse and providing the necessary background against which its usefulness is best revealed. Secondly, it served to justify the choice for the P-S-A model by demonstrating the bias and limitations of earlier forms of integration theories. The second and third sections of this chapter subsequently elaborated on the use of the (dual) P-S-A theory and the necessity to involve an additional supervisor. The next chapter uses this theory to determine whether it is possible for an independent international financial organization to become a ‘de facto agent’.
III. Merging Universes
3.1 Introduction
The financial crisis that started in 2008 marked a turning point in the relationship between the EU and the IMF. Prior to these events, both institutions existed in parallel universes, separated by their own rules, operating procedures and interests. This changed once European Area Member States (EAMSs) were forced to seek external financial support from the IMF.58 As the crisis intensified, more EAMSs turned to the IMF for additional financial support. Since the IMF provided financial assistance to the central banks of the UK and Italy in the nineteen-seventies, it had not been so embroiled in European affairs. Some scholars have expressed the view that the financial crisis has turned the IMF into a ‘de facto agent’ of the EU to keep an extra eye on Europe’s financial stability.59 This chapter will analyze the validity of that statement by answering three questions.
§ Is it possible for an independent international organization like the IMF to become a ‘de facto agent’ of the EU? Intuitively many would argue that categorizing an autonomous international financial organization as part of the EU does not make sense. However, this section will demonstrate that the answer to this question is not as straightforward as it appears at first glance.
§ The second question asks how the EU coordinated, cooperated and implemented budgetary and fiscal policies prior to the financial crisis. It will argue that the EU and IMF were living in parallel universes until the 2008 financial crisis struck.
§ The third section of this chapter will address to what extent the activities of the EU and the IMF have merged during the financial crisis and how this has changed their relationship.
Whereas this chapter tries to answer how the IMF became so deeply involved, chapters IV and V will discuss why this happened.
58 Throughout this chapter, EU members will be referenced to as ‘European Area Member States (EAMSs). This is to avoid
confusion between EU and IMF members. EAMSs include both participants in the EMU and those that have not yet adopted the Euro.
59 D. Hodson, ‘The IMF as a de facto Institution of the EU: a Multiple Supervisor Approach’, Review of International Political
3.2. Exploring the Parameters of IMF-EU Agency
For there to be a PA relationship of any kind, there has to be a transfer or delegation of policy authorities from the principal to the agent. The European Council serves as the principal in this case, because it is the main decision-maker in the EU. The EC on the other hand can be described as the Council’s primary agent. The EC serves as the enforcer and monitor of Council decisions.60 In addition to the EC, the EU employs a wide range of other agents in various
policy sectors. Some of these organizational bodies are formally recognized as part of the EU, whereas others are not. Article 13 of the Treaty on the European Union (TEU) lists all recognized institutions of the EU.61 The IMF is not on that list. This does not rule out, however, that under certain circumstances the IMF may be characterized as a ‘de facto agent’ of the EU. This thesis investigates whether the circumstances and conditions in which the IMF operated justify that characterization.
The TEU is ambiguous in its definition of what constitutes a body of the EU or what the threshold for involvement is before it is counted as one. Recent history has demonstrated on several occasions that new ‘official’ institutions of the EU ‘emerge’ even before they legally exist. There have been numerous cases where organizations acting outside the formal framework of EU treaties, have assumed agent responsibilities prior to their formal incorporation in the EU framework. The European Council itself is a product of this process. During a 1974 summit in Paris, heads of state and heads of government agreed that instead of occasional meetings, they should meet regularly in order to ‘ensure progress and overall consistency’ of the European project.62 As a result, regular informal meetings between heads of state and heads of government started to take place. Though the initial kamingesprächen (fireside talks) had no legal basis, they proved influential in shaping European politics and its institutions.63 Moravcsik explained the emergence of the European Council therefore as an intergovernmental body explicitly designed to limit the power of supranational institutions.64
In retrospect it is debatable whether that statement holds true. Though the European Council would eventually evolve into the primary European decision-making authority, the
60 H. Wallace, ‘An Institutional Anatomy and Five Policy Modes’, in H. Wallace, M. A. Pollack and A. Young: Policy-making
in the European Union, 6th edition (Oxford, 2010) pp. 71.
61 European Council, ‘Consolidated Version of the Treaty on European Union, Provisions on the Institutions Article 13’,
Official Journal of the European Union (2012) pp. 10.
62 P. de Schoutheete and H. Wallace, ‘The European Council’, Groupement d’études et de Recherches Notre Europe No. 19
(2002) pp. 3.
63 Ibid, pp. 3.
64 A. Moravcsik, The Choice for Europe: Social Purpose and State Power from Messina to Maastricht (London & Ithaca, NY.
fact that it was not officially recognized as part of the institutional framework of the Single European Act in 1987 suggests that its political dominance only emerged effectively at a later stage. Meanwhile, EU Member States ceded substantial authorities to the EC.65 Only in 2009 was the European Council formally enshrined in the Treaty of Lisbon, endowing it with formal authorities within the European institutional framework. The Eurogroup evolved in a similar fashion as an offshoot of the Eurozone Ministers of Finance. This group of finance ministers also started to meet informally in 1997 and was also recognized by the Treaty of Lisbon in 2009.66
But this does not yet answer the question under what circumstances one may classify the IMF as a de facto agent of the EU. It only demonstrates that the EU institutional framework is in constant movement and subject to changes that are by no means minor. Yet, there remains a big difference between the European Council, the Eurogroup and the IMF that has to be reconciled. Whereas the former two bodies are ‘de novo bodies’ whose existence was shaped by and in the service of their Member States, the IMF is an ‘autonomous’ international organization with its own legal mandate. The purpose and mandate of the IMF is not geared to facilitating the EU. Moreover, the EU is not a member of the IMF, making it difficult for the EU to cast the IMF into the role of an agent.
So if the IMF has its own agenda, how then can one construe its relationship with the EU after the outbreak of the Eurozone crisis in terms of a PA relationship? Luckily there is a precedent of an institution that also has an autonomous legal identity, but that is argued to now play a structural supervisory role in European legal affairs. The institution in question is the European Court of Human Rights (ECHR) based in Strasbourg.67 Scholars have argued that
the European Court of Justice does not only draw its legitimacy from European Convention case law, but also in large part from the decisions produced by the ECHR.68 The structural nature of this practice has thus resulted in a ‘de facto relationship’ between the EU and the ECHR in which the ECHR may be viewed as serving as a supervisory legal body to the European Court in human rights matters.69 Though there is not much evidence to support the claim of a P-S-A relationship with the IMF prior to the financial crisis, after 2008, Council
65 P. de Schoutheete and H. Wallace, ‘The European Council’, Groupement d’études et de Recherches Notre Europe No. 19
(2002) pp. 6 – 8.
66 Treaty of Lisbon, ‘Protocol on the Eurogroup Article 1 and 2’ (2009) pp. 153.
67 D. Hawkins and W. Jacoby, ‘Agent Permeability, Principal Delegation and the European Court of Human Rights’, The
Review of International Organizations Vol. 3. No. 1 (2008) pp. 4 – 9.
68 T. Horseley, ‘Subsidiarity and the European Court of Justice: Missing Pieces in the Subsidiarity Jigsaw?’, Journal of
Common Market Studies Vol. 50. No. 2 (2011) pp. 268 – 271.
69 N. Shuibhne, ‘The European Court of Justice’, in: J. Peterson and M. Shackleton, The Institutions of the European Union
