Tangled governance : international regime complexity, the troika, and the Euro crisis

This book addresses the institutions that were deployed to fight the euro crisis, re-establish financial stability, and prevent contagion beyond Europe. It addresses why European leaders chose to include the International Monetary Fund and provides a detailed account of the decisions of the institutions that make up the “troika” (the European Commission, European Central Bank, and IMF). The study explains the institutions’ negotiating strategies, the outcomes of their interaction, and the effectiveness of their cooperation. It also explores the strategies of the member states, including Germany and the United States, with respect to the institutions and the advantages they sought in directing them to work together. The book locates the analysis within the framework of regime complexity, clusters of overlapping and intersecting regional and multilateral institutions. It tests conjectures spawned by that literature against the seven cases of financial rescues of euro-area countries that were stricken by crisis during 2010–15. The book concludes that regime complexity is the consequence of a strategy by key states to control “agency drift.” States mediate conflicts among institutions, through informal as well as formal mechanisms, and thereby limit fragmentation of the regime complex and underpin substantive efficacy. In so doing, the book answers several key puzzles, including why (a) Germany and other northern European countries supported IMF inclusion despite substantive positions opposed to their economic preferences, (b) crisis-fighting arrangements endured intense conflicts among the institutions, and (c) the United States and the IMF promoted further steps to “complete” the monetary union. Cover 1 Tangled Governance: International Regime Complexity, the Troika, and the Euro Crisis 4 Copyright 5 Dedication 6 Acknowledgments 8 Contents 12 List of Figures 14 List of Tables 16 List of Abbreviations 18 1: Introduction 20 Moment of Truth 20 Debate Over Crisis Response 22 Tangled by Design? 26 Puzzles and Questions 31 Organization of the Book 33 2: Regime Complexity and Main Argument 35 Regime Complexes and Complexity 35 Genesis and Scope 35 Concepts and Definitions 38 States and Institutions 39 State Strategy 42 Informalism and Coordination 43 Cooperation and Conflict 45 External Actors and European Integration 46 Design of the Study 47 Main Arguments 51 3: Dramatis Institutiones 56 European Council and Eurogroup 56 Rules and Principles 58 Strategic Challenges 60 European Commission 60 Rules and Principles 62 Strategic Challenges 64 European Central Bank 64 Rules and Principles 65 Strategic Challenges 67 International Monetary Fund 68 Rules and Principles 71 Strategic Challenges 73 Divergence 74 4: Euro Crisis in a Nutshell 75 Origins and Diagnosis 75 Financial Conditions 77 European Governments Respond 80 European Central Bank Responds 85 Muddling Through and Architectural Reform 88 Foreshocks: Central and Eastern Europe 91 5: Greece 2010 95 Contentious Path to Rescue 95 January 2010 Stability Program 96 Opposition to the IMF 98 Bringing in the IMF 100 The First Program 103 IMF Analysis and Decision 105 Common Facilities 110 EFSM and EFSF 110 Securities Market Programme 111 German Preferences and Strategy 112 Why Not the World Bank? 116 Key Observations 118 6: The Troika, Ireland, and Portugal 120 Complex and Conflict 120 Program Financing 125 Fiscal Adjustment 126 Bank Deleveraging and Recapitalization 127 Private-Sector Involvement 127 Structural Reform 128 Ireland 129 Path to the Program 130 Eurogroup and Bank Exposure 133 Prominence of the ECB 134 Conflict among the Institutions 138 Exit from the Program 139 Portugal 141 Program Negotiations and Outcome 143 Implementation 145 Exit from the Program 146 Key Observations 148 7: Spain and Italy 150 Contrasts 150 European Central Bank Demands Reform 151 Euro Leaders Demand Reform 153 Government Transitions 155 Spain ́s Financial Sector Program 156 Role of the IMF and Cross-Conditionality 158 Getting Ahead of the Curve, Finally 161 Spain Exits 162 Italy Escapes 163 Sources of Variation on the Troika 164 8: United States and International Monetary Fund 167 Preferences and Instruments 168 Initial Strategy 171 Revised Strategy 173 European Firewalls 174 Wroclaw Ecofin 175 Cannes 176 Lagarde ́s Firewall 177 Harnessing the European Central Bank 179 Advocacy of Euro Deepening 180 U.S. Advocacy 180 IMF Advocacy 183 Closing Observations 184 9: New Facilities and Institutions 186 Evolution of Euro-Area Facilities 186 Transitional Facilities 186 Permanent Mechanism 188 Intergovernmentalism 190 Role of the IMF 193 New Kid on the Block 196 Reviews of the Troika and Proposals for Reform 198 10: Greece 2012 and Cyprus 2013 203 Greece 2012 203 Second Program and Debt Restructuring, 2011-2012 204 Recommitting to the Euro, Summer 2012 207 German Elections and Official Sector Involvement 208 Conflict over Debt Restructuring 209 Cyprus 212 Choosing Institutions 213 Debacle over Insured Deposits 215 Completion and Exit 218 Key Observations 219 11: Greece, the Crisis Continues 220 Syriza Takes Control 220 Disputes Within the Troika 224 Governments Negotiate 228 Peering Again into the Abyss 231 Greek Referendum 232 Threat of Grexit 233 Third Program 234 Dueling Debt Analyses 236 Protracted First Review 240 Love-Hate Triangle 240 ``Dynamite with a Lighted Candle ́ ́ 241 Debt Showdown, Spring 2016 243 Viability of the Program 247 Key Observations 249 12: Lessons and Conclusions 252 Explaining the Institutional Mix 253 Complexity for Control 258 Is German Power at Work? 262 Consequences of the Choice of Institutions 264 Conflict with Cooperation 265 Preparing for the Next Crisis 266 Fiscal Union 268 European Monetary Fund 269 Incremental Institutional Change 270 International Monetary Fund 272 Organizing Regime Complexes 273 Research Agenda on Institutions and Complexity 276 Bibliography 288 Index 304 'tangled Governance' Addresses The Institutions That Were Deployed To Fight The Euro Crisis, Re-establish Financial Stability, And Prevent Contagion Beyond Europe. The Author Addresses Why European Leaders Chose To Include The Imf And Provides A Detailed Account Of The Decisions Of The Institutions That Make Up The 'troika' (the European Commission, Ecb, And Imf). He Explains The Institutions' Negotiating Strategies, The Outcomes Of Their Interaction, And The Effectiveness Of Their Cooperation. The Book Also Explores The Strategies Of The Member States, Including Germany And The United States, With Respect To The Institutions And The Advantages They Sought In Directing Them To Work Together. The Book Locates The Analysis Within The Framework Of Regime Complexity And Clusters Of Overlapping And Intersecting Regional And Multilateral Institutions. It Tests Conjectures Spawned By That Literature Against The Seven Cases Of Financial Rescues Of Euro-area Countries That Were Stricken By Crisis During 2010-2015. 'tangled Governance' Concludes That Regime Complexity Is The Consequence Of A Strategy By Key States To Control 'agency Drift'. States Mediate Conflicts Among Institutions, Through Informal As Well As Formal Mechanisms, And Thereby Limit Fragmentation Of The Regime Complex And Underpin Substantive Efficacy. In So Doing, The Book Answers Several Key Puzzles, Including Why (a) Germany And Other Northern European Countries Supported Imf Inclusion Despite Substantive Positions Opposed To Their Economic Preferences, (b) Crisis-fighting Arrangements Endured Intense Conflicts Among The Institutions, And (c) The United States And The Imf Promoted Further Steps To 'complete' The Monetary Union. Introduction -- Regime Complexity And Main Argument -- Dramatis Institutiones -- Euro Crisis In A Nutshell -- Greece 2010 -- The Troika, Ireland, And Portugal -- Spain And Italy -- United States And International Monetary Fund -- New Facilities And Institutions -- Greece 2012 And Cyprus 2013 -- Greece, The Crisis Continues -- Lessons And Conclusions. C. Randall Henning. Includes Bibliographical References (pages 269-283) And Index. Tangled Governance addresses the institutions that were deployed to fight the euro crisis, reestablish financial stability in Europe, and prevent contagion to the rest of the world. Henning explains why European leaders chose to include the International Monetary Fund (IMF) in the crisis response and provides a detailed account of the decisions of the institutions that make up the troika (the European Commission, European Central Bank, and IMF). He examines the institutions negotiating strategies, the outcomes of their interaction, and the effectiveness of their cooperation. The institutional strategies of key member states, including Germany and the United States, are also explored in this study. The book locates its analysis within the framework of regime complexity, involving clusters of overlapping and intersecting regional and multilateral institutions. It tests conjectures in the regime-complexity literature against the seven cases of financial rescues of euro area countries that were stricken by crises between 2010 and 2015. Tangled Governance concludes that states use some institutions to control others, that complexity is the consequence of a strategy to control agency drift. States mediate conflicts among institutions and thereby limit fragmentation of the regime complex and underpin substantive efficacy. In reaching these conclusions, the book also answers several key puzzles, including why Germany and other northern European countries supported IMF inclusion despite its adopting positions opposed to their preferences; why crisis fighting arrangements endured intense conflicts among the institutions; and, finally, why the United States and the IMF promoted further steps to complete the monetary union. Tangled Governance addresses the institutions that were deployed to fight the euro crisis, re-establish financial stability, and prevent contagion beyond Europe. The author addresses why European leaders chose to include the IMF and provides a detailed account of the decisions of the institutions that make up the 'Troika' (the European Commission, ECB, and IMF). He explains the institutions' negotiating strategies, the outcomes of their interaction, and the effectiveness of their cooperation. The book also explores the strategies of the member states, including Germany and the United States, with respect to the institutions and the advantages they sought in directing them to work together. The book locates the analysis within the framework of regime complexity, clusters of overlapping and intersecting regional and multilateral institutions. It tests conjectures spawned by that literature against the seven cases of financial rescues of euro area countries that were stricken by crisis during 2010-2015. Tangled Governance concludes that regime complexity is the consequence of a strategy by key states to control 'agency drift'. States mediate conflicts among institutions, through informal as well as formal mechanisms, and thereby limit fragmentation of the regime complex and underpin substantive efficacy. In so doing, the book answers several key puzzles, including why (a) Germany and other Northern European countries supported IMF inclusion despite substantive positions opposed to their economic preferences, (b) crisis-fighting arrangements endured intense conflicts among the institutions, and (c) the United States and the IMF promoted further steps to 'complete' the monetary union.