EU institutional reforms in reaction to the Euro crisis present us with a puzzle. While supervision of the most important Eurozone banks has been delegated entirely to the ECB, there has hardly been any delegation of power in fiscal policy. In fact, the Single Supervisory Mechanism (SSM) of the ECB is highly integrated as it introduces more precise and more enforceable rules, and greatly centralises decision making and parliamentary control at the European level. In fiscal policy, precision and enforceability of Eurozone rules is low, and decision making and parliamentary control has remained largely national.
While an array of explanations already exist, few have focussed on accounting for this stark difference in institutional design. I argue that this variation can be explained by the difference in types of public goods provided by the two institutions. Banking system stability has the characteristics of an excludable network good with strong centripetal effects. These make member states more prone to agree to the introduction of precise, enforceable rules and a centralisation of authority. Member state differences in fragmentation of banking systems, amounts of publicly relevant foul debt or the size of material liabilities can compromise these effects, yet did not fundamentally affect both the agreement on banking union of 2012 nor the establishment of SSM in 2013.
In contrast, fiscal stability has the characteristics of a common pool good, which is non-excludable and rival in consumption, producing centrifugal effects on member states. This explains the low degree of precision, enforceability and centralisation. Admittedly, centrifugal effects are much weaker for surplus countries than for deficit countries, which can always block further integration in fiscal policy due to voting rules in the Council.
In this paper, I derive detailed empirical implications from public goods theory to explain institutional design in the post-crisis EU.
