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Moral hazard, EU central bankers, and Banking Union: Professional dissensus and the politics of European financial system stability

Elites
Governance
Political Economy
Communication
Comparative Perspective
Power
Empirical
Eurozone
Laura Pierret
European University Institute
David Howarth
University of Luxembourg
Laura Pierret
European University Institute

Abstract

The creation of European Banking Union is a response to the financial crisis that began in 2007 and the subsequent sovereign debt crisis in the euro area. Moral hazard, commonly understood as the positive effect of limited liability on risk-taking behaviours, has been frequently described as a major cause of these crises. By syllogism, one could argue that Europe’s banking union is a response to moral hazard. Yet, moral hazard was an acknowledged and supposedly managed problem prior to these events. Paradoxically, the concern with moral hazard appears to have justified over time both the opposed policy options of ‘no substantial competence’ and ‘explicit responsibility’ of the European Central Bank (ECB) for the stability of the European financial system. To address this puzzle, this paper investigates the role of ideational power (Carstensen and Schmidt 2016). This contribution argues that the ambiguity of the concept and the lack of precise empirical knowledge about the phenomenon present an opportunity for actors to influence other actors’ beliefs about moral hazard and achieve negotiated policy outcomes in line with specific interests. This paper will examine how policy makers of the Bundesbank and the ECB understand and make use of moral hazard. Applying (quantitative and qualitative) text analysis techniques, the empirical research aims to identify meanings of moral hazard and related discursive strategies. In doing so, this contribution seeks not only to help explain major German and ECB disagreements on the institutional design of Banking Union but also to challenge those who assign a purely technical and objective nature to the concept of moral hazard. More generally, this paper serves to inform the state of the ideational consensus among European central banks and offers a chance to assess the contemporary influence of the Bundesbank in shaping domestic negotiating positions on economic and monetary union.