In Europe we trust: selecting and empowering EU institutions in disruptive circumstances

ABSTRACT

Over the past decade, the European Union (EU) made significant strides in economic and fiscal policy integration without formal treaty-based changes. After the euro crisis, member states granted the European Central Bank banking supervisory powers. During the pandemic, they entrusted the European Commission with raising EU debt through NextGenerationEurope. This article examines the empowerment of supranational institutions as a deliberate ajustment to disruptive circumstances. By so doing, it demonstrates that empowerment can happen through legislative acts and joint decisions by member states. The study reveals that when states have multiple agent options, like in the banking union, they select the institution they trust the most. Conversely, in nested delegation games, extensive monitoring and reporting requirements, as in the case of NextGenerationEurope, are aimed at avoiding the defection of single member states, what we call ”principal slack”, at the implementation stage.

KEYWORDS:

• European Commission
• European central bank
• empowerment
• delegation
• COVID-19 pandemic

Introduction

In the context of disruptive circumstances, member states of the European Union (EU) delegated substantial competencies in economic and fiscal policy to supranational institutions without formal treaty-based changes. Member states extensively empowered with banking supervisory authority the European Central Bank (ECB) after the sovereign debt crisis without changing the ECB’s mandate. However, the creation of the European Banking Union (EBU) and allocation of competencies to the ECB for banking supervision and resolution were formal and explicit, turning the ECB into a supervision ‘centre of gravity’ (Draghi 2012a). During the pandemic, member states explicitly entrusted the European Commission (henceforth, the Commission) with raising EU debt in financial markets, transforming it into a big lender in the sovereign bond market. Certainly, the Commission already had borrowing powers since the oil crisis in the 1970s. However, the NextGenerationEU (NGEU) program significantly strengthened these borrowing powers by empowering the Commission to raise up to €750 billion and redistribute it in the form of grants and loans to member states through the new Recovery and Resilience Facility (RRF) instrument. This raises the questions of why and how the empowerment of the ECB and Commission occurred without treaty-based changes.

To answer these questions, this study demonstrates that the empowerment of supranational institutions through legislative acts and joint decisions by member states was a deliberate adjustment to disruptive circumstances. In so doing, this article presents a more nuanced perspective on empowerment by embracing a scale of delegation in which member states (principals) can select the more suitable agent to fulfil specific tasks or choose a delegation design with extensive monitoring and reporting requirements to avoid slack of single principals at the implementation stage. The new term ‘principal slack’ refers to single principals out of the collective principal defecting from agreed rules.

Existing studies on the EBU and COVID-19 pandemic embraced predominantly an intergovernmental, supranational, and historical institutionalist perspective. The EBU literature has examined member states’ preferences by resorting to the domestic features of banking sectors (Howarth and Quaglia 2016; Spendzharova 2014), role of transnational actors (Epstein and Rhodes 2016), politics behind its creation (Donnelly 2014, 2018; Howarth and Quaglia 2013; Howarth and Schild 2020; Quaglia 2013, 2019; Rios Camacho 2021; Skuodis 2018), (neo-) functionalist dynamics of these reforms (Glöckler, Lindner, and Salines 2017; Jones, Kelemen, and Meunier 2016; Quaglia and Verdun 2023a), and influence of EU institutions (De Rynck 2016; Dehousse 2016; Nielsen and Smeets 2018). The emerging literature on the pandemic has conceptualized this disruptive event through the lens of historical institutionalism as a critical juncture (Schmidt 2020) to explain macroeconomic policy coordination (D’Erman and Verdun 2022), policy change (Wolff and Ladi 2020), and the European Semester as the main institutional vehicle of the RRF (Vanhercke and Verdun 2022). Other studies rooted in supranationalism investigate the leadership role of the Commission (Kassim 2023), crisis manager role of the European Council (Schramm and Wessels 2023; Wessels, Schramm, and Kunstein 2022), and how European institutions responded more generally to the pandemic (Boin and Rhinard 2023; Quaglia and Verdun 2023b; Tesche 2022; Truchlewski, Schelkle, and Ganderson 2021). Intergovernmental studies, in turn, examine member states’ preferences during the NGEU negotiations. For example, Becker (2023) shows that Germany’s hesitancy was a function of its role as a status quo power. In addition, Krotz and Schramm (2022) demonstrate that bilateral leadership between Germany and France, what they call ‘embedded bilateralism’, was crucial in enacting the RRF. Other studies focus on the impact and implications of NGEU (de la Porte and Heins 2022; Schramm, Krotz, and De Witte 2022), the NGEU and EU recovery fund as a new paradigm of economic governance (Buti and Fabbrini 2023; Fabbrini 2022), and role of public opinion (Bauhr and Charron 2023) and that of economic and social actors (Vanhercke et al. 2021).

This article advances this debate by introducing a delegation perspective to the study of the EBU and NGEU. It focuses on why and how formal non-treaty-based empowerment of supranational institutions occurred in disruptive circumstances. As such, this study makes four contributions to the literature. First, we introduce a concept of empowerment that refers to the delegation of power to European institutions, which can happen through a scale of change that encompasses European treaties (primary law), EU legislative acts (regulations and directives), and joint decisions. We show that power transfers to supranational institutions can go beyond the initially foreseen mandate, but without treaty changes. The delegation of power happens through legislative acts or joint decisions to solve pressing problems without the need to recur to lengthy ratification procedures with an uncertain outcome. Second, inspired by Heldt and Schmidtke (2017) the study delves into three components of formal empowerment: tasks delegated to supranational institutions, the scope and intrusiveness of issue areas in which European institutions exercise power, and their staff and financial capabilities. Empowerment leads to the transfer of new competences, widening or deepening the scope of issue areas (and mandates), alongside the transfer of budgetary and staff resources. Third, this study contributes to the delegation literature. The two case studies enable us to investigate agent selection at the EU level (the case of the ECB) and a nested delegation game between member states and the Commission (the NGEU case). In terms of agent selection, it is rare in the EU to have multiple agents that can fulfil the same tasks, with principals assessing the suitability of such agents. The nested delegation game is an interesting case of a) crafting a contract on the amount, format, and system under which the EU can borrow; b) deciding under which conditions this money can be spent by member states; and c) establishing by whom and how the new system will be monitored. Finally, this study draws on vast empirical material including primary sources from the EU such as documents from the Commission, European Council, Council of the EU, and ECB, as well as from European news agencies Euractiv and Agence Europe. More important, we conducted 23 semi-structured interviews with EU officials from the Council, Commission, and ECB and representatives from member states.¹

This article proceeds as follows: the next section conceptualizes the empowerment of EU institutions from a delegation perspective. This is followed by a section exploring the principal components of supranational institutions’ power to unpack the dynamics of empowerment in two different cases of delegation design. Next, we investigate the two cases of empowerment in practice. Whilst the first case delegation design exemplifies a case of allocation of competencies to the ECB in the EBU, the second case zooms into a nested delegation game between member states and the Commission in the NGEU. Finally, we summarize the findings and outline their implications for EU governance.

Empowering European institutions from a delegation perspective

Major theoretical approaches have been applied to explain incremental changes in EU institutions between treaty changes in past crises, notably historical institutionalism and neo-functionalism (Jones, Kelemen, and Meunier 2016, 2021; Pollack 2019; Verdun 2015). In addition, scholars have widely used the principal-agent approach to investigate situations where member states (principals) delegate authority to supranational organizations (agents) (Graham and Serdaru 2020; Hawkins et al. 2006; Heldt et al. 2022; Pollack 1997). By doing so, the collective principal (the Council of the EU) empowers agents – supranational institutions such as the Commission or the ECB – to perform specified tasks on its behalf.

The delegation contract between principals and agents specifies the types of tasks the latter are expected to perform and the scope of issue areas where these tasks are to be performed. Delegation in EU governance can take two forms: agency and fiduciary relations (Alter 2006; Majone 2001). While principals decide to delegate power to agents to reduce transaction costs, trustees are established when there are credibility problems. In the first case, principals have homogenous preferences and wish to improve efficiency in decision making. However, in the last case, principals have heterogeneous preferences and need a trustee to enhance the credibility of their commitments (Majone 2001). We expect that member states (principals) empower the Commission and ECB (trustees) to enhance credible commitment problems in disruptive circumstances.

The delegation of power to agents and trustees is characterized by three components. First, trustees are empowered by principals and expected to act according to their professional norms and integrity. Second, member states entrust them with a high range of discretion to fulfil their mandates. Third, trustees are empowered to decide on behalf of collective principals according to their best expertise and specialized knowledge (see also Alter 2008). In a fiduciary relationship, principals empower trustees with a vague and discretion-based delegation mandate. This means that principals merely define their goals; they do not specify what actions trustees must take to fulfil their assigned mandate (Hawkins et al. 2006). Abbott et al. (2020) underline that this delegation design affords trustees a high degree of discretion and specialization. This also means there is a trade-off between competence and control. Therefore, fiduciary relations involve a high degree of discretion and independence to the detriment of accountability mechanisms.

To explain the empowerment process of EU institutions and choice of various delegation models, the next section presents a more nuanced approach to empowerment that explores three components of delegated power: the tasks delegated to supranational institutions by member states, scope and intrusiveness of issue areas where supranational institutions perform these tasks, and staff and financial capabilities that underpin their work.

Principal components of European institutions’ power

The extensive literature on European integration provides few insights into EU institutions’ financial and staff capabilities. Thus far, studies focus on formal rules and treaty changes, specifying their competences and issue scope in specific policy areas (for an exception, see Börzel 2005). However, the capability of European institutions to perform tasks has received considerably less attention. Therefore, our study adds financial and staff capabilities as the third component that formally empowers supranational institutions. We assume that European institutions are powerful when they perform a broad set of tasks, can carry out these tasks in domestically intrusive issue areas, and possess the necessary financial and staff capabilities to perform these tasks (see also Heldt and Schmidtke 2017).

The types of tasks delegated to the EU level are a principal component of delegation design. Besides the early neo-functionalists (see Lindberg and Scheingold 1970; Schmitter 1970), Börzel (2005) was among the first to systematically map out the centralization of the EU’s tasks, combining the pooling of sovereignty with delegation of power to supranational institutions. Franchino (2001, 2007) and Pollack (2003) measured delegation and the discretion of the Commission using two indicators: the delegation ratio and procedural constraints. We expect supranational institutions to become more powerful when more tasks are delegated to them and when these tasks become more intrusive. The second component of power, namely issue scope, also matters to understand the empowerment of supranational institutions.

Issue scope refers to the areas in which supranational institutions can operate. For example, Börzel (2005) coded 18 issue areas to analyse the issue scope of the EU and investigate the procedures by which policy decisions are taken at the European level. In this study, we assume that when the number of issue areas delegated to EU institutions increases and the type of issue area becomes more intrusive, the institutional power of these institutions is more likely to increase (see also Heldt and Schmidtke 2017). However, the exclusive focus on these formal components comes at a substantial cost. Doing so neglects the fact that exercising power over a set of actors requires a bureaucratic staff that is sufficiently well-equipped to execute general mandates and implement specific policies. To implement rules and programs, the staff of EU institutions must also have sufficient financial resources at their disposal. This brings us to the third component of EU institutions powers.

Capabilities refer to the financial and human resources available to European institutions. Regardless of which tasks are delegated to supranational institutions and how broad their scope of application is, the performance of any task by European institutions requires personnel and financial resources (Heldt and Schmidtke 2017). These basic resources are essential for supranational institutions to fulfil their mandates.

Delegation studies examine what EU institutions do with their power, how they seek to expand their resources and competencies, and whether they sometimes act in a way unintended by their masters – what is commonly referred to in the literature as agency slack (Heldt et al. 2022). Most studies focus on the formal process of delegation (Graham and Serdaru 2020; Pollack 1997). However, they leave aside the choice of a delegation model with the possibility of agent selection and different types of control mechanisms in the post-delegation stage to ensure principals comply with the agreed rules. The next section elaborates the two delegation designs that empowered two supranational institutions in variegated ways.

Empowering EU institutions: agent selection and nested delegation games

Empowerment refers to the formal process of transferring specific competences, tasks, and resources to EU institutions over time. This can occur through formal treaty changes, new EU legislation (e.g. directives or regulations), and joint decisions. Treaty (primary law) change is not a prerequisite for formal empowerment to take place.

The delegation literature has extensively studied formal acts of power delegation. Héritier (2015) asserts that the European integration process is driven by ‘covert integration’, which means that the powers delegated to the EU extend beyond what the treaties prescribe. She shows that five mechanisms – general commitment, external contracts, delegation to independent regulators, soft modes of governance, and regulatory venue shopping (Héritier 2015, 355–358) – deepen integration. Delreux and Adriaensen (2018) point out that over time, most of the principal-agent scholarship has shifted its analytical prism from macro delegation (power delegation from the national to supranational level) to micro delegation (power delegation between EU bodies such as agencies).

This study contributes to this literature by introducing a more nuanced definition of empowerment that refers to the transfer of power and capabilities (financial and human resources) beyond the initially foreseen formal delegation mandate. This can occur outside treaty changes through regular EU legislation and decisions. Empowerment entails adding new tasks to the portfolios of supranational institutions, extending the issue areas in which European institutions’ tasks are performed, and increasing staff and financial capabilities without changing their formal treaty-based delegation contract. Here, we show that empowerment can be dynamic and occur suddenly. Empowerment results from pressing problems, can happen within a few months only, and leads to transfers of power that extend beyond the initially foreseen mandate of European institutions. The delegation of power happens through legislative acts or joint decisions. For example, the empowerment of the ECB in the context of the banking union was codified in the Official Journal of the EU. The same holds for the Commission in the context of NGEU, whose competencies in monitoring national plans are codified in the Official Journal, as we demonstrate in the empirical sections of the article. Member states use legislative acts and informal political change to overcome formal treaty gaps by using existing EU institutions instead of creating new ones. The formal delegation of powers to EU institutions in the relevant EU treaties is complemented by delegation through legislative acts. The latter is an important instrument to enable intergovernmental consensus, circumvent the unanimity and ratification traps, and quickly adapt to new disruptive circumstances.

Our two case studies illustrate two delegation situations in the EU. The first case study focuses on the delegation design and scope of empowerment of the ECB, which allocated it more competencies on banking supervision and resolution. The case illustrates how and why member states decided to select a trusted agent with EU-wide banking supervisory powers. In the EU, having multiple agents that can fulfil the same tasks and member states assessing the suitability of such agents is unique. In the first case, agent selection was at the core of the delegation design.

The second case study on the empowerment of the Commission in the context of NGEU is a nested delegation game between member states and the Commission. The choice of the delegation design, namely a contract specifying the scope of authority delegated to the agent, instruments permitting the agent to carry out its tasks, and types of monitoring and reporting mechanisms regarding the agent’s actions, can increase or decrease the range of discretion conferred to agents. Delegation theory predicts that the more authority delegated and the firmer and more centralized the control mechanisms are, the less likely it is that agency losses will occur (Graham and Serdaru 2020; Hawkins et al. 2006; Heldt et al. 2022). Our contribution demonstrates that the rationale behind monitoring and reporting requirements equally applies to single principals. In delegation designs, member states want to avoid slack (and defection) of single principals from agreed rules; thus, they agree to transfer extensive scrutinization powers to supranational institutions. We now turn to the specific delegation design of the EBU and NGEU program.

Empowering EU Institutions in practice

In the context of two disruptive circumstances, EU member states decided to formally empower the ECB and Commission through legislative acts and joint decisions without recurring to treaty-based changes. While the ECB was empowered with new banking supervision competences, the Commission was entrusted with raising European debt on the financial markets under the NGEU program. Member states’ de facto recognition of the ECB as the Eurozone’s lender of last resort and their backing for ECB President Draghi after he stated that his institution was ready to do ‘whatever it takes’ to save the common currency, demonstrate politically motivated change as part of the empowerment process. Arguably, the Commission was even more explicitly empowered and entrusted with powers to borrow and monitor single principals. These two case studies differ in terms of the extent of delegated powers and choice of an appropriate level of control over delegated tasks.

Agent selection and empowerment of the ECB: supervising national banks

Before the EBU was established, the ECB’s formal competencies were restricted to its narrow mandate on price stability. Now, the central bank is also in charge of banking supervision and resolution in the countries in the euro area. These new competencies widen the issue scope of the ECB and its level of intrusiveness in the supervision of banks together with the national banking authorities. The EBU is composed of three pillars: the single supervisory mechanism (SSM), single resolution mechanism (SRM), and European deposit insurance scheme (EDIS). Because EDIS is still under negotiation, this case study is restricted to focusing on the empowerment of the ECB in the SSM and SRM.

Widening the scope of the ECB beyond monetary issues

When delegating power to agents, principals have two options: a) they can ‘create’ new agents, establishing a new institution from scratch; or b) choose from a pool of existing institutions. The first option has the advantage of ideally having an agent with preferences closer to those of the collective principal. However, it is costly and has numerous start-up costs. The second option enables principals to select from a pool of existing institutions optimally designed to perform the new tasks (Hawkins et al. 2006, 25). When principals have multiple agents that can fulfil the same tasks, they need to assess the suitability of these agents. In such situations, principals need to carefully consider whom they entrust with new tasks without breaking relations with an existing agent or ‘offending’ it in terms of being viewed as not trusting its competencies by re-delegating tasks to another existing agent or trustee and not empowering it. Negotiating the establishment of the SSM, member states discussed three potential delegation designs: a) the delegation of supervisory tasks to the ECB via Article 127(6) TFEU (enabling clause), which implies consultation and unanimity; b) creation of a single supervisory agency under the aegis of the Commission via Article 114 TFEU, which involves co-decision and qualified majority voting; and c) establishment of an EU agency via the so-called general treaty catch-all provision (Article 352 TFEU), which entails consent and unanimity (Interviews 1 and 7).

Member states had different preferences on the configuration of the banking union (Spendzharova 2014). Howarth and Quaglia (2016) explain the various preferences in the design of the national banking systems. Initially, Germany and Finland opposed empowering the ECB within the SSM and preferred the general treaty catch-all option (Interviews 6 and 12). Both countries wanted to prevent the ECB from ‘wearing two hats’ with competencies in monetary policy and banking supervision due to the potential conflict of interest (Interviews 3, 8, 9, 10, and 11). The Commission also opposed the empowerment and future competition of the ECB ‘as a fundamental engine in European integration’ (Interviews 3, 5, and 8). To reassure the Commission, ECB president Draghi emphasized that the ECB would respect the separation between monetary policy and financial supervision, as other central banks perform both functions (Draghi 2012b). At the 28–29 June 2012 EU summit, Draghi clearly ‘pushed’ for banking supervisory tasks to be transferred to the ECB based on a re-interpretation of Article 127(6) TFEU (Interview 3).

On the other side of the spectrum, southern European countries and France supported widening the ECB’s scope to increase the credibility of their banking systems (Interviews 5 and 6). Italy and Spain were extremely dependent on the liquidity of the ECB (Interview 3). According to some interviewees, at the 2012 June euro area summit, these countries ‘pressured’ Germany to accept the ECB as supervisor (Interviews 1 and 8). Furthermore, the Commission ‘had no choice but to accept member states’ decision and had to look for ways to set up the SSM within the ECB’ (Interview 3). As some scholars asserted, the Commission was ‘not very visible in early crisis management’ (Puetter 2012, 172); instead, the governments of member states took the driver’s seat (Savage and Verdun 2016). This confirms liberal intergovernmentalism expectations (Moravcsik 1993, 1998, 2018) that when the preferences of the most powerful member states converge, they delegate power to supranational institutions.

Interviewees from the Council and Commission highlighted that the option of one EU institution in charge of bank supervision was inevitable because of the consequences of additional supervisory instruments for the public finances of member states. The option of delegating supervisory tasks to a new EU agency was not feasible, as EU institutions cannot delegate discretionary powers to EU regulatory agencies, because of the so-called ‘Meroni’ doctrine (Interview 8). This legal principle limits the delegation of decision-making authority within the EU by emphasizing that certain powers must remain within EU institutions rather than bein delegated to agencies (EUR-Lex 2023). Moreover, establishing a new agency under the supervision of the Commission would not have had the same credibility as the ECB. In addition, the fact that Article 127(6) TFEU enabled member states to establish the ECB-SSM upon unanimous agreement in the Council and without revising the treaties (Interviews 1 and 5) influenced member states’ decision to empower the ECB. Moreover, for the Council as a collective principal, empowering the ECB as a banking supervisor had the advantage of re-delegating power to a trustee with expertise on banking issues and a solid reputation on monetary issues. The ECB underlined the importance of trust in this empowerment process, and that it was optimally designed to perform its new task as appointed (see also Heldt and Mueller 2021). In a speech celebrating the first anniversary of the ECB banking supervision, ECB President Draghi stated that ‘[a] single supervisor, applying homogenous methodology across institutions, internalizes mutual trust [and] builds trust not only between supervisors, but also with shareholders and other stakeholders, including the fiscal authorities that, in the past, were too often assumed to be the shareholders of last resort of their national financial system’ (Draghi 2015).

At the European Council summit in December 2012, EU leaders agreed on delegating banking supervision powers to the ECB, which would be ‘responsible for the overall effective functioning of the SSM’ (European Council 2012). This formal decision to transfer these extensive supervisory tasks to the ECB was then codified in the Official Journal of the EU. In this way, the scope of the ECB’s power was extensively widened to include the right to issue and withdraw authorizations to credit institutions; assess their assets and liabilities to guarantee compliance with the regulations on exposure limits, leverage, liquidity, transparency of information, and risk management processes; and conduct supervisory reviews in coordination with the European Banking Authority (EBA) and stress tests (Official Journal of the European Union 2013).

The formal empowerment of the ECB in the EBU increased its scope and intrusiveness in the national banking system. The SSM directly supervises the 129 largest and most systematically important Eurozone banking groups, accounting for approximately 85% of the total banking assets of the euro area (European Central Bank 2015). In the case of ‘less significant’ institutions, the ECB can carry out some supervisory tasks, including general instructions, while national competent authorities (NCAs) exercise the other functions. This system, which is based on direct and indirect supervision by the ECB, resulted from an intergovernmental compromise among member states on the delegation of direct supervision to the supranational level. While Spain, France, Italy, and the Netherlands favoured a single system of ECB direct supervision for all euro area banks to avoid fragmentation (Howarth and Quaglia 2016, 92), Germany, Austria, Belgium, and Finland demanded direct supervision only for systemic financial institutions or those under European Stability Mechanism (ESM) programs (Interview 4).

Despite ECB-SSM’s supervisory tasks, the NCAs are in charge of the larger number of euro area banks. NCAs are still the first line of communication with the banks and provide the ECB-SSM with data. Thus, the ECB is dependent on the commitment and information exchange from NCAs for its day-to-day work (Interview 2). The ECB takes over direct supervision of the remaining 3,100 less important banks when it deems it necessary to ensure the coherent application of high prudential standards:

The ECB may at any time, on its own initiative after consulting with national competent authorities or upon request by a national competent authority, decide to exercise directly itself all the relevant powers for one or more credit institutions. (Official Journal of the European Union 2013)

Transferring these new competences on banking supervision required a careful separation of monetary policy and banking supervision. This led to the establishment of a Single Supervisory Board (SSB) responsible for preparing supervisory decisions within the ECB-SSM. The ECB’s Governing Council adopts draft decisions proposed by the SSB via a ‘silent assent procedure’. This means that if the ECB’s Governing Council does not object within 10 days, the draft decision is deemed adopted and may be reviewed by the administrative board of review, which then submits a non-binding opinion to the SSB. If the ECB’s Governing Council objects, it returns the decision to this board for a new draft. This means that the de jure decision maker is the ECB Governing Council, but the de facto decision maker is the SSB (Official Journal of the European Union 2013).

Immediately after establishing the SSM, the president of the ECB called for a strong European resolution framework as an essential part of the SSM and supported the Commission’s proposal for an SRM (Draghi 2013). The aim of this mechanism is to restructure and wind down insolvent banks, rather than allowing member states’ governments to bail them out, thereby increasing their own debt (Howarth and Quaglia 2014). The Commission’s proposal for the SRM envisaged a centralized institutional set-up under Article 114 TFEU, where the Commission would be responsible for triggering resolutions and having decision-making powers regarding the allocation of the SRM (European Commission 2013). In the final compromise, the ECB-SSM can trigger the resolution process in the context of the SRM.

In terms of oversight, the Single Resolution Board (SRB) is accountable to the European Parliament, Council, and Commission for implementing the SRM regulation. The board of the SRB submits annual reports to the EP, national parliaments of participating member states, Council, Commission, and European Court of Auditors on the performance of its functions (Official Journal of the European Union 2014). The SSM regulation also includes strong accountability provisions for the SSB, but not for the ECB’s Governing Council (Official Journal of the European Union 2013).

New staff and financial capabilities of the ECB-SSM

Regarding staff and financial capabilities, the ECB was also substantially empowered to implement its new supervisory tasks. In terms of staff capabilities, the number of ECB permanent and temporary staff increased from 1,765 in 2010 to 3,171 in 2016 (European Central Bank 2010, 2016). In less than two years (2014–16), the ECB hired approximately 900 supervisory staff (Quaglia 2019, 962). Currently, more than one-third of the ECB staff works for the SSM, which has twice as many personnel as all ESAs together (de Groen and Zielinska 2018, 2–3).

Concerning financial capabilities, in 2016, the total amount of ESAs’ operating expenses was €97 million. While the EBA and European Securities and Markets Authority had operating expenses of approximately €40 million, the ECB’s expenses increased to €954 million (de Groen and Zielinska 2018, 3). The ECB’s budget for supervision, which is exclusively financed through supervisory fees from financial institutions, was €537.0 million (European Central Bank 2019).

This case study demonstrates that the decision to re-delegate power to an existing trustee, the ECB, which has extensive expertise in monetary and financial matters, went alongside the transfer of new tasks, extensively widening the scope and intrusiveness of the ECB in the supervision and resolution of national banks.

The formal empowerment process of the Commission in the context of NGEU, to which we now turn, was different. Principals chose a delegation design in which they temporarily entrusted the Commission with a borrowing mandate to raise debt on the financial markets, which was embedded in extensive monitoring and reporting requirements to the Council.

Empowering the commission during the pandemic: a nested delegation game

As a result of the COVID-19 pandemic, member states empowered the Commission to borrow an unprecedented amount from international capital markets on behalf of the EU. The Commission was given further competences to raise European debt on financial markets, and co-design and assess member states’ recovery and resilience plans under the NGEU program and RRF. The RRF is the key instrument at the core of NGEU that gives the Commission a ‘treasury function’ (Interview 17). Krotz and Schramm (2022) argue that this empowerment was an outcome of the decisiveness and close bilateral coordination between France and Germany.

The processes of empowerment of the ECB and Commission share similarities. Both EU supranational institutions were entrusted with new powers in the context of unprecedented circumstances that required rapid decisions and member states’ agreement. However, the Commission’s empowerment differs in form and scope from that of the ECB-SSM for two reasons. First, the permanent transfer of supervisory powers to the ECB constitutes an impressive delegation of sovereignty comparable to the creation of the euro. The NGEU is the largest stimulus package ever financed through the EU budget (Bauhr and Charron 2023; Buti and Fabbrini 2023). Even if it represents a huge step in EU fiscal solidarity (Genschel and Jachtenfuchs 2021), by agreeing on a temporary recovery instrument (Interview 14), member states also deliberately delegated temporary fiscal capacity powers to the Commission (Interview 17). NGEU is a joint debt issuance, but it is not Eurobonds or ‘corona bonds’ (Interview 16). Hence, despite the time pressure in the context of the pandemic, the EU could not agree on more far-reaching reforms, as was the case with the ECB-SSM during the banking crisis (Interview 13). Second, like the ECB-SSM, member states deepened and widened the Commission’s scope in the EU’s macroeconomic policy coordination by entrusting this institution with more powers in this policy. Buti and Fabbrini (20232023:1) even refer to a ”“new paradigm of economic governance””. However, the RRF does not replace member states’ current national expenditures (Interview 13). Rather, its functioning depends on member states (Interview 14).

Delegating new tasks and deepening the issue scope of the commission

Under NGEU, the Commission will raise approximately €800 billion through funding operations in capital markets from 2021 to 2026 (European Commission 2021a). The Commission was empowered, under Article 5(1) of the Own Resources Decision, to borrow funds on capital markets on behalf of the EU (European Council 2020: 4). The borrowing volumes will amount to approximately €150 billion per year, thereby making the EU one of the largest issuers in euro. They must be repaid by 2058 (European Commission 2021b). Approximately €420 billion will be redistributed as grants and up to €386 billion as loans. Approximately €90 billion in credit will be given to 18 member states from the ‘Support to Mitigate Unemployment Risks in an Emergency Scheme’ (Darvas and Wolff 2021). Given the complexity of NGEU borrowing, the Commission adopted a diversified funding strategy using medium and long-term bonds as well as short-term EU legislative acts (Hahn 2021). The complexity of NGEU borrowing required fundamental changes in the approach to international markets. However, the European Council underlined that the Commission’s new borrowing tasks are limited in time and scope (European Council 2020; Interview 17).

Member states also delegated monitoring and implementing tasks to the Commission in the RRF for the next six years from February 2020 until 31 December 2026 (Interview 15). The Commission is responsible for preparing, monitoring, and implementing the recovery and resilience plans (RRPs). If these do not comply with the assessment criteria – which include being consistent with the country-specific recommendations (CSRs) of the European Semester, enhancing growth potential and economic and social resilience, and contributing to green and digital transition (EURACTIV 2020b) – the member state concerned will not receive any financial contribution (Official Journal of the European Union 2021).

The RRF is a performance-based instrument through which the Commission fulfils a new role in assessing the RRPs. The Commission does much more than implement the RRF (Vanhercke et al. 2021). As widely confirmed by our interviewees, the delegation design of the RRF enables the Commission to change the country-specific recommendations into conditions. Thus, the concession of a loan is linked to conditions (Interviews 15, 17, 21, and 22). The Commission not only decides on payment requests, but is also involved in more discussions with member states than before (Interview 14). These new tasks give the Commission considerable leverage, because the CSRs now have a reward dimension and are rubberstamped by the Commission (Interviews 18 and 19, Vanhercke and Verdun 2022). Member states are required to reform their economies to unlock their allocated share of grants (Financial Times 2020b).

The Commission can submit a proposal to the Council to suspend all or part of the payments when the Council decides following Article 126(8) or (11) TFEU that a member state has not taken effective measures to correct its excessive deficit (Official Journal of the European Union 2021). Member states can also obtain financial support via a loan agreement with the Commission, which can create a scoreboard to track the progress of implementing the RRPs of member states (Official Journal of the European Union 2021). Specifically, delegating scrutinization powers to the Commission increased enormously the scope of tasks and intrusiveness of this institution in the economic governance of member states. Some caveats on the challenges for the implementation of the RRPs by member states relate to the fact that investments could take longer than originally envisioned, delaying the objectives and milestones in the plans; member states cannot operationalize the investments on time; and the governments of member states may change (Interviews 13 and 14).

Member states must report to the Commission their progress regarding their RRPs twice a year in the context of the European Semester and provide the institution with access to underlying relevant data (Official Journal of the European Union 2021). The oversight mechanisms to guarantee that member states implement promised reforms were among the most controversial negotiation items. Following the demand of Dutch Prime Minister Mark Rutte, the ‘emergency brake’ will allow any member state to block the EU’s payments to a country by calling for a review by the Council on whether promised reforms are being implemented. However, this review process has a three-month time limit and requires an agreement of a qualified majority at the Council (Official Journal of the European Union 2021). The final decision remains formally in the hands of the Commission (Financial Times 2020a, b). Even though the ‘emergency brake’ does not have a legal effect, it does not limit the Commission’s decision-making ability (Interviews 13, 17, and 18), because member states ‘trust the Commission to do its job’ (Interview 17). The Council has the formal means to interfere, but does not have the information, capacity, and specific expertise to interfere in the complex procedures of RRPs (Interview 25, Vanhercke and Verdun 2022). In addition, the Council has only one month to sign off on the payment request (Interview 13).

During the negotiations on the RRF, the Netherlands asked for monitoring mechanisms that give member states political control over the RRPs via the Council, instead of the technical supervision of comitology committees initially proposed by the Commission (EURACTIV 2020b). The Commission’s initial proposal foresaw that both it and the Council would have the final say on plans and payment requests. Ultimately, member states agreed on a delegation design in which the Council adopts the decision regarding plans via its implementing decision. Decisions on payment requests can never be delegated to the Council. These go to a comitology committee whose decisions are binding. This committee is chaired by the Commission and composed of representatives from member states. Furthermore, the Council and Commission agreed that the Economic and Financial Committee could issue an opinion within four weeks. If there is no opinion, the Commission can proceed (Interview 14). Hence, the Commission has the final say in the payment requests in the RRF and plays a much stronger role in economic issues at the national level (Interviews 19 and 20).

With the decision to create the NGEU and implement the RRF, the Council delegated new tasks to the Commission and deepened its scope in the coordination of EU macroeconomic policy. The Commission’s new tasks under the RRF increased its intrusiveness in economic issues as ‘money is given against conditionality reforms’ (Interview 19). The scope of issue areas of the Commission was also deepened with its new tasks pertaining to monitoring member states’ RRPs (Interviews 21 and 23, Vanhercke and Verdun 2022).

The decision of member states to formally empower the Commission was based on the need to boost economic recovery after the end of the pandemic. The extended duration of the pandemic made evident that more than very cheap loans would be needed for the worst-hit member states, because their public debt would continue to increase (European Central Bank 2020). Moreover, the ECB’s ammunition was empty even before the pandemic. Thus, there was not much the ECB could do. The ECB’s benchmark deposit rate was −0.5%, and it has been buying government and corporate bonds through its quantitative easing (QE) program since 2015. None of the top executives of the five largest euro area banks thought the ECB’s QE program alone would lead to more demand for credit (The Economist 2020). According to Lagarde:

Faced with a common shock, it was appropriate for Europe to deploy its collective weight through its common institutions to ensure that all members could react to the crisis adequately. (European Central Bank 2020)

Compared with the banking union negotiations, the difference is that during the pandemic, the ECB ‘had nothing to offer’ (Interview 13). Highly indebted southern European countries, particularly Italy, started to push for so-called ‘corona bonds’. They were also reticent to use the ESM given its strict conditionality and austerity (Ladi and Tsarouhas 2020, 1052). France, aware of the German opposition, quickly abandoned the idea of introducing ‘corona bonds’, instead suggesting a temporary European recovery fund outside the EU framework (Genschel and Jachtenfuchs 2021, 14). The Commission wanted to create a recovery instrument under the community method. Furthermore, in the institution was a re-interpretation of its existing borrowing powers under Article 310(1) of the TFEU to include the new tasks of borrowing to spend to provide financial support to the economies of EU member states (Interview 18). As in the case of the ECB-SSM, the empowerment of the Commission is characterized by the re-interpretation of existing treaty articles.

The most powerful member states such as Germany recognized that the economic downturn in the southern countries would not only put the euro in danger, but also weaken Germany’s export-based economy (EURACTIV 2020a). Therefore, the country was willing to help other member states most affected by the pandemic (Interviews 15 and 23). The political pressure at the EU level was such that German Chancellor Merkel domestically promoted the need to support the southern European countries (Interview 22). Germany was willing to show solidarity, but with ‘some strings attached’. More important, ‘they were setting the terms’ (Interview 19). The strict opposition of Germany to the introduction of ‘corona bonds’ led to the adoption of the NGEU and RRF as a compromise solution that brought together the German and French positions (Interview 16). As some interviewees contended, member states ‘were in the driver’s seat during these negotiations’ (Interviews 18, 20, and 23). After the intergovernmental agreement, Commission President von der Leyen vented plans in late March 2020 for turning the EU budget into the ‘mothership of our recovery’ (von der Leyen 2020a), declaring:

We showed what is possible when we trust each other and trust our European institutions. And with all of that, we choose to not only repair and recover for the here and now, but to shape a better way of living for the world of tomorrow. (von der Leyen 2020b)

Germany favoured a delegation design with strong monitoring mechanisms for the Commission to enable it to fulfil the eligibility criteria of the program. The delegation literature is predominantly concerned with oversight mechanisms to avoid agency losses of agents in the post-delegation stage (Hawkins et al. 2006; Heldt et al. 2022). In this case, however, due to the existing mistrust between net contributors and net recipients to the EU budget, and aligned with the trust of net contributors in the Commission’s expertise and experience (Interview 22), monitoring and reporting requirements were designed to ensure that some principals (net recipients) complied with the agreed rules to avoid ”principal slack” at the implementation stage. Before the RRF was established, member states were reluctant to carry out structural reforms and there was ‘no real punishment’ for failing to do so (Interviews 13 and 21).

The preferences of member states were aligned in two groups, namely the ‘hardliners’ (including the Netherlands, Denmark, and Finland) and the southern EU countries. In return for their support for the new economic recovery program, the first group asked that the Commission be in charge of monitoring how member states would disburse the funds of this program. In contrast, the southern EU countries pleaded for an automatic payment process and the less intrusive role of the Commission (Interview 22).

Overall, the RRF constituted a unique opportunity for the Commission to increase its tasks and issue scope in the coordination of EU macroeconomic policy (Interview 23). The heterogeneous preferences of multiple principals enabled empowerment with the delegation of new tasks and deepening of the Commission’s scope of issue areas to enhance credible commitments related to implementing the new economic recovery program.

Financial and staff capabilities of the Commission in NGEU

The NGEU package empowers the Commission in novel ways. This empowerment also entails substantial transfers of financial resources enshrined in a European Council decision of 21 July 2020 (European Council 2020) and new EU regulation adopted on 14 December 2020, in which the Council established the EU recovery instrument, namely the RRF (Official Journal of the European Union 2020). Following the ratification of the new own resources decision by all member states, the RRF became operational in June 2021 (European Parliament 2020). National government representatives agreed on a package of €1.824.3 billion, which combines the new EU’s multiannual financial framework and RRF instrument. Even if NGEU has a total volume of €750 billion, the mix of grants (€390 billion, down from €500 billion from the Commission’s original proposal) and loans (€350 billion, up from €250 billion) changes (European Council 2020, 5). The resources for the RRF increased to €672.5 billion. Here, loans amount to €360 billion and grants to €312.5 billion. In addition, several EU budgetary instruments receive additional resources from NGEU. This includes REACT-EU (€47.5 billion), the Just Transition Fund (€10 billion), InvestEU (€5.6 billion), and RescEU with €1.9 billion (Official Journal of the European Union 2020).²

In terms of staff resources, the estimated requirements of human resources will be met by staff from the DG ECOFIN and DG Budget already assigned to the management of the action and/or redeployed within the DG. This is alongside any necessary allocation that may be given to the managing DG under the annual allocation procedure and with respect to budgetary constraints (Interviews 17 and 21). The total estimated staff is approximately 90 (European Commission 2020). On 16 August 2020, the Recovery and Resilience Task Force (RECOVER) was created within the Commission’s Secretariat-General. This task force is in charge of leading the implementation of the RRF and coordinating the European Semester (European Commission 2021c). RECOVER works closely with DG ECOFIN to support member states in the drafting of their RRPs, ensuring that these comply with the requirements set in the regulation concerning green and digital transition, and in assessing member states’ progress in implementing their plans. Besides the new taskforce, there is not a huge increase in financial and staff capabilities. However, the Commission managed to maintain its financial and staff capabilities, because member states wanted to reduce the number of staff and there had been some relocations internally (Interviews 13 and 18). Resources of agents are often discussed in the literature as a means of principals to exert control (Hawkins et al. 2006; Heldt et al. 2022). In this specific case, member states were not willing to increase the staff capabilities of the Commission to cover resources the increased workload. Our conversations with interviewees do not confirm the theoretical assumption of resources as control mechanism used by principals to rein on their agents.

These two case studies demonstrate the empowerment of the ECB and Commission. Both institutions were formally empowered in micro-prudential supervision and economic policy coordination, respectively, two policy areas to which member states have thus far been reticent to transfer sovereignty.

Conclusion

This contribution provides a comprehensive analysis of the dynamic empowerment of the ECB and Commission in the context of disruptive circumstances without formal treaty-based change. Instead, member states delegated power through legislative acts and joint decisions. This study demonstrates that member states delegated new tasks, widened, and deepened the scope of issue areas and respective mandates. This took place alongside additional capabilities in the form of the ECB’s human and budgetary resources in the supervision of national banks and entrusted the Commission with the role of lender of last resort. Before the creation of the single supervisory mechanism within the ECB, European micro-prudential supervision was based on a decentralized network of national and European authorities that did not have strong supervisory powers vis-à-vis national financial institutions. In the context of the coordination of macro-economic policy and the European Semester, the Commission has gained stronger competences to guide and monitor member states’ compliance with country-specific recommendations.

Our findings demonstrate that the careful selection of an agent, which is trusted by principals, was crucial in the first delegation design of allocating powers on bank supervision to the ECB. In contrast, the second case exemplifies a nested delegation game between member states and the Commission. Herein, member states designed a complex delegation contract regarding the amount, format, and system under which the Commission can borrow in financial markets on behalf of principals; decided under which conditions this money can be spent by member states; and established whom and through which mechanism monitoring would occur in the RRF. Thus far, the delegation literature has focused on the monitoring and reporting requirements of agents to avoid agency losses in the post-delegation stage. This case study shows that distrust in the collective principal between member states can lead to a collective principal agreeing on centralized control mechanisms to ensure some principals (net recipients of the EU budget) comply with the agreed rules at the implementation stage of the RRF. The extensive delegation of scrutinization powers to the Commission by member states on country-specific recommendations empowers and entrusts it with new tasks and increases its intrusiveness in the economic governance of those member states applying for funding through the RRF.

What are the implications of these findings for the European integration process? In both cases, member states opted for more supranationalism with slight differences. In the case of the ECB, oversight and accountability mechanisms are less developed. In contrast, in the case of the Commission, more supranationalism went together with intergovernmental oversight mechanisms in the form of the ‘emergency brake’ and time limitation for the extensive borrowing and monitoring powers of the Commission that will expire in 2026. In disruptive circumstances, member state governments trust in the expertise and capabilities of European institutions to navigate them like a bridge over troubled water.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

This work has received generous support from the Technical University of Munich, Institute for Advanced Study.

Notes

1. The interviews were conducted with EU officials from the Commission – including DG Economic and Financial Affairs, Budget, and the Recovery and Resilience Task Force – at the ECB’s representative office in Brussels with members from the Budget and Economic and Monetary Affairs Committees of the European Parliament. We also interviewed civil servants at the General Secretariat of the Council, Economic and Financial Committee, Economic and Financial Affairs Council, Council’s Legal Service, and Cabinet of the Presidency of the European Council. Other interviewees include civil servants from the permanent representations of some member states in Brussels, including heads of units, directors, assistants to Directors-General, EP Rapporteurs and Shadow Rapporteurs, policy officers, MEP assistants, and legal advisors. For the ECB case study, we conducted interviews in March, November, and December 2016 and in February and July 2017. For the Commission delegation case, we conducted interviews in July, September, and October 2021. All interview partners agreed to talk with us anonymously without disclosure of their names or job positions. The interview material was transcribed using the MAXQDA software for the qualitative data analysis.

2. We thank Reviewer 2 for encouraging us to add more extensive evidence to strengthen our argument on the empowerment of the Commission in terms of the delegation of power and transfer of financial resources.