European policymakers missed an important opportunity when they neglected to address their banking sector's fragility decisively when market conditions were relatively favorable in 2009, especially after the success of the US Supervisory Capital Assessment Program. This failure is not for lack of good advice: The IMF, among others, had emphasized this challenge in its policy recommendations to European leaders. Had this advice been taken, and had Greek debt been adequately restructured in the first half of 2010, we would probably not have a major systemic crisis in Europe.
In decisions taken after May 2010, and until now, European leaders have often appeared to be behind the curve, and to react to the crisis's previous stage rather than to the current one. The European Commission, with the significant exception of DG COMP (the European Commission's Directorate-General for Competition Policy), has not been able to make executive decisions that it could impose on individual market participants. Its Directorate-General for the Internal Market and Services (DG MARKT) has focused on drafting new financial legislation but has devoted limited resources to its core mission of enforcing the integrity of the single market for financial services. Its Directorate-General for Economic and Financial Affairs (DG ECFIN) has provided valuable economic analysis, but so far has not presented a blueprint for crisis management instruments that would bring the situation under control. The Commission's President, José Manuel Barroso, has been very successful and proactive on one important occasion, when he commissioned a report from a blue-ribbon group led by former French central banker Jacques de Larosière, which resulted in a major overhaul of the European Union's supervisory architecture (see below). But in terms of crisis management, the Commission has generally not been able to get ahead of events, partly because of its limited de facto decision-making autonomy vis-à-vis member states (apart from DG COMP, which enjoys special status). This has left much of the action in the hands of the Council, i.e., the group formed by relevant representatives of the individual member states' governments, who, being accountable as they are to their respective national constituencies, have found it difficult to overcome their differences.
This is better analyzed as a failure of institutions than of individual leaders. A different set of political leaders might have done better, but the core problem has been the insufficient political mandate of the Commission (and of the permanent president of the Council since the entry into force of the Lisbon Treaty in January 2010, Herman Van Rompuy), combined with the misalignment between the incentives of individual countries' leaders and the collective European interest. This combination works more or less satisfactorily in ordinary times, but its shortcomings become much more apparent in a crisis environment as it does not allow for effective executive decision-making at the EU level. The "French-German couple" is occasionally presented as a pragmatic option to bridge the executive leadership gap, but its accountability and legitimacy have been insufficient to provide the required impetus.
In the course of the crisis, individual EU bodies have occasionally found it possible to bridge part of the executive leadership gap. This has been most obviously the case of the ECB, particularly since May 2010 with the Securities Markets Programme of buying sovereign bonds from selected euro area countries on the secondary markets. However, the extent to which the ECB can go further on this path is not unconstrained, because it is seen by a number of constituents (notably in Germany) as a dangerous intrusion into fiscal policy that is bound to compromise the ECB's independence and its integrity in delivering on its core mission of ensuring price stability. Similarly, though less prominently, since 2008 DG COMP has leveraged its authority to examine state aid by individual member states to individual financial institutions to press for more aggressive recapitalization of the weaker links in Europe's banking system, but its mandate has not allowed it to embark on a system-wide approach.
As mentioned above, a high-level group led by Jacques de Larosière was formed in late 2008 at the initiative of the European Commission's President, and in February 2009 this group recommended the creation of three European Supervisory Authorities to help oversee Europe's financial sector from a pan-European perspective—respectively, the European Banking Authority (EBA) based in London, the European Securities and Markets Authority (ESMA) based in Paris, and the European Insurance and Occupational Pensions Authority (EIOPA) based in Frankfurt. These supervisory authorities were complemented by the creation of a European Systemic Risk Board (ESRB) to coordinate macroprudential policy. The corresponding EU legislation was (by EU standards) swiftly approved and the new institutions officially started operations on January 1, 2011. Even though it is still early to form a judgment, the EBA has had a material impact in making the disclosures accompanying the July 2011 stress tests markedly more reliable than had been the case in the previous round a year earlier. Thus, it can be hoped that these new agencies can bridge part of the leadership gap in the future as they gather institutional strength. However, as with the ECB and DG COMP, their mandate is limited and cannot be overextended to matters that entail major dimensions of political legitimacy and accountability.
The European Parliament has been gaining competencies in successive revisions of the European treaties, and is now an important player in shaping legislation. However, its oversight powers on the EU institutions, especially the Council, remain restricted in comparison to most national parliaments. Moreover, the European Parliament, unlike lower houses in democratic regimes, is not elected on the basis of electoral constituencies of about-equal demographic weight, as smaller EU member states elect more Members of the European Parliament (MEPs) than larger ones in proportion to their population. These shortcomings have led Germany's Federal Constitutional Court, in a landmark ruling in June 2009, to find the EU institutions not democratic enough to be granted powers in key areas of sovereignty, including fiscal policy.
In the words of the Court, "With the present status of integration, the European Union does, even upon the entry into force of the Treaty of Lisbon, not yet attain a shape that corresponds to the level of legitimisation of a democracy constituted as a state. (…) Neither as regards its composition nor its position in the European competence structure is the European Parliament sufficiently prepared to take representative and assignable majority decisions as uniform decisions on political direction. Measured against requirements placed on democracy in states, its election does not take due account of equality, and it is not competent to take authoritative decisions on political direction in the context of the supranational balancing of interest between the states. It therefore cannot support a parliamentary government and organise itself with regard to party politics in the system of government and opposition in such a way that a decision on political direction taken by the European electorate could have a politically decisive effect." This "structural democratic deficit" (also in the words of the Court) is a fundamental impediment to building up an effective executive capability at the EU level.
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