Loss Sharing in the Eurosystem

Faculty Colloquium

Presenter: Pieter-Augustijn Van Malleghem, associate professor at Sciences Po Law School.

The European Central Bank is commonly perceived as the most robust institutional pillar of the EU's macro-economic governance architecture. Whereas fiscal policy remains mostly decentralized with the EU's Member States -- and liable to fiscal crises -- monetary policy is usually conceptualized as centralized, and a source of potentially infinite liquidity.

The presentation examines the enduring role of national central banks in the Eurosystem, and argues that European monetary union itself has remained incomplete. Risk sharing rules between the European Central Bank and the national central banks, which continue to play a crucial role in the Eurosystem, are important because they raise the prospect of the bankruptcy of one or more national central banks -- thereby multiplying the potential single points of failure within the Eurosystem. Legal rules distributing risks and losses incurred by national central banks have given rise to significant struggles among policy actors, in an attempt to influence their distributive impact. These interpretive disagreements remain a significant source of fragility for the euro area, not only in that they raise questions about the credibility of euro area monetary policy, but also because they create the legal infrastructure for a much more visible clash between core and periphery economies within the euro area.