Part I - (Re)theorising Accountability in EMU

1 From Procedural to Substantive Accountability in EMU Governance

Adina Akbik and Mark Dawson ^*

1.1 Introduction: Why We Need a Different Perspective on Accountability in the EMU

The Economic and Monetary Union (EMU) is a major achievement of European integration but also one of its major democratic accountability challenges. No other policy area of the European Union (EU) is as clear about ‘who gets what, when, how’¹ as the EMU. No other policy area has laid bare the necessity of controls – political, legal and administrative – over the exercise of power at the EU level as much as the EMU did during the euro crisis.² And yet the academic and political debate about democratic accountability in this policy field has reached a stalemate. On the one hand, it is widely acknowledged that the EMU suffers from structural flaws determined by a multi-level system that blurs conventional accountability lines between those who hold political authority in a representative democracy (the citizens) and those who make decisions on their behalf (in this case EU institutions).³ With respect to economic policy coordination, it remains difficult to disentangle the individual responsibility of finance ministers acting collectively in the Eurogroup and the Economic and Financial Affairs Council (ECOFIN), although their members are technically accountable to their respective national parliaments and electorates.⁴ The same problem exists when considering decisions made by heads of state and government in the European Council – an institution which has taken a clear leadership role during the euro crisis.⁵ The European Parliament (EP) has virtually no control over the intergovernmental institutions, while its legislative oversight of the European Commission in economic governance remains weak.⁶ In parallel, the Commission saw its powers expanded during the euro crisis by assuming key responsibilities for the coordination of national budgets through the newly introduced European Semester.⁷

On the monetary union side, the European Central Bank (ECB) has always faced criticism from an accountability perspective because its establishment effectively took monetary policy decisions away from Eurozone Member States and entrusted them to a technocratic institution, which, by several accounts, is the most independent central bank in the world.⁸ The expansion of the ECB mandate during the euro crisis has further complicated the situation, adding new accountability deficits with respect to unconventional monetary policies, financial assistance programmes and banking supervision.⁹ Last but not least, the Eurozone Member States established in 2012 an intergovernmental organization – the European Stability Mechanism (ESM) – designed to provide financial assistance to countries experiencing sovereign debt problems. Given its status outside EU Treaties, the ESM is subject only to a limited extent to scrutiny by national parliaments and not at all to scrutiny by the EP.¹⁰ To sum up, the EMU institutional structure illustrates in many ways the ‘impossible accountability thesis’ in the EU, according to which democratic accountability is simply incompatible with the EU’s multi-level governance model.¹¹

On the other hand, scholars have emphasized the need to improve EMU’s democratic accountability since its inception.¹² Demands to make the EMU more accountable follow the standard discourse on accountability in modern governance: at the basic level, accountability requires public officials – whether elected or not – to justify their conduct in front of a higher authority;¹³ at the next level, accountability ensures the possibility to punish those officials found lacking or allow them to make amends for past failures.¹⁴ An accountability relationship thus involves two parties: an account-giver – henceforth ‘the actor’ – who can be a person (member of a legislature, executive, bureaucracy) or a public institution, and an account-holder – henceforth ‘the forum’ – who can also be an individual (a direct superior, a minister, a parliamentarian) or an institution (parliaments, courts, ombudsmen, audit offices).¹⁵ In the policy discourse on accountability, the concept has multiple positive connotations, holding (1) the promise of democracy (by ensuring the answerability and responsiveness of elected officials), (2) the promise of control (through mechanisms designed to oversee executive and administrative action), (3) the promise of justice (through judicial and administrative review of government decisions), and (4) the promise of performance (through target-setting and incentivization of public officials).¹⁶

The problem, however, is that the institutional set-up of the EMU reduces the potential of such promises significantly. For example, in order to address the structural weaknesses of the EP in the EU political system, there is a proposal to institutionalize a subcommittee for Eurozone oversight that would call executive actors to account for their decisions.¹⁷ It is doubtful, however, that such a committee would deliver on the ‘promise of democracy’, given the well-known disconnect between citizens and EP elections – despite the institutional empowerment of the EP in recent years.¹⁸ In a similar vein, since the ECB mandate can only be altered through a cumbersome treaty change, there is pressure for the institution to narrow the mandate on its own – for instance, by excluding itself from financial assistance conditionality, limiting the purchase of government bonds to avoid redistribution or setting more specific objectives to measure the effectiveness of its banking supervision.¹⁹ To put it differently, given the constraints of the ECB legal framework, the ‘promise of control’ present in accountability discourse is largely a voluntary exercise – dependent on the ECB’s ‘willingness for control’ by oversight bodies like the EP and national parliaments, the European Ombudsman, the European Court of Auditors (ECA) or the European Anti-Fraud Office.

The mismatch between the structural flaws of EMU accountability and the incremental proposals put forth to reform the system suggests that academic thinking about accountability on the topic is at a stalemate. There is a gap between what is seen as necessary and what is feasible in the EMU governance framework – given the complications of multi-level decision-making within a hybrid institutional constellation of intergovernmental and supranational actors. In this chapter, we identify the cause of the stalemate in the parallel development of deductive and inductive approaches to accountability in the EU. Most deductive approaches typically apply national accountability benchmarks on EMU and subsequently find numerous shortcomings in their institutionalization at the EU level – especially when it comes to the role of parliaments. In contrast, inductive approaches start from the EU’s Treaty framework on EMU and subsequently infer standards of accountable behaviour for different EU institutions. The problem is that the EU cannot meet national benchmarks for accountability, while the principles set in the EU Treaties are too narrow and hence decoupled from generally applicable accountability standards.

To break the stalemate, we propose a new deductive framework for studying accountability more suitable to EMU and the EU setting – which can be applied and drawn upon in subsequent theoretical and empirical chapters within this collection. Drawing on public administration literature, legal scholarship, and liberal and republican thinking in political theory, we develop a normative conceptualization of accountability that seeks to answer a basic question: ‘what is accountability good for?’ Accordingly, we identify four normative ‘goods’ of accountability: openness, non-arbitrariness, effectiveness and publicness. We show that existing mechanisms of accountability can address the normative ‘goods’ in two ways: one centred on the processes through which actors take decisions (procedural accountability) and the other focused on the merit of the decisions themselves (substantive accountability).²⁰ We argue that there are both pay-offs and trade-offs in choosing one alternative over the other. While procedural accountability brings clarity and predictability for the people involved in the process, it tends to detract from the underlying goals of accountability’s four normative goods because it draws public attention away from the policies public officials pursue and their effects to the procedures by which they do so. In contrast, substantive accountability is more complex and costly to achieve but has the merit of maintaining the normative ethos of the concept. After analysing various aspects of EMU accountability, we conclude that procedural accountability dominates: a finding that we encourage our authors to critically explore.

The chapter is structured as follows. We begin by explaining the stalemate of the EMU accountability literature, caught between deductive approaches focused on national benchmarks of democratic accountability and inductive approaches emphasizing contrasting interpretations of different principles set by EU Treaties. We show the need for a deductive, normative perspective that is applicable to the EMU without being specific to it. The second section introduces the four normative goods of accountability and describes the possibilities to enforce them in a procedural or substantive way. The third section applies the new conceptualization to examples across the EMU in order to show how political and legal institutions deliver the normative goods of accountability procedurally and substantively – with an emphasis on the former. The fourth section highlights the limits of procedural accountability, making an argument against its prevalence in the EMU governance structure. We conclude with a call for both our authors and other scholars to apply the distinction between procedural and substantive accountability to different policy fields and institutions within EMU.

1.2 The Stalemate of Accountability Research on EMU: Between Deductive and Inductive Approaches

To make sense of the accountability literature on EMU, we propose a distinction between deductive and inductive approaches to accountability. The basis of the classification is the reasoning behind accountability assessments: how do scholars judge whether an actor has acted accountably in the EMU? Do they start from general definitions and seek to apply them to specific institutions like the ECB? Or alternatively, do they first examine a given institutional setting, for example, the legal framework of the ECB, and then derive general accountability standards applicable thereof? The distinction between deductive and inductive methods is well known in scientific inquiry. From Aristotle to Francis Bacon to William Whewell, philosophers have discussed two directions of the scientific method: the first begins with general and fundamental principles that are then applied to specific cases (deduction), while the second starts with the specific of what is observed and then moves to general and fundamental principles (induction).²¹ Although this chapter focuses on the EMU, the distinction between deductive and inductive approaches applies to accountability research more generally.

In fact, accountability research benefits from the new classification in two ways. First, the distinction between deductive and inductive approaches transcends regular disciplinary boundaries dividing the study of accountability²² – especially visible between political scientists and legal scholars. Browsing through the relevant academic literature, we can identify deductive and inductive studies which examine all the classic institutional mechanisms of accountability, regardless if they are political (elections, parliamentary scrutiny of the executive), legal (judicial review), administrative (investigations by ombudsmen, auditing and anti-fraud offices) or managerial (hierarchy in a bureaucratic organization).²³ Second, the deductive/inductive dichotomy encompasses definitions of accountability that are either normative or descriptive, as distinguished by Mark Bovens.²⁴ From a normative standpoint, what matters are standards for accountable behaviour, which can be either general (deductive) or specific to a situation (inductive). From a descriptive perspective, the interest is in [the appropriate] institutional mechanisms of accountability, which can be borrowed from other contexts in a comparativist effort (deduction) or inferred on an ad hoc basis from the experience of selected actors (induction). Consequently, deductive or inductive studies can have an explicit normative focus on the accountable behaviour of actors or a more analytical focus on the institutional arrangements of accountability.

In the EMU accountability literature, deductive approaches revolve around two general standards of accountability: ensuring democratic control and preventing abuses of power.²⁵ This is visible among authors who underline the accumulation of executive power in economic governance after the euro crisis and the necessity to increase the role of parliaments as a countervailing power.²⁶ While the EP had been marginally involved in economic governance prior to the crisis, national parliaments actually saw their budgetary and fiscal monitoring powers reduced since the institutionalization of the European Semester.²⁷ The importance of parliaments for democratic accountability is grounded in an understanding of the concept as the counterpart to delegation in the ubiquitous principal–agent model. The logic is straightforward: if ‘A is obliged to act in some way on behalf of B’, then ‘B is empowered … to sanction or reward A for her activities or performance in this capacity’.²⁸ Transposed to the EU level, what is required is to (re-)build the democratic accountability chain from voters to elected representatives but especially from elected representatives to executive actors.²⁹ Parliaments are thus crucial in closing the gap between citizens as the ultimate principals of economic decisions and various executive agents such as the European Council, the Council or the Commission. Accordingly, scholars argue that the EMU could improve its democratic accountability credentials by empowering the EP³⁰ and national parliaments³¹ in terms of both decision-making and legislative oversight of executive actors. Despite having different analytical foci, these studies share an implicit normative assumption that parliamentary involvement in economic governance can help Member States – and hence the EU – ‘meet their legitimacy obligations to their own publics’.³²

In monetary affairs, deductive studies focus on ‘preventing the development of concentrations of power’ and ensuring an appropriate system of checks and balances of the ECB.³³ The emphasis here is different because the ECB is a non-majoritarian institution whose need for independence from electoral competition has been one of the cornerstones of the EMU since its creation (Article 130 TFEU). The EP is thus often cited as an ‘accountability forum’ and not the principal of the ECB in monetary policy and banking supervision; consequently, the ECB ‘owes’ the EP transparency and justification of decisions but not obedience or even political responsiveness.³⁴ Conversely, the importance of preventing abuses of power is much stronger in the area of legal accountability, that is, judicial review of ECB decisions by national and EU courts.³⁵ In legal accountability, deductive and inductive approaches are sometimes intertwined, as courts apply the general standard of ‘curtailing the abuse of executive power’ in reference to existing regulations.³⁶ A combination of deductive and inductive approaches can be found for instance in the work of Markakis, who examines the accountability of the ECB in relation to the price stability objective prescribed in Article 127(1) TFEU.³⁷

Conversely, studies that are ‘purely’ inductive use the EMU legal and institutional architecture as the starting point for evaluating accountability. A clear example is offered by case-law analyses of ECB or ESM instruments. In this category, scholars do not apply an overarching accountability definition in order to evaluate judicial decisions; conversely, they selectively employ the Treaty framework in order to identify specific features, for example, the independence of the ECB, which are then connected to different headings and degrees of judicial review, for example, the duty to state reasons as displayed in Gauweiler.³⁸ As a result, there is room for contrasting interpretations of the stringency with which the Court of Justice of the European Union (CJEU) should uphold different Treaty principles. For instance, with respect to the ECB, the introduction of the first unconventional monetary instrument – the Outright Monetary Transactions (OMT, 2012) – divided lawyers on the question of the violation of the Treaty’s ‘no-bailout’ clause³⁹ and the extent to which national courts and the CJEU should intervene to hold the ECB accountable for potentially acting ultra vires.⁴⁰ The ‘no-bailout’ clause had also featured in Pringle⁴¹ in relation to the establishment of the ESM, which similarly divided scholars on whether courts should interpret Treaty articles in light of background teleological expectations about current political circumstances.⁴² In this context, several scholars emphasized the deferential approach of the CJEU towards EMU executive actors, as judicial decisions failed to question if austerity was indeed demanded by ‘the logic of the market’,⁴³ or whether the instruments adopted during the euro crisis were substantively justified by ‘a logic of emergency’.⁴⁴ Regardless of whether studies criticize or endorse court decisions on the EMU, the inductive approach to evaluating accountability is obvious – as the benchmarks for accountable behaviour are derived from specific features of the EU Treaties.

Another variant of inductive studies examines the normative peculiarities of EMU governance. In a recent article further developed in this volume, Steinbach argued that the ‘normative choice for accountability’ in the EMU need not be democratic in the principal–agent sense of empowering political institutions (especially parliaments); conversely, EU economic governance has created an accountability regime of its own, subject to the judgement of the market.⁴⁵ According to Steinbach, the orientation towards the market is institutionalized in the EU Treaties, which highlight the Union’s commitment to create ‘an open market economy with free competition’.⁴⁶ Moreover, the emphasis on the ‘free market’ is seen as a constitutional norm which ‘implies the absence of state intervention in the market-based price determination process’.⁴⁷ Accordingly, states and private actors in the EMU are/should be accountable to markets rather than attempt to create a political accountability regime in a flawed democratic system. In fact, Steinbach sees current criticism of EMU accountability as the result of attempting to substitute economic accountability with political accountability, for example, in financial assistance when creditor states and EU institutions have taken over the position of accountability forum from the market.⁴⁸ The issue is whether accountability to the market is normatively justifiable in a democratic system; after all, the belief that the market will hold actors accountable ‘just the right amount’ is rooted in ordoliberal assumptions of political economy that have been seriously challenged since the crisis.⁴⁹ As a recent study by the ECB acknowledges in relation to fiscal requirements for price stability, a certain paradigm of political economy ‘became constitutional law in Europe before the economics profession could even prove [its] value’.⁵⁰

Overall, the point of this review is to show that there are problems with both deductive and inductive approaches to EMU accountability. First, deductive studies drawing on principal–agent theory are stuck in a vision of accountability designed for the nation-state that is simply unattainable in the specific institutional setting of EMU governance. National parliaments and the EP are important accountability forums, but they cannot be expected to deliver in the same way as legislatures within national democratic systems of government. In the EMU, the delegation chain from voters to elected representatives to executive actors is either short-circuited (in the case of the EP) or too tortuous to function properly (in the case of national parliaments). In contrast, inductive studies display different problems, namely the replacement of general accountability standards with situation-specific benchmarks assessing the performance of an actor in a given setting. In EMU, the EU Treaties constitutionalize certain principles (like the ‘no-bailout clause’ or the ‘free-market orientation’) that remain open to political contestation and ordinary decision-making domestically.⁵¹ One of the difficulties of this constitutionalization is that EU institutions can be held accountable for the extent to which their decisions comply with Treaty principles but not for the principles themselves. Political accountability, however, may concern the overall principles governing EMU (a level of contestation that inductive studies – as they are oriented by these principles themselves – cannot capture). Normative standards of accountability should be broader than policy-specific benchmarks for holding actors accountable in a particular context. We introduce such an approach in the next section in relation to the EU setting.

1.3 The Four Normative Goods of Accountability in Modern Governance

The objective to conceptualize accountability beyond the nation-state is usually associated with global politics.⁵² In this context, Michael Goodhart has observed that all approaches to global accountability share a similar understanding of the term, namely the ‘question of making those who wield power answerable to the appropriate people’.⁵³ In his view, this standard definition is based on a Westphalian notion of the state that is unworkable in world politics. In the EU, the absence of a European demos and the resilience of national demoi⁵⁴ implies that accountability cannot be organized around the ‘appropriate’ forum because this is simply not feasible in a large-scale political unit where citizens have few opportunities to influence governing decisions.⁵⁵ In this context, Goodhart proposes to shift our thinking about accountability ‘from who is entitled to hold power to account to the reasons why accountability is justified in democratic theory’.⁵⁶ His interest is in the nexus between democracy and human rights, linking accountability to emancipatory human rights norms that ‘constrain the exercise of power and enable meaningful political agency’ in the global arena.⁵⁷ We agree with Goodhart that the conceptualization of accountability beyond the nation-state must include normative standards for holding power to account. However, we believe that focusing on human rights reduces accountability to the role of an instrument necessary to achieve other democratic objectives rather than giving it credit as a democratic goal in itself. Accordingly, we hold that any meaningful conception of accountability must begin with an understanding of the normative goods to which accountability is aimed. Drawing on liberal and republican thinking from political theory and the broader public administration literature, we distinguish between four such goods.⁵⁸

The first good is openness. Liberal thinkers from Bentham onwards have long argued that public confidence in official action is likely to be increased where public policy is conducted under the public gaze (what he termed ‘publicity’).⁵⁹ The openness of public policy has thus been linked to a number of public goods, such as the avoidance of corruption,⁶⁰ the improvement of public knowledge and the republican demand that free citizens should enjoy ‘non-domination’ through the ability to question and contest official action.⁶¹ We might therefore want accountability because we see it as a device to ensure that public action is open, transparent and contestable.

The second such good is non-arbitrariness. There is a deep tradition in accountability research of tying accountability to notions of principal–agent theory in which accountability is a device for (political) principles to control (administrative) agents to whom they have delegated powers.⁶² This is a narrower instance of a broader accountability good, namely that those who wield public power should do so in a limited manner and that they should exercise coercion only to the degree necessary to achieve their goals.⁶³ Non-arbitrariness is also therefore linked to more general limits on public action such as human rights or due process guarantees that seek to regulate the relationship between the individual and the state.⁶⁴ Accountability – by making officials answer for conduct – provides a means by which arbitrary distinctions or applications of power can be identified and later remedied.

The third good which accountability seeks to render concerns effectiveness. While openness and non-arbitrariness seem highly normative values, accountability may be sought for more utilitarian reasons, namely that accountable officials are more likely to deliver high-quality services. From this perspective, accountability holds the promise of performance.⁶⁵ By making an official answer for their conduct, and by offering the possibility to correct potential errors, accountability is a mechanism to improve the efficacy and responsiveness of public policy.⁶⁶ Here, the premise is that the need to justify and even correct conduct will likely improve, and encourage reflection upon, the design of policy-making or implementation.

The final such good is one of publicness or that official action should be oriented towards the common good (and therefore justified by public or universal reasons).⁶⁷ This involves demonstrating both that officials were not personally enriched and that their decisions are fairly balanced, taking into account different societal interests and perspectives. Once again, accountability is a key device for ensuring the publicness of official action in this sense – when parliamentarians scrutinize government agencies, or courts conduct judicial review, a key demand is that actors show how their activities forwarded the national or collective interest (with different accountability forums likely to disagree on what a fair balancing of societal interests would entail).⁶⁸ Accountability is thus a device to advance the normative good of public policy grounded in the public interest.

Having established the normative goods of accountability, the question is how they can be delivered in practice. Our proposal is to distinguish between procedural and substantive ways of providing the four normative goods of accountability. To put it simply, actors are procedurally accountable if they can demonstrate that the processes or steps they followed in performing their tasks were open, limited (non-arbitrary), effective and/or public. By contrast, actors are substantively accountable if they can demonstrate that the decisions themselves or the outcomes to which they led were open, limited, effective and public. We further explain the distinction below.

1.4 Providing Accountability Goods: Procedural versus Substantive Ways

How can accountability be procedural, and how can it be substantive? The simplest way of understanding the distinction is through the categories of public law.⁶⁹ In this context, judges often distinguish between reviewing parliamentary acts on procedural or on substantive grounds.⁷⁰ When conducting a procedural review, a judge will enquire into the robustness of the process through which a parliamentary act was adopted.⁷¹ When conducting a substantive review, what is important is not the process of adopting an act but its substantive provisions per se and their likely impact. To give an example, if a Court is enquiring whether a statute setting out minimum requirements for religious schools infringes the right to freedom of religion, it might assess the infringement either procedurally (did Parliament consider the impact of the bill on freedom of religion, or incorporate the views of religious minorities, when adopting it?) or substantively (is the statute likely to infringe religious freedom, or is it in fact neutral vis-à-vis different systems of belief?).

If we transport this distinction to the world of accountability, procedural accountability suggests an accountability relation oriented around the process by which a particular decision was rendered. If we are holding an actor to account procedurally, we are calling them to account for, and justify, the procedural steps they undertook in forming or executing a policy decision. If we are holding an actor to account substantively, by contrast, we are calling them to account for and justify the substantive worth of the policy decision itself. Thus, a parliamentary committee examining the implementation of the bill above might also seek to hold a school inspectorate either procedurally or substantively accountable. Procedurally, they might ask how often religious schools had been inspected or how parents of religious minorities had been consulted in drawing up guidelines for inspection. By asking such procedural questions, the committee is not calling into question the substantive worth of the inspectorate’s decisions but confining itself to examining the steps the inspectorate took to fulfil its mandate.

Parliamentarians might also seek, however, to hold the inspectorate substantively accountable – did the implementation of the statute achieve the goals (e.g. of improving school standards) it originally sought, or why did the inspectorate choose to prioritize the inspection of one set of schools or one aspect of the school curriculum over another? In the latter case, what is at issue is not the form of decision-making but its substance, that is, did the actor being held accountable make substantively worthwhile, just or efficient decisions? The official is thus being held accountable against a substantive rather than procedural benchmark: they are being asked to explain and justify the worth of their action.

From a conceptual perspective, process is either unimportant or instrumental in this case – the inspectorate could be judged by parliamentarians to have implemented the statute justly or effectively even in circumstances where the procedure by which they had done so was inadequate just as the inspectorate could demonstrate a robust, transparent and inclusive procedure yet still be seen by parliamentarians as substantively failing to adequately explain the correctness or efficacy of their decisions. In simple terms, the two ‘forms’ of accountability carry different lenses through which to understand whether accountability has been adequately rendered.

The notions of procedural and substantive accountability overlap to a certain extent with the distinction between process and outcome accountability found in social psychology.⁷² The interest there is in the micro-behaviour of individuals and how they respond to different types of evaluation standards set by accountability forums, which can focus on processes or outcomes. In contrast, we take a macro-level approach and discuss the abstract forms (procedural or substantive) through which the normative goods of accountability can be delivered in practice. Our concept of accountability is therefore not relative to a specific accountability forum, but it is centred on general democratic ‘goods’ considered inherent in the term. For the purposes of illustration, these are applied to the EMU context in the next section. The purpose of the edited collection is to expand and apply these goods in a manner more comprehensive than this schematic overview can provide.

1.5 Procedural and Substantive Accountability in the EMU

The four normative goods of accountability can be identified across the EMU governance architecture. The examples below focus on diverse cases that are ‘representative in the minimal sense of representing the full variation of the population’.⁷³ The purpose is to show the predominance of procedural ways of providing the normative goods of accountability in the EMU.

Let us start with the first good – openness. Transparency has been for decades a key concern of accountability research.⁷⁴ Most importantly, however, transparency seems a good that can be fulfilled without a demand for substantive justification. An official can therefore satisfy the demand for openness procedurally by providing the public with information and documents on a regular basis. In this scenario, the task of accountability forums, such as parliaments, auditors or courts, is to enquire into the procedures by which citizens can access official information and to demand reform if these procedures are found wanting. Many accountability requests in the field of EU economic governance are of this nature. To take a specific example from banking supervision, the largest number of questions asked by Members of the European Parliament (MEPs) to the ECB are requests for information, seeking to address information asymmetries between the two institutions.⁷⁵ Keeping in mind that ‘transparency is a necessary but insufficient condition for accountability’,⁷⁶ it would make sense for MEPs to first ask for information before acting on it substantively. But when political accountability does not move beyond transparency requests, the value of openness remains procedural.

The value of openness can also, however, be met substantively. The test of substantive openness is not the de jure but the de facto openness of official action. To be substantively open, an official must not simply provide information, or demonstrate transparent procedures, but provide information in a sufficiently relevant and timely way that it is likely to be used by accountability forums, such as parliaments, courts or citizens.⁷⁷ The test of substantive accountability is thus one of whether official action is in fact regularly probed and contested. This establishes an obligation on accountability forums too, namely that they utilize their information rights to understand policy decisions and to make clear to the public the substantive choices, including the achievements and errors, of public actors. To return to the example above, the key difficulty in the parliamentary accountability of the ECB is not only the availability of information but its volume and complexity.⁷⁸ MEPs simply do not have the expertise to identify the most relevant or salient questions that would allow them to substantively challenge ECB decisions.⁷⁹ Substantive openness often requires additional resources, raising difficult questions about who should bear its costs.

The second good – non-arbitrariness – also carries procedural and substantive elements. Procedurally, public actors are commonly bound by statutes or other rules which specify their substantive mission. When adopting legislation, or making specific decisions, officials are commonly under a duty to explain why particular decisions are necessary to fulfil their mandate (which may be subject to judicial review).⁸⁰ Similarly, public institutions may adopt procedures to ‘mainstream’ rights-based limitations into their policy-making, that is, to conduct impact assessments or other exercises by which officials may demonstrate that human rights have been taken into account.⁸¹ Here, arbitrariness is limited procedurally in the sense that public actors bind themselves via process-based limits on their action; subsequently, accountability forums such as courts and parliaments are able to verify these limits; for example, was a rights-based impact assessment conducted? To provide an example from the EMU, the Commission committed, as part of the Juncker Commission’s promise to improve the EMU’s social dimension, to produce social impact assessments to assess and minimize detrimental social rights implications of future EU financial assistance. Such an assessment was conducted in relation to the third Greek bailout.⁸²

Substantively, however, non-arbitrariness carries a higher bar. As with openness, the important element is whether public action was de facto limited and non-arbitrary. This would require not only that actors are bound by limits but that they demonstrate how limits constrained their activities. Non-arbitrariness also concerns whether a given policy arbitrarily discriminates against a given group in society or infringes an individual’s rights. From the perspective of an accountability forum, the key question would be whether a particular group in society or (for a judge) a core autonomy right is disadvantaged by virtue of how a policy has been designed. To return to the definition of the procedural/substantive distinction of the previous section, the existence of a procedure to mainstream human rights considerations within an institution would not fulfil this requirement if the outcome of such mainstreaming violated a core right. To continue the example of financial assistance, while the Commission indeed conducted a social impact assessment for the third Greek bailout, academic commentary on this assessment has been highly critical.⁸³ These criticisms range from the inadequacy of the assessment to the question of how it actually fed into policy-making (with no indication that it led to any meaningful changes in how the stability programme for Greece was designed or implemented). The key test for substantive accountability as non-arbitrariness is thus whether policy choices in EMU plausibly aimed for and achieved non-arbitrary results.

The third accountability good, effectiveness, would seem to be inherently substantive in nature – as it concerns whether planned policies resulted in particular outcomes. Nevertheless, the ‘explosion’ of auditing in the 1990s as a means to control the government suggests that effectiveness can also be implemented in a limited procedural way.⁸⁴ In 2016, the ECA evaluated the operational performance of the Single Supervisory Mechanism (SSM) and the role of the ECB thereof.⁸⁵ The evaluation report included a section on the ‘difficulty in obtaining audit evidence’, as the ECA officially complained that the ECB provided the auditing team ‘very little’ of the information required.⁸⁶ The ECB was given the chance to respond to the report, emphasizing its different understanding of ‘sufficient information’ for auditing purposes. Specifically, the ECB claimed that ‘all audit evidence covered by the Court’s mandate to audit the “operational efficiency of the management of the ECB” had been provided’ and that any exception concerned documents that were not related to the SSM’s operational efficiency.⁸⁷

The problem here concerns the legal limits imposed on auditing the ECB’s substantive effectiveness by the ECA. According to EU primary law, the ECA has ‘full power to examine all books and accounts of the ECB’ but only with respect to examining the ‘operational efficiency of the management of the ECB’ (Article 27, Protocol no. 4 TFEU). The conflict between the two institutions regarding the SSM report reflects the different interpretations of ‘operational efficiency’ and the substantive need for information to make such an assessment. In the absence of said information, the ECA’s report was reduced to evaluating procedural aspects such as staffing, for example, whether on-site inspections of banks should be run by ECB staff as opposed to representatives of national supervisors.⁸⁸ Despite these legal limitations, the ECA clearly understood the value of substantive effectiveness, as the report recommended that the ECB develops a public and formal performance framework to assess the effectiveness of its supervisory activities.⁸⁹

Lastly, the final accountability good of publicness can also be rendered procedurally or substantively. In both cases, publicness requires that public officials demonstrate the orientation of their conduct towards the common good. In the EU context, this may take on a specific meaning, namely the duty of EU actors to demonstrate that their policies (such as in EMU, country-specific recommendations) take the interests of the EU as a whole into account (and not just of selected industries or states). A common mechanism to achieve accountability as publicness concerns establishing procedures for public participation in government action from notice and comment procedures to more intensive forms of citizen participation.⁹⁰ An accountability forum may therefore assess whether a robust process of consultation existed when adopting public policies. This can also include proportionality review in the sense that such review commonly requires, in order for limitations on rights to be justified, that officials demonstrate that their policies restricted rights in pursuit of a ‘legitimate aim’.

In the context of EMU, examples of both can be found. In the 2015 ‘Five Presidents Report’, the leaders of the EU’s main institutions committed to greater involvement of the social partners in fiscal coordination processes such as the European Semester, with some commentators arguing that this has led to a gradual ‘socialization’ or re-balancing of the Semester’s policy priorities.⁹¹ Elsewhere, several ECB programmes – most notably the OMT, the Asset Purchase Programme (APP) and the Public Sector Purchase Programme (PSPP) – have been subject to judicial challenge, with the CJEU asked to rule on whether their effects on national economic competencies were adequately grounded in the ECB’s mandate of producing stable prices for the Eurozone as a whole.⁹²

Substantively, publicness concerns not just the existence but the effects of participation and reason-giving. With respect to participatory governance, many studies of the phenomenon in different national and transnational settings complain of its elitist, or perfunctory character, questioning whether participation actually leads to policy change.⁹³ Substantive accountability regarding publicness would therefore concern the question of how participation affects outcomes, or how the knowledge garnered via participation was utilized in the policy process. In respect to proportionality review, substantive accountability would not merely require officials to posit the aim to which their policies were directed but would allow scrutiny of the suitability and necessity of those policies, given those negatively affected by them (such as those whose fundamental rights were infringed).

Once again, demands for substantive accountability as publicness can also be found in the EMU context. To return to the examples above, while the participation of civil society actors in the European Semester may be an end in itself, the tying of this participation to a debate about the Semester’s policy priorities illustrates the weakness of accountability in this policy context. The real question is whether the involvement of civil society in the Semester matters or is simply another abstract commitment boldly stated in policy documents only to be safely disregarded when substantive decisions about EU fiscal policy are made. Similarly, those analysing proportionality review of the ECB have repeatedly questioned whether such review in the area of monetary policy is meaningful or whether the standard of review provides the ECB with such a margin of discretion as to make judicial review practically meaningless (or ‘incomprehensible’ as provocatively put by the German Constitutional Court).⁹⁴ In this sense, what matters for accountability as publicness is not the mere provision of reasons for action relating to the common good but whether these reasons meaningfully orient the conduct of economic policy-makers.

With all four categories, the guiding distinction between procedural and substantive accountability is between process and merit. For the former, the connecting point between actor and forum is the steps taken to make public action accountable; for the latter, the basis for interaction is the merit of official action vis-à-vis alternatives. This leaves a crucial question: from an institutional design perspective, why would anyone choose an accountability regime focused on one form of accountability, rather than the other? This is the subject of the next section.

1.6 Procedural Accountability – and Its Limits

There are good reasons why institutions may favour procedural accountability. The main reason concerns the clarity and predictability of the standards used to orient accountability. Under the substantive reading, a potentially broad set of standards are at play, with the actor under a heavy and potentially limitless justificatory burden. To take one of the four categories discussed above, requirements of publicness in public policy are complex and may be subject to significant disagreement.⁹⁵ This diversity in interpretation applies to both actors and accountability forums. Assuming that officials may be accountable – in a complex and ‘networked’ modern polity – to multiple accountability forums, representing an array of interests, finding an appropriate balance able to satisfy these interests can be an overwhelming task.⁹⁶ In the EMU context, the ECB’s bond-buying programme was of such volume and complexity to have potentially limitless consequences on a wide variety of societal interests; under the circumstances, how could the ECB adequately demonstrate that this policy was non-arbitrary, effective and oriented towards the common good? Substantive accountability widens the set of standards orienting the conduct of the actor, potentially confusing both public officials themselves and the accountability forums that must scrutinize them.

In this regard, procedural accountability seems to be much more straightforward. Here, the primary duty of the actor is to follow an established process (under the assumption that, if followed, this process will lead to open, non-arbitrary and effective outcomes oriented towards the common good). The job of the forum is then to verify that the correct process has been implemented. As a result, a significant burden – of calculating and adjusting conduct according to its concrete effects – is lifted and externalized. This may be particularly important in a judicial context, where judges may lack both the knowledge and legitimacy to interfere in complex economic debates. In social psychology, experimental research has demonstrated that procedural (or process) accountability is linked to situations when actors lack knowledge about the specific outcomes they are expected to achieve; consequently, they shift their focus to the quality of the decision-making process.⁹⁷ This suggests that procedural accountability can easily become decoupled from substantive outcomes.

The potential ‘replacement effect’ of procedures for substance therefore represents the first major limitation of procedural accountability. Indeed, there are important implications to ‘lifting the burden of substantive justification’ for actors. Jane Mansbridge has famously discussed the interplay of material and moral incentives in the process of delegation.⁹⁸ As she argues, the introduction of material incentives may destroy moral incentives by making what was once a duty (to act in the right way) a material question (is this action in my interest?). A similar risk applies in relation to procedural accountability. As discussed above, procedural accountability is based on the assumption that, if actors follow the correct procedures, they will then orient their activities towards correct substantive outcomes. The risk is that the opposite applies – that if actors begin to care only about procedures at the expense of the substantive goods, those procedures are designed to secure (and without reflecting on their adequacy). According to Roy Heidelberg, this logic reflects a technical conception of accountability that ‘allows for an actor to dismiss criticism of a policy or action by appealing to an obedience to procedural rules or, at worst, to justify doing the wrong thing in the right way’.⁹⁹

In the EMU, the substitution effect of procedural for substantive accountability is significant. As we have argued elsewhere, ECB accountability in particular is grounded in procedural devices such as transparency, which are seen as better suited to the institution’s operational independence.¹⁰⁰ Nevertheless, transparency obligations tend to carry the functional mission of the ECB to the outer limit, as accountability debates become hijacked by discussions over the secrecy regime of the ECB.¹⁰¹ As a result, the focus on transparency limits the substantive contestation of the actual merit and distributive implications of ECB decisions. While accountability forums like the EP are thus permitted and even encouraged to ask questions of ECB officials, their ability to contest and seek to influence the direction of monetary and supervisory policy is minimal.¹⁰² Accountability in substance seems needed but is also excluded a priori by the EMU institutional structure.

Second, procedural accountability is limiting from the perspective of accountability forums. As indicated by the classic accountability literature, one challenge faced by accountability forums is information asymmetry, or the difficulty of holding accountable actors with greater knowledge of a specific topic. In principal–agent theory, agents are expected to ‘shirk’ their obligations before principals either by hiding information before they are appointed (adverse selection) or by hiding their behaviour while on the job (moral hazard).¹⁰³ Procedural accountability extends these problems, as explained by Heidelberg:

Because the accountor is exposed to the rules and subject to them, it is not unusual for the accountor to have a better understanding of how the rule system works than the accountee, in which case, the rule system is as much an instrument for the accountor as the accountee.¹⁰⁴

The discussion about the exceptions to the application of the Stability and Growth Pact (SGP) by the Commission is a clear example of an actor exploiting the rule-based system introduced by the excessive deficit and macroeconomic imbalance procedures. In fact, the Commission’s past record of sanctioning some Member States but not others for budgetary or macroeconomic transgressions has raised important accountability questions of arbitrariness and equal treatment.¹⁰⁵ MEPs have regularly accused the Commission of unfair treatment of a few Member States, for example, for the failure to take action against France’s excessive deficit in 2014 or Germany’s macroeconomic imbalances in 2015.¹⁰⁶ The problem is that the relevant legislation – the Two-Pack and the Six-Pack – gives the Commission ample discretion to calculate budget deficits by deciding which expenditures, fluctuations and one-off investments are taken into account and which are excluded.¹⁰⁷ This has two important implications. On the one hand, the Commission benefits from information asymmetries in fiscal governance, as it is the only institution with the [expert] knowledge to navigate the ‘maze of alternative or even-conflicting rules, part legislative, part non-legislative, which few understand’.¹⁰⁸ On the other hand, the Commission can make strategic use of these rules in order to explain away decisions not to sanction some Member States, as shown by the justification given for the French and German decisions to MEPs during hearings in 2014 and 2015.¹⁰⁹ Overall, procedural accountability seems to favour the actor at the forum’s expense.

To sum up, of the two forms of accountability, which is more suitable for the EMU? The argument of this section was not that procedural accountability is of limited value universally. In fact, there are advantages to procedural accountability, namely its clarity and predictability, which make it an important avenue for providing the normative goods of accountability in the EMU. This may be particularly important in an EMU constitutional settlement that gives particular institutions – namely the ECB – high operational independence. But without a substantive component, the normative goods of accountability remain focused on processes of decision-making, which are insufficient for evaluating decisions in a policy field that decides ‘who gets what, when, how’¹¹⁰ as much as EMU.

Substantive accountability can be more complex and costly to achieve; for instance, in order to balance information asymmetries between forums and actors, the former would need to acquire expertise in many fields, which requires additional resources. In some cases, this might be infeasible – no matter how desirable or demanded substantive accountability becomes. Under the circumstances, political architects of EMU accountability will have to decide if the costs of substantive accountability are worth the payoffs or, alternatively, if they are willing to accept the trade-offs between substantive and procedural accountability which the EMU’s institutional set-up currently entails.

1.7 Conclusion

In this chapter, we introduced a new normative framework for analysing accountability in the EMU. The framework has been determined deductively by surveying the relevant literature in political theory, law and public administration in order to identify four goods that accountability is supposed to ensure: openness, non-arbitrariness, effectiveness and publicness. All of these can be achieved in a procedural or substantive way, but the latter imposes higher standards of accountable behaviour for actors – as they have to demonstrate the merit of their decisions rather than defend the process through which those decisions have been reached. Different types of accountability forums can examine an actor’s conduct in line with the four goods: parliaments through legislative oversight, courts through judicial review, ombudsmen and court of auditors through administrative review. When transposed to the EMU, there seems to be a predominance of procedural accountability that remains limited because of the ‘replacement effect’ of procedures for substance and the weak position of accountability forums vis-à-vis actors with expert knowledge of the policy area. Our argument is that there is a clear need for more substantive accountability in the EMU across different mechanisms of accountability – political, legal and administrative: a claim that we invite our authors to question, probe and elaborate in the chapters that follow.

We have sought through the chapter to add to the academic literature on EMU accountability by constructing an approach that is deductive without being rooted in a nation-state view of the concept and which identifies normative standards of accountability that are not inductively derived from the EU Treaties alone. The benefit of the approach is that accountability is evaluated on the basis of norms, rather than owed to a specific principal – part of a would-be democratic chain of delegation. Acknowledging that the term is often used interchangeably with ‘answerability’ or ‘responsiveness’,¹¹¹ we argue in favour of a change of analytical optics: instead of obsessing about the appropriate forum to whom actors should answer or respond, scholars should focus on the question ‘what should actors be accountable for?’ This is particularly applicable at the EU level, where the distance between the ultimate democratic principal (the citizens) and their supposed agent (EU institutions) remains great. We thus call on other authors to break the stalemate of EMU accountability research by researching the extent to which national and EU institutions provide the four normative goods of accountability, and subsequently, by showing how account-giving by EU institutions can be made more substantive in the future. We hope to have provided useful conceptual tools for the more empirical papers that follow this chapter.

2 Reconsidering the Good of Improving Accountability

Roy L. Heidelberg

2.1 Introduction

One of the more curious developments of twentieth-century modern political thought is the laudatory treatment of accountability. Despite frequent debates over accountability, the general sense is that it is something to be preserved and improved for the sake of democracy.¹ Accountability has long been connected to democracy in the sense of representation, a feature that dates to JS Mill. But the modern notion of accountability is different in substance from the liberal idea, which is tied to representation. Accountability in its modern guise trends away from ideas of representation towards matters of technology and design. What I mean by this is that accountability is a derivative value that functions at the level of instrumentation. What makes accountability good is its use in achieving a goal. Accountability is still regarded as and spoken about as a political good, but this is generally a remnant of the liberal idea of accountability tied to representation. As Mill put it, perfecting accountability, in the sense that he meant it, depended on aligning the interests of rulers with that of the people.² Mill, however, did not have the insight into what accountability looks like in a modern bureaucratic state, which is the modern version upon which I will focus here.

The approbation of accountability derives from a sense that accountability is a promotional good of democracy. In other words, accountability has been framed over the past century as a feature of modern government that is essential to the broad success of realizing democratic government, which has lately been transformed into an idea of participatory governance. Achieving accountability entails success in both realizing the increasingly complex objectives of the modern state and satisfying the values of democracy. As such, many regard promoting accountability as de rigueur of democracy. The idea carries a normative force that appears essential to addressing imbalances of power that favor experts against the public. As Dawson and Maricut-Akbik describe in their introductory chapter to this volume, the normative goods of accountability can help guide frameworks to address the nongovernmental, extra-nation-state institutions developed and developing alongside the increasingly complex demands of modern governance. They propose four normative goods: openness, nonarbitrariness (procedural limits on discretion), effectiveness through measured performance, and ensuring that actions are in the public interest (publicness). These goods underscore both the procedural and substantive qualities of accountability. Procedural accountability ensures that activities are done correctly (open, public, nonarbitrary) and lead to appropriate outcomes (effective). Substantive accountability places higher demands on the institutional setting, as Dawson and Maricut-Akbik describe, by requiring an explanation of the decisions behind the activities.

It is unusual not to be swept along in the laudation of accountability. I myself have described accountability in two previous essays, one in which I attempt to deepen the connection between accountability and democracy by incorporating practices of contestation and nondomination into its conceptual fold.³ I see such matters slightly differently now, especially considering some of the distinctions I will address in this essay, namely the distinction between responsibility and accountability and the ways in which accountability serves bureaucracy and not democracy. I focus upon the concept as it applies to public administration and the political formations associated with it (i.e. the administrative state). The administrative idea of accountability is tied to design and performance, evident in the procedural sense of accountability, making accountability a concept that deepens technological systems of control. I also identify problems on the substantive side of accountability where actors are required to tell a story (give an account) of their decisions. The account itself is plagued by the dual problem that, first, it is the account itself that is subjected to procedural accountability through design and, second, that accountability as a practice does not permit a meaningful discourse between experts and the public. Ultimately, accountability is a practice that formalizes expertise into governing, an idea contrary to the prevailing notion of it as a value that ensures democratic control.

I doubt the integrity of ideas that connect modern accountability to democracy and see the rethinking of accountability against democracy as an important political problem of our time. Accountability is not an idea that promotes democracy. Contra democracy, the notion of accountability is found in strengthening bureaucracy, and it does so without explicit regard for ideas of democracy. Viewing accountability not as an institutional good but as a concept with relational consequences achieved through technology brings into question this largely uncriticized connection between democracy and accountability. In this essay, I question “the good” of accountability and identify how the concept of accountability in both the procedural and substantive sense reinforces the power of experts above the public.

2.2 Responsibility and Accountability

I begin by distinguishing between accountability and the more common notion of responsibility. Responsibility partly entails giving an account of one’s actions, meaning an explanation for what one did, why one did it, and what reasonable expectations were behind doing it. This does not mean that responsibility is the account itself. Responsibility is something that one can have in the sense of “my responsibility.” We can speak of responsibility in a way that gives it a sense of character and connection with an individual.

On the other hand, accountability takes that element of the account as everything. For accountability, the details of the account prevail, so much so that in its reductive sense, accountability renders pointless the thinking and decision that lies behind the human act itself. One cannot speak of “my accountability.” It is meaningless. Being accountable means being held accountable. This contrasts sharply with the quality of responsibility, which does not require an other to act upon me. One does not need another to make one responsible. The other can play a role in one’s sense of responsibility, but it does not serve to make my actions objective to a preconceived principle, as a principal does in the sense of accountability.

The relationship between the holder and the one held that makes accountability – let us refer to them as principal and agent for the sake of simplicity – is entirely bound by an instrumental scheme. The principal wants beneficial actions done by the agent, who serves as a means to achievement. This arrangement of expectations is the core of the relationship between the principal and the agent. The principal is a principal insofar as she has expectations for an agent. The agent is an agent insofar as he acts under the oversight of the principal. This is a relationship in only a superficial sense. Each party does what serves himself/herself under the constraint of what the other desires or wants. There is no expectation of sincere consideration for the other in this relational schema, the absence of which minimizes, even eliminates, the relational sense of it. In other words, the moral or custom is dictated by a fully inward consideration of one’s objectives. This collapses any real sense of morality, a feature that frequently plagues institutions and organizations premised on impersonal relationships.

What do I mean by an impersonal relationship? Simply put, it is one that is dictated by formal rules. The rules are not suggestions. They are prescriptions, stipulations on a course of action. The challenge for the principal is not to express the rules of action; the challenge for the principal is guaranteeing that the rules are followed. The agent can have been prescribed how to act, can be fully aware of the rules. But even then, the agent may not perform. It is at this point that accountability is thought to function. Accountability is imposed on the agent. It is an instrument of the principal. In other words, it is an instrument of power over another where formal rules determine how another must act. The starting point of any accountability relationship, then, is the objective of the principal. A perfect accountability scheme (we will revisit this idea of “perfect” below) requires that the agent perform a prescribed role. To the greatest extent possible, the complications involved in performing this prescribed role have been addressed through the formal rule scheme.

One way of thinking through this impersonal relationship is by seeing it as a contest over the decision. The agent is in a position through which his decision will have ramifications for the principal. The principal, meanwhile, wants to minimize the decision-making scope of the agent and enforce arrangements that accord with her decision (of what is to be done). A perfection of accountability is a condition of nondecision for the agent. This is one reason why substantive accountability is conceptually convoluted: procedural accountability designs away the substance of the decision itself.

The condition of nondecision is one facet of accountability. It is the condition that Dubnick and Frederickson refer to as pre factum accountability, or accountability before the deed.⁴ They contrast this facet of accountability with post factum accountability, which places focus upon consequences as a facet of the principal–agent relationship. It is reasonable to see the necessity of consequences as made by a failure of control. When the condition of nondecision in pre factum accountability fails, the force of consequence in post factum accountability arises.

2.3 Reconsidering Per Factum Accountability

In a previous essay,⁵ I added to the dual concepts of pre factum and post factum accountability the idea of per factum, which I described as during or through the deed itself. Viewed through administrative logic, in particular the solutionism of technics, per factum accountability is better thought of in the sense of “thoroughly done,” the sense bearing a connotation of perfection. Achieving the condition of nondecision through thorough design is perfect accountability. But the political consideration eschews perfection in that sense. The focus must be on the deed itself, the ongoing process of any activity that is supported by authority and involves power. In this respect, the per factum accountability should be viewed as ongoing, as being “through” the deed, in the same sense that “permeate” means to go through and “permit” means to send through. This meaning of per factum does not correlate with a sense of perfection, though, because of the contestable practices intrinsic to politics. Simply put, the administrative logic of accountability begins and ideally ends with pre factum, meaning a properly and thoroughly designed system or institution that minimizes the concern over the execution of the deed (per factum) and the possibility of incompletion (post factum). While this may itself appear impossible, it is the basis of accountability design: a system that functions impersonally does so without judgment or thought of its performing elements (in an organization’s case, people are the elements). In other words, perfection renders moot the question of performance, and thus the per factum and post factum concerns are irrelevant.

We should not be distracted by the challenge and the fact that such design is not possible in many cases. Particularities will always make such “perfection” inconsistent with practice. But inconsistency is not inconceivability, and the point is that every error in the system is perceived as an opportunity for improving the pre factum system that is behind it. This is an ethos of technology. The question should never be posed in terms of a given state, a fixed condition, because at issue is the condition of perfectibility, not the state of perfection. The administrative sense that is behind solutionism is supported by a belief in a perfectible state or institution.⁶ This belief is not hindered by the evidence of imperfection since that is considered evidence for what can be improved. Such is the logic of technics, and it is thus that accountability is realized as a concept of technology.

The idea that accountability is possible “during” the deed, as I imply with the sense of per factum, is conceptually inconsistent with how accountability is generally conceived within administrative logics. In other words, opening the deed is a direct challenge to accountability and exposes the problems with it. These problems are largely the result of accountability being a concept of and for technology, a concept in diametrical opposition to responsibility.

It is worth returning to the question of responsibility to clarify the claim that accountability is in both concept and practice against responsibility. The distinction hinges primarily on how accountability is premised on impersonal structures and institutions to facilitate preconceived actions. Responsibility, however, operates within ambiguity and uncertainty, conditions that require judgment about how to act in particular circumstances. As already mentioned, it is understandable to speak of “my responsibility” because one must take possession of the decision that corresponds with the action directed towards the particular concern. However, the grammar of accountability does not allow us to speak of “my accountability.” This phrase is senseless. I can say, for example, “Raising my children is my responsibility.” This connotes a relational understanding of my role, what we can call a caretaker, and its meaning is built upon this relationship. The actions that correspond with “raising my children” are not preconceived, even if I hold firmly to certain standards, morals, customs, or even principles. The point is that my responsibility may require me to act in a particular case against such standards and then to answer for doing so (hence the account within the concept of responsibility).

I am unable to say “Raising my children is my accountability” and to convey a sensible meaning. The reason is that accountability produces an object relationship so that the “I” that speaks cannot express something about the “I” through accountability, but only about the tasks and expected behaviors. To speak in this way of accountability requires me to say “I am accountable for raising my children,” a remark that connotes a person or structure that “holds” me accountable and “possesses” my condition of accountability. The “I” then turns to the tasks necessary to fulfill the accountability relationship. What accountability enables above responsibility is an objective view on what is necessary to be done, objective to the extent that another party is charged with determining the appropriateness of the act based upon established standards. It is this last qualification that distinguishes “being held accountable” from “my responsibility,” and this distinction is further clarified by the difference between action and tasks.

2.4 Tasks and Design

Consider what is connoted by task: a duty, a chore, an assignment, a charge. A task is something given to you based upon what is expected of you. It is often generalized by the expected conditions that demand activity. I want to contrast this with the idea of action, which I believe connotes a greater degree of ambiguity sufficient to support the judgment of the actor. A task is itself an idea that eschews judgment, while action demands it. The distinction is clarified by Arendt’s description of action as being the conditio per quam (the condition by means) of political life, a category she contrasted with work (the category of artificial worldliness) and labor (the category of life in the sense of the biological).⁷ What is specific to action is what Arendt called natality. Action is the condition by which a person can start something new, can bring about a beginning, and it is partly for this that action is a condition of freedom itself. Natality is first realized in the fact of our birth, that every birth is a new beginning, and our capacity to create something new is what makes us free.

Arendt’s conception of action is diametrically opposed to the conditions that are fostered through the bureaucratic apparatus through which accountability functions. The actualization of freedom through action is the capacity to do the unexpected, which is how a new beginning is brought about. “It is in the nature of beginning that something new is started which cannot be expected from whatever may have happened before.”⁸ Routine, standards, and procedure all work against the conditions of action precisely so that expectations are realized, so that the unexpected does not happen.

But accountability and the associated administrative logics are not to be found in the other “human conditions” that Arendt discusses. There is no biological need for accountability, so it is not present in labor. Work, according to Arendt, is judged based upon the production of a world suitable for human use. It is associated primarily with the production of the material world, the kind of artifice that we associate with the Promethean violence against nature,⁹ wresting from it the materials for our needs and goals. Work characterizes the condition of making the material world accommodate human life. Accountability is about task, not work. It is not premised on human use but on the use of humans. Accountability is complicit in the bureaucratic arrangement that prioritizes artificial production above human use, the quality of dehumanization that is especially associated with bureaucracy.

It does not have to be this way. There was a sense of accountability that was associated with representation and a liberal sense of government, an understanding that derived accountability from responsibility. But that idea no longer prevails in the meaning of accountability. The modern idea of accountability rests on notions of control over the administrative apparatus to ensure execution. It is a concept that follows the growth of bureaucracy and administration to such an extent that responsibility is conditioned by accountability. Action, as Arendt described it, is consistent with responsibility but not accountability. Accountability is a political concept only to the extent that it domesticates the components of politics to the point of erasure. What is done through accountability is not a space of contestation where the possibility of action might produce the unexpected; rather, what is done is a restricted space of behavior, where ultimately an algorithmic expression is possible, thus erasing action and responsibility. Behavior is the antithesis of action. It is produced by design, and behavior is to act in a way consistent with expectations.¹⁰ Design implies expectation, and accountability is a concept of design insofar as the agent is given the procedures and the incentives to do as the design dictates. Actors properly embedded within an accountable institution do not act where their tasks are not prescribed, which is a way of saying that action is conceptually inconsistent with accountability itself. Prescription is the arena of behavior and the act of constraining action; or, more concisely, prescription erases action. Therefore, one can never say “my accountability”; the prescription of one’s actions removes any ownership over the act itself.

The early debates over accountability were focused on what was called “administrative responsibility.” The sense of administrative responsibility was eventually abandoned in favor of talking about accountability, and I argue elsewhere that this shift in language testifies to a changing idea of the meaning of “responsible government.”¹¹ Carl Friedrich, who appeared to take the side of administrative discretion and deference to expertise, stated that

if a responsible person is one who is answerable for his acts to some other person or body, who has to give an account of his doings (Oxford English Dictionary), it should be clear without further argument that there must be some agreement between such a responsible agent and his principal concerning the action in hand or at least the end to be achieved. When one considers the complexity of modern governmental activities, it is at once evident that such agreement can only be partial and incomplete, no matter who is involved.¹²

Friedrich’s apparent defense of discretion in fact opened the door for design. He goes on to say immediately after this remark that a realistic consideration of the electorate and its representatives shows that, as principals, they are inadequate to the task of reaching such an agreement over administrative tasks. They are unable to bring about what Friedrich calls “responsible conduct of public affairs,” by which he meant the alignment of required actions and defined ends, with one qualification: “unless elaborate techniques make explicit what purposes and activities are involved in all the many different phases of public policy.” Indeed, the qualities associated with modern accountability – performance measurement, transparency, incentives of various sorts, rules, and procedures – are the elaborate techniques that fulfill this qualification. These techniques render moot the story from the “responsible person” since they address the problem from a design perspective, meaning the “many different phases of public policy” are considered in dictating how an agent acts under relevant conditions.

A fair rejoinder would point to the way that Friedrich himself defined responsible: one who is answerable for his acts to some other person or body, who must give an account of his doings. He cited the Oxford English Dictionary. The current version (OED Third Edition, March 2010; most recently modified version published online June 2021) offers the following as the first definition of responsible: “Capable of fulfilling an obligation or duty; reliable, trustworthy, sensible.” The third, fourth, fifth, and sixth definitions under the adjectival use refer to some variation of answering a charge (even using “accountable for” and “to be held as”). There is no dispute here that responsibility includes some facet of account-giving, but the distinction between accountability and responsibility is the extent to which the account remains a story communicated between two people about what happened. Modern accountability takes the story as a component of control, as though the story must be written beforehand. Responsibility entails an account about why one decided to act as one did, which in some respect is the arena of “substantive accountability.” In perfect form, though, accountability takes the account and makes it an ex ante concern that determines what is to be done. At issue is how accountability takes the component of the account and magnifies it. In responsibility, I may feel obligated to explain to someone why I did what I did. With accountability, that account is transformed so that I act as you intend, making the story itself not one that the account-giver tells but rather a story to be followed.

The emphasis on the account that coincides with modern accountability is not about the act of explaining one’s action; the emphasis is on controlling the account itself, on dictating the story. To refer to accountability is not to refer to a human quality but to a technological quality in which systems are designed to guarantee outcomes. The “ability” in accountability is a quality of the institution or system, not the person. When we refer to an accountable actor, we refer not to a person capable of action and responsibility but instead to an agent performing within a designed institution or system. The perfection is aimed at the task, and the person is an instrument within a perfectible system. One could say that accountability seeks to solve the problem of responsibility by perfecting it. Responsibility conceptually retains the possibility that a person might act on their own discretion and judgment, and accountability removes this by and through design. It is not that accountability is different from responsibility. Rather, it is an extreme form of it expressed through the administrative logics of solution and technology. Referring back to the definition of responsibility above (capable of fulfilling an obligation or duty; reliable, trustworthy, sensible), the -able of accountability erases the uncertainty of the second part of the definition. The design approach seeks to exclude the variable effect of reliability, trustworthiness, and sensibility. The one holding the agent accountable is an institution.

2.5 Perfecting Bureaucracy

Let us return to the question of perfection in accountability. The perfection of accountability rests in the same ideal condition of perfection identified more than a century ago in the bureaucratic system of order described by Weber: in dehumanization.¹³ He defined this quality of the bureaucratic apparatus as being composed of agents acting sine ira et studio, a phrase he might have borrowed from Tacitus, meaning without anger or bias. Tacitus meant by this that a story of historical occurrence (an account) might be presented to an audience based solely on facts of what happened and without any flourishing from the speaker. In this way, an orator is restrained from attempting to influence the audience. In essence, Tacitus refers to what we might consider an “objective viewpoint” and used this formulation in his early history of the Roman Empire. Weber’s meaning is slightly different. His meaning refers to the acts of agents in a bureaucratic system. It is the deed, not the story, that concerns Weber’s notion of objectivity behind sine ira et studio. Nevertheless, both Tacitus and Weber refer to a condition that is restricted by a conception of objectivity. Both sought to introduce a condition through which fact (that which is done) supersedes truth to such an extent that fact itself becomes truth. But Weber’s description did something that Tacitus’s did not. Tacitus’s conception of an objective account allowed interpretation by the listener. A story can be told “faithful to the facts” but the meaning can remain open to the audience. Tacitus’s sine ira et studio meant that the account must be given according to what was done. There thus remained some political element concerning how what was done could be relevant to current matters of action and deed. The sine ira et studio expressed by Weber is not concerned with what was done but rather what is to be done. Meaning, interpretation, and understanding are expressly removed from the question of fact, understood to mean deed or that which is done. The agent of the Weberian sine ira et studio is foremost an instrument of the design. This is the meaning of dehumanization: a prescription to ensure that design becomes fact. This quality is of utmost importance to bureaucracy and administration. Weber called it the special virtue in his description of the ideal-type bureaucracy.

Weber answered the issue of what is to be done by upholding the function of calculability in the deed itself. Here is how Weber expressed it:

The peculiarity of modern culture, and specifically of its technical and economic basis, demands this very “calculability” of results. When fully developed, bureaucracy also stands, in a specific sense, under the principle of sine ira ac studio. Bureaucracy develops the more perfectly, the more it is “dehumanized,” the more completely it succeeds in eliminating from official business love, hatred, and all purely personal, irrational, and emotional elements which escape calculation. This is appraised as its special virtue by capitalism.¹⁴

Perfection (fully developed or thoroughly done) requires dehumanization. This is the mode through which the bureaucratic apparatus exerts control, and it is precisely the condition of modern accountability. What is to be done is predetermined so that actors behave according to tasks. The story is told beforehand. This is markedly different from the sense of responsibility, which retains some sense of moral conduct by the individual, a conduct that depends upon the exercise of the faculty of judgment. Accountability operates where judgment is made obsolete.

Accountability is the moral expression of amoral conduct that marries the conditions of perfection in bureaucracy: dehumanization and calculability. How can one claim accountability to be a moral expression of amorality? The simple answer to this is that a moral expression is concerned with the central principles of right and wrong as pertains to right conduct; amoral conduct is carried out without regard to right or wrong. This is precisely the condition of calculability (morality as determined by calculable rules of conduct) and dehumanization (disregard for personal considerations of right and wrong). How does accountability marry these conditions together? A necessary premise of accountability is that the actor behaves in accordance with established rules and procedures and not according to their own judgment of appropriate conduct. In other words, “Objective discharge of business primarily means a discharge of business according to calculable rules and ‘without regard for persons.’”¹⁵

2.6 Contestation Is Not a Fix

Modern accountability differs from responsibility. The key distinction is that accountability is conceptually linked to the use of humans as part of an instrumental institutional apparatus, which makes it an extreme version of certain components of responsibility. The apparatus, which in modern parlance is called bureaucracy, puts primary emphasis on the tasks and procedures for achieving defined goals. We may speak of an accountable person, but in effect we are describing the system in which the person operates. Persons cannot have accountability because in being accountable they relinquish action to the operations of tasks and thus to a power that holds them accountable. Accountability operates as a condition of perfectibility for bureaucracy.

Accountability cannot be political insofar as it is premised on the erasure of politics from the discharge of state operations. Conceiving of accountability as political has sparked interest among many scholars (the present author included), who hold that accountability is an essential precondition for democracy and that there is the possibility of democratic accountability in the modern sense of government. But there is not. Rather, accountability operates against democracy in the important sense that it perfects bureaucracy, not democracy. What I previously identified as per factum accountability – something between pre factum and post factum that took place during the deed – suffers the same problem as post factum accountability: everything depends on the perfection before the deed. Accountability operates against the unexpected; its functions seek fulfillment of expected outcomes through increasingly optimal designs. The unexpected of today becomes a bit of new information for the greater perfection of the system. That is what a thoroughly done (per factum) bureaucratic system is in practice. Accountability is a concept of and for technology and design, not a concept for human use but, at the risk of repetition, it is a concept for the use of humans. While it is the case that in its early stages humans (principals) use humans (agents), the logic persists in such a way that rules and algorithms ultimately prevail. In other words, the design is intended so that eventually the tasks of the agent are compelled by evidence.

This logic is one of the reasons that rethinking accountability by embedding contestation or by emphasizing a substantive orientation of account-giving fixes nothing. Modern accountability entails practices that absorb what was not used where and when it is useful to do so. The shift in focus that occurred with modern accountability was not a move away from representation but rather a step further into the direction set by representation where the state addresses the increasingly complicated and specialized conditions of modern culture that derive from the interests of the people. Accountability is its own solution. When things go wrong in modern mass society, the calls for accountability ring out almost immediately. Sometimes this means punishing the wrongdoers, but it is also a call for preventing it from happening again. What this ultimately looks like is no surprise: refinement of rules and procedures. Contestation is a value similar to transparency that can easily be normalized under the broader goals of accountability. This is in practice quite common. Public participation and transparency are both facets of modern accountability arrangements. The point is not that they are present in the arrangement. The important point is that they are subsumed under accountability itself.

The problem in accountability has always been who is in control. This is apparent from the earliest stages of the debate. It is at the very heart of the dispute between Carl Friedrich and Herman Finer: is a responsible administration better guided by experts or public representatives? The entry of “the public” into this debate is not a progressive step, nor is it necessarily a normative good.¹⁶ Increasing the publicness of an accountability regime or arrangement does not address the issue of control. What it does, however, is to highlight that the control falls to nobody. The public is not a somebody but a calculated political entity designated by its generality. It fits the essence of calculability (in, e.g. “public opinion”), the quality that provides bureaucracy its technical superiority: decisions are based on measurable criteria and not left to somebody. The decision must be for the “public benefit.” The decision is what accountability addresses, and the modern form of it eschews representation in favor of objectivity, an objectivity that is realized in nobody deciding. Questions about the exception and the unexpected, the questions that constitute political concerns, are erased by design.¹⁷

An agent under an accountability regime asked to justify or defend a decision presents two problems. The first is that it is not the agent’s decision. This is not meant in the banal sense that the agent is simply following orders from a principal because it is rarely so simple, although this is an issue of substantive accountability and is the source of perversions of accountability, such as scapegoating. More critically, though, the decision is increasingly determined by the measurable components of the substantive policy arena. The orders come from nobody. They can be based possibly on evidence, data or information. The second issue is to whom the decision must be defended or justified. The defense here must balance a finely tuned distinction between justification and manipulation through what can only be properly called propaganda.

For example, let us imagine an official in a national health department, such as a leading infectious disease expert. This expert identifies a highly infectious virus that leads to greater than average mortality. She briefs government officials and explains that certain difficult measures must be implemented in order to stem the spread of the disease. Cities shut down commerce, schools close, and only essential services are allowed to continue operating. The expert is then scheduled to speak on dozens of news programs to explain what she sees in the data and to exert her expertise in defending the judgment to take such drastic measures. She explains that this will save lives and that the sacrifices are necessary to stem the spread of the virus. She explains the decision with admirable clarity and cites data and evidence. But most people cannot understand the evidence and cannot interpret the data. They express doubt. They contradict the expert with their own data and evidence. They question the integrity of the expert. At some point, the attention turns from justification to winning the argument. The expert is joined by other experts to spread a message and to counter “home remedies” and “alternative facts.” Her status as an expert is questioned by her opponents, who claim that she is nothing but an opposition bully trying to undermine the people and destabilize society. Meanwhile, commercials and billboards and public service announcements encourage people to take the steps necessary to stem the spread of the virus: avoid socializing, wear a mask, and wash your hands.

One could tell a similar story about a monetary expert who faces a potential catastrophic financial collapse. During the 2008 financial crisis, the US Fed began a policy of quantitative easing, a monetary policy that had to that point been scarcely used in a few countries, including Japan in the early 2000s. The experts in the Federal Reserve Bank faced the challenge of explaining a complex purchasing practice that was intended to encourage banks to protect their balance sheets enough that they could make loans and, thus, send money into the economy. To nonexperts, this looked like the equivalent of printing money, which sparked fears of inflation, but the experts had to make nuanced arguments on the differences between money printing and quantitative easing. A little more than a decade later, facing another potential financial crisis from a global pandemic, the US Fed began purchasing Treasury bills again, but this time the leader of the Fed was adamant that the practice was not quantitative easing. Instead, the practice was framed as a way for the Fed to create reserves. They purchased short-term rather than long-term bills and were not making the purchases with the goal of increasing liquidity. As then Fed Chairman Jerome Powell said, “This is not QE. In no sense is this QE.”¹⁸

Both descriptions of experts at work highlight the disparity of knowledge between the experts and the public at large. The expert health official case could be seen as an example of contestation, and it could be viewed as an example of substantive accountability. The expert is put in a position of justifying the activities (policies) that she deems necessary based on the evidence. On its face, this would seem to be an exercise of accountability. But, I think that it actually exemplifies a failure of accountability as I understand it. The example displays the justification of accountability as necessitated by the increasingly complicated conditions of modern government. To grasp the failure, consider the way that Mill described accountability:

When the accountability is perfect, the interest of rulers approximates more and more to identity with that of the people, in proportion as the people are more enlightened. The identity would be perfect, only if the people were so wise, that it should no longer be practicable to employ deceit as an instrument of government; a point of advancement only one stage below that at which they could do without government altogether; at least, without force, and penal sanctions, not (of course) without guidance and organized co-operation.¹⁹

Mill alluded to the ingredients necessary for going from representation to administration. Perfection approaches the point when the people could do without government, by which he seemed to mean the use of force and penalty. There will always be the need, one infers, for guidance and organization. The perfection of accountability in the liberal sense makes the purpose and function of representation unnecessary. If the interest of the representatives approximates the interests that identify the people, then the people do not need representation. This only works, though, to the extent (in proportion with) the enlightenment of the people. Mill’s liberalism depended upon expertise and leadership of those who were knowledgeable, as he made clear in his advocacy for weighing voting rights based on education. For Mill, this was a solution to the problem of aristocratic power. He believed that knowledgeable voters would improve upon the political decisions made by property owners. By the early twentieth century (and into the twenty-first), this same argument of giving more political power to those who know would be used to tame democracy (which of course was the original target of this argument, dating back to ancient Greece). The perfection that Mill described in the nineteenth century had a different nuance by the middle of the twentieth century. The person who is accountable is not a representative but an administrator. They are not supposed to have interests (sine ira et studio) and are supposed to act according to calculability (measurable, evidence-based reasoning). The point at which an administrator must explain to the public the reasons for a policy decision is a failure of accountability precisely because the decision is under question. This activity is aimed at bringing the interests of the public into line with what the expert has deemed appropriate based upon evidence and data. As Mill himself described it, the perfection of accountability entails improving the wisdom of the public (since, ab definitio, the expert knows). When the public displays an ignorance about the issue at hand, we witness the imperfection of accountability.

This standpoint is clearer in the context of administrative accountability because, as described above, the – able of accountability rests in the institution, not an individual. At issue is the story about what is to be done, as in telling the story ahead of time. In other words, the ability of accountability situates power into the nobody of administration (public administration), and the expert is the remnant agency of this nobody. That the public is insufficient for the task of governing is a key premise of public administration. Woodrow Wilson regarded public opinion as being meddlesome and considered it the role of the reformer to “persuade [his fellow-citizens] to want the particular change he [the reformer] wants.”²⁰ Walter Lippmann said that “the false ideal of democracy can lead only to disillusionment and to meddlesome tyranny.… The public must be put in its place, so that it may exercise its own powers.”²¹ Finally, consider Carl Friedrich, in his explication of what he called administrative responsibility:

The pious formulas about the will of the people are all very well, but when it comes to these issues of social maladjustment the popular will has little content, except the desire to see such maladjustments removed.… Consequently, the responsible administrator is one who is responsive to these two dominant factors: technical knowledge and popular sentiment. Any policy which violates either standard or which fails to crystallize in spite of their urgent imperatives, renders the official responsible for it liable to the charge of irresponsible conduct.²²

What Friedrich, Wilson, and Lippmann are describing is the arrangement for a technical civilization that, while being sensitive to public opinion or sentiment, also must, as Wilson put it, “make public opinion efficient without suffering it to be meddlesome.”²³ And as Friedrich argued, this new kind of responsibility, which I have argued is modern accountability, must serve the double standard of adhering to technical knowledge and remaining sensitive to public opinion. These are the requirements that Friedrich described as a novel type of responsibility for the permanent administrator that we now call accountability.²⁴

So how does this story about the health administrator indicate a failure of accountability rather than an exercise of it? The short answer is that it only fulfilled one of the two standards: it failed on the popular sentiment front. The example illustrates also how accountability operates ideally as a pre factum course of action: the tasks must be seen as necessary according to the evidence and information, or according to the technical details of the issue. Accountability is an operation that is primarily concerned with the decision, and in its perfect state, the decision is preordained by necessity. Popular sentiment must be “accounted for” in the decision itself. If it reaches the point of persuasion (force), then it is imperfect. Thus, a key part of public accountability is constructing what Mill called the identity of the people.

For Mill, this perfection of accountability centered upon the public sentiment merging with representative interests. The new sense of responsibility arising in the twentieth century that Friedrich remarked upon is not representative in nature but rather centered upon expertise and public sentiment. The difference is not negligible since, assuming the expert acts in good faith to her profession (a key proviso in Friedrich’s model), the contest will inevitably favor the expert. Contestation in this regard contradicts the premise of expertise. Mill’s notion of perfect accountability fits the administrative conception of accountability to the extent that the perfection of accountability requires an alignment of what is to be done with the enlightenment of the people – in other words, the people are in no position to dispute the necessity of evidence. The substantive accountability in which justification is required is an act of persuasion, but it may as well be an act of manipulation. The expert knows. The public doesn’t. The expert has to convince the public. This is the justification. If the public disputes the expert, then the very premise of the expert’s position flounders. Thus, contestation is not a way of improving or fixing accountability. It is an act of destruction. The contest calls into question the very legitimacy of the institutional arrangement by putting into question the premise of expertise. The Millian standpoint retains an element of the public sentiment that Friedrich mentioned, but the administrative concept of accountability incorporates public sentiment as another component of perfection, a problem to be solved. To contest the decision within an accountability framework is a destructive act, but as fits the logic of technology, destruction is constructive. There is the ongoing possibility of subsuming the content of the contest for the sake of improving accountability, to the extent that the contest reveals improvement or the possibility thereof. The accountable institution can incorporate the values or ideas into the accountability framework, whether that be through formalizing contestation in public participation or transparency or by using the problems raised in the contest to improve the impersonal operations of the accountable institution. Herein lies the perfection of accountability, a thoroughly done task achieved by design that will further alienate the nonexpert from the decision itself. The realization of per factum components of accountability deepens bureaucracy.

3 Markets as an Accountability Mechanism in EU Economic Governance

Armin Steinbach ^*

3.1 Introduction

By upsetting traditional interdependencies between financial actors, the European sovereign debt crisis has engendered a range of accountability concerns. Prior to the crisis, treaty-based arrangements in the EU subjected both public and private entities to the discipline of market forces. Specifically, governments and financial institutions relied on liquidity furnished by private counterparties, and Member States met their financing needs without central bank intervention or assistance from other EU countries. However, the collapse of financial markets significantly reshaped relations between creditors and debtors. Indeed, a new regime now prevails in which central banks act as pivotal market makers and in which sovereign states backstop other sovereigns. For many years now, the European Central Bank (ECB) has been injecting massive liquidity into markets, which has had strong redistributive effects between EU states while also distorting private-sector competition.¹ As a result, bond rates have been effectively unmoored from practical realities, and the principle of strict national responsibility for public debt has been all but invalidated. In this way, market forces no longer determine the allocation of debt capital; this role is now performed by EU creditor states and the ECB. In exchange for financial assistance, EU creditors have imposed a range of obligations on debtor states in order to encourage their fiscal consolidation.

This shift has been associated with a ‘derogation’ of democratic governance, according to various legal and political scholars.² To be sure, the current structural arrangements did not arrive all at once but rather on a piecemeal basis as part of numerous macroeconomic adjustment programmes, granular memoranda of understanding, and unconventional monetary policy measures, many of which are viewed by commentators as hostile to the democratic principle that parliament should be the progenitor of policy decisions – particularly when it comes to weighty matters of public interest. ‘Intergovernmentalism’, ‘non-majoritarianism’ and ‘executivism’ are just some of the terms that have been deployed in discussing this shift away from standard notions of democratic accountability.³ However, rather than focus on assessing such developments from the perspective of democratic representation, an examination of how underlying accountability relationships have been transformed would appear to be a more fruitful line of inquiry. Since time immemorial states have been obligated to raise money to fulfil various functions, from waging war to providing infrastructure. Here, a distinction is illuminating, for there have traditionally been two main sources of public financing: specifically, direct taxation of domestic entities over which the state enjoys sovereign authority, and, alternatively, procurement of funding from other states or foreign organisations.⁴ The second mode of financing is typically governed by market mechanisms, as states normally enter into a competitive market in which bond rates are free to rise or fall in line with demand and perceived risk. Accordingly, when states raise finance internationally, accountability is typically structured through market arrangements. By contrast, under the non-market model of domestic finance, the entities providing tax revenues exercise a disciplinary effect through political representation.

Notably, the foregoing distinction regarding forms of accountability coincides with the difference typically drawn between the ‘tax state’ (Steuerstaat) and ‘debt state’ (Schuldenstaat). The former term was coined by Schumpeter to draw attention to the crucial role played by taxation in enabling the activities of the state.⁵ By contrast, the latter term emphasises the tendency of states to amass large public debts. While states have accrued enormous debt loads in past eras – British national debt, for example, stood at 200 per cent of GDP at the end of the Napoleonic wars – Streeck argues that 1970 was a transitional moment, as the enormous post-war increases in the size of the public sector in all Western states heralded a new stage in the relationship between capitalism and democracy.⁶ In Streeck’s view, the growing dependence of governments on large-scale debt issuance entailed growing susceptibility to political influence by financiers. Streeck also undertakes a division between the tax and debt state, positing that under the former model, governments are predominantly accountable to their citizenry, or Staatsvolk, who enjoy political representation. Under the debt state model, by contrast, citizens have to compete with bondholders, or Marktvolk, who demand reliable debt service.⁷ The accountability concept introduced previously reflects this point of distinction between the debt and tax state, while also situating them in wider categories. In particular, the tax state is one type of financing regime based on public relationships – that is, between the taxpayer and sovereign, but public relationships are also at stake in financing between states (e.g. bilateral lending between EU states through the European Financial Stability Facility, or EFSF) or between states and other public institutions (e.g. the International Monetary Fund (IMF) or European Stability Mechanism or, indirectly, the ECB when it purchases government debt). This wider notion of the relationship between public entities and political accountability in the domain of state financing transcends Streeck’s notion of the tax state. At the same time, the notion of market accountability goes beyond concern with the debt state’s dependence on tax revenues (thus creating accountability to Marktvolk) by also encompassing the private relationships of market participants who enter into lending and borrowing transactions without the involvement of the state (e.g. on credit markets or interbank markets). The notion of the tax state versus debt state thus differentiates between sources of government revenue (taxpayers versus market actors), while market versus non-market-based accountability attends to the conditions under which such financing is provided.

One key contribution of this chapter is to elaborate an alternative notion of accountability that furnishes a theoretical underpinning for how economic governance has evolved in the post-crisis setting. The theoretical framework that is developed here builds on the observation that states have the option of raising financing through relationships that depend on market accountability or political accountability, respectively, and that one can be substituted with the other. Furthermore, market accountability as a dominant mode of raising financing has been steadily supplanted in the EU by political accountability in the relationship between debtor states, on the one hand, and creditor states and the ECB, on the other, thus engendering the democratic tensions widely cited in the literature. My central claim is that this shift offers an explanation for the seemingly undemocratic evolution of EU economic governance that has been described by various scholars.⁸ Consequently, it follows logically that one way of solving the widely maligned ‘democratic deficits’ within the Economic and Monetary Union (EMU) would be to restore the market accountability enshrined in the Treaties, as evident in part on the ban on monetary financing, bailouts and state aid. As part of a gradual return to market discipline, it would of course be necessary to enact institutional safeguards that limit the risk of excessive and destabilising market fluctuations. In this regard, with the European Stability Mechanism (ESM) effectively in place, the European Banking Union moving towards completion, and financial market regulations continuously being updated, important safeguards have been established to prevent a return to market accountability from triggering excessive turbulence.

A second contribution of this chapter is to relate the notion of accountability presented here with the accountability concept developed in the introductory chapter of this volume. While the distinction between market and political accountability primarily focuses on whether accountability relationships can be organised through market- or non-market-based arrangements, the introductory chapter focuses on how accountability standards can be determined and how political accountability should be designed. Specifically, Dawson and Maricut-Akbik develop a compelling subdivision between four normative goods of accountability in modern governance – namely: openness, non-arbitrariness, effectiveness and publicness. By reference to their accountability concept, my contribution shows how market accountability – as substitute for political accountability – meets all four of these standards.

3.2 The EU’s Economic Accountability Regime and Its Dissolution during the Crisis

Accountability can be defined as a ‘liability to reveal, to explain and to justify what one does’.⁹ Bovens offers a general understanding of accountability as a relationship between an actor and a forum – the actor has an obligation to explain and to justify his or her conduct, while the forum can pose questions and pass judgement, and the actor may face consequences.¹⁰ Furthermore, this relationship is founded on three elements: information captures the actor’s duty to provide information to the forum about his or her conduct. Justification expresses the forum’s authority to demand that the actor justify his or her actions. And consequences denotes the forum’s power to impose sanctions or offer rewards.¹¹

The three elements of accountability – information, justification, consequences – are readily apparent in the normal exercise of public authority. The government in power (the actor) is accountable to the parliament (the forum); the government informs parliament about its actions and policies (information), which are subjected to open debate in parliamentary sessions and special committees (justification). On this basis, parliament may impose punishments or rewards (consequences).¹²

At this conceptual level, accountability is not limited to the exercise of public power. Rather, accountability more generally encompasses the notion of normative dependencies, which can be established in a formal or informal manner, through social norms or laws. In other words, the legal order may stipulate multiple checks and balances or supervisory mechanisms, which can be understood as normative dependencies. Recalling the above differentiation between market- and non-market-based methods of financing a sovereign state, we can infer that accountability as a normative dependency can be established through either market or political relationships.

3.2.1 Market Accountability in the EU

The EU is a market economy, which means that investment and spending decisions are guided by price signals. A key principle underlying a market-economic system is individual responsibility, in which companies and individuals reap the consequences of their decisions, whether they produce benefits or culminate in economic failure. If a company wishes to raise investment capital, it must convince investors of its merits. Similarly, when governments borrow money from financial markets, the interest rate they pay is determined by investor assessment of creditworthiness.

The EU Treaties enshrine the notion that both public and private actors should be exposed and accountable to market forces, asserting that economic policy should be ‘conducted in accordance with the principle of an open market economy with free competition’.¹³ This commitment to free market principles applies not only to the private sector but also to the public sector, as governments seeking to raise financing must subject their fiscal conduct to the allocative judgements of the market. Similarly, state aid rules forbid government spending that would distort free competition, while the no-bailout principle and prohibition of monetary financing seek to expose governments to the disciplinary force of the market. A commitment to free competition and market-based accountability – including prohibitions against state aid and bailouts – has been a constitutive element of the European Treaties since Maastricht.¹⁴ Thus, despite financial assistance for crisis-wracked Member States, the EU has not created a so-called Transfer Union in which debt obligations are shifted between Member States or to the EU level.¹⁵ In this way, the EU remains committed at least in principle to the allocative wisdom of freely fluctuating price signals, not only as a means of organising economic activity in the private sector but also as a tool in sovereign debt markets for ensuring that Member States conduct sound fiscal policy.

Referring again to the model of market accountability presented above, the market acts as a ‘forum’ by which judgements are rendered concerning the behaviour of participating actors. Under the EU’s legal framework, markets thus perform a crucial organising function, not only in the private sector, by preventing companies from relying on state aid, but also in the area of fiscal policy, as the prohibition of direct transfers between Member States or the EU is designed to prevent irresponsible fiscal behaviour. Under this framework, markets ultimately have the responsibility for rendering judgement on the fiscal viability of a Member State, based on economic criteria. This stands in sharp contrast to the supervisory function exercised by the citizenry and its democratically elected representatives, as various types of value judgements, rather than a purely economic calculus, typically inform assessments regarding the reasonableness of a given policy. Following Bovens’s accountability concept, the state–market relationship corresponds to an agent–forum relationship. Public and private actors provide information in the sense that both actors communicate signals concerning their performance (whether in the form of macroeconomic statistics or profit statements). The market (as a forum) processes the information provided by the actors (whether public or private) to assess economic viability and solvency. The debating element is less explicit, as states are not literally interrogated by markets in the same way that political authorities are. However, state actors do provide justification for their actions to markets at various levels.¹⁶ Specifically, states testify to the soundness of their policies and to their solvency by publishing budgetary statistics and by adhering to certain accounting standards.¹⁷ They comply with the bond issuance requirements requested by investors, and they cooperate with the rating agencies that scrutinise their policies in order to assess their solvency. Finally, consequences represent the forum’s power to reward or punish actors for their performance;¹⁸ market prices thus act as the disciplinary mechanism. Rising bond rates reflect riskier lending conditions and are an outcome of the assessment performed by market observers. States are thus held liable for their economic performance through interest rates, with sanctions or rewards taking the form of higher or lower risk premiums.¹⁹

3.2.2 How the EU Replaced Market Accountability with Political Accountability

Over the course of the crisis, the market orientation that previously served as a mechanism for ensuring sound fiscal policy was gradually supplanted by a new regime of political accountability, as Member State reliance on market financing was substituted with non-market-based support facilities. As the finances of some debtor states deteriorated, causing them to lose access to capital markets, the EU stepped in to prevent financial collapse, providing bilateral financial aid, which was later replaced by the ESM. The ESM and other forms of assistance were structured with conditions that can be ascribed to the categories of information, justification and consequences. Specifically, a Member State must apply for assistance and provide information that fulfils transparency standards (information); it must comply with a set of conditions, adopt policy changes, and demonstrate adherence to agreed terms (justification); and lastly, it may be subject to consequences – rewards in case of compliance, sanctions in case of non-compliance (consequences).²⁰

Various policy tools subsequently developed by the EU also adhere to this logic. Prior to the outbreak of the COVID-19 pandemic, a ‘reform delivery tool’ was envisaged by the EU Commission, under which Member States would enact structural reforms in exchange for financial assistance.²¹ In concrete terms, Member States wishing to receive support would submit a proposal for reform commitments to the Commission substantiating how it would address the challenges identified in the European Semester (i.e. informing).²² The Commission would be entitled to request additional information and require the Member State to revise the proposal if needed (i.e. justifying).²³ During the implementation process, the Commission would assess compliance with milestones and would be able to suspend disbursement (i.e. sanctioning).²⁴ With the onset of the COVID-19 crisis, this tool was replaced by an even more financially potent instrument: the Next Generation EU (NGEU) and the Recover and Resilience Facility (RRF), which establish a quid pro quo mechanism in which grants are offered in return for compliance with a conditionality regime; financial assistance is made contingent on certain types of public expenditure.²⁵ The RRF allocation mechanism builds on information provided by Member States as they pitch eligible projects;²⁶ involves an element of justification by virtue of an assessment by the Commission, which may entail requests for changes or additional information;²⁷ and foresees the sanction of payment suspension if milestones or targets are not adequately fulfilled.²⁸

Thus, rather than being exposed to the collective and (ostensibly) impassioned judgements of the market, ESM or RRF funding, recipients are subject to the discretion of the bureaucratic authorities administering these funding programmes.²⁹ In this way, market accountability has effectively been replaced with a new regime of political accountability. Accordingly, it stands to reason that insofar as a public authority (in this case, the European Commission) is rendering judgement on the policy decisions of a Member State, the principle of democratic representation would demand that Commission’s decision be legitimised through an appeal to its proper authority as an elected body. While the relationship between markets and democracy has always been controversial,³⁰ this new accountability regime would be far less fraught if Member States were to subject their fiscal policy to the judgement of markets, for the abolishment of market accountability has raised major questions surrounding the proper role for EU institutions in the financing of Member States, including associated theoretical issues related to democratic legitimacy.

With fiscal and monetary support for crisis-racked countries undermining the principle of market accountability, strict national responsibility for national debt has been practically invalidated, thereby relaxing the economic accountability rule enshrined in EU Treaty arrangements. Moreover, the shift from market to political accountability has not been limited to state financing. The crisis-induced easing of EU restrictions on state aid illustrates how the decline of market accountability standards has also extended to the private sector. The numerous public–sector interventions that have been witnessed in past years – from bailouts to liquidity lifelines – are far from compatible with the regulatory ideal of free markets that are enshrined in the Treaties.³¹

In sum, with the principle of market exposure weakened by crisis and a greatly expanded role for the public sector in providing financing and ensuring liquidity, debt financing is now granted for political reasons under the logic of discretional conditionality, rather than for reasons of market economics. In this way, markets are no longer the motive force for states to engage in fiscal consolidation – rather, consolidation and restructuring are performed due to conditions attached to ESM, RRF or ECB aid.³² Numerous observers have argued that the discontinuation of market accountability was predominantly driven by market failure: with bond spreads jumping erratically, fear of financial collapse triggering bank runs, and investors pulling out of crisis-roiled countries, policy officials enacted far-reaching interventions to clamp down on market turmoil and limit the economic fallout of the crisis. Legally, the ESM has a mandate to intervene if ‘indispensable to safeguard the financial stability of the euro areas as a whole and of its Member States’;³³ similarly, it has been argued that unconventional monetary policy measures were necessary to sustain the transmission of monetary impulses to the real economy.³⁴ In the wake of the crisis, should we therefore conclude that market accountability has failed as an organising principle for sovereign financing, and should thus be abandoned, as some have argued?³⁵ Insofar as one supports this view, one must contend with the limitations to state sovereignty that emerge from dependence on creditor countries and institutions, and associated challenges to democratic legitimacy. Accordingly, it would appear more promising to advocate the preservation of market accountability, yet in a modified form that limits risk market failure through sound regulatory and monetary policy in combination with limited backstopping and bailout measures.

3.3 The Normative, Procedural and Substantive Dimensions of Market Accountability

In the introductory chapter, Dawson and Maricut-Akbik develop a standard of accountability with two-fold applicability: on the one hand, it can serve as analytical benchmark for assessing the degree and scope of accountability; and, on the other, it can serve as a normative standard for ensuring a high level of democratic accountability. This section engages in greater detail with the accountability concept presented in the introductory chapter. Specifically, I argue that market accountability can serve as a conceptual vehicle for ‘four normative goods’ doctrine developed by Dawson and Maricut-Akbik, not least because it also accommodates the procedural and substantive dimensions of this typology. Accordingly, market accountability is useful not only as an analytical category but also as a conceptual tool for framing an accountability regime grounded in normative ethics, one that supports subjecting public policy to the allocative wisdom of the market. I argue that, when properly regulated, market accountability promotes openness, incentivises impartiality among policy officials, augments the effectiveness of policy measures, and support decisions oriented to the common good. Yet this does not mean to elevate market accountability to the status of universal applicability at the expense of democratic accountability norms – market considerations should not trump democratic legitimacy where core matters of public interest are concerned.³⁶ However, market exposure would appear decidedly preferable to political accountability when multiple levels of governance confound clear lines of democratic control, as in the case of European sovereign debt financing.

3.3.1 Market Accountability and the Four Normative Goods

Dawson and Maricut-Akbik developed their accountability concept against the backdrop of the structurally flawed EMU accountability regime, subject as it is to a complex array of intergovernmental and supranational actors, who interact at multiple decision-making levels. The authors propose a new deductive framework for studying accountability that is more suitable to the EMU setting. Drawing on the public administration literature and liberal and republican strands in political theory, they develop a model of accountability that posits four normative ‘goods’ of accountability: openness, non-arbitrariness, effectiveness and publicness. They explore this normativity along the two normative dimensions of accountability typically recognised in public law – namely, procedural accountability, which focuses on the processes used by actors to take decisions, and substantive accountability, which focuses on the merits of the decisions themselves.

In a previous section, we discussed how Bovens’s general characteristics of accountability – that is, information, justification and consequences – are evident not only in market accountability relationships but also in the political accountability relationships that structure EMU financial assistance and RRF support. Notably, there are clear parallels between Dawson’s and Bovens’s accountability standards: first, openness refers to the expectation that the workings of the state should be transparent. It is a defining feature of the democratic ideal that citizens should be in a position to observe the actions of public authority as a necessary prerequisite for rendering judgement on it. This relates directly to Bovens’s notion of ‘justification’, according to which the actor must give an account of her actions in a public forum. Crucially, openness (and Bovens’s ‘information’ and ‘justification’) can be found in both market and non-market accountability settings. For example, in federal systems, regional authorities who obtain financial transfers from the federal government are held politically accountable, as they are typically obliged to demonstrate their financial need (‘informing’), while accounting for how they have spent this funding in the past or will do so in future (‘justifying’).³⁷ Public entities are required to maintain open books and to report their expenditures to parliament and to the citizenry. Similarly, market accountability relies on openness – governments seeking to receive obtain financing through bond sales are expected to disclose their financial position so that market actors can assess associated lending risks, with more precarious macroeconomic and fiscal conditions leading to higher risk premiums and less favourable financing conditions, which can culminate in extreme cases in loss of access to financial markets.

The second good in the model posited by Dawson and Maricut-Akbik is non-arbitrariness. Drawing on principal–agent theory, non-arbitrariness limits the agent’s scope of authority and links it to the principal’s interest. Non-arbitrariness also encompasses the legal protection of the principal against non-compliant actions of the agent. Holding officials responsible for their conduct allows the arbitrary application of power to not only be discouraged but also remedied, should it occur.³⁸ The concept of non-arbitrariness is inherent to public fiscal relationships, as parliament approves and monitors budgets proposed by government, and citizens also exert an oversight function through elections. Similarly, under a market accountability regime, financing conditions are (in theory) determined by underlying economic fundamentals, thus compelling the state to pursue viable fiscal policies. Furthermore, if a state were to act arbitrarily or in opposition to the interests of the principal (i.e. investors) by defaulting on bond payments, the state in question would not only face legal attempts to force repayment but would witness a withdrawal of market confidence, and, by extension, rapidly deteriorating economic conditions.³⁹ However, the principle of non-arbitrariness in the domain of market accountability does have certain limitations, as markets can behave irrationally, such as when investors are seized by herd behaviour.⁴⁰ This is an important point of divergence from political accountability that is based on constitutional rights. When the relationship between economic fundamentals (as an outcome of policy) and bond rates (as a judgement rendered on that policy) becomes fundamentally disturbed or arbitrary, market accountability as an operative principle breaks down. This underscores the importance of embedding market accountability in an adequate regulatory and institutional architecture that can limit and address such instances of market failure.

The third good that accountability seeks to ensure is effectiveness. Unlike the first two goods, effectiveness refers to a standard of performance: public officials are expected to enact policies of a satisfactory quality. Indeed, explicit efficiency benchmarks are not foreign to the accountability standards that are applied to government authorities. To be sure, the notion that public goods should be supplied in line with market mechanisms is a rich strand in the public administration literature, one that has stimulated numerous managerial reforms in the public sector.⁴¹ Effectiveness may well be the aspect of accountability most closely related to market accountability, as functioning markets impose clear financial constraints on public-sector budgets. In this regard, effectiveness also mirrors Bovens’s criterion of ‘consequences’ – as the agent (here, the state) suffers immediate disadvantages if its conduct does not conform with market expectations. Specifically, bond rates can be expected to fluctuate in line with a state’s financial position and solvency. In this way, sovereign debt markets send price signals that act as a disciplinary mechanism, incentivising policymakers to adopt judicious policies.

The fourth and final normative good is ‘publicness’, which refers to the notion that policy should serve the common good. This aspect enshrines the notion that government authorities should not pursue selfish purposes but rather take into account collective interests. This does not mean, however, that each forum must pursue the same collective interests: for example, courts review public authority on the basis of certain legal standards; citizens vote in elections based on their political convictions; and parliaments monitor the executive with a view to the fulfilment of legislative goals. This criterion subsumes the notions of both ‘justification’ and ‘consequences’ contained in Bovens’s model, as it implies officials are to be scrutinised and must also give an account of their actions. Regarding the mechanisms of market accountability, markets price the risk of default based on a country’s ability to service a bond – and this risk depends on numerous factors, including the performance of the economy as a whole, which depends in part on inclusive growth. In this way, financial investors will punish countries that flout the interests of the society at large. However, the market may also be indifferent to ethical considerations when a country is otherwise fiscally sound. For example, authoritarian states may enjoy the full confidence of the market, particularly if they are rich in commodities, and high levels of inequality do not necessarily impair fiscal stability. However, as open and stable societies with a strong tradition of individual rights are generally more prosperous, we often find a correlation between these characteristics and the market’s valuation of a country’s creditworthiness.

Against this backdrop, we infer that market accountability can be assessed within the normative framework proposed by Dawson and Maricut-Akbik and that the normative premises grounded in public law are not alien to market accountability. This does not mean to imply that political accountability can be substituted in all instances with market accountability, as the exercise of public power in line with democratic principles requires political legitimacy to traceable to the will of the citizenry.⁴² However, in domains in which market actors and political actors supply an identical good – that is, financing – it is important to recognise that market accountability can fulfil all of the standards associated with political accountability – namely, openness, non-arbitrariness, effectiveness and publicness.

3.3.2 Procedural and Substantive Dimensions of Market Accountability

The concordance between market accountability and procedural and substantive notions of accountability also deserves our attention. The respective scope of procedural and substantive accountability emerges most clearly from the judicial review of parliamentary decisions, where courts exercise judicial restraint with regard to substance. Typically, the substantive and procedural dimensions of a legality review interact as communicating vessels: the more the court requires in procedural terms, the more it alleviates the judicial review on substantive grounds towards a ‘manifestly inappropriate’ standard.⁴³ Judicial procedural review implies a thorough assessment of the process by which a parliamentary act was adopted.⁴⁴ Not the substantive content of the decision is at stake but rather the procedural steps that led to the formation of a policy decision. Conversely, a substantive account would value the substantive worth of the policy decision itself.

Regarding the first normative good – openness – market accountability operates on the basis of procedural grounds: states periodically disclose statistics and indicators that reveal their fiscal position and economic outlook. Also, public-sector emitters of bonds must comply with certain transparency requirements in order to protect investors.⁴⁵ The regulatory framework, which includes the requirement to publish transparent statistics and adhere to good accounting practices, generates trustworthiness through behavioural compliance. The second criterion – non-arbitrariness – also has a procedural and behavioural dimension. Rating agencies play an important role in this regard. While they do not perform a public policy function, rating agencies serve the interests of the principal (i.e. the market) by requiring the state to reveal the information necessary for markets to monitor the state’s conduct. Rating agencies help to discipline states, dissuading them from putting their solvency at risk. There is a procedural dimension in the fact that rating agencies work through a web of more or less formalised interactions between actors and market institutions, by which they subject states to justification and transparency. Internally, rating agencies apply substantive standards, on the basis of which they form their solvency assessment and assign a bond credit rating. Rating grades are a substantive and quantifiable metric of fiscal viability – however, as a substantive standard, such ratings are not legally contestable, nor are they transparent or uniformly applicable.

Effectiveness as an accountability standard is of a substantive nature, as it mirrors the degree to which markets can hold states to be fiscally viable or not. The precise nature and scope of solvency in terms of market judgement may be hardly computable, but the market price for debt is the numerical tool through which markets impose fiscal discipline on states. Functioning markets translate the fundamental performance data of a state into a price that ultimately has an impact on the state’s conduct. While price signals are a market-based tool for promoting effectiveness, reporting and disclosure practices are undertaken to fulfil demands imposed by market actors and public transparency expectations. As mentioned, public-sector emitters of bonds must comply with certain transparency rules. At the same time, states justify their fiscal expenditures in the public sphere, and they also publicise statistics through multiple channels, as required by EU reporting duties. These legally defined reporting duties (e.g. as imposed by the European Semester) seek to capture various dimensions of economic viability.⁴⁶

Finally, publicness also contains both procedural and substantive dimensions. This criterion encapsulates the expectation that the state demonstrate its commitment to working towards the common good. Clearly, markets are not formally committed to promoting the general welfare, so it cannot be expected the market forces will necessarily encourage states to pursue the common good. While there are often political movements that aim to constrain markets and make them subject to the public will, markets do in fact promote virtuous policy to some extent, for they discourage kleptocratic fiscal management that is harmful to economic fundamentals or growth prospects. An economy will fare better over the long term if its resources are managed to encourage growth and prosperity, rather than to enrich a narrow segment of society. In this way, while market exposure can neither assure socioeconomic fairness nor prevent corrupt rulers from holding power, a market’s assessment of a country’s solvency may indirectly promote innovation and inclusive growth. As with the other normative goods, disclosure and transparency have an important signalling effect that a country is engaged in practices that are generally supportive of a healthy society.

3.4 Conclusion

With the outbreak of sovereign debt crisis, there was a gradual shift in European state financing from market-based accountability relationships to a political accountability regime. From the perspective of democratic accountability, there is a significant difference between, on the one hand, raising financing from financial markets, with bond rates determined by a dispassionate assessment of default risk, and, on the other hand, from accepting financing on conditions set by sovereign foreign or supranational entities, which, by virtue of their creditor position, can directly impinge upon the state’s sovereignty. As part of the massive market interventions undertaken since the outbreak of the crisis, the ECB and EU lending facilities such as the ESM have extended financing to debtor nations at favourable rates unmoored from economic fundamentals while simultaneously imposing various forms of political conditionality, thus engendering numerous tensions related to democratic representation and legitimacy.⁴⁷ Specifically, the public authorities empowered to intervene in the affairs of debtor nations are not subject to the accountability controls normally ascribed to democratic systems. This situation is directly attributable to the regime shift from market accountability to (anaemic) political accountability, a shift that occurred in the absence of robust public discussion or debate.⁴⁸

As shown in this chapter, market-based accountability exhibits strong congruence with other accountability regimes. Market accountability features both an actor and a forum, and relationships are structured based on information, justification and consequences. Our analysis suggests that market accountability may also undergird the supply of normative goods by promoting openness, non-arbitrariness, effectiveness and publicness. Markets exercise behavioural pressure on debtor states, encouraging transparency, fiscal stability and inclusive growth. Of course, there are strong limitations on the ability of international financial markets to encourage states to respect individual rights and the general welfare.⁴⁹ However, given the role ascribed to the market-based allocation of financial resources in the EU Treaties in tandem with ongoing concerns about the democratic deficits exhibited by alternative arrangements, reinvigorating market forces may in fact represent a solution for encouraging a more impartial and broadly accepted governance architecture in the EU.

While this discussion by no means aims to assert that market accountability should generally prevail over political accountability regimes, the major contribution of this chapter is to highlight that market accountability has theoretical underpinnings that are congruent with traditional accountability systems rooted in public law or political theory. At the same time, market-based modes of accountability are less intrusive and less susceptible to control by narrow interests than the EU economic governance regime that has emerged in the wake of the crisis.⁵⁰ Hence, in order to avoid economic and social policy in debtor states from being subjugated by the fiat decisions of creditor nations or supranational governance bodies, there is a need for an eventual retreat from political accountability as an organising principle in the domain of European sovereign debt financing. A return should be sought to the EU Treaties’ choice of free market rules that subject the financing needs of private actors and states to the judgement of markets, rather than political actors.

As it stands, current trends indicate there could be a further weakening of market accountability in favour of an even greater role for EU institutions in the area of public-sector financing. Since the outbreak of the COVID-19 pandemic, the ECB has been purchasing sovereign debt on an expanded scale, and there has been an attendant growth in political conditionalities. More generally, Member State reliance on EU-based financing is slated to expand dramatically in the coming years as part of the general proliferation of lending facilities. This will increase the EU’s exposure to market accountability while also increasing the political accountability of Member States to EU institutions.

Finally, drawing on the difference between market and political accountability, our analysis relates back to Streeck’s critical view on the gradual shift from the tax state to the debt state. For Streeck, the shift from the publicly dominated tax state to the privately dominated dependence on markets is undemocratic, since the emergence of private creditors as a second constituency alongside national citizens requires public officials to balance between maintaining the loyalty of their citizens while at the same time preserving the confidence of private investors.⁵¹ This contrasts with the finding of this study: starting from the vast body of literature that has spotlighted the democratic issues emerging from abandoning market exposure in sovereign debt financing,⁵² this study argued that market accountability poses fewer issues from a democratic perspective, for it avoids the inevitable intrusions into national sovereignty that result from borrowing at preferred terms from EU bodies or other Member States. Clearly, market accountability comes with its own specific risks, which is why it is necessary to adopt an institutional framework that contains and combats the risks of market irrationality or Black Swan events. Ultimately, when properly managed, markets thus appear to be more compatible with responsible accountability and policy founded on a chain of legitimacy and stems from the citizenry.

4 The Case for Intra-executive Accountability in the Banking Union

Matthias Goldmann ^*

4.1 Introduction

One remarkable, widespread trend in the European economic constitution since the financial crisis has been the rise of discretionary powers on the part of independent government agencies, specifically, the European Central Bank (ECB). The shift to unorthodox monetary policy, and in particular quantitative easing, has increased, or rather, brought to light the discretionary powers of the ECB within the four corners of its stability mandate.¹ Moreover, the competencies assigned to the Single Supervisory Mechanism (SSM) imply enormous leeway for the ECB in assessing the financial situation of banks throughout the European Union.² In times of radical uncertainty, it seems difficult to imagine carrying out monetary policy or supervisory functions without ample discretion at hand.³

Yet, many observers frown upon these powers as they undermine the technocratic narrative that has served as a justification for ECB independence so far.⁴ A first boiling point was reached in the Landesbank case. According to the Court of Justice of the European Union (CJEU), the SSM enjoys wide discretion to cede its supervisory competence over less significant institutions to national supervisory authorities.⁵ This judgment provoked backlash not only in academia⁶ but also at the German Constitutional Court (BVerfG). While ultimately accepting the CJEU judgment, it clearly drew a red line, pointing out that the CJEU narrowly missed an ultra vires verdict from Karlsruhe.⁷ Moreover, members of domestic parliaments sense a loss of influence and are skeptical of the concentration of powers in the hands of the ECB, even though Article 21 SSM Regulation stipulates ample consultation rights for them.⁸ On the other hand, nobody has come forward with a proposal to dismantle the ECB and shift its powers to the European Commission or, worse, the Council. Apart from well-known time-inconsistency problems, the ideas of expertise and reliability favor delegation to authorities enjoying some degree of autonomy.⁹ Some therefore suggest that one should assign supervisory competencies to the European Banking Authority (EBA) instead of the ECB.¹⁰

This chapter argues that the accountability of the SSM may be better than the current debate suggests. While judicial and parliamentary modes of accountability – the focus of the present debate – do have certain limits, a set of intra-executive accountability mechanisms is often overlooked. It is adequate for politically salient decisions like the discretionary powers exercised by the SSM.

The chapter proceeds as follows. An overview of the breadth and depth of discretionary powers exercised by the SSM debunks any attempt to base the legitimacy of the SSM on a technocratic rationale (B.I.). Instead, the chapter argues that the legitimacy of independent institutions like the SSM is effectively a question of a level of accountability commensurate to the institutional position of the SSM and the authority exercised by it (B.II.). The specific authority exercised by the SSM requires judicial, parliamentary, and intra-executive accountability (B.III.).

The chapter then reviews the current framework of checks and balances applicable to the SSM. While judicial review is an effective accountability mechanism for standard administrative decisions that implement legal requirements, it has a limited function in respect of the highly policy-relevant, quasi-governmental powers of the SSM (C.I.). Parliamentary accountability is generally capable of dealing with politically salient issues that might require changes in the law or of keeping budgetary side effects of financial regulation under control. However, the control exercised by the parliament is rather general in nature and cannot address individual regulatory decisions. This impedes the review of policy-heavy, discretionary decisions addressing individual cases (C.II.). This turns the focus to intra-executive accountability mechanisms. These mechanisms comprise the review of individual, discretionary decisions with potentially far-reaching consequences. As the independence of the ECB prohibits the issuance of binding directives like in ordinary administrative review proceedings, the Commission and the European Court of Auditors (ECA) yield a nonbinding type of authority by reviewing the work of the SSM. Fortunately, obstacles initially preventing the work of ECA have been eliminated. Taken together with parliamentary accountability and judicial review, it does not appear that the SSM is suffering from a severe accountability gap (C.III.).

The chapter concludes by reviewing suggestions for strengthening intra-executive accountability. They range from reassigning the SSM to EBA, to increasing the Commission’s powers of control. In fact, the latter scenario seems most advantageous. It is even possible to reconcile it with the treaty-guaranteed independence of the ECB. Despite the positive assessment of the present level of SSM accountability, increasing the powers of the Commission over the SSM might be in the ECB’s best long-term interest (D.).

4.2 The Legitimacy of Independent Institutions

4.2.1 The Limits of Technocratic Legitimacy

Historically, the legitimacy of independent institutions has been based on the ideas of expertise and time inconsistency. Some decisions require too much technical expertise and a longer-term perspective to leave them to elected officials whose primary focus is on winning the next elections.¹¹ This, however, assumes that the issue in question is essentially a technical, low-politics one that does not shift major redistributive decisions to unelected institutions.¹²

I think that this justification is insufficient for independent supervisory authorities. The sheer extent of the SSM’s discretionary powers debunks the attempt to adorn it with a technocratic varnish. Of course, not all SSM decisions raise similar concerns. To the extent that the SSM takes decisions of a rather narrow administrative character, that is, by applying a narrowly defined normative program to a specific case, it would be wild to assume a spectacular legitimacy gap. One example would be fit and proper decisions.¹³ Rigorous judicial review appears to be sufficient for decisions of this type. The CJEU would even allow delegating such competencies to independent agencies.¹⁴ However, there is another category of supervisory decisions, which are of far-reaching political significance. They involve crucial choices that might have relevance for the health of the entire financial sector. The following scenarios illustrate some of these decisions and their impact and potential for conflict.

First, supervisory decisions may include monetary policy considerations. While the SSM Regulation provides for the separation of monetary and supervisory powers,¹⁵ in practice, the two fields are too closely related for a full separation to work out. It would create an impossible situation for the ECB if its monetary and supervisory prongs were pulling on the opposing ends of one and the same string.¹⁶ Moreover, the legal frameworks of the Treaty on the Functioning of the EU (TFEU) and the SSM Regulation provide enough discretionary leeway for the ECB to take monetary concerns and concerns for financial stability into account in its prudential decisions.¹⁷ The relevant rules define goals rather than setting out a precise normative program to be applied in a narrowly defined situation – a familiar feature of the provisions applicable in the scope of the Economic and Monetary Union.¹⁸ Naturally, the application of goal-oriented provisions involves a wide margin of discretion.

Second, wide discretionary powers exist with respect to decisions on bank resolution. According to the Single Resolution Mechanism (SRM) Regulation, the Resolution Board decides about the resolution of a financial institution on the basis of the opinion of the ECB on the probability of default.¹⁹ Although the Resolution Board may override the ECB’s opinion, the ECB’s decision structures the ultimate result in a decisive way.²⁰ In taking this decision, the ECB might have to balance conflicting interests. On the one hand, it might be cost-effective to resolve failing institutions as soon as the situation appears to be irreversible. On the other hand, supervisory concern for the stability of other institutions likely to be affected by the resolution might militate in favor of a delay until precautionary measures are in place or the other institutions have been stabilized. The wording of Article 18 SRM Resolution provides enough leeway for the ECB to tilt in one direction or another. In particular, to establish under Article 18(1)(c) SRM Regulation that a resolution action is in the public interest, Article 18(5) SRM Regulation refers to the broadly phrased objectives of Article 14(2) SRM Regulation, which comprise, among others, the objective to protect “financial stability.”²¹ This concept is hardly more concrete than the notion of price stability.²²

The third scenario concerns the influence of the ECB on rulemaking. In the Banking Union, the EBA in cooperation with the Commission normally holds rulemaking powers, while the ECB is only a nonvoting member of the EBA board of supervisors.²³ However, the ECB has gained effective influence owing to its position as the institution hosting the SSM. In particular, the ECB and National Competent Authorities (NCAs) are charged with the implementation of EBA guidelines. For this purpose, the ECB and the NCAs have developed common policies reflected in guides, such as the guide for fit and proper decisions.²⁴ Of course, such guides are subordinate to, and need to be in compliance with, all applicable rules, including relevant EBA guidelines. But apart from the fact that the ECB published its guide before the adoption of the relevant EBA guidelines,²⁵ the ECB’s guide effectively reduces options available to NCAs under the regulatory framework.²⁶ The regulatory powers of the ECB under Article 4(3) SSM Regulation for its own supervisory powers, and under Article 6(5)(a) SSM Regulation with respect to the supervisory activities of NCAs, put the ECB in a competition with EBA.²⁷ Moreover, the development of a common “supervisory culture”²⁸ by the EBA is difficult to imagine without crucial support from the ECB. In fact, this culture is likely to be framed by ECB practice and through supervisory guidelines and recommendations pursuant to Article 4(3) SSM Regulation. One might therefore wonder who the master is and who the servant in this relationship.

The last scenario described here concerns the familiar interplay between financial stability and fiscal policy. The ECB is – still – involved in the design and implementation of adjustment policies of the European Stability Mechanism (ESM). According to Article 13 ESM Treaty, the ECB is charged with the production of debt sustainability analyses, the negotiation of MoUs, and, as part of the “troika,” with compliance control (Article 13(7) ESM Treaty). In states where a spillover from problems in the banking sector is at the origin of trouble, the multiple roles of the ECB might be difficult to juggle. On the one hand, as a supervisor, the ECB sets the conditions relevant for the fiscal situation of member states. On the other hand, it is charged with playing crucial roles in fixing the very same crisis.²⁹

Overall, this overview reveals the political salience of the ECB’s supervisory powers. This regularly stems from the fact that the applicable legislation often holds the ECB to follow certain objectives rather than strict rules, or even to balance various potentially diverging objectives, thereby equipping the ECB with considerable authority.³⁰ These decisions are not merely of a technocratic nature but involve political judgment, including difficult discretionary choices and at times severe financial consequences. The ECB’s supervisory powers therefore require more than a technical, expertise-driven kind of legitimacy based on narrowly defined mandates.³¹

4.2.2 Democratic Legitimacy of Independent Institutions

How to establish the legitimacy of independent authorities with considerable discretionary powers? At the outset, it is important to move beyond the familiar, yet mythological concept of technocratic legitimacy. This concept implies that independent institutions are a democratic pathology. In particular, in the view of the BVerfG, they are at loggerheads with the principle of representative democracy, undermining the principle of ministerial control, a core trajectory of legitimacy in parliamentary democracies.³² The court therefore accepts them only under narrowly circumscribed conditions.³³ The result is no different if one understands the European Parliament (EP) as the ventricle of representative democracy, rather than national parliaments.³⁴ However, the pathological view tends to underestimate the significance of independent institutions for the Union. As Antoine Vauchez has argued, the Union’s independent institutions – the Commission, the CJEU, and the ECB – have been its most effective ones, the ones that represent the Union’s interest most clearly and have given the Union its contemporary shape.³⁵ The concept of technocratic legitimacy therefore not only fails to provide a satisfactory level of legitimacy for the existing discretionary powers of independent institutions; by doing so, it also misses out on core features of the European Union’s exercise of public authority, redefining the “normal” as an anomaly. It might occasionally go as far as echoing populist attacks on the administrative state.³⁶

The point is therefore to ensure the democratic legitimacy of independent institutions in a genuine way, one that sees them as part of democratic institutional frameworks, rather than as pathologies. This is a challenge that certainly exceeds the analysis of the SSM. This chapter may only outline the broad contours of such a theory of democratic legitimacy for independent institutions. This theory is based on proposals in the literature. For the most part, they emerge from specific contexts other than the European Union, which one should keep in mind when analogizing from them.

As a first insight from this literature, it seems important to distinguish between different types of independent institutions. Bruce Ackerman proposed to distinguish regulatory and integrity institutions as specific emanations of the administrative state.³⁷ While integrity institutions, like courts of audit, would be justified by the significance of their task and the limitations of their mandate, regulatory institutions fulfill more executive functions, therefore requiring some level of democratic participation.³⁸ Tarunab Khaitan has recently extended the concept of integrity institutions by pointing out the specific role of “guarantor institutions,” including ombudsmen and human rights commissions.³⁹ The kind of independent institution in the focus of this chapter is clearly different, given the political salience of SSM decisions.

A second recent proposal merits consideration. Cass Sunstein and Adrian Vermeule have suggested a strategy to redeem the administrative law by charging courts with the enforcement of the “inner morality” of the law against administrative agencies.⁴⁰ The concept of the “inner morality” stems from Lon Fuller’s theory of government legitimacy and comprises a bunch of rule-of-law principles of an overly formal-procedural character. The authors argue that recent case law mostly revolves around obliging the administration to respect this inner morality. Their theory intends to dispel fears of the administrative state predominantly among the political right. This strategy deliberately restricts judicial control of allocative decisions⁴¹ and does not consider the democratization of the administrative state as a particular urgency.⁴² While this strategy might further Sunstein’s and Vermeule’s agendas of nudging and common good constitutionalism,⁴³ it seems hardly adequate for a pluralistic society.

A third proposal is Pierre Rosanvallon’s theory of good government.⁴⁴ He argues that democratic struggles for representation prevailed during the nineteenth and early twentieth centuries. As the elected members of government became the predominant political power in the latter part of the twentieth century and traditional party systems began to erode, the struggles for representation became one for a better quality of government, for making the executive act in the people’s best interest. It is therefore time to go beyond a conception of democracy as centered on elections and to understand democracy as a permanent process that requires transparency, responsibility, responsiveness, and truthfulness on the part of the executive power. In this respect, Rosanvallon points out the antipopulist potential of independent institutions and the function of integrity institutions to control the executive.⁴⁵ One could further extend this thought and even consider regulatory agencies as a way of establishing a separation of powers within the executive branch.

I believe that one can read the core constitutional provisions of the European Union as comprising both classical ideas of representative democracy and the trajectories for ensuring permanent democracy in line with Rosanvallon’s theory. At the center of the core constitutional provisions sits Article 2 TEU, which stipulates the fundamental values of the Union, among them democracy and the rule of law.⁴⁶ Articles 9 to 12 TEU further specify these values for the interaction between citizens and Union institutions,⁴⁷ while Articles 13 to 19 TEU concretize them with respect to the institutional legal frameworks. There is no doubt that the core constitutional provisions of EU law also apply to the ECB.⁴⁸ From these provisions, one may derive various trajectories of legitimacy for independent institutions.

The first trajectory is representative democracy as required by Article 10 TEU. While representative democracy is normally associated with Parliaments, there is no reason to exclude independent institutions from its scope. The members of their governing bodies are not subject to direct election, but their composition might still follow principles of representation. That, of course, requires seeing them as representatives of the diverging parts that form the Union interest, rather than as neutral experts.⁴⁹ The structure of the ECB governing council reflects this desire for representative expertise. It is important that different national traditions and sensitivities have a voice on the governing council and participate in the formation of the Union interest.

Second, besides representative democracy, Articles 10 (3) and 11 TEU stipulate principles for the direct interaction between institutions and the people. In light of Article 10(3) TEU, this implies for independent institutions like the ECB to engage in public discourse, explain their decisions and scientific basis, and interact with the public on these matters.⁵⁰ Since the beginning of the financial crisis, the ECB has much improved its practice in this regard.⁵¹

A third trajectory concerns the relationship between institutions as per Article 13(2) TEU. The principles of conferred powers and mutual sincere cooperation provide a basic framework for interinstitutional accountability, for mechanisms of mutual oversight and control as an essential aspect of the separation of powers in democracies.⁵² As I will argue, this includes but goes beyond the control exercised by the EP. It is important to point out that interinstitutional forms of accountability are not per se limited to procedural checks. Depending on the institution exercising accountability, such mechanisms may well question the substance of an independent institution’s decision. To safeguard an institution’s independence, they may exercise deference and confine themselves to plausibility checks. The distinction between full review and deference should, however, not be confused with one between procedure and substance.⁵³

Lastly, Article 19 TEU establishes the need for both the Union and the member states to respect the rule of law. In case of the SSM, this comprises not only judicial review but also administrative review before the Administrative Board of Review.⁵⁴

In principle, independent institutions need to respect all these trajectories of democratic legitimacy, but not to the same degree. Rather, the adequate legitimacy mix depends on two variables: the particular constitutional framework and the particular authority exercised by an independent institution.⁵⁵ Insightful in the latter respect is Habermas’s theory of communicative action. Accordingly, one can distinguish different forms of power by the different types of reasons offered for their justification.⁵⁶ These reasons oscillate between pragmatic, ethical, and moral arguments in case of law-making, and the strictures of legal discourse in case of law enforcement.⁵⁷ The regulatory functions exercised by independent institutions will often display an amalgam of law-making and enforcement, involving legal as well as pragmatic, ethical, and moral arguments, depending on the specific decision taken. In a similar vein, Paul Tucker has proposed a matrix for independent institutions with three options each for who sets policies, and who implements them.⁵⁸ The next part will elaborate on how these different trajectories work out in relation to the SSM.

4.2.3 Democratic Legitimacy of the SSM as a Question of Accountability

Before assessing whether the SSM actually enjoys a sufficient level of legitimacy, it is necessary to establish a standard of legitimacy for the SSM in accordance with the specific form of authority it exercises. This standard will crucially depend on legal and political forms of accountability, that is on mutual checks and balances. Concerning the other trajectories, the Supervisory Board has a fairly representative structure that reflects a mix of expertise and national interests.⁵⁹ Moreover, the ECB has stepped up its interaction with the public considerably, in respect of both monetary policy and its supervisory activities, although there is disagreement as to whether the present level suffices.⁶⁰

As concerns appropriate levels of accountability, the current literature focuses on two forms of accountability: judicial review and parliamentary oversight.⁶¹ In explanation of the focus on parliamentary accountability, Menelaos Markakis submits that someone needs to define the public interest with respect to economic and monetary policy, and that should be the EP.⁶² For analogous reasons, Paul Tucker is chiefly concerned about the interaction between parliaments and democratic legislatures.⁶³

However, what is sufficient for monetary policy does not need to be good for supervisory authority. In this regard, it seems useful to take a closer look at similarities and differences between the two prongs of the ECB. A crucial difference between these two functions is often said to consist in the fact that monetary policy only pursues one objective, that of price stability, while financial supervision has to keep an eye on an array of objectives.⁶⁴ After the Public Sector Purchase Programme (PSPP) saga, this position no longer holds. According to the BVerfG, the ECB has to balance many factors to ensure the social impact of its monetary policy remains within reasonable limits.⁶⁵ Although the proportionality analysis required by the CJEU differs on this point,⁶⁶ it turned out that considerations concerning the social impact actually do play a role in monetary policy decisions.⁶⁷ Hence, as concerns their policy implications, there is no longer much of a difference between monetary policy and financial supervision. While price stability is undeniably the primary objective of the ECB pursuant to Article 127(1) TFEU, it has the secondary objective to support the Union’s economic policy. Whatever the precise relationship between the primary and secondary objectives, it shows that the complexity of monetary policy might not be inferior to that of financial supervision.

Nevertheless, there is indeed a difference between monetary policy and financial supervision with respect to the dimensions and the addressees of each policy. Monetary policy is macro policy. It affects everyone. The ECB sets only one policy rate for the Eurozone. Financial supervision has a more narrow scope. Decisions typically concern individual institutions or persons, or, in the case of guidelines and regulations, a specific industry, or part thereof. This applies even though the exercise of supervisory powers might involve a good deal of far-reaching policy considerations, as the initial examples have shown. Hence, accountability mechanisms for financial supervision need to take account of the comparatively narrow scope of supervisory powers.

This raises the question as to the institutions that should hold the SSM to account. While the SSM Regulation seems to understand accountability quite specifically as the relationship between the SSM on the one hand and the EP and Council on the other,⁶⁸ the treaty framework as applied to the SSM suggests a holistic view of accountability that comprises multiple accountability channels. Depending on the specific power exercised, accountability mechanisms operating within the executive branch might be particularly well-positioned to fill gaps left by judicial or parliamentary oversight.⁶⁹ This concerns particularly the gaps created by the comparatively narrow scope of supervision.

With this in mind, the following part will analyze the different accountability relationships that operate within the legal framework of the SSM with a view to achieving an overall level of accountability that is commensurate to their powers.

4.3 Accountability of the SSM

4.3.1 Judicial Review

Decisions of the SSM are subject to judicial review before the CJEU.⁷⁰ This follows from Article 263 TFEU, to which Recital 60 of the SSM Regulation makes explicit reference. In addition, persons concerned by SSM decisions have the option of lodging an internal review before the Administrative Board of Review pursuant to Article 24 SSM Regulation.⁷¹ The scope of review to be carried out by the Administrative Board of Review is limited to assessing the procedural and substantive conformity with the SSM Regulation. It may adopt an opinion but cannot directly modify the challenged decision.⁷²

Despite the seemingly far-reaching dimensions of judicial review, one can doubt for several reasons whether judicial review alone leads to a satisfactory level of accountability. First, the scope of acts subject to judicial review is limited, as the scenarios set out in the previous part usefully illustrate. For instance, the ECB’s assessment of whether an institution is failing or likely to fail is a preparatory decision and therefore not subject to judicial review.⁷³

Second, judicial review of the guides published by the ECB under the SSM Regulation faces the obstacle that these instruments are of nonbinding character. Article 263(1) TFEU requires actions for annulment to be directed against acts having “legal effect.” In the case concerning the location of Central Counterparties, the General Court gave a wide reading to this term. While mere recommendations would not have “legal effect,” the General Court considered it sufficient to assume legal effects that national competent authorities might have reason to consider themselves obliged to implement the policy.⁷⁴ This might not be the case for guides like the one guide on fit and proper assessments, as it states explicitly that it is nonbinding.⁷⁵ Also, NCAs have to take relevant domestic law into account and might not be able to implement the guide in a strict manner. It therefore seems difficult to subject such guides to judicial review. In any event, only privileged applicants under Article 263(2) TFEU would be in the position to bring such a suit.

The third limitation of judicial review, and arguably the most important one, relates to the applicable standard of review, especially in case of discretionary SSM decisions. The exercise of such discretion depends to a large extent on economic projections, the balancing of complex, uncertain risks, and other policy choices, not on the interpretation of a legal rule. A case in point is the definition of financial stability. In Article 10(5) of the SRM Regulation, financial stability is defined as “a situation where the financial system is actually or potentially exposed to a disruption that may give rise to financial distress liable to jeopardize the orderly functioning, efficiency and integrity of the internal market or the economy or the financial system of one or more Member States.”⁷⁶ The prognostic challenges implied in this definition are evident. One might reasonably disagree about the requisite data basis and methodology. Such decisions diverge significantly from the classical, Weberian ideal type of administrative activity guarded by legal rationality. It rather resembles a governmental type of decision-making, characterized by multiple, overlapping policy considerations.⁷⁷ In taking such decisions, independent institutions all but meet the expectation of rules-based, depoliticized governance.⁷⁸

Such settings call for judicial deference and self-restraint. Courts need to respect the fact that the administration is in principle better positioned to take the requisite policy decisions and to assess risks under conditions of (radical) uncertainty.⁷⁹ Judicial review may still play a role, for example, by applying plausibility checks of the reasons given by independent institutions and controlling their actions for manifest disproportionality and arbitrariness.⁸⁰ Those checks are substantive, not merely procedural; one cannot deduce from the fact that the CJEU has often accepted the reasons given by the ECB that the Court has not reached its own conclusions regarding their plausibility. The requirement to give plausible reasons is different from a requirement to give any reasons at all.⁸¹ By contrast, full review of discretionary decisions would effectively replace the informed view of the SSM with the comparatively uninformed view of a court.⁸² The PSPP saga has shown that this road should be avoided, not least because it might destabilize the Union.⁸³

Notably, this limited standard of judicial review derives from the separation of powers doctrine and may apply to any kind of administrative decision, not just to the exercise of authority by independent institutions.⁸⁴ The functional limitation of judicial review is the flip side of the functional separation of powers between different branches of government, especially in highly uncertain, technical fields. Recognizing this policy salience, Recital 64 of the SSM Regulation explicitly states that the Administrative Board should check the legality of SSM decisions “while respecting the margin of discretion left to the ECB to decide on the opportunity to take those decisions.”

To make matters worse, this limited standard of judicial review can even apply to routine, administrative-type decisions of the SSM. The decision by the General Court in the Landeskreditbank dispute is a case in point.⁸⁵ It turned around the qualification of the plaintiff institution as a systemically important one. This qualification involves many evaluative criteria that defy strict legal scrutiny, such as “particular circumstances” that might justify an exception according to Article 6(4) SSM Regulation. Again, courts might apply plausibility and proportionality checks that duly defer to the administration’s higher level of expertise. The main value of judicial review might therefore lie in its preventive effect, in the impact it may have on decision-makers.⁸⁶

In conclusion, it emerges that judicial review of SSM decisions stops short of an intense, substantive scrutiny of the discretionary powers of the SSM. This holds even after the BVerfG’s Banking Union judgment, in which the BVerfG disagreed with the CJEU on competence issues, rather than on the right standard of judicial review. Accepting the limits of judicial review, it instead emphasized the need for democratic legitimacy of the SSM – the subject of the following section.⁸⁷

4.3.2 Parliamentary Accountability

According to Article 20 SSM Regulation, the SSM needs to report to the EP and to the Council. The EP is also involved in the appointment of Supervisory Board and has a role to play in procedures for the removal of its chair or vice-chair, Article 26(4). The interinstitutional agreement between the ECB and the EP specifies the reporting requirements, establishes channels of communication (e.g. feedback), specifies public and confidential hearings and confidentiality requirements, etc. A similar agreement exists between the ECB and the Ecofin Council.⁸⁸ National parliaments have rights of information and control specified under Article 21 SSM Regulation, including the right to invite the Chair of the Supervisory Board for an exchange of views.

Many hail the “banking dialogue,” which has developed since the establishment of the SSM on the basis of these provisions.⁸⁹ The ECB seems to understand it as its main form of accountability.⁹⁰ It is even pitched as a model for a refurbished monetary dialogue.⁹¹ However, despite its popularity, even this form of accountability has certain limitations. Some of them stem from empirical issues; others are of a more theoretical character.

Empirically, from a quantitative perspective, banking dialogue has seen an increasing frequency of interactions between the SSM and the EP, as well as more focused exchanges.⁹² The ECB has stepped up its transparency by providing multiple reports, holding press conferences, publishing minutes, and making internal documents more accessible.⁹³ Qualitatively, according to an empirical survey of EP hearings of the Chair of the Supervisory Board, the quality of the questions asked varies, though. They often seem to address issues outside of the competence of the SSM, such as monetary policy, or the development of the banking sector in general or in specific countries, rather than questions relating to supervisory practice.⁹⁴ There has also been silencing of policy issues.⁹⁵

Theoretically, one should not overestimate the potential of the EP to check the performance of the SSM. First, for the EP to be in the position to impose effective checks on the SSM would require consensus on the actual standard by which the SSM is to be measured.⁹⁶ The notion of financial stability does not become easier to apply when put in the hands of the heterogeneous group of members of the EP.

Second, effective accountability requires a congruence between the power of review and the power to impose consequences.⁹⁷ It therefore stands to reason that parliamentary control is most effective for tasks in respect of which the EP is a stakeholder because of its legislative, budgetary, or creative functions. However, the fact that the SMM Regulation has been adopted under Article 127(6) TFEU relegates the EP to an advisory body. Also, the EP does not control the budgets, which might suffer the most should the SSM err in its judgment. Any losses that require bail-out or compensation by the public purse will likely be covered by domestic budgets or the ESM. The only significant power of the EP over the SSM consists in its role in the appointment process of Supervisory Board members pursuant to Article 26(3) SSM Regulation. But for that, ex-post control is rather ineffective.

By contrast, national parliaments do have reason to worry about the impact of banking supervision on their budgets. In this respect, however, Banking Dialogue suffers from a structural difficulty. In case of a conflict about bail-in or bail-out, national parliaments might take diametrically opposed positions, with the majority of the members of parliament in the member state affected being in favor of a bail-out backed up ultimately by the ESM, and the majority of the members of parliament in other member states likely to favor bail-in to protect their (short-term) domestic budgetary interests. Similar constellations can be expected for the balance between monetary policy and financial stability. Only the EP could assume a neutral position. The EP, however, is not responsible for the budgets that would need to ultimately provide financial support. There is thus an incoherence between control rights and potential financial implications of the EP, on the one hand, and national parliaments, on the other. While interparliamentary hearings might solve the information gap between the EP and domestic parliaments,⁹⁸ the problem persists that national parliaments might widely disagree on decisions that affect their constituencies differently.

One further limitation of parliamentary accountability derives from the fact that individual decisions involving specific credit institutions, such as fit and proper decisions concerning board members, or the view of the ECB regarding the regulatory capital of an institution, are usually confidential. It has been reported that while lots of questions relating to individual firms are asked in the EP, the Chair of the Supervisory Board invoke their confidentiality obligations.⁹⁹ This also shows that parliaments are not the right place for the review of individual decisions as their intervention would undercut the separation of powers between parliament and the executive branch of government.

4.3.3 Intra-executive Checks and Balances

This shifts the focus to accountability mechanisms within the executive branch of government. In many jurisdictions, the higher echelons of the executive branch have mechanisms at their disposal allowing them a certain level of control over administrative decisions, including discretionary ones. Administrative agencies in the United States (to the extent that they are not independent like the SEC or the FED) are under the control of the president. To a certain extent, this even comprises independent agencies, whose head is usually appointed by the President. In Germany, any administrative decision is subject to ministerial control.¹⁰⁰ Ministers might issue general or specific directions. While this power is rarely used, its activation usually takes place in cases with high political significance, reaching beyond the pay grade of the ordinary administration. A well-known example is the decision in the Kaiser-Tengelmann merger case by the Federal Minister of Economics, who allowed the merger against the advice of the Federal Cartel Office.¹⁰¹ While some might consider ministerial intervention as being prone to capture by special interests, one needs to understand it in the context of the separation of powers. As the minister is directly answerable to parliament in a parliamentary democracy, ministerial intervention shifts political accountability from peripheral intra-executive relationships to the gravitational center of political accountability exercised by parliament over government.¹⁰² In the end, ministerial intervention indirectly increases the leverage of parliament over executive decision-making, thereby contributing to democratic accountability. After all, the members of parliament likely have more influence on the minister than on members of the civil service, who are in the first place answerable to the higher echelons of the government.

Similar principles apply to European law. Article 17 TEU stipulates that the Commission is responsible for the implementation of legal acts by the Union. A corollary of this principle is the Meroni doctrine. Accordingly, no powers that include a discretionary element may be delegated to agencies.¹⁰³ The doctrine may have been partially restated in the ESMA case.¹⁰⁴ The CJEU decided that ESMA could independently exercise discretionary powers. However, the Court emphasized that these powers need to be restricted in various respects. In particular, ESMA may prohibit short selling only in specifically defined emergency situations, and the Commission may further define these situations through secondary rules.¹⁰⁵ The Court concluded that ESMA was ultimately not equipped with “a very large measure of discretion.”¹⁰⁶

As has been shown at the beginning of this chapter, this cannot be said about the SSM, which enjoys ample discretionary powers.¹⁰⁷ In fact, the SSM only escapes the Meroni doctrine because it was adopted under Article 127 (6) TFEU,¹⁰⁸ a move that evoked much criticism.¹⁰⁹ While the argument that the SSM powers exceeded the restriction of delegations under Article 127(6) TFEU to “specific tasks” is difficult to sustain as long as domestic supervisory authorities retain important supervisory competencies over insurance companies, securities, or investment firms, the critique has a point insofar as this legal basis obviates the need to satisfy the accountability requirements that form the true core of the Meroni doctrine.

Yet, even in case of authorities like the SSM enjoying wide discretionary powers exercised in independence from the administrative hierarchy, intra-executive accountability might make a decisive contribution to the overall accountability mix that might push their legitimacy to acceptable levels. Hence, it seems apposite to investigate whether the SSM is subject to a satisfactory level of intra-executive accountability. There are two potential yielders of such accountability: the Commission and the ECA.

As concerns the Commission, the independence of the SSM under Article 19 SSM Regulation prevents it from revoking, modifying, or otherwise affecting the decisions of the SSM. This also cuts off potential chains of legitimacy between the Supervisory Board and national governments, as representatives of NCAs on the Supervisory Board are obliged to act independently and in the Union interest.

Nevertheless, the Commission has powers to review the decisions of the SSM at a structural level. Article 32 SSM Regulation charges the Commission with triannual in-depth reviews of the performance of the SSM. The first report published under this provision in 2017 demonstrates the potential of this mechanism.¹¹⁰ It covers the governance structure of the SSM, its instruments and processes, and checks the results for their cost-effectiveness. While the 2017 report understandably postpones a definite assessment of the ultimate impact of the SSM on financial stability and market integration to another day, this trajectory seems particularly apposite as an accountability mechanism for goal-oriented administrative power such as that of the SSM. One cannot review goal achievement by reviewing individual decisions, only by looking at the field in context. Issues of managerial effectiveness also require a holistic approach. In this respect, the Commission report scrutinizes the cooperation of the SSM with other stakeholders, the internal organization, including the delegation of decision-making competencies, and the application of discretionary legal provisions, for example, the categorization of certain assets (which might desire more transparency) and waivers for capital requirements (which require further development).¹¹¹

The ECA is charged with examining the operational efficiency of the ECB in accordance with Article 287 TFEU and Article 27.2 ECB Statute. According to Article 20(7) SSM Regulation, this also applies to the SSM. From the text of these provisions, it is unclear how far the ECA may review the practice of the SSM, in particular how far the mandate of the SSM to examine the operational efficiency of the ECB allows it to review supervisory practice.¹¹² This ambiguity gave rise to a conflict between the ECA and the ECB when ECA compiled information for its 2018 thematic report on the operational efficiency of the ECB’s crisis management for banks. The ECB refused to disclose certain information to the ECA that it believed to fall outside the mandate of the latter.¹¹³ On the insistence of the Commission, the ECB has meanwhile concluded a Memorandum of Understanding with the ECA on the issue.¹¹⁴

In substance, the ECA criticizes issues pertaining to supervision that are of a discretionary nature. For example, it submitted that the ECB did not set up specific indicators for crisis identification.¹¹⁵ At this point, ECA and ECB seem to be following different supervisory philosophies: The ECA seems to favor a rules-based approach, while the ECB prefers a more discretionary approach.¹¹⁶ This goes quite to the heart of the ECB’s discretionary powers. One could argue that, instead of imposing a certain level of specificity, ECB should justify their absence. At least, instead of presenting its criticism of ECB as a piece of technical expertise, the ECA should have been more open about the political dimension of their disagreement. This would provide the Commission, the EP, or other stakeholders with a better basis for a decision on whether to follow up on this point.

Be this as it may, on the whole, these two reports by the Commission and the ECA seem to subject the SSM to more effective scrutiny than some hearings before the EP. The reports are systematic, focused, rigorous, and based on an intense study of the SSM practice. Also, the report by the Commission is not without direct consequences, as the commission has the power to recommend interpretations of the legal framework, or propose amendments to the legislature.¹¹⁷ The interplay between the executive and legislative branches in the EU lends particular strength to intra-executive accountability. And even though the reports do not review individual decisions, they are well-positioned to identify structural problems. Individuals affected by decisions of the SSM therefore have the possibility of judicial review at their disposal as a remedy against arbitrary decisions, while intra-executive mechanisms, together with parliamentary accountability, will ensure the SSM stays focused on its objectives and puts in place an efficient management structure. It is this combination of the three branches of government that holds the SSM quite firmly to account.

4.4 Options for Improving the Accountability of the SSM

While the overall level of accountability of the SSM appears satisfactory in light of the intra-executive accountability relations, one might ask for institutional alternatives that might deploy intra-executive accountability even better.

The option to reassign supervisory tasks to the EBA does not appear to be beneficial. While this would defeat the sometimes hegemonic position of ECB towards EBA, it would simply create a new hegemon – one that would combine the formal power to make rules with the power to implement them, and thereby remove an important dimension of intra-executive checks and balances. Apart from the fact that such a shift would possibly require a treaty change, it does not seem advantageous from an accountability perspective.

Another option might consist of integrating the SSM into the hierarchical structure of the Commission. This would correspond to the model of European administration envisaged by Article 17 TEU. However, this would require major shifts in the organizational setup of the SSM as it seems difficult to imagine the representatives of NCAs to be involved in decision-making in the frame of the Commission. From the perspective of the subsidiarity principle, the present constellation therefore appears as advantageous. It involves a certain amount of intra-federal checks and balances. Given that financial markets are heterogeneous across the EU, this should be an asset.

As a third option, one might give the Commission the right to review, modify, or discard decisions by the SSM, or give directions to the SSM to act accordingly. This option would create a host of constitutional problems, as the ECB Governing Council has to take ultimate responsibility for the decisions of the ECB, including those of the SSM, pursuant to Article 282(2) TFEU. By way of a treaty amendment, an exception from this rule would have to be introduced for the SSM should it be subject to the Commission’s direction. Moreover, this option would strip the SSM effectively of its independence. Whether this step would be economically advantageous or not,¹¹⁸ as a matter of treaty law, it is not unthinkable. While it is argued that the level of independence enjoyed by the SSM under Article 19 SSM Regulation is equivalent to that of the ECB under Article 130 TFEU,¹¹⁹ the latter does not require granting independence to the SSM, as independence was only intended to protect monetary policy. Independent supervisory agencies are a much more recent and much rarer phenomenon.¹²⁰ As a novelty in European administrative law at the time, Article 130 TFEU deserves a narrow reading. Nevertheless, the question is whether such a power of review would be advantageous. As the SSM would remain part of the ECB, the Commission would lack the requisite expertise to intervene in individual cases. By comparison, the present framework gives the Commission ample opportunity already by virtue of its right to initiate legislative amendments and adopt regulations.

On the whole, the present state of the SSM appears as advantageous from an accountability perspective. While the present arrangement owes its emergence to the contingency of a specific historical situation and might appear as a constitutional anomaly, it enables a reasonable level of checks and balances. Specifically, it offers a whole network of mutually interconnected accountability mechanisms that extend beyond the much-debated issue of parliamentary accountability. In this regard, intra-executive accountability appears as particularly relevant. Should stakeholders wish to strengthen the accountability of the SSM, this trajectory of accountability might bear some potential. For example, one could complement the periodic reports of the Commission with ongoing mechanisms of supervision and information exchange, or harmonize the cycles of the Banking Dialogue with the review exercised by the Commission or the ECA. But given the present state of the SSM, these improvements appear as options, rather than as stringent constitutional requirements.