Smoke with Fire : Financial Crises, Institutional Reform, and the Future of EU Democracy

Abstract

The handling of the recent sovereign debt crisis in Europe has raised fears that decision making among European countries has become less democratic, and that technocrats now call the shots in the European Union (EU). In this article we confront this view by proposing an alternative theory for the effects of financial crises in this supranational organization. We argue that national parliaments in Europe refrain from demanding control of EU institutions during a financial crisis if they think their request may undermine the credibility of governments in other member states their policies depend on. A crisis should then depress demand for political reforms in monetarily independent countries that are in financial trouble, but not in countries whose fiscal and monetary status rely on the economic reputation of the Union as a whole. We show evidence in support of our theory with qualitative evaluations and econometric regressions, using different types of data for the years between 1950 and 2010. Our findings let us reconsider that the recent Eurocrisis has depleted the power of the European legislatures.