The Agreement on EU Banking Union: Analysing Decision-Making Dynamics in EMU

This paper seeks to analyse the creation of the EU’s recent grand bargain: how did the EU banking union come about? While still in 2011 key member states objected to joint banking supervision, the eurozone heads of state or government agreed on banking union in June 2012. The theoretical framework of this paper consists of a liberal intergovernmentalist explanation (i.e. material interests and power) and an ideational frame stressing the role of deliberation and ideas. Methodologically, this paper establishes a thick description by tracing the process leading to banking union. The sources considered are policy papers and manifestos, press reports, statements by leading politicians, and around 60 interviews conducted with key negotiators, including members of the European Council and their sherpas, finance ministers, director-generals, directors, heads of unit, etc. in key member states and EU institutions. It is argued that three factors explain the agreement on banking union. Firstly, crisis pressures opened a window of opportunity. They urged governments to act in order to save the single currency. Secondly, ideas matter. In late-2011, policy-makers in member state governments learned about the vicious circle between banks and sovereigns. This idea suggested banking union as solution and became constitutive for member state preferences. Thirdly, deliberation matters. Whereas the idea of a vicious circle suggested joint banking supervision and resolution to break the sovereign bank nexus, the German government consistently rejected any form of mutualisation during the euro zone crisis. Yet, it had already publicly acknowledged the existence of the vicious circle and therefore Chancellor Merkel could not credibly argue against its solution at the June 2012 Euro Summit. Despite strong power asymmetries favourable to the German government, it was rhetorically entrapped, which was used by the main policy entrepreneurs of the agreement to bring about an agreement on banking union.