The Doom Loop and Democratic Legitimacy in the Euro Area

Much has been written on the ability of European Banking Union (EBU) to mitigate the mutual-capture relationships between governments and banks (the ‘doom loop’). However, the effects of EBU on the democratic legitimacy of member states’ governments has been neglected. We expect output legitimacy to fall when the ‘doom loop’ intensifies, as it did in the euro area, because it downplays voters’ interests. We argue that the public responds politically to bank losses, especially under high concentration in the banking sector, as a transparent signal of the government’s supervision failure. Our dataset includes more than 100 democracies since 1988. We compile data on losses of banks, calculate concentration levels in national banking sectors and the share of banking assets under direct SSM supervision. We find that bank losses tend to drive anti-government street protests even regardless of the level of concentration in the banking system, but that under high levels of concentration the public is especially upset about losses in locally-owned banks. Our results also confirm the expectation that the public protests more in such situations inside the euro area than outside it. Supranational supervision increases protests, and even reduces the vote for the incumbent government, rather than assuage the public’s concerns. We believe that by studying the output legitimacy of supervision, this study fills an important gap in the literature on the politics of banking in the euro area; it also adds empirical value to this literature, with its original design, operationalization of output legitimacy, and comprehensive dataset.