Time Will Tell: The EFSF, the ESM, and the Euro Crisis

Abstract Abstract The European Financial Stability Facility (EFSF), a slim and temporary bailout fund created by the European Union in May 2010 to quell a growing sovereign debt crisis in Europe, became the foundation for a permanent, more powerful institution, the European Stability Mechanism (ESM), adopted in March 2011. Did the creation of the EFSF constrain policy-makers and narrow down the path of options subsequently available to them? This paper assesses whether the euro crisis of 2010–2012 provides an instance of historical institutionalism in action, whereby the institutional creation decided at the critical juncture of the initial reaction to the crisis transformed the path of options available at later attempts to tackle the crisis, sometimes with unintended consequences. Through careful process tracing, we analyze the temporal sequences of reactions to the crisis and argue that the creation of the EFSF and ESM created path dependency in the subsequent management of an unrelenting crisis, enshrined intergovernmentalism as the modus operandi, and led to suboptimal solutions. Key Words: bailoutEuropean Central BankEFSFEuroGermanyGreece Acknowledgements The authors would like to thank Jean-Pierre Landau, Jeffry Frieden, Christine Landfried, the participants of the College of Europe Conference on economic governance in Bruges on 1 March 2011 and the participants of the panel 'Assessing the Eurozone Crisis' of the IPSA World Congress in Madrid on 8 July 2012 for their comments. Notes 1. Pro rata based on the share of the paid-up capital to the ECB, see Ludlow (2010 Ludlow, P. 2010. In the last resort, the euro crisis and the European Council, Spring 2010. EuroComment 7, no. 7/8, http://www.eurocomment.be/?p=182#more-182. Google Scholar, 23). 2. The views expressed by Yiangou are in a personal capacity and do not necessarily reflect those of the ECB. 3. The ESM was officially inaugurated in October 2012. 4. Assuming, for the sake of this thought experiment, that the mechanism would have been limited to the EAMS to avoid UK opposition. 5. See Pierson (1996 Pierson, P. 1996. The path to European integration: a historical institutionalist analysis. Comparative Political Studies, 29(2): 123–163. Crossref, Web of Science ® , Google Scholar).