Preparedness, Crisis Management and Policy Change: The Euro Area at the Critical Juncture of 2008–2013

Abstract

Research Highlights and Abstract This article contributes to the literature on ideational and institutional change at critical junctures more generally, and in the context of economic crises in particular. In the context of explosive economic crises critical junctures should be conceptualised as consisting of two distinct phases—a phase of emergency crisis management and a subsequent phase of purposeful institution building. The analytical significance of the crisis management phase lies in its tendency to create path dependencies for subsequent ideational entrepreneurs and institution building efforts. Crisis management is always ‘bricolage’. However, in order to understand why certain tools are ‘at hand’ during a crisis, one needs to take into account the variable of crisis preparedness. Contingency planning for non-normal times is a constitutive aspect of any economic policy paradigm. The empirical analysis shows that the euro area's lack of preparedness caused the ECB to assume a dominant position during the emergency phase of the crisis. This windfall gain in power for the ECB has already begun to shape the future institutional architecture of the EMU. Focusing on the experience of the euro area in general, and the ECB in particular, this article argues that in the context of explosive financial crises a phase of emergency crisis management precedes the phase of purposeful institution building. Importantly for our understanding of policy change, crisis management measures create their own path dependencies. However, albeit often improvised, crisis management decisions are not entirely contingent. The article therefore introduces the notion of preparedness, which measures the extent to which the pre-crisis policy paradigm was prepared for the joint occurrence of, in this case, a systemic banking crisis and a sovereign debt crisis. The analysis shows that the Euro area's lack of preparedness caused the ECB to assume a dominant position in the euro area during the emergency phase of the crisis. This windfall gain in power for the ECB has already begun to shape the future institutional architecture of the EMU.