I. LIST OF CONTENTS
2. THE PRINCIPAL-AGENT APPROACH
3. THE EUROPEAN CENTRAL BANK
4. THE OUTRIGHT MONETARY TRANSACTIONS PROGRAM
5. THE DEBATE FROM A PRINCIPAL-AGENT PERSPECTIVE
5.1 The preferences of the agent - ECB
5.2 The preferences of the principals - Member states of the Eurozone
5.3 Did the ECB exceed its mandate by announcing OMTs program?
What started as the Greek government's debt crisis in 2009 has evolved into a fundamental economic and political crisis in the Eurozone. The economic situation during the summer 2012 climbed to dangerous highs. For instance, the yield on Italian bonds rose to the highest level since the euro was introduced as a currency in 1999 (Asmussen, 2013). Even the British government drew up emergency plans for a potential collapse of the Euro (Asmussen, 2013). Previous measures like the EFSF, a temporary rescue mechanism, or the ESM, a permanent rescue mechanism, were not sufficient instruments to solve the crisis. Since then the member states have different opinions about handling the crisis. One group calls for rigorous austerity measures and does not want to be bound by assistance obligations, while the other group is in favor of a communalization of debts and a lax austerity policy.
On September 6, 2012, the President of the ECB, Mario Draghi, announced that the ECB "will do whatever it takes [...] to preserve the euro" (Draghi, 2012b). Due to the unfavorable economic situation and the emerging fear of an involuntary break-up of the Eurozone, the Governing Council decided to launch the OMTs program that would allow the ECB to buy unlimited government bonds from countries of the Eurozone on the secondary market. This announcement led to a subject of considerable political debate across the world. On the one hand, governments and market participants were relieved and celebrated the news. The program was headlined in newspapers as the ECB's "bazooka" (Handelsblatt, 2013) to finally manage the crisis. On the other hand, more than 37,000 German citizens brought a legal action against this program to the German Federal Constitutional Court due to concerns of the OMTs program's incompatibility with the primary law of the EU and of the ECB exceeding its monetary policy mandate. In the beginning of February 2014, the Second Senate of the Court made a pronouncement referring the question of authority to the ECJ for a preliminary ruling. Many people are concerned about the Euro-crisis and the debate on the European fiscal strategy seems at times like a "war of religion" (Buti and Carnot 2013: 1). It is with this background in mind that the research question arises:
Did the European Central Bank exceed its mandate by announcing the bond-buying program, outrightmonetary transactions (OMTs)?
This paper will show that the principals' preferences heterogeneity with regard to different crisis solution approaches changes when it comes to the survival of the Eurozone. Thus, the agent was given more discretion to do everything to defend the Euro as a common goal. The aim of this contribution is to answer the research question from a principal-agent perspective, not to provide a jurisprudential or economic analysis of the issue. Therefore, the decision of the German Federal Constitution Court will not be included in the following work.
PA approach is well used in EU studies and every institution has been reflected within this framework: EC, ECJ, EP, EU Council Presidency (Conceiçâo-Heldt, 2010; Kassim and Menon, 2005; Pollack, 2002; Tallberg, 2003). Regarding the ECB, PA theory was mainly used to describe the institutional design (Heisenberg and Richmond, 2002; Hodson, 2009) or the special issue of a democratic deficit (Elgie, 2002). In the wake of the Euro-crisis many scholars reflected this topic from different approaches: For example, Schimmelfennig (2012) and Immerfall (2013) examined the explanation power of integration theories regarding the crisis. However, there is still a clear concentration of economic (Hristov, 2014; ifo institut, 2014) and legal literature (Thiele, 2013; Degenhart, 2012), which addresses the issue of the OMTs program and the ECB's mandate. To fill this research gap, the PA approach, a branch of rational choice institutionalism, will be used to identify more clearly the principals' and agents' preferences during the Euro-crisis, to evaluate the relationship between them and the existence of a possible conflict of interest. On the basis of the PA approach, the institutional design of the ECB can be analyzed to identify possible gaps in the mandate.
The remainder of this paper is organized as follows: The first part gives a brief introduction to the main assumptions of the PA approach. The next chapter discusses the ECB as an institution, together with the framework and the design of its mandate to consider the level of autonomy of the ECB and which gaps in the policy-making authority could occur. The third part outlines the technical features of the announced OMTs program to see if the bond-buying program is in accordance with the mandate. Then, the debate on this program from a PA perspective becomes the focus. The final chapter summarizes the paper.
2. The Principal-AgentApproach
Before moving forward to the debate it is useful to outline the main aspects of the PA approach, which developed to a well-used theory within EU studies (Maher et al., 2009: 410).
The PA approach describes the relationship that occurs when a principal delegates power to an agent who then works on behalf of the principal on its own responsibility with an agreed upon discretion in a certain spectrum of tasks. A principal can be defined as a "political official who use[s] his authority to establish non-majoritarian institutions through a public act of delegation" and "agents are those who govern by exercising delegated powers" (Thatcher and Stone Sweet, 2002: 3-4). Both parties are bound by a contract and it is possible for the principal to determine this relationship at any time (Kassim and Menon, 2003).
The primary reason why principals delegate is to reduce transaction costs (Hawkins et al., 2006: 168). There are four strands of explication that define those transaction costs: First, the principal expects the agent to contribute with their knowledge to specific problems, while the principal reserves the right for the policy-making power. The estimated effect would be an increase in effectiveness and efficiency of the policy or the law making procedure (Wonka, 2008: 50; Thatcher and Stone, 2002: 4; Kassim and Menon, 2003: 123). Second, by delegating power, the principal stabilizes his own politics because he is bound to certain rules in the future (Wonka, 2008: 50) which lends him credibility (Thatcher and Stone, 2002: 4) and he can create a "lock-in-effect" to freeze a certain power constellation (Hawkins et al., 2006: 19). Third, the principal wants to overcome information asymmetries by taking advantage of the agent's expertise to produce suitable public policy (Thatcher and Stone, 2002: 4). Fourth, sometimes unpopular decisions must be made and the agent can be presented to the public as the responsible party in order to take the blame (Thatcher and Stone Sweet: 2002: 4). Another important aspect of the PA theory is that cooperation needs to be profitable for the principal; otherwise there would be no incentive to delegate. Therefore, a cost-benefit-analysis is a helpful instrument. Costs incurred due to delegation of power can be defined as agency losses and costs of control mechanisms. Agency losses are caused by an opportunistic behavior of the agent as a result of the "existence of asymmetric information" (Elsig, 2010: 498). They can arise in two different ways: For example, the agent shifts the negotiation outcome towards its own preferences and against the principal's expectations (agencyslippage) or the agent reduces its efforts for the completion of tasks (agency shirking) (Hawkins et al., 2006: 8). The second type of costs, costs ofcontrol mechanism (like bureaucracy, work time, money), arise because the principal does not want the agent to act with autonomy and therefore he must have effective mechanism of control to reduce or minimize the agency losses. There are two standard possibilities for controlling the agent's behavior.
Ex ante administrative procedures, like certain fixed rules which describe exactly how the agent is supposed to work (rule-based delegation) or choosing a favorable agent (screening and selection procedures) are expected to have preventive effects on the agent's future scope of actions. However, rule-based delegation is inefficient and inflexible because it requires the principal to be acquainted with the policy matter, which incurs additional costs. The opposite would be for the principal to only define the goals within the contract and the agent would be free to choose the appropriate actions to achieve those objectives (discretion-based delegation). This allows the agent to react in uncertain or knowledge- needed situations with high flexibility and autonomy (Hawkins et al., 2006: 26-27).
Ex post oversight procedures are used to identify agency slack and to react and sanction if necessary. The principal can monitor the agency behavior by himself (police patrol) or by a third party who raises alarm (fire alarm). To influence the agent it is possible for the principal to apply positive or negative sanctions depending on the agent's behavior. But for a useful and viable cost-benefit-balance it is important for the principal to select the control mechanism carefully (trade-off) because they are expensive and affect the agent's independence in performing his role (Hawkins et al., 2006: 26-27,180).
The constellation of multiple principals and one agent has additional effects on the relationship. The agent could serve as a mediator if there are differences among principals and contributes to a long-term cooperation (Kassim and Menon, 2003: 123). Additionally, the involvement of multiple principals means that the transaction costs will be lower as they are proportioned among the group (Pollack, 1997: 103). Nonetheless, the process of delegating power to an agent is more complex and the possibility to bring this process to a successful end is low (Hawkins et al., 2006: 27-28). Depending on the institutional design, the costs of monitoring the agent will be higher because it has to be done by every principal (Kassim and Menon, 2003: 124). Determining whether agencyslippage or shirking occurred is problematic due to the varying opinions of the principals which increases the agent's discretion (Hawkins et al., 2006: 21).
Overall, the PA approach is a relevant tool to understand the delegation process to supranational agent and for analyzing the long-term effects on this cooperation. In chapter five, the analytical framework of PA theory will be applied to the mandate of the ECB during the Euro-crisis. Prior to this, the institutional design of the ECB needs to be analyzed.
3. The European Central Bank
Scholars describe the ECB as "unique" among EU institutions or "the most spectacular example of delegation in the EU since the EEC Treaty of 1957" (Hodson, 2009: 1). In 1988, Germany proposed the creation of a monetary union and in 1999, the ECB took over the functions of the national central banks and was responsible for monetary policy. Heisenberg and Richmond (2002: 215) concluded that the ECB's establishment process was strictly controlled by the member states. Thus, the ECB has "a very specific institutional mandate" (Heisenberg and Richmond, 2002: 206) which is written in the Articles 127-133 in the TFEU and in the Protocol on the Statute of the ESCB and of the ECB. According to Article 127 of the TFEU, the mandate covers the following tasks with a hierarchical order: 1) Maintaining price stability and supporting the general economic policies in the Union; 2) defining and implementing the monetary policy of the Union; 3) conducting foreign- exchange operations within the provisions of Article 219; 4) holding and managing the official foreign reserves of the Member States; 5) promoting the smooth operation of payment systems (Article 127 of the TFEU). The mandate is evidence that the member states had a strong interest in describing the tasks of the ECB as precisely as possible (rule- based delegation). Due to the low degree of discretion it is unlikely that an agent could engage in opportunistic behavior (Hawkins et al., 2006: 27-28). The national governments were aware that this institution would run their monetary policy and would have long-term consequences on them, and discussed the concept of one independent central bank intensively (Heisenberg and Richmond, 2002: 205).