Smoke with Fire: Financial Crises, Institutional Reform, and the Future of EU Democracy

The handling of the sovereign debt crisis in the European Union (EU) has raised fears that decision making in supranational organization and its member states has become less democratic and that European Central Bank now calls the shots in Europe. This article confronts this pessimistic speculation with systematic evidence of the institutional consequences of past financial crises. We advance an adapted modernization argument and expect in contrast to the renewed debate over the “Democratic deficit” of the EU that severe economic crises have increased the level of both democracy and central bank independence. Panel regression models support the double conjecture that growing democratic and technocratic decision making should be a consequence of severe economic crises. We qualify in light of these findings the widespread pessimism that the EMU crisis has depleted the power of the European legislatures. Our assessment of the reform potential of the EU boils down to the contention that treaty amendments need to rectify the potential for supranational agenda setting that that the Treaty of Lisbon has created and that the Fiscal Compact Treaty has further strengthened.