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This book discusses the relationship between democracy and the financial order from various legal perspectives. Each of the nine contributions adopts a unique perspective on the legal and political challenges brought to the fore by the Global Financial Crisis. This crisis and the ensuing sovereign debt crisis in Europe are only the latest in a long series of financial crises around the globe in recent decades. By their very existence, but also as a result of the political turmoil they have created, these financial crises testify to the well-known tensions between democracy and a market-based economic and financial order. However, what is missing in this debate is an analysis of the role of law for reconciling democracy with a market-based financial order.

To fill this lacuna, the book focuses on the controversy surrounding the concept of law, thereby adding another variable to the debate on the relation between democracy and capitalism. Each chapter addresses the concept of law from a particular theoretical angle, be it a full-grown legal theory or an approach in political economy that has a particular view of the law.



Introduction: Democracy and Financial Order – Legal Perspectives

This volume assembles nine articles on the relationship between democracy and the financial order from various legal perspectives. Each contribution adopts a unique perspective on the legal and political challenges brought to the fore by the Global Financial Crisis. This crisis and the ensuing sovereign debt crisis in Europe are only the latest in a long series of financial crises in the last decades all over the world. By their very existence, but also by the political turmoil they have created, these financial crises testify to the well-known tensions between democracy and a market-based economic and financial order.
Matthias Goldmann, Silvia Steininger

A Discourse Theoretical Approach to Sovereign Debt Restructuring: Towards a Democratic Financial Order

This chapter studies the role of law for aligning democracy with a market-based financial order. Jürgen Habermas’s discourse theoretical understanding of the role of law in the welfare state establishes a structure for exploring this issue. According to this approach, law needs to be enforceable, law-making and law-application need to be institutionally separated, and public law needs to be distinguishable from private law. The contemporary practice of sovereign debt restructuring reveals some empirical and normative challenges to this understanding of the law. Based on these findings, this chapter proposes several conceptual and institutional improvements that might lead to a more stable relationship between democracy and financial order. In particular, we argue that sovereign debt restructuring should tap the legitimating potential of existing transnational discourses that are characterized by cross-border cleavages in public discourse.
Matthias Goldmann, Silvia Steininger

The Limits of Law (and Democracy) in the Euro Crisis: An Approach from Systems Theory

The chapter attempts to explore the fate of law and democracy in the euro crisis from the sociological perspective of systems theory. It consecutively ascertains the performance, the relevance, and the function of the law with regard to the current practice of restructuring sovereign debt in the euro area. While novel forms of regulation such as the European Stability Mechanism attest a remarkable assertiveness of the law, they cannot effectively command economic recovery and must cede to economic imperatives for their part. Under such circumstances, the law can no longer adequately fulfill its function to counterfactually secure normative expectations. Nevertheless, the regulatory experiments in the euro crisis may not be regarded as undemocratic. Rather, the heterarchical processes of mutual observation, recognition, and contestation among the various constituencies involved, including representatives of governments, institutions of the European Union, central banks, national parliaments and peoples via referenda, as well as European and national courts, provide some substitute for the lack of elections and parliamentary decision-making at the European level.
Lars Viellechner

Rational Choice and Its Limits

This chapter asks the fundamental question of whether the concept of a market-oriented (economic) order can be reconciled with the idea of democracy from the perspective of rational choice approaches to the law. Europe has been facing great economic challenges for the past years—sovereign debt; fiscal and monetary policy; financial market regulation; trade and investment agreements. Some observers argue that prioritizing an economic rationale in the policy response to these challenges comes at the expense of democracy by undermining its most vital preconditions (such as equality and solidarity), while their antagonists state that in fact democratic decision-making is undermining financial stability and long-term welfare of societies. This contribution will establish that both positions contribute important insights and yet display too narrow a field of vision. Combining the arguments puts the cart before the horse: Democratic decision-making undermines, among other things, financial stability—and thus long-term welfare of societies—because it follows a logic that is primarily economic.
Emanuel V. Towfigh

Constitutional and Administrative Pluralism in the EU System of Banking Supervision

This chapter examines the relationship between the developing European Union (EU) system of banking supervision and the theories of constitutional pluralism. It questions the remaining epistemic, explanatory, and normative value of these theories with regard to the EU system of banking supervision. The argument is broken down into three sections. First, the chapter briefly describes the system of banking supervision in the European Union and the pluralist challenges that it spurs. Second, it schematically maps out the leading theories of constitutional pluralism to test, by way of their application to the field of EU banking supervision, their epistemic, explanatory, and normative value. Finally, to the extent that this value has diminished, the chapter offers another pluralist theory, not a constitutional one, which could supplement the identified epistemic, explanatory, and normative gaps. This is a theory of administrative pluralism.
Matej Avbelj

Debt, Default, and Two Liberal Theories of Justice

There is a fundamental disconnect between the public discourse about sovereign and external debt in comparison to private domestic debt. The latter is predominantly viewed through a Humean lens, which sees economic morality in terms of contingent social institutions, justified by the valuable goods they realize; while sovereign and external debt is viewed through a Lockean lens, which sees property, contract, and debt as possessing an intrinsic moral quality, independent of social context or consequences. This chapter examines whether this Lockean perspective on sovereign and external debt is compatible with the dominance of Humean approaches to the domestic economy. It considers and rejects the most plausible argument for reconciling these views, which emphasizes the different qualities of cooperation in the international and domestic economies. It further argues that many standard objections to a Humean approach to sovereign debt suggest, not the Lockean approach, but rather a Hobbesian international moral skepticism. Concluding that the Lockean approach is unmotivated, this chapter instead advances a Humean account of sovereign debt and default. It shows how taking seriously the demand for institutional justification and the idea of persons and peoples as free and equal provides an account of the duties of states—whether creditors, debtors or third parties—in sovereign debt crises. It further examines the implications of each approach for democratic choice about sovereign default.
Oisin Suttle

The Financial Crisis as a Crisis of Democracy: Towards Prudential Regulation Through Public Reasoning

The financial crisis challenges our understanding of democracy. Before the crisis there was a widespread conviction that democracies were not only morally superior to authoritarian forms of government, but were also better positioned to deal with severe economic and financial turmoil. Systemic events that exceed purely cyclical ups and downs were believed to be confined to the less democratic parts of the world. The crises in Asia and the post-soviet states of the 1990s seemed to confirm this.
The recent financial crisis, however, has been a crisis in and of the West, while some authoritarian regimes have done much better. It raises the question whether democracy can really produce outcomes that are superior to those of other forms of governance and create a just society.
To explore this question, the paper chooses as a starting point Amartya Sen’s comparative theory of democracy that combines output and input oriented aspects. Sen considers “public reasoning” as the key mechanism through which democracies achieve better outcomes than authoritarian regimes. The paper then looks into some of the causes of the crisis that have been identified in the literature. It shows that each of these causes can be understood as a lack of public reasoning. Indeed, I claim that there is an intrinsic relationship between the prudential regulation of financial markets and public reasoning. Public reasoning is able to optimize decision-making under conditions of uncertainty, which is exactly what prudential regulation is about. This insight has important consequences for the design of the regulatory architecture of financial markets and the interpretation and application of the relevant domestic and international law.
Matthias Goldmann

Neoliberalism and Law: The Case of the Constitutional Balanced-Budget Amendment

This chapter discusses the significance of law in neoliberal theory and practice. Prefaced by a brief look at the role that law plays in the theories of the ordo- and neoliberal thinkers Franz Böhm and Friedrich August von Hayek, the subsequent sections focus on the work of James Buchanan and his brand of neoliberalism, which combines constitutional economics public choice theory. Buchanan’s core demand is a balanced-budget amendment to the constitution. The following sections examine this measure in its various aspects before the final section switches to the world of “actually existing neoliberalism” with a discussion of the various reforms of the economic governance structure of the European Union in recent years, particularly the “Fiscal Compact”, which amounts to the real world equivalent of a balanced-budget amendment.
Thomas Biebricher

An Alert from the Left: The Endangered Connection Between Taxes and Solidarity at the Local and Global Levels

Neoliberal tax policies at the local and the global levels risk democracy consolidating economic inequality by allowing and fostering capital accumulation. As a consequence capital owners have increased their political power to influence and decide on local and global tax policies for their own benefit. The Chilean income tax system and the international tax law system (including tax competition among states and tax havens) are analyzed as examples of neoliberal tax policies at the local and the global level, respectively. At the same time, neoliberalism as a normative order of reason has replaced the political aspect of taxation with economic concepts that tend to dissolve the connection between taxes and solidarity. In this scenario, taxes make no economic or political sense as they are not understood as duties of citizenship. In this chapter recent alternatives proposed to diminish global no taxation and inequality, as the OECD BEPS project and Thomas Piketty’s proposal for a global tax on capital are analyzed and criticized.
Francisco Saffie G.

Public Law’s Rationalization of the Legal Architecture of Money: What Might Legal Analysis of Money Become?

Many of the ills afflicting democratic capitalism have their source in the current legal architecture of money and finance. At the same time the reimagination of institutions of money and finance promise an avenue for reform to democratize the economy and prevent the perpetuation of austerity politics. Such institutional reimagination requires a perspective that recognizes money as an institution linking state and civil society, politics and the economy. Economics in great part eschews such a perspective and perceives of money as a medium of exchange largely independent of government and politics. Legal analysis, by contrast, should be ideally suited for the endeavor to analyse the various ways in which the institutional design of money configures political economy.
To start paving the way for such analysis, I seek to clarify how German public law scholarship has been obstructing a reimagination of monetary design. It has adopted an understanding of money that is informed by economics and on this basis has rationalized the particular legal architecture of money in Germany and in the European Economic and Monetary Union as necessary to protect individual freedom and democratic constitutionalism. Recent practice of the European Central Bank reveals that the strict separation between monetary and economic policy, between money and public finance that characterizes the European Economic and Monetary Union, and its rationalization by legal scholarship and case law cannot be maintained. I argue that a growing body of literature on the political economy of money can inspire a legal analysis that overcomes the current fetishization of the legal architecture of money. This literature provides a starting point for imagining institutions that operationalize monetary sovereignty to serve the public interest and that decrease the hold of private creditors on democratic politics.
Isabel Feichtner


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