Week 8 Essay - George Giannakopoulos Written analysis of the

research paper: A Lamfalussy Exit from the Joint-Decision Trap

Introduction
The Lamfalussy Procedure was implemented in order to provide an exit from
the Joint Decision Trap [JDT]. Zdenek Kudrnas article provides us with a
comparative analysis of two different initiatives to regulate the financial markets
within the EU. The author analyzes the two regulatory frameworks, in an attempt to
circumscribe the effect that the Lamfalussy Procedure had in the exit of the JDT. The
research question is obviously congruent; whether the delegation of competencies to
technocratic bodies is a solution to the Joint Decision Trap.
The research question is embedded in a wider discourse regarding the JDT that
started over 30 years ago, with the publishing of the famous article written by F.W.
Scharpf. Scharpf himself expanded and evolved the concept of the Joint Decision
Trap in later articles he wrote (Scharpf 2006; 2011), while at the same time attempted
to identify the particular areas of policy-making that are more susceptible to this
phenomenon. According to Scharpfs line of reasoning, initiatives associated with
positive integration are more prone to reach stalemate. The financial markets
regulation included both mutual recognition and harmonization measures, hence it did
transcend member states sovereignty. The blockade in the negotiations was an
outcome predicted by the relevant literature. What was unique about this case
however, was the utilization of technocratic committees as means towards a
sustainable solution. That point precisely is the contribution that this article is making
to the relevant literature.

Attempts for financial regulation

Financial integration requires a sophisticated regulatory framework, otherwise
a regulatory gap appears. That was the case in the EU, since financial firms had the
capacities to operate beyond their national boarders, yet the different regulatory
frameworks they were facing, served as an impediment to genuine market integration.
Two major regulatory attempts took place. The first was the Investment Services
Directive [ISD] and the latter was the Market in Financial Instruments Directive
[MiFID] which was implemented more than 10 years later.
In both cases, member states preferences were aligned on the bulk of the
regulatory measures. Nevertheless, when it came to the provisions that would affect
incumbent firms and small securities investors their views where diverging. Two
stable coalitions were formed, the Northern and the Southern. The Northern
coalition preferred a more deregulated market, while the South was rooting for a less
competitive financial landscape. During the legislative processes, these two coalitions
took the form of veto players; neither the one nor the other were willing to recede
from their respective positions, despite the fact that no matter which view prevailed
the result would be Pareto optimum for both.
In a perfect world, where transaction costs would be negligible, Coases
Theorem would provide the solution. The respective parties would be able to
negotiate, offer side-payments and package deals in order to obtain the other partys
Week 8 Essay - George Giannakopoulos Written analysis of the
research paper: A Lamfalussy Exit from the Joint-Decision Trap

consent. However, reality is far from ideal. The preferences of the participants are not
always apparent and there are significant transaction costs. Hence, when it comes to
matters that affect national sovereignty and the opinions of the agents are diverging, a
JDT is imminent (Scharpf 2006).
We can conjure, that in both cases the conditions for a JDT and a consequent
stalemate were present. Yet, only in the case of ISD did the JDT take place. Ceteris
paribus, the only difference between ISD and MiFID was the implementation of the
Lamfalussy process. If this is true, as the author asserts, then the Lamfalussy
procedure is a solution to the JDT. In order to examine the authors arguments a more
detailed analysis of the two frameworks is required.

ISD and MiFID

The ISD was deliberated between 1989 and 1993. At the time, Qualified
Majority Voting [QMV] had been implemented in the co-decision process. The QMV,
which replaced unanimous decisions, allowed decisions to be ratified even if a small
minority was opposing. In this particular case, even with QMV the results were
meager. Both coalitions were sufficiently big to block every proposal that deviated
from their preferences. At the same time, the prominent nature of the regulation of the
financial sector demanded some sort of action to be taken. The compromise that took
place did not resolve the points of contention; rather gave the agreement a
configuration of vagueness and obscurity. Although in theory, the new legislation
established a common regulatory framework for all the participants in the markets for
securities, the implementation of this framework differed among member states.
Individual countries took advantage of the vagueness in the provisions and
implemented the new framework in a way that was congruent to their respective
preferences. The countries of the Southern Coalition added extra layers of legislation
to the original, in order to create market barriers for the non incumbent firms and
protect their domestic financial sector. Substantially, that means that the regulatory
framework remained fragmented along member states. Hence the status quo was
retained and the ISD failed to fulfill its purpose. Although both parties could achieve
a Pareto improvement of their initial position, they failed doing so, due to a JDT. In
this case, the Lowest Common Denominator took the form of vague clauses and
obscure descriptions in the implementation process.
The literature on the JDT has proposed several methods that could resolve this
failure of coordination. Scharpf himself mentions three possible solutions; firstly a
constructivist problem-solving approach, which at the time was not present among the
two coalitions; secondly the implementation of simple majoritarian voting rule;
finally, a Supranational- Hierarchical approach, which dictates that the European
Commission alongside the European Court of Justice would bypass the individual
member states in order to facilitate integration. Both these concepts suffer from a lack
of democratic legitimacy, in addition to the fact that the first requires an amendment
of the institutional procedures (which would be declined in first place), and the second
requires that the Commission will bring a case of infringement in the jurisdiction of
Week 8 Essay - George Giannakopoulos Written analysis of the
research paper: A Lamfalussy Exit from the Joint-Decision Trap

the ECJ. The Commission chose not to pursue any case of infringement in front of the
ECJ, possibly because it conjured that there was no overlap between the win sets of
the two coalition and thus any attempt to enforce legislation would create a severe
wound in the legitimization of the Union.
The Lamfalussy procedure, comes as a solution to this conundrum. This
procedure basically separates the decision making process in 4 stages. The first and
the forth are still administrated by existing actors (EC, Commission, ECJ), while the
second and the third require new bodies to be generated, in the form of committees
with scrutiny. The European Securities Committee [ESC] (composed by member
states representatives) was formulated in the second level and is responsible for the
implementation of the measures, as they are defined by the Commissions mandate. In
addition to that, the ESC has a limited capacity to legislate, so that the negotiations at
the first level wont reopen for trivial matters. The Committee of European Securities
Regulators [CESR] is formulated at the 3rd level and is the most technocratic body. It
is composed by technocrats and representatives of the national regulatory agencies. It
monitors the implementation process and resolves any issues that arise. In a nutshell,
the Lamfalussy committees have two functions: (a) allow greater deliberation, which
is translated in a capacity to deliver more complex solutions that can satisfy opposing
preferences (b) insulate the legislation from the implementation, thus reducing the
scope of conflict within member states.
The Lamfalussy process, combined with QMV, managed to formulate a
legislative framework that would allow the integration of financial markets in a
homogenous regulatory landscape. The MiFID was, comparing to the ISD, far broader
in scope, and it was put together much faster. This time there were no ambiguous
clauses, and no room for circumvention. This is apparent from the limitation of gold-
platting after the implementation of the MiFID. The member nation were now bound
from the directives and had no longer any capacities to deviate from the directives.
The only downside of the Lamfalussy process was the growing complexity of the
legislation, due to the greater depth that the technocratic committees were able to
reach, when they were trying to reconcile opposing preferences. In fact, due to its
success, it was proposed that the CESR should become a permanent agency. The
author concludes that the effectiveness of the Lamfalussy procedure in this case is
evident. Indeed, under this method the JDT was avoided and an almost optimal
outcome was produced. Nevertheless, we still cannot claim that technocratic
committees will always be a solution to the JDT; in fact we cannot even claim that the
Lamfalussy procedure was the sole paragon behind the success of the MiFID.

Assessing the authors arguments

The catalysts behind the JDT in the first place were the diverging preferences
among member states and their faculty to veto every directive that was incompatible
with their interests. This same predicament was still in effect. At the first level, there
could still be a blockade that would prevent the continuation of the Lamfalussy
process. Furthermore, there could still be formulated a JDT, in the form of a mandate
Week 8 Essay - George Giannakopoulos Written analysis of the
research paper: A Lamfalussy Exit from the Joint-Decision Trap

that is the lowest common denominator of the proposed legislation, which will itself
lead to an suboptimal outcome. One could claim that the committees have the ability
to ameliorate the proposed framework and thats probably the case, although their
freedom to legislate is limited by the scrutiny which is imposed upon them. In the
case of the regulation of the financial markets, a number of fortunate coincidences
allowed a Qualified Majority to be mustered. At the time, the Southern Block had the
agenda setting power, which could utilize in order to achieve the desired outcome.
Furthermore the Commission chose to side with the less deregulated proposition. The
co-decision procedure with the EP served as a balance to the Councils proposal and
in favor of the Northern Block. The compromise between the European Council and
the European Parliament was made available only because of the technocratic nature
of the Lamfalussy Committees.
The major advantage of the technocratic committees is that they narrow the
scope of conflict and they concentrate all the divergence of preferences to the first
level of framework legislation. If this impediment is overcome, the other levels are
insulated from all kinds of pressures. The utilization of technocratic committees does
not depoliticize the process of policy making, thus the political actors will always be
subject to two level games and their personal preferences. As the mandate granted to
the committees at the following levels resembles the political bargaining at the first,
the actions of the technocratic committees at level two and three will be a function of
the political bargaining at the first level. Hence, the possibility of a JDT is not
completely eradicated.
The second issue that arises has to do with the technocratic committees
themselves. If the technocrats are chosen by the politicians, based on the compatibility
of their respective viewpoints and if there is the same proportional representation of
each country in the technocratic committees, as is in the Council, then a stalemate at
the technocratic committees is a possibility, especially since the decision making
mechanism is QMV. This particular issue might be more easily resolved, comparing
to the previous one, via the institutionalization of the committees into permanent
agencies, as in the case of CERS. In this case, the technocrats will not act as mere
agents to their principles will, but rather protected by their independent status, they
will be able develop cooperation mechanisms with their counterparts.
Finally, the role of the European Parliament poses another challenge. Under
the co-decision mode, both the EC and the EP must agree on the legislation proposed
by the Commission. Hence, there are now two different arenas where bargaining takes
place. In the case of the Securities Regulation, the EP served as a cushion against the
Southern block hardline position. Yet, that might not be the case in future attempts to
legislate. Nevertheless, the utilization of technocratic committees allows greater
optimism for agreements in co-decision mode, since disagreements at the introductory
level can be resolved in a more analytical approach by technocrats.
Week 8 Essay - George Giannakopoulos Written analysis of the
research paper: A Lamfalussy Exit from the Joint-Decision Trap

Conclusions
The author presents a comparative analysis of two regulatory attempts, in
order to demonstrate the effectiveness of the Lamfalussy Procedure. His analysis
indicates that the Lamfalussy procedure was the factor that rendered the MiFID a
success. Hence, it is a necessary step towards an exit from the JDT. Nevertheless, the
Lamfalussy Procedure is not a sufficient factor, because it does not internalize the
choice mechanism between the Nash equilibria. Political agents are still behind the
choice mechanism, thus rendering it vulnerable to bargaining traps. The same
procedure, due to its technocratic nature might resolve issues related to the co-
decision mode. Alas, the circumvention of a technocratic stalemate requires a great
deal of independence of the technocratic committees from their respective political
principles. Hence, a trade-off between efficiency and democratic legitimization is
likely to appear. Overall, despite its promising outlook, more empirical data are
required, in order to assess the success of the Lamfalussy Procedure as a way out of
the JDT.

Word count: 2158

Bibliography
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EUs Decision Traps: Comparing Policies. Oxford: Oxford University Press
Scharpf F. W., 2006. The Joint-Decision Trap Revisited. JCMS: Journal of Common
Market Studies 44, 845864.
Tsebelis, G. , Veto players: how political institutions work. Princeton University
Press, Princeton, N.J.