‘Over-the-counter’ (‘OTC’) derivatives have attracted unprecedented levels of scrutiny since the global financial crisis which broke out in 2007–8. Yet this would be the wrong place to start in order to understand the modern derivatives markets and the courts’ role in relation to them. This chapter argues that in order to understand post-crisis developments in the OTC markets, including the unprecedented surge of litigation after 2008, it is necessary to place these developments in historical, legal and regulatory context. Having set out important definitions and discussed the main uses of derivatives by way of introduction, the chapter explores the evolution of the modern derivatives markets, highlighting the particular significance of contractual standardisation and market diversification.

The previous chapter explored the pivotal role of the ISDA Master Agreement in the evolution of the OTC derivatives markets and highlighted the combination of legal techniques behind the various ‘self-help’ remedies in this contract. These contractual remedies, which culminate with Close-out, are designed to manage disruption arising during the lifespan of a derivatives contract without requiring recourse to the formal procedures associated with enforcing rights under general law. While versions of these self-help remedies appear in many types of financial contracts, including in market standard syndicated loan agreements and in the terms and conditions of debt securities, they have reached unmatched levels of sophistication in the derivatives context. As such they have been referred to in a recent English case as amounting to ‘an exclusive code’ under which parties manage the implications of a breach of contract, to the exclusion of the general law. As is now well-documented in the literature addressing the transnational qualities of modern finance, these arrangements underpin the cross-border markets in OTC derivatives by promoting autonomy from national insolvency law, a strategy which has, in turn, enjoyed generous regulatory treatment. The questions to which this chapter now turns is what role is left for the courts in relation to such a tightly designed, closely maintained and ‘exclusive’ contractual framework, and, as a starting point, why such litigation arises in the first place.

The role of government has evolved significantly over the past 150 years. In the late nineteenth century, only about 10% of GDP passed through the hands of government. This was consistent with the prevailing view that government should only be minimally involved in the economy. By 1960, public spending had increased to 25–30% of GDP as governments focussed on delivering their core tasks: rules of the game, public goods and services and basic safety nets. Private choice still predominated and safeguarded both economic and financial freedom. The Keynesian ‘revolution’ from 1960 to about 1980 saw government grow to 50% and 60% of GDP in some countries and to over 40% on average. Over the next two decades, the classical ‘counter-revolution’ propagated smaller states. Many countries began fiscal reform and rules-based policy-making gained prominence. Spending growth came to a halt, and in some cases reversed. The years since 2000 have seen a revival of Keynesian thinking. Countries engaged in expansionary policies before the global financial crisis and experienced new record highs in public expenditure and debt thereafter. Another wave of reforms brought spending down in some crisis countries in the 2010s. However, public spending ratios on average rose well above the level of 2000.

Rules and institutions are at the heart of effective and well-managed governments that focus on their core tasks. Sound rules and institutions constrain policy-makers and guide the expectations of citizens. This promotes trust, opportunities, prosperity and freedom. It prevents hubris and excessive expectations about what governments should and can do. Sound rules and institutions constrain deficits, spending and debt. They govern the process of budget-making and implementation and ensure the effectiveness and efficiency of spending programmes. They also help constrain government activities relative to the private sector. Rules and institutions for the banking and shadow banking sectors protect government and citizens from the fiscal risks of financial crisis. The international institutional architecture underpins stability across both countries and continents. Fiscal rules and institutions have gone through phases of support and decline, and there has been more progress in the financial than in the fiscal sphere. We need to re-strengthen our rules and institutions to tackle successfully the challenges of the ‘spending state’: to keep government lean, efficient and sustainable.

Financial sector developments pose the second important fiscal risk for the coming years and decades and this is the first of two chapters mapping and analysing such fiscal–financial risks. Rising financing costs affect debt service expenditure, especially for countries with high debt and short-term financing. Asset price movements can constitute further major fiscal risks in a downturn. Adverse financial sector developments and negative confidence effects also burden public expenditure and finances via the real economy, and guarantees that fall due in ‘bad’ times can exacerbate this effect. Debt has ratcheted up over consecutive economic and financial cycles over the past forty years, an effect particularly strong during the global financial crisis due to fiscal–financial linkages. Simulations show that the situation of several advanced countries is critical, given their lack of fiscal buffers for another crisis.

This chapter commences a case study analysis into the influence of economic and financial conditions on the operation of public finance law and the constitutional distribution of authority between parliaments and executive governments. The fiscal activities (taxing and spending) of the central governments of the UK and the Commonwealth of Australian between 2005 and 2016 are selected for analysis. The chapter begins with a detailed examination of appropriation and taxation legislation in the two jurisdictions, including the respective financing contribution of annual and standing statutes and their role in delegating authority to treasury departments. The chapter then examines the influence of expansions and contractions in economic output on the balance of constitutional authority possessed by parliaments, with a special focus on the impact of the financial crisis. Thereafter, the often-hidden reality of public spending in breach of appropriation legislation is studied, along with the legal frameworks governing public accounts and audit. The chapter concludes by observing the vast amount of fiscal authority delegated to treasury departments by public finance law.

This chapter provides a case study analysis of the operation of public finance law concerning sovereign debt and monetary finance in the UK and Australia between 2005 and 2016. The legal and financial mechanics of sovereign borrowing and monetary finance are closely examined by reference to the authority of central banks and treasuries to finance the state beyond the point of fiscal deficit. The very broad powers delegated to treasuries over sovereign debt are scrutinised in the context of vastly different economic conditions, and their capacity to shrink the financial authority held by parliaments is observed. Special attention is then given to the monetary financing powers of central banks, particularly the Bank of England. The emergency monetary finance provided by the Bank of England during the financial crisis is surveyed, and the public financing aspect of 'unconventional' monetary policy, particularly quantitative easing, is examined. The chapter closes by observing the absence of meaningful legislative governance of debt and monetary finance in the context of financial or economic emergencies.

The Bank of England was heavily involved in the management of Hong Kong’s banking and currency arrangements. The shadow that continually hung over both was the prospect of the termination of the lease on the ‘Crown Colony’ in 1997. In the late summer of 1983, a property boom collapsed and brought major financial strain and an exchange rate crisis. The Bank sent experts who backed schemes to create a currency peg, managed by currency board arrangements, with a link to the British pound. That had implications for the positions of the large banks, which issued bank notes. There was also a question about the position of the large Hong Kong banks, and the largest, HSBC, wanted to acquire, or merge with, a UK bank: eventually HSBC took over Midland.

The EU is cloaked in expressions of solidarity. Despite the fundamental role that solidarity plays, cracks have appeared and become more evident across Member States. The euro – a transnational single currency – was a bold endeavour when first established, and its adoption was expected to generate a leap forward for by making European integration stronger, and more resilient. The prolonged battle of the sovereign debt crisis that emerged in 2009 tested the limits of solidarity: a confrontation waged on multiple levels, playing into constitutional frameworks and socio-economic divisions, and exacerbating fault-lines between states. Yet despite frequent arguments made to the contrary, solidarity was a feature of the financial crisis, albeit of a particular kind. The legitimate expectation of what role different concepts of solidarity ought to have played (particularly where fiscal redistribution is concerned), compared to the role it actually served, ensured that an expectations deficit opened. This chapter examines solidarity within the EU’s legal framework in the context of the Eurozone crisis. It analyses the ramifications of the idea of solidarity, variously defined, and the implications it may have for the future direction of the Union as it faces ever-greater challenges.

It is a commonplace to state that we live in a time of continuous change. But that doesn’t make it any less true. The force and impact of change become all the more obvious when considering a horizon that spans two generations. Fifty years ago, a mere handful of advanced industrial economies dominated the global economy. Since then, a wide array of countries have emerged as new economic powerhouses. Economic development and prosperity are now more equally spread across the globe than at any other time over at least the past two centuries.

Our narrative is rooted in historical analysis but is of vital contemporary relevance. Ernst-Joachim Mestmäcker and Rudolf Wiethölter are celebrated protagonists of the post-war German academic generation and, as such, are each obsessed with the “proprium” of law. Conceptually-rooted in the ordoliberal tradition of Franz Böhm and Walter Eucken, on the one hand, and in the living constitutionalism of Hermann Heller, on the other, Mestmäcker and Wiethölter have consequently trod very different paths in their treatment of economy and society within the legal-constitutional perspective. We are clearly partisan in our allegiance, yet, in recalling the efforts of Mestmäcker to defend the legal co-ordination of the economy within a pre-political “order freedom” (Eucken), and the contrasting endeavour of Wiethölter to picture the political administration of the economy, as well as the “law-(justification)-making” of its societal law, we are reminded of the naïvety of utopian notions of market constitution, but also of the corresponding difficulties (paradoxes) of political socialisation processes that are mediated by the law. In a contemporary context of European financial and sovereign debt crisis, we find that one of the primary victims of naïvety and complexity is the proprium of law itself, which seems to have run out in the subsuming of economic theory within European law, and which can surely only be re-established with great difficulty through the, as yet to be established, relationship between a societal European law and the emerging grassroots politics of progressive European peoples.

Euro area countries have experienced profound economic, financial and institutional changes over the last three decades. GDP growth has been very volatile, and very uneven, across countries. Which factors played a role in stirring growth and/or reducing it? We provide an atheoretical toolkit looking at a large set of real, financial, monetary and institutional variables, as possible factors behind fluctuations and differences in growth rates among euro area countries since 1990. The main outcome stresses the key positive role for long-run growth of higher European institutional integration, overall and for the periphery in specific. This result is robust across specifications and setups. If we split the European institutional integration into its main components, we can see a significant positive role for financial and political integration in the long run. However, the first seems to have beneficial effects for the core only, while the opposite holds for the political integration, which influences positively the periphery.