Fiscal Policy Co-ordination in the European Monetary Union

This book studies the formal creation and the gradual change of the Stability and Growth Pact in the European Monetary Union (EMU). Daniela Schwarzer explains why and how the Pact was pushed through by Germany despite fierce opposition from the majority of member states. She provides a unique in-depth analysis of how a new coalition of member states, again comprising Germany, achieved a creeping reinterpretation of the rules which prepared the way for a formal reform of the Pact in 2005, ten years after its invention. Four case studies show why and how the margin of manoeuvre inherent in the Pact was used to accommodate the preferences of those governments which were in breach of the Pact, and explains how they managed to lower the costs of change. To analyse these formal and informal dynamics, the study develops a model of institutional change which focuses on the actors, their preferences and the systemic intermediation of national preferences. This model is applicable to other policy fields in the multi-level EU system. By offering new insights into the conflict potential inherent in the interplay of national preferences and European fiscal rules, the book feeds into the recent debate on the necessity and feasibility of a political union in the evolving EMU.

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Table of Contents

Acknowledgements
p. 11

A. SETTING THE STAGE
p. 13

1. Introduction
p. 13

1.1 Creation and change of an institution: the Stability and Growth Pact
p. 13

1.2 The structure of the book
p. 15

2. Why EMU is different
p. 18

2.1 Fiscal discipline as a collective action problem
p. 18

2.2 The stabilising function of fiscal policy in the EMU
p. 20

2.3 Mechanisms and actors in deficit control in the EMU
p. 22

B. THE ANALYTICAL MODEL
p. 29

1. Theoretical foundations for the study of institutional change
p. 29

1.1 Bridging the divide: integration theory and multi-level governance
p. 29

1.2 Three institutionalisms and their conceptual starting points
p. 32

1.3 Competing explanations of institutional change
p. 35

2. A preference-based model of institutional change
p. 41

2.1 Characteristics and objectives of the model
p. 41

2.2 Actors of change in the multi-level system
p. 44

2.2.1 Acting for an unknown future
p. 44

2.2.2 The member states in the multi-level system
p. 45

2.2.3 The European Commission as the member states’ agent
p. 47

2.2.4 European Central Bank, European Parliament, European Court of Justice
p. 51

3. Sources of change: Modelling national preferences
p. 52

3.1 Basic definitions
p. 52

3.1.1 Long-term preferences and bargaining positions
p. 52

3.1.2 Whose preferences?
p. 54

3.2 The empirical determination of preferences
p. 55

3.3 Material and immaterial variables in preference formation in economic policy
p. 57

3.4 Preferences and institutions
p. 60

3.5 The preference model
p. 61

4. The process of change: systemic intermediation of preferences
p. 63

4.1 The limits of preference-based explanations of institutional change
p. 63

4.2 Characteristics of the bargaining system
p. 63

5. Actors, sources and processes of change – the model
p. 64

C. EXPLAINING INSTITUTIONAL DYNAMICS I:
THE STABILITY AND GROWTH PACT
p. 67

1. Strengthening the fiscal rules in the EMU: Puzzles to solve
p. 67

2. Actors and sources of change
p. 68

2.1 Germany the pace setter
p. 69

2.1.1 Interest groups and public goods in the EMU
p. 69

2.1.2 The normative anchoring of the stability concern
p. 72

2.1.3 Increasing politicisation and mediatisation
p. 74

2.1.4 Catching the domestic veto players
p. 75

2.1.5 A first experience with deficit control increases concerns
p. 77

2.1.6 Germany’s preference as a proxy for other high credibility countries
p. 79

2.2 The Pact’s critics
p. 81

2.2.1 Low credibility countries
p. 81

2.2.2 France
p. 83

2.2.3 The European Commission
p. 85

3. The process of creating the Pact:
systemic intermediation of preferences
p. 87

3.1 A formal model of the negotiations
p. 88

3.2 The systemic intermediation of preferences
p. 94

3.2.1 A supranational agent struggling for a task
p. 94

3.2.2 Voting rights and timing of negotiations
p. 96

3.2.3 Side payments
p. 98

3.3 A Pact reshaped in the bargaining process
p. 99

4. Conclusion
p. 101

D. EXPLAINING INSTITUTIONAL DYNAMICS II:
OPENING A CORSET WITHOUT UNDRESSING
p. 105

1. Introduction
p. 105

1.1 The Stability and Growth Pact under pressure
p. 105

1.2 The Pact as an incomplete contract
p. 107

2. Actors and sources of change: Member states and their preferences
p. 110

2.1 Governments as stakeholders and decision-makers
p. 110

2.2 National preferences about what?
p. 111

2.2.1 Seeking scope of action while avoiding costs
p. 111

2.2.2 The political economy of deficits – tools, ends, side effects?
p. 117

2.2.3 Political and institutional determinants of deficit preferences
p. 120

2.2.4 Falling costs of institutional change
p. 125

2.2.5 Keep-the-Pact and Change-the-Pact countries
p. 127

3. The Process of Change: Four challenges to the rules
p. 131

3.1 A formal model for relaxing the rules
p. 131

3.2 The reprimand of Ireland in February 2001
p. 137

3.2.1 The economics of the Irish case and the government’s preferences
p. 137

3.2.2 Systemic intermediation:
Ecofin in unanimity and co-ordination with the ECB
p. 140

3.2.3 Long-term consequences for deficit control in the EMU
p. 144

3.3 Germany’s exemption from the early warning procedure in February 2002
p. 146

3.3.1 The economics of the German case and the government’s preferences
p. 146

3.3.2 Systemic intermediation: the politics of the Ecofin’s silence
p. 148

3.3.3 Flexibility reigns – with the ECB’s backing
p. 152

3.4. Postponing the balanced budget objective in June 2003
p. 153

3.4.1 France’s preference for more flexibility
p. 153

3.4.2 Systemic intermediation or: why the Seville summit gave in
p. 154

3.5 Putting the Pact on hold in November 2003
p. 157

3.5.1 France’s preference for an Excessive Deficit
p. 157

3.5.2 Germany’s preference to avoid pro-cyclical budget restrictions
p. 159

3.5.3 Systemic intermediation: the Council vote and the ECJ ruling .............161

4. Creeping institutional change – an explanation
p. 164

4.1 A systematic comparison of the cases
p. 164

4.2 The Stability and Growth Pact as an incomplete contract – revisited
p. 167

4.2.1 Unclear procedural aspects and enforcement weaknesses
p. 167

4.2.2 The changing rationale of deficit control
p. 169

4.3 The return of electoral cycles, and positions on a stabilising fiscal policy
p. 170

4.4 Strategic interaction under the systemic conditions of EMU
p. 174

E. SUMMARY OF THE FINDINGS AND OUTLOOK
p. 177

1. Studying change between grand bargains and policy-making
p. 177

2. Explaining the rise and fall of the Stability and Growth Pact
p. 178

2.1 The creation of the Stability and Growth Pact
p. 178

2.2 Creeping change leading to a formal reform
p. 180

3. A predictable revision of the rules, but credibility remains to be regained
p. 182

F. REFERENCES
p. 189