NYU in London / University
Association of Contemporary European
Studies (UACES) Conference
Building EU Economic Government: Revising the Rules?
NYU in London, Bedford Square, London
Conference Venue: Senate HOUSE, University of London, 10:30 25 / 26 April 2003
David Howarth, Lecturer, NYU in London Lecturer, Department of Politics, Queen Mary College, University of London d.j.howarth@qmul.ac.uk
The aim of this conference is to bring together political scientists and political economists working on 'economic governance' issues in the EU and to explore the political and economic dimensions of the decisions of 2002 to relax the application of the Stability Pact. We are interested in what the recent decisions demonstrate about the political nature of Economic Government as a manifestation of the 'semi-sovereignty' game and rule-bound intergovernmentalism. We also seek to explore the potential forms that revised Economic Governance could / should take, while considering the political and economic difficulties that Member States and EU institutions face applying the current framework of rules.
Confirmed participants:
- Panel Chair / Discussant: Jonathan Story, INSEAD, France.
- Kathleen McNamara, Princeton University
- Patrick Crowley, Department of Economics, Texas A&M University, Corpus Christi
- Professor David Mayes, Bank of Finland, Southbank University, London
- Matti Viren, Southbank University, London
- Stefan Collignon, London School of Economics
- Christoph O. Meyer, University of Cologne, Research Institute for Political Science and European Affairs
- David Howarth, NYU-London; Queen Mary College, University of London
- Peter Loedel, West Chester University, Pennsylvania
- William Clark, New York University
- Mark Hallerberg, University of Pittsburgh
- Uwe Puetter, Queen’s University Belfast
- Amy Verdun, Jean Monnet Chair, University of Victoria
- Martin Heipertz, MPI, Cologne
- Ingo Linsenmann, University of Cologne, Research Institute for Political Science and European Affairs
- Miriam Campanella (Advisor to the Ministry of Economy and SECIT, Rome)
- Dermot Hodson, London School of Economics (presenting a paper by him and Imedla Maher, LSE and Australia National University)
- Christopher Taylor, senior economist, National Institute for Economic and Social Research, London
Summary of topics covered in the conference:
- The origins of the Stability Pact and the reasons for its change.
- Why the Stability Pact has failed as a deterrent to the electoral use of fiscal policy.
- The role of the Eurogroup — as an informal institution — in shaping the interpretation of the Stability Pact.
- The ECB and the Stability Pact: policeman or benign guardian? How should the ECB respond to the flexible interpretation of the Stability Pact?
- Peer review and Public discourse on the Stability Pact and Economic Governance in the member states.
- A plea for discretion over the alternation between competing sets of rules.
- Why a flexible interpretation of the rules is necessary to overcome the political problems of the Stability Pact and EU macro-economic policy.
- Why further policy delegation to the EU-level is necessary to overcome weak coordination failure in the Euro-Zone, particularly for the definition of an aggregate fiscal policy stance. Why a European-wide policy consensus must precede such a move.
- A critique of the considerable hurdles in the way of ministers' traditional prerogative to adopt an exchange rate strategy and proposals to remedy this.
- An examination of the extent to which the Stability Pact has led to the creation and/or amendment of institutional and procedural provisions at the domestic level.
- An argument in favour of significant EU budget reform in 2006 with the aim of sharing the provision of strategic public goods with national budgetary authorities.
- An exploration of the hard, soft and open Methods of Policy Co-ordination and Reform of the SGP.
- A critical analysis of the various options for scrapping or modifying the SGP in both economic and political terms.
- The lessons of history: earlier monetary unions and the prospects for the EU Stability Pact and EU fiscal federalism.
Paper abstracts
The Past and Present of the Stability and Growth Pact: Understanding its Background and its Political Objectives
Amy Verdun, Jean Monnet Chair, University of Victoria
Martin Heipertz, MPI, Cologne
This paper will provide a general overview of the Stability and Growth Pact. Its purpose is to expose the political nature of the SGP as well as the underlying consensus that was and is needed to support it. Building on the knowledge and expertise-based theoretical framework that various authors have adopted to understand Economic and Monetary Union (EMU) (cf. Dyson and Featherstone 1999, Marcussen 2000, McNamara 1998, Verdun 1999) and European Union (EU) policy making in general (Radaelli 1999), it is argued that the role of ideas and experts were crucial for the creation of the SGP and for its continuing survival. We make this argument in three steps.
First, we review why the Stability and Growth Pact was created (namely to scare), what economic 'doctrines' the experts had in mind and how it was to operate. From that we conclude that the SGP was created to secure a policy-making regime following a very narrow concept of appropriate monetary policy-making based on 'German type' policies. Second, we look at the changes in ideas in the period 1996-2002 that led to the wavering we see today. We examine how some issues (such as concerns over economic growth) became more salient among some political elites.
Third, we will assess what issues are on the table today and how we may expect them to affect the SGP. We will argue that what happens with the SGP will be directly linked to the views of the core monetary elites. As long as they still hold the same beliefs (e.g. that the credibility of the ECB and its coherent monetary policy still needs to be built up and secured at all possible costs) the SGP will remain unchallenged. If, however, a majority of the monetary elite starts to favour a more growth-oriented policy at the expense of the performance of budgetary deficits, the SGP might be in danger. The claim here is that the views held among the members of the ECB Governing Council are crucial for the survival or demise of the SGP rather than, let us say, the views of individual national politicians.
Has the Stability Pact has failed as a deterrent to the electoral use of fiscal policy?
William Clark, NYU; Mark Hallerberg, University of Pittsburgh
Clark and Hallerberg (2000) find that countries with fixed exchange rates, mobile capital, and independent central banks are particularly prone to electorally motivated fiscal cycles. They conjecture that, after EMU, EU members would continue to experience electoral fiscal policies because the institutions they would confront (a single currency and an independent ECB) would be functionally equivalent to those that facilitated the electoral use of fiscal policy in the past. They argue further that the SGP was insufficient in its design to prevent such cycles. In this study, we test this conjecture with data from all EMU members using cross-sectional time series data from before and after the implementation (and subsequent loosening) of the Stability Pact to determine whether there has been an observable change in the link between fiscal policy and the electoral calendar.
Governing informally: the central role of the Eurogroup within EMU and the Stability and Growth Pact
Uwe Puetter, Queen’s University Belfast
Comprising the finance ministers of the Euro-Zone, the informal Eurogroup plays a central role in the economic governance set-up, albeit one widely unnoticed in the literature on EMU. The group not only pre-agrees all critical council decisions with relevance for the Euro-Zone member states, it also functions as a forum where ministers decide on the overall orientation of economic governance in the Euro-Zone and establish common interpretations of EMU’s core policy instruments and their applicability. This might seem surprising given that the group is not mentioned by the Treaty and lacks formal decision-making competences.
This article seeks to establish the causal link between the Eurogroup’s informal working method and its central role in the economic governance set-up. It demonstrates why informal consensus building among ministers is crucial within the context of EMU’s rules-based but decentralised economic policy and highlights how the pattern of intergovernmental negotiations has been radically changed.
Empirically, the role of informal governance is demonstrated with reference to the case of the SGP. The paper delineates how the Eurogroup has shaped the interpretation of the SGP and the economic doctrine behind it from the beginning of the final stage of monetary union and how the group became the centre of discussion once the pact was openly challenged by individual countries.
The ECB and the Stability Pact: policeman or benign guardian?
David Howarth, NYU-London and Peter Loedel, West Chester University.
How should the ECB respond to the flexible interpretation of the Stability Pact and EMU rules by several Euro-Zone Member States? This paper applies a game-theoretical framework taking into consideration the EMU rules under which the ECB must operate. Given these rules, the ECB must be critical of governments failing to respect the Stability Pact commitments. At the same time, the Bank must be wary of exacerbating the public antagonism in certain Member States (notably Germany) towards EMU and focus upon its core goal of Euro-Zone wide price stability, rather than the application of specific Stability Pact requirements. The ECB must play a proactive role in economic governance, ensure an ongoing dialogue with national governments in various EU fora and with the European Parliament in order to avoid the Bank's 'isolation' and the undermining of its legitimacy as the defender of EMU rules. Such efforts are of greater importance in the context of sluggish Euro-Zone economic growth rates and rule-breaking by several member states. The current ECB policy, allowing a Euro-Zone inflation rate moderately above the 1-2 per cent target zone — which on 5 December 2002 permitted a .50 per cent cut in Euro-Zone interest rates — reflects both a pragmatic reaction to the diversity of national economic considerations but also new thinking by economists on inflation rate targeting which has come to rescue of the ECB allowing it to reinterpret its own vision of price stability. This reinterpretation in turn reinforces the Bank's position in justifying the continued application of Stability Pact rules.
The Soft Side of Hard Policy Coordination in EMU:
Peer Review and Publicised Opinion in Germany and Ireland, Christoph O. Meyer, University of Cologne
This paper seeks to advance the debate about economic governance through policy coordination, which holds the promise of enhancing the problem-solving capacity of the European Union, whilst avoiding the legitimacy pitfalls of outright competence transfers. Central to our understanding of these governing modes are the provisions for peer review, which aim to encourage voluntary learning and deliberation among member states and national publics.
The SGP and the Broad Economic Policy Guidelines (BEPGs) have established peer review cycles aimed at ensuring fiscal discipline and economic convergence beyond the start of Monetary Union. In case of non-compliance with the commonly set goals, they provide for the possibility of addressing critical recommendations to member states. However, the capacity of peer review to change member states’ behaviour and to induce learning depends to a considerable degree on how these recommendations play out in the national media of the member states concerned. This is why the paper looks at how peer review translates into publicised discourses, taking Ireland (BEPGs of 2001) and Germany (SGP of 2002) as crucial cases of first time application. Three questions will be covered: To what extent are these recommendations covered at all by the media? Does media debate impose 'reputation costs' on governments deviating from the European rules? And finally, to what extent can we see a Europeanisation of public discourses in the media’s portrayal of EU institutions, minister peers, and other foreign voices? These case studies will be supplemented by data derived from the analysis of media coverage of the Stability Pact in four member states since 1997.
The empirical analysis indicates that the peer review has not induced a marked shift towards deliberative forms of governance, but rather reinforced existing tendencies of blame-shifting in multi-level governance. The main purpose of policy coordination to stimulate transnational learning has been hardly fulfilled in the past. Yet, the recommendations have translated into considerable media attention and pressure on governments to justify themselves in public. If the trend towards a mediatisation of economic governance continues, the EU will be able to increase its capacity to impose reputational costs on member states and to foster public debates on economic issues of common concern.
The Pressures on the Stability and Growth Pact from Asymmetry in Policy, Professor David Mayes / Matti Viren, Southbank University, London.
This paper focuses upon various economic concerns with the SGP: problems of distinguishing structural and cyclical fluctuations, whether the current constraints are too tight for fluctuations, whether the measurement system is well thought-out, whether the structural aims are consistent. Our conclusions are that the problems with the SGP and indeed with macro-policy more generally are more political than economic. The asymmetry of governmental behaviour in the member states in response to shocks means that they tend to develop their fiscal stance in a way that is inconsistent with a long run sustainable balance and debt ratio. This can be interpreted as saying either that they are persistently too optimistic about growth and hence this gives them pressure on the deficit limit which they then blame on cyclical causes or that it is politically easier to cut taxes and increase expenditures than there it is to increase taxes and cut expenditure, so the incentive is always to go for the former rather than the latter under uncertainty (hence the bias towards optimism). The recent proposals by the Commission partly address this problem by allowing member states that do not have problems with the sustainability of their debt position to have more flexibility in responding to adverse shocks.
Economic Policy Coordination in EMU: Institutional and Political Requirements
Stefan Collignon, London School of Economics
This paper looks at the macroeconomic performance of EMU since it started in 1999. It argues that the Euro-Zone has benefited from a benign environment, appropriate monetary policy and structural reforms. However, there is no institution clearly in charge of formulating coherent economic policies in the Euro-Zone and this was reflected in the euro's external value during the first three years of EMU. The paper then evaluates the need for policy coordination, distinguishing between weak and strong forms of coordination failure. The paper shows that intergovernmental coordination may be an answer to the latter, pareto-improving multiple equilibria. However, overcoming weak coordination failure requires further policy delegation to the EU-level, particularly for the definition of an aggregate fiscal policy stance. Yet, this is only possible if the democratic deficit resulting from intergovernmental cooperation is closed by a European-wide policy consensus. To achieve this should be the objective of a European constitution.
Fiscal Policy-Making under the Stability and Growth Pact: What impact on national systems?
Ingo Linsenmann, University of Cologne, Research Institute for Political Science and European Affairs
This paper looks at adaptations that have taken place in recent years in the field of national fiscal policy making. It follows a top-down approach which expects that the establishment of the Stability and Growth Pact on the European level has led to the creation and/or amendment of institutional and procedural provisions on the domestic level.
Two questions seem to be relevant in respect to the impact of the SGP on national policy-making. First, to what extent has the introduction of the SGP redistributed powers and resources between domestic actors in favour of central governments and administrations? Three elements of the SGP which might have led to adaptations on the domestic level need to be distinguished, i.e. the annual general government deficit ceiling of 3 per cent, the medium-term goal of achieving budgetary balance, as well as the principle that while the deficits of all levels of government are taken into account, it is only the member state government which is accountable towards the EU level. What accounts for variations among the member states, for example national stability pacts introduced in Austria and – to some extent – in Germany, multi-annual budgeting (UK) or frameworks (Italy), etc. Is there a straight-forward correlation between the pressure resulting from either high sub-national government expenditure or unfavourable starting points (high annual deficits, high debt/GDP ratio) and actual changes that have taken place?
Second, in how far has the SGP contributed to changes in the decision-making processes on the national level, especially between governments and national parliaments. In how far are national parliaments involved in the formulation and/or adoption of the stability programme (updates) or is this task solely executed by the government? Does the timing of the submission of the programme updates and the annual budgetary procedure support the view that indirect parliamentary endorsement is given by the vote during the budgetary procedure? Furthermore, are opinions on the programme updates by the Ecofin and the Commission as well as the fiscal policy recommendations of the Broad Economic Policy Guidelines taken into account when drafting the subsequent annual budget?
Preliminary empirical data obtained in the context of a study on the implementation of the BEPG in 2002 as well as within the framework of the Govecor project indicate that while a gradual shift towards multi-annual budget frameworks is linked to the requirements of the SGP and indeed to learning processes of the actors involved, the establishment of arrangements between various levels of government depends strongly on existing institutional provisions prior to the SPG. The latter findings tend to support the concept of path dependency rather than of the ‘degree of fit’.
The Exchange Rate Regime in EMU
C. T. Taylor, National Institute for Economic and Social Research, London
The rules relating to exchange rate policy for the euro have received less attention than those for fiscal policy, but they are arguably no less important. Despite efforts in the pre-Maastricht IGC to keep authority for the exchange rate in ministerial hands, it was in the event substantially passed to the European Central Bank. In conferring autonomy over monetary policy on the ECB, the treaty gave it exclusive control of the only instruments available for conducting exchange-rate policy in market economies - exchange-market intervention and the power to set key short-term interest rates; and it put considerable hurdles in the way of ministers' traditional prerogative to adopt an exchange rate strategy. In view of the marked volatility displayed by the euro since its launch and its likely continuation, this is an unsatisfactory situation and should be remedied. This paper i) recalls the relevant treaty rules; ii) summarises the record of the euro and its predecessors in respect of both high- and low-frequency volatility over the past ten years; iii) reviews the ECB's minimalist approach to exchange-rate management since it began operations; iv) assesses what the literature has said about the role of exchange-rate policy in the new era of central bank independence, concluding that mainstream economists have become too negative on this subject; and v) suggests changes in EMU rules to match or even promote a revival of interest in international cooperation on currency stabilisation. In doing so the paper addresses basic questions about economic governance in EMU, including such matters as responsibility for the fiscal-monetary policy mix, which may be important for the exchange rate, and Euro-zone representation on international fora like the G7 and IMF, on which prospects for global currency cooperation could depend.
Financial Governance in a minimalist multi-tiered financial regime. The EU budget reform and the provision of strategic public goods
Miriam Campanella (Advisor to the Ministry of Economy and SECIT, Rome)
In the framework of high mobile factor mobility (proxy of globalization), subsidiarity and proportionality are deemed to be appropriate principles in the allocation of government functions. In the present EU financial regime the two principles are appropriate to deliver a 'minimalist financial federalism' which — with a 1.27 per cent EU budget (Inman, Rubinfeld 1997) — is closer than the full-fledged federalism to meeting the requirements of a light and sober fiscal regime. The present redistributive policies granted to the EU budget risk, however, underprovide those 'strategic public goods', such as security and defence which are crucial to the enlarged Union. Failing to deliver them suggests the EU's incompleteness and its inability to meet international commitments. After reviewing literature in favour of using the EU budget to support stabilization policy, this paper supports the thesis that in 2006, EU budget reform, while reducing the scope and latitude of cohesion policy to only regions most in need should address and share with national budgetary authorities the provision of strategic public goods.
Hard, Soft and Open Methods of Policy Co-ordination and Reform of the SGP
Dermot Hodson, LSE and Imelda Maher, LSE and the Australian National University
The aim of this paper is to explore the ongoing development of soft policy co-ordination through the open method of co-ordination and to locate the reform of the SGP within that broader policy content. The paper's starting position is that the existing policy framework emphasises horizontal policy co-ordination across individual policy areas rather than achieving a more traditional combination of monetary and fiscal policy. Thus the SGP will be considered as one form of policy coordination which as currently constituted, combines elements of hard and soft law.
The paper explores the parameters and operation of rule types as used in policy formation, arguing that hard law elements (where failure can lead to sanction and recourse to the European Courts), and soft law (where there is reliance on peer pressure supplemented by various devices such as reporting and benchmarking) both have a role to play. The paper examines the role of sanctions and their influence on policy formation, how they are used as a symbol, the failure to trigger sanctions, the institutional and policy reasons for this, and the circumstances where sanctions can support co-ordination effectively, noting that a defensive response to policy co-ordination can be triggered if such coordination is seen as coercive and top-down.
Reform of policy methods and institutions are constrained by the prospect of treaty reform — generally seen as best avoided in relation to EMU and the ECB in particular. This leaves any reform agenda focused on non-Treaty aspects of policy formation of which the SGP is perhaps the most obvious. Recent reform proposals by the Commission have thus focused on a more flexible interpretation of the SGP: a medium-term budgetary balance rule to take into account the size of public debt and the quality of public investment. While both of these reforms would help to restore consistency between the SGP and the position of the UK Treasury — and thus remove an important obstacle to UK membership — they fail to adequately address the current problem of public finances in France, Germany, Italy and Portugal. The proposed flexible interpretation of the pact will do little to change the fact that the SGP failed to promote an adequate degree of fiscal consolidation in these countries in advance of the current economic slowdown.
The fact of reform for a cornerstone measure of EMU after a limited period of time itself highlights the importance of having a stable set of rules that are durable in the light of economic and social change. This reflects a broader problem in EU law — the need for constant reform undermining the rule of law itself and any claims of a nascent constitution. The need for reform also highlights the question of the level of regulation as well as the type of regulation called for. This can be articulated in terms of the institutional means by which a particular procedure is triggered (a subject dear to the Commission), the threshold at which it arises as well as the level of detail and the focus of the trigger (e.g. debt ratios or current deficit). Thus whatever shape the reform of the SGP takes it needs to be durable — durability normally is achieved through sufficiently general rules, which can cater for changes across different circumstances (or jurisdictions), and over time. This points to the need for the revised Pact to continue to combine hard and soft law measures allowing for coordination backed up by the threat of effective sanction where necessary. Finally, while discussion of reform is instrumental in nature, pre-occupation with questions of policy-mix by economic and monetary elites runs of risk of avoiding, if not hiding the ongoing role for the rule of law and the legitimacy of policy coordination in general and the SPG in particular.
Do we really need a Stability and Growth Pact for EMU?
Patrick Crowley, Department of Economics, Texas A&M University, Corpus Christi
The SGP was first agreed upon in late 1996 by the Council of the EU, and came into force once the first stage of EMU began. The pact has been very controversial lately, causing the implementation of severe austerity programmes in certain member states, hostility by politicians in other member states, and comments about its 'stupidity' by the President of the EU Commission. This paper first outlines the original intentions and rationale for the pact, and then explores various options for scrapping or modifying the SGP in both economic and political terms. The remainder of the paper is devoted to evaluating these options for replacing or softening the impact of the SGP, including, for example, renegotiation of the main features of the pact, employing other methods for fiscal policy coordination, or increased fiscal sovereignty at the supranational level.
The lessons of history: earlier monetary unions and the prospects for the EU Stability Pact and EU fiscal federalism
Kathleen McNamara, Princeton
Are monetary unions sustainable without a broader framework of economic governance? If not, what kind of economic governance structures are needed to ensure cohesion? Although this is one of the most compelling political questions facing the European Union in the wake of the Euro's introduction, we do not as yet have a satisfactory answer. This paper will assess the question of economic governance by examining the historical experiences of nineteenth century monetary unions, both successful and unsuccessful. Cases such as the United States, Germany, Switzerland, and Italy as well as the Latin Monetary Union and the Scandanavian Monetary Union will be surveyed to better understand the political construction of economic governance systems, with particular focus on fiscal policy dynamics. The range of historical cases will give us leverage on the linkages between currency and broader forms of economic governance, and allowing us to make more informed predictions about the prospects for the Stability Pact and fiscal federalism in the EU.