The Dog that would bark but never bite?
Origins, Crisis and Reform of Europe’s Stability and Growth Pact1
Martin Heipertz (European Central Bank) and Amy Verdun (presenter) (University
of Victoria) email: [email protected]
Paper prepared for delivery at the 2006 EUSA Interest Section Workshop entitled
“Whither EU Integration and Cooperation”, to be held at the Viessmann Centre,
Waterloo, 28 April 2006.
Abstract
This chapter discusses the creation of the Stability and Growth Pact (SGP) with the
aim to shed light on its subsequent implementation and reform. It examines the
economic and political factors operating behind the scenes; such as the role of
economic ideas, experts, politicians, institutional arrangements in the Maastricht
Treaty, domestic politics, and the exceptional position of Germany in the realm of
monetary integration. It concludes that a set of commonly held beliefs together with a
corresponding power-political constellation explain the creation of the SGP. As these
parameters change, they also inform our understanding of its implementation and
reform.
Keywords: Economic and Monetary Union, European integration, Fiscal Policy,
Germany, Rules, Stability and Growth Pact.
1
Introduction
The Stability and Growth Pact (SGP) belongs to the body of European secondary law
and specifies the primary law provisions of the Treaty Establishing the European
1
An earlier version of this chapter was published in the Journal of European Public Policy (Issue 11,
No. 5, October 2004, pp. 765-80). Papers in the preparation of this chapter were presented at a
conference at the NYU in London “Building EU Economic Government: Revising the Rules?” 25-26
April 2003; at the 19th IPSA World Congress, Durban South Africa, 29 June – 4 July 2003; at the
European University Institute on 3 October 2003; at the University of Leiden on 6 October 2003; and at
the European Central Bank on 21 December 2004. The authors wish to thank the participants of these
conferences and meetings for useful comments and suggestions. Special thanks go to Patrick Crowley,
David Howarth, Demosthenes Ioannou, José Marín Arcas, Kathleen R. McNamara, Fritz W. Scharpf,
Francisco Torres and Hubert Zimmermann. The authors thank the MPIfG in Cologne and the Social
Sciences and Humanities Research Council Canada (Grant 410-2002-0522 held by Amy Verdun) for
financial support in the early phase of this research. This chapter is based in part on interviews with 35
key informants, all of whom were close to the actual creation and/or the current politics of the SGP.
The views expressed in this chapter are solely those of the authors and do not necessarily represent the
views of institutions for which they work or have worked.
1
Communities (TEC, Articles 99 and 104) in the area of fiscal policy. The SGP
consists of two Council Regulations from 1997, both of which were amended in
2005.2 In essence, the SGP regulates multilateral budgetary surveillance (‘preventive
arm’) and specifies a deficit limit and the excessive deficit procedure (EDP,
‘corrective arm’). Formally, when the Council decides that an excessive deficit exists,
the Member State concerned is obliged to reduce its deficit below the Treaty’s
reference value of three per cent of Gross Domestic Product (GDP). Otherwise, the
EDP can ultimately – and in theory – lead to financial sanctions.
In 2005, an excessive deficit existed in twelve Member States of the European Union
(EU), including the euro area Member States Germany, Greece, France, Italy and
Portugal. All these countries are subject to an EDP and find themselves in different
stages of that process. Metaphorically speaking, the SGP as a ‘dozing watchdog’ thus
turns out rather snappish and has indeed been ‘barking’ at the trespassers for quite
some time. However, on 25 November 2003 the Council effectively suspended the
EDPs for France and Germany, plunging the EU into an institutional crisis. On 13
July 2004, the European Court of Justice (ECJ) ruled that the EDP is indeed de facto
held in abeyance when the Council fails to find the required majority for further
decisions, such as giving notice to a Member State or imposing sanctions. On the
other hand, the ECJ annulled Council conclusions that had been adopted outside the
EDP framework, thereby precluding a side-stepping of the formal procedures. Out of
this impasse, the SGP underwent a painstaking reform exercise until June 2005,
leading to legal amendments of the Council Regulations and to a new Code of
Conduct.
Implementation and reform of the SGP are not detached from the factors that led to its
creation. In that context, this chapter addresses the following questions: (1) Why and
how was the SGP created? (2) What underlying conditions supported its creation? (3)
How have they changed since? (4) How do they inform our understanding of its
implementation, crisis and reform? Drawing on the process and outcome of the
original SGP negotiations, this chapter aims at providing background and clarification
to the ongoing debate. We argue that the initial SGP was possible due to a
convergence in fundamental ideas about the relationship between monetary and fiscal
policies held by experts in Ministries of Finance, central banks, the Commission, as
well as in academia and international organisations. Ideational convergence provided
the cognitive basis for a political compromise, in the sense that expert consensus on
principles was a necessary though not sufficient condition for intergovernmental
agreement. The full explanation has to also include power-political factors (Garret
1994), such as the prominent position of Germany in the creation of Economic and
2
The complete range of legal texts on the SGP is the following: (1) Resolution of the European
Council on the Stability and Growth Pact, O.J. 1997, C 236/1; (2) Council Regulation No. 1466/97 of 7
July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and
coordination of economic policies, O.J. 1997, L 209/1 as amended by Council Regulation 1055/105 of
27 June 2005; and (3) Council Regulation No. 1467/97 on speeding up and clarifying the
implementation of the excessive deficit procedure, O.J. L 209/6 as amended by Council Regulation
1056/2005. Usually, (4) an Opinion of the Economic and Financial Committee (EFC), called
‘Specifications on the implementation of the SGP and Guidelines on the format and content of Stability
and Convergence Programmes’ (in short: ‘Code of Conduct’), is also counted among the text basis of
the Pact, next to (5) a Council Report to the European Council titled ‘Improving the implementation of
the SGP’ of March 2005. The latter features among the European Council Conclusions of 22/23 March
2005 and complements the original 1997 SGP Resolution of the European Council.
2
Monetary Union (EMU) or its changing role, together with France, in the subsequent
management of the SGP.
The chapter is structured as follows. The next section examines the main ideas behind
the rationale of the SGP. The third section narrates the story of its creation,
implementation and reform. The fourth section examines and analyses the ideational
context of these events, informing our understanding of the political compromises that
have shaped the ongoing saga of the SGP. The final section concludes and offers a
tentative outlook on the SGP’s future.
2
Why is the SGP necessary? An answer between economics and politics
The Maastricht Treaty represents, so to speak, the ‘economic constitution’ of EMU.
However, while its monetary component is well developed, specifications on the
fiscal regime are partial and incomplete.3 The Treaty only contains rather loose
stipulations on the EDP and budgetary coordination. From the viewpoint of
economics, several arguments speak in favour of complementing the fiscal
arrangements of the Treaty.4 The most prominent reasons behind more stringent rules
are: (1) a general need for consolidation; (2) concerns about externalities; (3) the
credibility of ECB independence; and (4) the need for a more coherent framework of
economic policy coordination.
A general need for consolidation results from the expansionary path of public
expenditure in most industrialised countries since the ‘golden age’ of Keynesianism in
the 1960s and rapid welfare-state expansion in the 1970s and 1980s. By consequence,
the public sectors of most countries have become obese, stifling investment and
contributing to weak growth and underemployment. Government revenues flow into
debt servicing at the same time as ageing populations require a fundamental
reallocation of public spending. In light of these problems, the SGP has increasingly
come to be seen as a useful external anchor for long-term fiscal consolidation.
Second, a number of externality problems relate specifically to EMU.5 In monetary
union, possible effects of one country’s fiscal profligacy on interest and exchange
rates concern the entire currency zone. The direct impact on the individual ‘sinner’ is
reduced while the effect is increased indirectly for everybody else. Depreciation, risk
premia and higher interest rates occur less directly in a common currency zone. This
reduced disciplinary effect on national authorities can exacerbate the deficit bias of
public finances (Beetsma 1999). As a result, Member States could succumb to the
3
This lacuna is related to the fact that the negotiating parties were unable to agree on a so-called
Political Union in 1991. Political Union is generally associated with a mature and fully developed
institutional framework, including for economic policy-making at the European level. An exact
definition of Political Union, however, has never been developed and it remains unclear how a further
integrated institutional framework would look like under Political Union. The authors of the Maastricht
Treaty seem to have been aware of its shortcomings and included the task to produce further legislation
(TEC 99 V, 104 XIV).
4
For a detailed discussion of the economics literature see Heipertz (2003).
5
Negative externalities are welfare or opportunity costs not fully accounted for in the price and market
system, usually occurring to a third party not being part of the transaction.
3
perverse incentive of free-riding on each other by overspending on their budgets. Thus
strict rules on budgetary deficits are deemed necessary.6
A third concern warranting the existence of the SGP is related to the need to defend
central bank independence and the credibility of monetary policy against possible
effects of unsound public finances. Ultimately, ECB independence and specifically
the ‘no bail-out’ clause of the Treaty7 could be endangered by unsustainable fiscal
paths. Sargent and Wallace’s (1981) model of debt monetisation as well as the ‘Fiscal
Theory of the Price Level’ (e.g. Leeper 1991 and Woodford 1994) support this view
on theoretical grounds. It is generally recognised that the effectiveness and credibility
of monetary policy need to be supported through the fiscal regime. The SGP can
hence be seen as a way of ‘safeguarding the credibility of ECB independence’ (Artis
and Winkler 1999).
Fourth, in a monetary union the role of economic policy coordination becomes
pertinent (Begg 2002). A single monetary policy increases the need for a disciplined
and well-coordinated fiscal policy stance, which includes the free functioning of the
automatic stabilisers, especially in the event of asymmetric shocks.8 Enabling
effective fiscal policy coordination was one of the motives behind the SGP’s design.
Rather than hindering a countercyclical fiscal stance (as argued, among others, by
Eichengreen 1996 and Eichengreen and Wyplosz 1998), the Pact allows stabilising
cyclical fluctuations through the deficit as long as the upper limit of three per cent of
GDP is respected. The original Waigel proposal (see below) had envisaged a one per
cent target for national deficits in order to observe the three per cent ceiling and at the
same time permit automatic stabilisation. The SGP featured a medium-term budgetary
objective (MTO) of ‘close to balance or in surplus’ for the same purpose and foresaw
a ‘safety margin’ that would allow countries to achieve both aims: fiscal stabilisation
and fiscal stability. The 2005 reform has kept the principle of MTOs but introduced
country-specific objectives, to be set by the Member States themselves. One hopes
that countries would assume ‘ownership’ over their self-appointed MTOs and strive to
adjust to them in order to allow automatic stabilisers to operate without overstepping
the deficit reference value.
The political background of the SGP’s origins can be traced back to German
domestic politics. The Stability Pact was politically used by the Kohl government to
comfort public opinion about EMU and to appease the Bundesbank, which had
perceived fiscal policy in particular as the ‘open flank’ of monetary union. Since the
mid-1990s, the German public had become extremely anxious about giving up the
well-proven deutschmark in favour of a new currency that could include traditionally
weak economies without profound ‘stability culture’. Politically, there was a risk that
the opposition and even parts of the ruling coalition would capitalise on this sentiment
and run on an anti-EMU platform in regional and national elections. The SGP can
6
It is noteworthy that the need for limits on budgets had already been mentioned in the original EMU
blueprint laid out in the ‘Delors Report’ (Committee for the Study of Economic and Monetary Union
1989).
7
The no-bailout clause implies that neither the ECB nor the Community will provide funds to or buy
bonds of a national government that becomes insolvent (TEC 101, 103).
8
Sustainable public finances can smooth cyclical fluctuations of the economy by automatically
increasing state expenditure and decreasing revenue during periods of weak growth (in the form of
lower tax revenues and increased transfers) and vice versa during an upturn. The public sector hence
‘breathes’ over the cycle and reduces the amplitude of cyclical swings.
4
hence also be interpreted as a means to address these concerns held by the German
public and thereby pre-empt related campaign strategies.
In institutional terms, the Maastricht Treaty has to be seen as an incomplete contract.
As far as rules on EMU are concerned, secondary law had to be developed in the form
of explicit rules that would elaborate on and go beyond the Treaty stipulations. At the
time, some national governments, the German and Dutch governments in particular,
favoured such a more explicit, rules-based system that would restrict budgetary
deficits once EMU was fully operational. This concern seemed especially relevant
with respect to a number of (Mediterranean) countries that were making strenuous
efforts to join stage III of EMU from the outset.9 The larger the future membership of
EMU was hence appearing to become and the less likely a postponement, the more
urgent grew the need for Germany to reinforce at least the deficit criterion. This
situation has been described as an ‘endgame’ for the transition towards stage III of
monetary union (Crowley 2002).
More subtle, cognitive processes were also at work. Of importance was the gradual
nature of economic and monetary integration, especially ‘policy learning’ (Bennett
and Howlett 1992) or ‘lesson drawing’ (Radaelli 2004) from the experience with the
European Monetary System (EMS) since the 1970s (see also Verdun 2000a). The
monetary authorities participating in the EMS had contributed to factual and
ideational convergence in monetary policy. Aligning their exchange rates was the aim
but also the engine of that process. By ‘shadowing’ Bundesbank policies throughout
the 1980s, the monetary authorities and the national representatives in the then
Monetary Committee came to endorse fundamental principles about economic and
monetary governance (Verdun 2000a; 2000b). The experts involved in the
preparation of EMU feared that national governments would become more ‘relaxed’
and return to old practices once stage III of EMU had been achieved. They were keen
to perpetuate the stability-orientation of economic policy in Europe and hence wielded
their influence in order to shape the SGP according to their convictions.
Once operational, the SGP evolved and has gradually overcome the assertion of being
a German-inspired straightjacket on fiscal policy. With Germany even joining the
camp of the ‘deficit sinners’,10 it were increasingly the small (and fiscally more
‘virtuous’) Member States, above all the Netherlands, Austria and Finland, that
assumed ‘ownership’ of the SGP and embraced the demands for its strict
implementation. It turned out that a rules-based system would hold their best chance
for ‘equal treatment’, provided that all Member States would play by the rules.11
Although this gentlemen’s agreement temporarily collapsed in November 2003 –
Germany and France enforcing ‘special treatment’ of their excessive deficits – the
reform of the SGP in 2005 has made all participants more aware of the difficulties to
preserve equal treatment, which is now at the core of the discussion surrounding the
implementation of the framework.
9
Stage III of EMU started when exchange rates were irrevocably fixed and the Eurosystem was given
sovereignty over monetary policy. Eleven Member States eventually first entered into this stage on 1
January 1999.
10
Germany breeched the three per cent deficit limit for the first time in 1995. After entering stage III of
EMU in 1999, Germany has been in excessive deficit since January 2003.
11
For an analysis of the logic of this type of behaviour by small versus large Member States, see
Schure and Verdun (2005).
5
Like any compromise solution, the SGP can be criticised from several angles. It can
neither be a substitute for an efficient, mature and full-blown institution, nor does it
offer a guarantee against budgetary irresponsibility. It certainly sometimes strikes an
awkward balance between on the one hand the degree of simplicity that is made
necessary by EMU’s political economy and on the other hand today’s complexities of
public finance. But the SGP remains the framework for the coordination of fiscal
policy in EMU since 1999 – drawing as much as possible on economic insights and
requirements while leaving national budgets and procedural decisions in the sole
responsibility of the Member States, as required by the currently low level of political
integration in the EU and the apparent lack of political momentum behind the
originally intended project of ‘Political Union’.
3
Making, breaking and remaking the rules
How was the SGP created and implemented? The idea of some sort of ‘stability
treaty’ had been in the air since early 1995. Around the beginning of stage II of EMU
in 1994, the Monetary Committee (MC) started deliberating on this matter.
Brainstorming was particularly active among officials in the German Ministry of
Finance. The Sachverständigenrat, an influential advisory board to the federal
government, had already in 1992 demanded to make the EDP sanctions more precise
and to apply them strictly (Sachverständigenrat 1992: 433). Propelled by demands
from banking associations, a public debate arose in Germany on the need for some
sort of legal agreement on public finance stability in monetary union. The Institut für
Weltwirtschaft (IfW) in Kiel published a discussion paper on how to make the
Maastricht stipulations workable (Lehment and Scheide 1995). The IfW proposal
suggested automatic, interest-free deposits to be placed with the ECB by countries
exceeding the three per cent reference value. Similar arguments re-appeared as
demands for a ‘budgetary pact’ in the 1995 report of the Sachverständigenrat
(Sachverständigenrat 1995: 446).
The German government at the time had come under severe political pressure when
public opinion was turning sour on EMU. In fact, more than two-thirds of German
citizens were opposed to monetary union at the time (Commission of the European
Communities 1995), and resentment against EMU started to appear on the platforms
of regional elections as well as in intra-party struggles. In September 1995, Minister
of Finance Theo Waigel talked informally to his colleagues about his wish to
formalise the rules on budgetary policy in EMU (Milesi 1998: 95-6, Stark 2001: 89
and interviews with German Ministry of Finance officials, June 2003). Academic
sources like the IfW paper, but also ideas from the Bundesbank were used as input for
a policy initiative by the ministry. Four weeks later (on 7 and 10 November 1995),
Waigel announced his proposal for a ‘Stability Pact’ (Bundesministerium der
Finanzen 1995) during the Parliamentary reading of the 1996 budget (Waigel 1995a,
1995b). He thereby managed to stifle the opposition, but earned only reserved support
from his European colleagues. The idea that the Maastricht Treaty could be subject to
renegotiations was out of the question. Yet, an intergovernmental agreement in the
6
form of a new treaty à la Schengen,12 as originally envisaged by Waigel and his then
state secretary Jürgen Stark, was also unacceptable to the other Member States. It also
met heavy criticism from the Commission that was in fear of being marginalised. The
Madrid European Council of December 1995 hence prompted the Commission to
propose a solution within the Community framework. Successive Commission notes
for deliberation in the Monetary Committee, released successively from October 1996
onwards, kept closer to the Maastricht Treaty than to the Waigel proposal. Going
beyond both the Treaty and the German initiative, the Commission additionally
developed the ‘surveillance arm’ of the SGP as a procedural device for economic
policy coordination on the basis of Article 99. However, it did not introduce automatic
fines into the EDP and kept possible sanctions as a discretionary and political measure
of the Council, rejecting more far-reaching demands by Waigel and Stark.
The Stability Pact dossier featured prominently and advanced in the relevant
European fora, i.e. primarily the Monetary Committee (MC), but also the Ecofin
Council and the European Council. The project was also discussed in bilateral
exchanges, above all at Franco-German meetings. Nevertheless, the bulk of work was
completed in the MC. Only very few open issues had to be referred to the Council.
The underlying controversy was that Germany’s partners agreed on the principle of
mutual surveillance and reinforced dissuasion of excessive deficits, but refused
automatic sanctions as they had been demanded by Waigel and Stark. The focal point
of dissent became a clause that defines possible exemptions from the definition of an
‘excessive deficit’. Major wrestling about legal semantics was in fact behind the
negotiations that crafted the operational circumstances and procedural margins of
political discretion. Waigel was isolated in requiring nothing less than an
‘exceptional’ GDP contraction of two per cent of GDP or worse as a qualification for
an exemption. The compromise reached in Dublin – during the morning hours of
Friday 13 December 1996, in parallel sessions of Ecofin and the European Council –
introduced a definition into the legally non-binding Council Resolution to the effect
that a recession of less than 0.75 per cent ‘as a rule’ did not qualify as exceptional,
whereas a recession of over two per cent automatically did. If the size of the recession
was between 0.75 and 2.0 per cent, Ecofin would judge case by case whether or not it
is deemed ‘exceptional’. In the 2005 reform of the Pact, this definition has been
relaxed to the effect that an excess over the three per cent of GDP reference value can
be considered exceptional if it results from negative or very low growth, provided that
the excess is ‘temporary’ and that the deficit stays ‘close’ to the reference value.13
In sum, the SGP Regulations as designed in 1996 did not depart from the Treaty but
rather increased procedural precision on the basis of Articles 99 and 104. They have
delivered some ‘added value’ in terms of legal substance, albeit without changing the
thrust of the existing Treaty basis. For example, the SGP shortens and clarifies the
timeline of the EDP, defines the distribution of possible fines (i.e. among the
‘virtuous’ Member States), clarifies the notion of ‘exceptional’ and ‘temporary’
12
When it was first signed, the Schengen Treaty was an international treaty among a subgroup of EU
Member States. Its contents were initially not part of the TEC; nor were all EU Members immediately
signatories. Theo Waigel initially was seeking a similar arrangement for the Stability Pact; namely to
negotiate an ‘ancillary’ Treaty that would be outside the framework of the TEC and thereby possibly
much stricter.
13
The judgemental decisions behind rather loose concepts like ‘temporary’, ‘close’ or ‘very low’
underpins the degree of political discretion that the new form of the SGP makes explicit.
7
deficits as exemptions from sanctions, introduces an urgency procedure, enables to
hold the EDP in abeyance, etc. Yet, due to the essentially political nature of the EDP,
the fundamental nature of the SGP was and remains not a mechanism of ‘quasiautomatic sanctions’ (as claimed publicly by Waigel), but the institutionalisation of a
political (and ultimately not exogenously enforceable) commitment of the Member
States, pledging to aim for low deficits.
When eleven Member States entered into stage III of EMU on 1 January 1999, most
countries had not converged to the medium-term budgetary objective of keeping
national budgetary deficits ‘close to balance or in surplus’. Nevertheless, high rates of
economic growth at the time led to improving deficit and debt ratios. Yet, in the early
years of monetary union, policymakers did not use the gains deriving from lower
interest rates and inflation to reduce permanently their deficit ratios, but in many cases
implemented wide-spread tax cuts and/or increases in primary expenditure ratios
instead. The corresponding erosion of government revenue and the renewed pressure
of spending proved fatal once the economy slowed down in 2001. Germany and
Portugal were the first countries to miss their budgetary targets by wide margins and
overstepped the deficit reference value of three per cent of GDP. The SGP’s early
warning procedure, although initiated by the Commission, was not activated by the
Council, following a direct intervention by the German Chancellery in the context of
the 2002 election campaign. This episode points to the at times critical domestic
dimension of the way the SGP is managed, especially when a large Member State has
the power to impose its domestically framed preferences at the European level
(Heipertz and Verdun 2004). The worsening fiscal outlook during 2002 triggered an
intense debate on the rules and possible reform options of the SGP, prompting on 24
October a statement of the ECB’s Governing Council in defence of the SGP. The
Commission in turn suggested that countries with fiscal imbalances should commit to
a consolidation strategy centred on a continuous annual improvement of the
underlying budget balance by at least 0.5 per cent of GDP; a proposal which was
endorsed by the Eurogroup in October 2002 and taken up, albeit not in a mechanical
way, in the reform of the SGP in 2005.
The Ecofin Council took note of the Commission’s proposals in March 2003 and
adopted a ‘Report on strengthening the coordination of budgetary policies’. At that
time, it saw no need to change the Treaty or the SGP Regulations but resolved to
apply more country-specific elements in the assessment of the budgetary situation of a
Member State. This should include appraisals of the long-term sustainability and the
quality of public finances. Subsequently, France joined Germany and Portugal when it
was also found to be in excessive deficit since June 2003. The EDP was triggered,
following an early warning procedure, which had not proved effective in preventing
the emergence of the excessive deficit. Anticipating continued negative fiscal
developments in France and Germany, the Commission proposed giving notice to
both countries under the EDP in the fall of 2003. On 25 November 2003, however, the
Council failed to adopt the necessary decisions and instead issued ‘conclusions’ to the
effect that both EDPs were being held in abeyance.14
14
Decisions in the framework of the EDP are taken by a two-thirds qualified majority in accordance
with Article 205. With Belgium, Denmark, Greece, Spain, the Netherlands, Austria, Finland and
Sweden in favour of the Commission recommendation, only 37 of the 51 necessary votes were
mustered for the decisions in accordance with Article 104 VIII. The decisions were blocked by the
combined votes of Germany (respectively France on the decision on Germany), Ireland, Italy,
8
In the context of an ongoing deterioration of public finances, the Commission
challenged the Council decisions before the European Court of Justice (ECJ, case C27/04) and in parallel started preparations for proposals to strengthen economic
governance in the euro area. The ECJ in July 2004 annulled the Ecofin Council
conclusions on France and Germany as having been adopted outside the Treaty
framework. At the same time, the ECJ rejected the Commission’s action for
annulment of the Council decision not to adopt the formal EDP instruments against
both countries. The Court declared that when the Council fails to decide on further
steps under the EDP, the procedure was to be considered de facto in abeyance. The
judges hence confirmed the prevalence of political discretion in the implementation of
the SGP’s procedures but also stressed that the rules and legal basis, including the
Commission’s right of initiative, had to be respected. The ECB called upon all parties
to live up to their responsibilities in the full implementation of the rules, while the
Commission started to successively release working documents to the Economic and
Financial Committee (EFC) on a possible reform of the SGP.
The crisis was aggravated in September 2004 when Greece had to revise substantially
its official figures for the deficit and debt ratios, showing that deficit ratios in excess
of 3% had even existed at the time of Greece’s euro area accession in 2001. The data
revisions led to an intensification of the already ongoing EDP for Greece. The
Council for the first time decided to ‘give notice’ under Article 104 IX of the Treaty.
Also six of the new Member States were found to be in excessive deficit. Among
them, Hungary has by now already twice been declared in accordance with Article
104 VIII not to have taken effective action.15 Italy joined the rank of countries in
excessive deficit in 2005, after having prevented an early warning. At the time of
writing, the only EDPs that have successfully been concluded and abrogated under
Article 104 XII are the cases of Portugal in 2004 and the Netherlands in 2005.
However, for Portugal a new EDP had to be opened one year later.
In parallel to the ongoing EDPs and in the aftermath of the legal confrontation, the
SGP was reformed in the course of 2005. Unlike in 2002, it was now deemed
necessary by the Commission and the Council to amend the Regulations, while the
ECB, in a public statement on 21 March 2003, declared that it was ‘seriously
concerned’ about the proposed changes. Similar to the original negotiation of the Pact,
technical discussions and most of the decisions were taken at senior expert level in the
EFC; only a limited number of contentious points had to be referred to the Ecofin
Council. The debate included the traditionally controversial issue of whether and how
to relax the definition of an excessive deficit via an easing of the conditions for
possible exemptions, above all the specification of the economic circumstances under
Luxembourg, Portugal and the United Kingdom that added up to 40 in total. Decisions in accordance
with Article 104 IX (giving notice) are taken only by the Member States participating in stage III of
EMU. The Commission recommendations were supported only by the 30 votes of Belgium, Greece,
Spain, the Netherlands, Austria and Finland, but also 30 votes opposed, i.e. those of Germany
(respectively France), Ireland, Italy, Luxembourg and Portugal. The Council instead issued
‘conclusions’ under the same voting rules as applied for the decision in accordance with Article 104
IX. These ‘conclusions’ found a very small qualified majority with the votes of Germany (respectively
France), Italy, Greece, Belgium, Portugal, Luxembourg and Ireland.
15
For non-participating Member States, the EDP stages of ‘giving notice’ (Article 104 IX) and
potential sanctions (Article 104 XI) do not apply. It would, however, in principle be possible to
partially suspend Cohesion Fund payments to Hungary.
9
Comment [m1]: Shouldn’t it be
104(9)?
which a deficit above three per cent of GDP would not be deemed excessive. Further
issues in the discussions concerned the possibility of repeating certain steps of the
procedure and extending deadlines as well as the formal conditions for such
judgemental decisions. The idea of a ‘minimum fiscal effort’ of consolidating the
structural balance by at least 0.5 per cent of GDP per year was taken up but not made
obligatory. It is now a benchmark for the adjustment path to the changed, countryspecific medium term objectives (MTOs), which have replaced the universal ‘close to
balance or in surplus’ rule of the old SGP.
Highly controversial was a list specifying the notion of the hitherto undefined ‘other
relevant factors’ that are already referred to in the original SGP Regulations as special
circumstances which can be taken into account in the decision on the existence of an
excessive deficit as well as in the application of the EDP. Some governments
proposed a whole range of such possible factors, including expenses related to
German reunification and net contributions to the EU budget. In the end, a list of
factors was taken aboard, but its application is limited by the double condition that the
excess over the reference value is, in the view of the Council, temporary and that the
deficit stays close to the reference value of three per cent of GDP.
During the negotiations, it emerged clearly that Germany under the Schröder
government had changed sides and was now among the most fervent supporters of a
permissive design of the SGP. The restrictive position was mainly represented by
smaller Member States, particularly Austria, the Netherlands and Finland. After
lengthy consultations, the Ecofin Council reached a political compromise at yet
another special meeting on 20 March 2005 and issued a report to the European
Council, entitled ‘Improving the Implementation of the Stability and Growth Pact’,
which was subsequently incorporated into the Presidency Conclusions of the
European Council of 22 and 23 March 2005. By June 2005, the Council finalised the
formal review of the SGP also in legal terms and adopted Regulations amending the
original SGP Regulations. In October, the Council also endorsed a revised Code of
Conduct. Technical work on procedural and methodological issues continued in the
Commission and the EFC throughout the year 2005 and into 2006.
4
Analysis
For our analysis of the history of the SGP, we combine an ideational approach with an
actor-centred, institutionalist perspective. First, we focus on how ideas came to shape
the preferences of actors and, second, on how their constellation and political
interaction produced the outcome. Following Scharpf (1997), ‘actors’ are defined as
individual or corporate strategic agents (mostly administrative bodies such as
ministries and the Commission). They are capable of intentional action, are internally
organised along hierarchical lines, and are characterised by preference orientations as
well as action resources. Furthermore, they are embedded in an institutional context,
which we use as explanatory shorthand for structural factors and external influences
on the actors themselves, such as voting rules or the influential role of financial
markets at certain stages in the negotiation process. We define the executive agents of
the negotiating ministries, of the Commission and of central banks as ‘experts’. They
are in contact with ‘non-actor experts’ who shape ideas but not decisions, such as
10
academics, journalists and institutions like the Organisation for Economic
Cooperation and Development (OECD) or the International Monetary Fund (IMF). At
the highest level of deliberations, politicians hold the final and democratically
legitimated competence for decision-making. The orientations of experts are defined
by specific converging ‘ideas’ about economic policy, influenced indirectly by nonactor experts. The orientations of politicians are crucially influenced by ‘their’
experts, whose essential function it is to prepare the decisions of politicians and, often
enough, decide and compromise within a predefined ‘envelope’ of political
preferences.
4.1
Ideational convergence
From an ideational perspective, the creation of EMU can be seen as the result of
policy learning and policy convergence, ultimately based on convergence in ideas
about monetary policy-making. When EMU was first conceived in the late 1960s and
early 1970s, such ideas still differed widely, for example on the question whether to
converge into Political Union first (the ‘coronation’ view of EMU) or whether to
proceed with monetary integration and assume that convergence would result (the
‘locomotive’ view of EMU). Concepts also varied on the policy objectives and on the
institutional design of EMU.
The 1970 Werner Plan on EMU reflected a time when governments were habitually
pursuing Keynesian policies (Committee on the Realization by Stages of Economic
and Monetary Union 1970). Though the actual institutional design of EMU as
envisaged by the Delors Committee in 1989 to some degree resembled its 1970
predecessor, a number of important ideational changes had occurred in the meantime.
First, economic and monetary integration had achieved a higher level of development
in both the areas: the process of completing the internal market was underway,
financial markets had become further integrated and the EMS had been in place for a
decade. Second, policy learning had occurred to a substantial degree. Monetary
policies were considered more effective when conducted by an independent central
bank like Germany’s Bundesbank. Third, ideas regarding monetary policy-making
had changed (see inter alia McNamara 1998 and Marcussen 2000). Whereas in the
1960s and 1970s Keynesian principles still lay at the heart of national economic
policies, by the late 1980s monetarist convictions and policies dominated the scene.
The most fundamental change in belief for the foundation of EMU was the spreading
conviction that no long-term trade-off exists between inflation and unemployment and
that sound money is a precondition for growth.
In their effort to proceed with monetary integration, the governments of the Member
States were aided by a so-called ‘epistemic community’. Members of central banks,
ministries of finance and academics held increasingly similar views about the main
aim of economic and monetary policy-making. There were a number of important
venues where experts shared ideas and where socialisation occurred. This took place
above all in the Monetary Committee (MC) – now the Economic and Financial
Committee (EFC) – which consists of representatives of central banks and Ministries
of Finance of the EU Member States (Verdun 2000b), as well as in other influential
EC committees (Rosenthal 1975, Verdun 1999) and international fora. The members
of the MC/EFC meet Haas’ four principles of an ‘epistemic community’ (Haas 1992:
3): (1) They share beliefs for a value-based rationale of social action. (2) They share
causal thinking, derived from their analyses of problems which in turn serve as the
11
basis for conceptualising the linkages between policy actions and desired outcomes.
(3) The members of these fora have shared notions of validity – that is intersubjective
understandings which help weighing and prioritising ideas within given areas of
competence and expertise. (4) They have a common policy enterprise and common
practices associated with a set of problems to which their competence is directed.
It is no surprise that the Member States’ Heads of State or Government relied on the
MC and later on the EFC for proposals and suggestions for action. The literature on
epistemic communities indeed suggests that a group of experts is often called upon
when national governments are divided on intergovernmental collaboration and find
themselves in need of technical expertise. The MC, which originally had dealt with
monetary matters, was an ideal group also to ask for advice on fiscal policy issues. Its
members can wear ‘double hats’: They can act as independent experts yet they are
fully aware of the political issues at stake and able to think within the ‘envelopes’
predefined by their national political masters.16 It was crucial that these experts had
learnt certain lessons and held certain common beliefs which they could pass on to the
political level. But those ideas alone were insufficient to produce the concrete SGP.
4.2
Negotiated compromise
We distinguish between a ‘political’ and an ‘expert’ sphere. Our distinction highlights
the fact that politicians – not experts – ultimately settle the most controversial issues.
Experts receive their instructions from politicians but are free to reach agreement
within an ‘envelope’ of politically uncontroversial bounds. In most cases, politicians
will simply rubberstamp an agreement reached at the expert level. Only issues on
which there is no consensus are passed on in substance and deliberated at the political
level. Next to the ‘top-down’ definition of negotiation ‘envelopes’ by politicians for
experts, the actual decision-making process is conceived in a ‘bottom-up’ manner.
Experts are in a strong position to influence politicians since they possess intimate
knowledge of the relevant issues and have detailed information on the bargaining
positions of the others. Moreover, their ‘framing’ of an issue is decisive for the
politician’s perception of related problems and options. Experts can indicate potential
solutions and prevent a discussion from being deadlocked. The main task of
politicians in this game is to arrive at compromise decisions and to bridge gaps that
experts were unable to overcome. This often places them in a position to make
‘dilemmatic choices’ in the sense that, instead of choosing between ‘right’ and
‘wrong’, they have to work out a common understanding of the lesser evil, which
subsequently and by definition is hardly perceived as any party’s preferred optimal
outcome. We will in the following briefly discuss each actor in turn.
In 1995, actor preferences were still widely dispersed. The Commission, once it had
adapted its view and supported the design of a pact, was entitled to make its
preference the base for the deliberations in the MC. Of course, it had to propose a pact
that was still acceptable to Germany, albeit less strict and without automatic
sanctions. In the MC, convergence occurred that was leaning somewhat towards the
‘German’ end of the preference scale. One explanation of this is that a ‘permissive
consensus’ (Lindberg and Scheingold 1970) pre-existed in the MC, the members of
which had already been in favour of a stability-oriented, rules-based model, which, for
16
One participant described their role as that of ‘financial diplomats’ (interview with the authors, 4 July
2003).
12
power-political reasons, then became acceptable to the actors at the political level. In
other words, the particular equilibrium solution was not yet determined, but the
solution space and hence the type of arrangement that the solution would look like
was already visible and pre-shaped in the MC. But the outcome also reflects
Germany’s asymmetric bargaining power at the time.
The reasons for Germany’s privileged position were fourfold: (1) Germany gave up
what de facto was the anchor-currency of the preceding regime, the EMS. Unlike the
other countries, it had to accept the opportunity cost of losing monetary discretion and
was able to make more demands – a fact well known from the Maastricht negotiations
(Dyson and Featherstone 1999). (2) The German position resembles Putnam’s twolevel game-constellation with the Bundesbank as an informal veto player (Putnam
1988). Due to its reputation and popularity, the Bundesbank had a strong influence on
German public opinion towards EMU. Had it publicly opposed the entry of a large
‘wave’ of countries into stage III, it would have made EMU politically extremely
costly for the Kohl government. The creation of the SGP was a strategy to reduce
public resentment by appeasing the Bundesbank. Thus the German preference set was
narrowed through the informal (declaratory) veto exercised by the Bundesbank, which
forced others to realise that a solution would have to lie closer to German preferences.
(3) Germany could credibly threaten to exit the EMU process. In fact, this implicit
threat was repeatedly used by German officials in the MC.17 (4) As another threatscenario, Germany could oppose EMU membership of the ‘Club Med’ countries, Italy
in particular. These countries had an incentive to agree to the Pact so that Germany
might be more acceptant of their membership. But even though the outcome is
situated towards the German preference point, the German government had to give in
as well, most importantly on the issue of automatic sanctions.
Turning to the institutional context, we find that three parallel processes were crucial
in shaping and facilitating the original SGP agreement. (1) The Franco-German ‘axis’
represented a subset of the negotiations on the European scene. Its most important
function was a radical reduction of the number of negotiators involved, which
increased the likelihood of finding a compromise solution. These summits were
important as France and Germany often held different perspectives on important
issues and thereby represented different groups of countries. Some issues of the
negotiations were virtually delegated to France and Germany.18 While the formal
solution was usually not reached during Franco-German summits or economic
consultations, the subsequent meetings at the European level were often shaped by the
prior exchange of views and signals between key players of France and Germany,
such as Finance Ministers Arthuis and Waigel.
(2) Ecofin negotiations were paralleled by meetings of the European Council, i.e. the
highest political level of the EU. The Heads of State or Government did not confine to
providing merely the initial political impetus and the strategic aims. Instead, they
punctuated and guided the negotiations throughout the process and defined operative
solutions in surprising detail, thereby removing important obstacles to compromise,
17
Interviews, 4 July 2003.
Milesi (1998: 145) quotes a delegation member of the Dublin summit: “C'est un problème francoallemand (…) Mettez-vous d'accord entre vous et nous accepterons votre solution.”
18
13
most notably in the case of the lower end of the definition of a severe recession that
would constitute an exemption from the imposition of sanctions.19
(3) Financial markets were influential in putting pressure on the negotiators to agree
on highly contentious issues. The deutschmark had a tendency to appreciate against
the other currencies whenever a deadlock seemed to jeopardise the course towards
stage III of EMU. In the wake of the ERM crises, this imposed a substantial cost of
failure on all negotiating partners and pointed to the danger of a derailment of the
EMU project. At the back of everybody’s minds, financial markets hence represented
an important disciplining factor and sustained a certain degree of the pressure to
ultimately reach a consensus. At critical points, actors would rather give in on certain
issues than leave the negotiation room empty-handed.
4.3 Analysis of the Implementation of the SGP
Implementation and management of the Pact soon turned out to be different from
what one may have expected. The early warning mechanism was not applied as a
preventive signal and failed to influence the course of events, in particular in the case
of Germany in 2002. Furthermore, in good times the Member States did not use the
funds that could have been used for reducing public debt and deficits, but instead cut
taxes or increased spending. Moreover, in November 2003 in the cases of Germany
and France, the Council was to move to the next stage of the EDP, but Member States
failed to decide accordingly and held the Pact in abeyance. Finally, in the spring of
2005 the SGP was amended to reflect the political choices of making explicit the
degree of flexibility in the SGP, thereby further increasing the scope for political
discretion in its implementation.
How can one make sense of these developments in light of the above analysis? What
was different and how can we understand what happened in these first five years after
the start of EMU? Adopting the same analytical framework as we did in the preceding
sections, we will examine the role of ideational support in conjunction with an actorcentred institutional approach.
Let us start with the first point, the failure to issue an early warning to Germany and
Portugal in early 2002. The German government and in particular the Chancellery felt
that receiving such an early warning would have been politically very costly in an
election year. While this reaction shows the potential force of the instrument, the
German government succeeded in convincing most other Member States that it would
not be necessary to issue the early warning. Thus, at the level of the Council – in
response to political bargaining before-hand – the initiative was withdrawn. It was
clear to observers that power-political considerations, rather than the underlying spirit
of the SGP, lay at the heart of the decision not to issue an early warnings to Germany
and Portugal. The incentive problem of ‘sinners judging sinners’ became apparent. By
consequence, the Commission has become increasingly discouraged to issue early
warnings unless it is reasonably sure of Council support.20 It is worth noting that,
19
The experience of the SGP negotiations should be seen as an important step in the institutionalisation
of the European Council.
20
The Commission had already suffered a set-back in the early implementation of multilateral
surveillance, when it issued a Recommendation in the context of the Broad Economic Policy
Guidelines (BEPGs) in the case of Ireland. In October 2001, its Recommendation to Ireland pointed to
the risk of overheating and urged Ireland to make corrections to cool down the economy. The response
14
when asked whether ideas had changed or the power-political constellation in the
management of the SGP, Commission officials point mostly to the power-political
constellation.21
The second event listed above was the fact that a number of Member States chose to
use economically ‘good times’ to reduce taxes (or increase spending) rather than cut
the levels of debt and deficit. This choice by Member State governments implicitly
meant that, down the road, when ‘bad times’ arrived, deficits went up breaching the
3% of GDP reference value and thus triggered the Excessive Deficit Procedure (EDP).
Member State governments had become overoptimistic about economic growth
prospects for the years to come. Growth forecasts of the Member States were
systematically higher than the actual outcomes. The result of overoptimistic
forecasting meant that some Member States had been insufficiently preparing for ‘bad
times’ and thus were in lack of a ‘safety margin’ for such a period. Thus, an important
factor here is the perceived budgetary space that turned out to be smaller than
expected. Furthermore, not only were the forecasts overly optimistic, the economic
growth that followed the period post-2001 was quite gloomy in comparison to earlier
years. Clearly a major part of the explanation of why deficits exceeded the ceiling
should be traced back to upbeat forecasting and low absolute economic growth (if put
in historical perspective). At the same time, even a realisation of the sanguine
expectations would hardly have secured compliance with the deficit limit. It appeared
as if the political will to continue consolidation had, if not faded, at least been
supplanted by short-term considerations and the desire to cut taxes without reducing
expenditure.
The third event was in 2003 when France and Germany ran excessive deficits and
were about to enter into the next stage of the EDP (if the Council had made that
decision in November 2003). It is conceptually interesting that the German and also
French governments left the normative debate of the SGP and disputed that the
outcome of a strict implementation would cause overly restrictive effects on their
countries. In the political debate, a trade-off was construed between consolidation and
structural reform, arguing that the deficit limit should not impede a major period of
restructuring. Hence the two Member States were unwilling to accept the next step of
the EDP, let alone the faint prospect of possible sanctions, which could have occurred
in the planned year of Germany’s general election, 2006. An important factor that had
changed and enabled the outcome of 25 November 2003 was the power-political
situation. The German government had moved from being pro-SGP and in favour of a
strict implementation to preferring more lenience. France had initially appeared even
willing to accept the next stage of the EDP but, when it found itself in tandem with
Germany, in the fall of 2003, agreed to challenge going into the next step of the EDP
by asking Member States to support a Council decision to hold the Pact in abeyance.
One could argue that the SGP as a regime would require at least the hegemonic
support of Germany in order to be implemented strictly. However, Germany finding
itself in excessive deficit (as if to everyone’s surprise), its own preference set was no
longer in line with a strict implementation.
was one of outrage. Many Member States supported the Irish reaction, amounting to a set-back for the
Commission. Although the Commission was merely executing the jointly agreed policies, the events
were poorly understood by the broader public.
21
Commission officials, interviews with the authors spring 2003.
15
The final event to analyse is the reform of the SGP in March 2005 with the revised
Regulations being adopted in June 2005. In a number of ways these reforms signal
that ideational consensus still existed on the need to have some kind of SGP, but that
the compromise solution was to grant the Council even more room for availing itself
of the already large discretionary margin. It is clear that the power-political
constellation had changed, in particular Germany being less supportive of strict rules.
The fact that the Franco-German axis had been at the core of the November 2003
Council decision was also crucial for the conduct and outcome of the reform. Many
have observed that no other pair of countries would likely have been able to ‘get away
with’ not moving to the next step of EDP and requesting a re-draft of the rules
themselves. It is understandable that, in light of this development, the smaller Member
States have brought central stage the notion of ‘equal treatment’. Once Germany and
France were sponsoring legal changes, the question had become to what degree the
other side could preserve the core principles of the Pact.
Our explanation is that a more moderate reform was chosen over a fundamental one
mainly because (1) the ideational consensus among experts had not disappeared and
(2), from an actor-centred perspective, because there was a blocking coalition of
smaller Member States against radical change (such as a full-blown incorporation of
the list of ‘other relevant factors’). Both factors enabled the existing framework to
become ‘path dependent’ (Pierson 2000). While ‘policy learning’ and ‘lesson
drawing’ had of course been going on and intensified after 1999, it did not lead to
fundamental changes in the ideas of experts in the EFC. It was realised, for example,
that more emphasis would have to be placed on long-term sustainability and the
quality of public finances and that it could prove counterproductive to publicly evoke
the false notion of a quasi-automatic sanctioning mechanism. On the other hand, there
was no voice speaking in favour of abandoning the regime altogether. In institutional
terms, radical change was prevented by the possible exercise of the veto right wielded
by every single Member State. In other words, even one single state could have
prevented the compromise solution. For these reasons, changing the Treaty was out of
the question (as for the original creation of the SGP), and adopting the new
Regulations also required unanimity, since the Council amended the legal texts
originally tabled by the Commission. Hence, ideational and institutional forces
counterbalanced the desire of some Member States to engage in more far-reaching
changes.
There is one other factor to consider. The original design of the SGP aimed at
simplicity. Thus the rules were straight-forward so as to ensure clarity and easy
implementation. It was considered important that the public debate could easily grasp
whether a Member State was in compliance with the broad norms of ‘stability
culture’. The spring 2005 reform moved the SGP away from this initial simplicity in
favour of a more sophisticated and nuanced framework, which, on the other hand, is
certainly less straight-forward to understand or implement. However, with the time
that had passed since the first discussions in the mid 1990s, elites and the publics alike
had grown more accustomed to thinking about government debt and budgetary
deficits. Both issues, not least because of the growing urgency of the problems, are
now regularly part of the public debate. This broader understanding might have led at
least the informed public to accept a higher degree of complexity. In fact, most of the
public criticism of the reform referred to its effect as weakening the framework, not to
16
the loss of simplicity. On the other hand, whether one implies the other, remains to be
seen.
Finally, financial markets played a somewhat different role after the introduction of
the euro. Exchange rate movements within the euro area obviously are no longer
possible. It is remarkable to observe that the November 2003 decision did not affect
financial markets (i.e. the exchange rate of the euro remained stable – even went up
slightly – and bond markets were calm). The fact that financial markets did not
respond to the November 2003 SGP Council decision has been interpreted as an
indication that the EMU regime as a whole remained credible, and that financial
markets trusted the EU Member State governments to still be concerned about debt
dynamics (see Leblond 2005). Thus the reform of the SGP over a period of eighteen
months did not feel the pressure of the financial markets in the same way as was the
case with EMS reforms during stage two of EMU (1993 and 1994 in particular) or the
implicit pressure that financial markets exerted on decision-makers during the
creation of the SGP, as discussed above. However, it should be recalled that
benevolent financial markets cannot be taken for granted. The very idea behind the
credibility of the SGP incorporates the need to underpin and justify market stability
with sound fiscal policies. It is obvious that potentially more serious fiscal problems
on the horizon would affect financial markets in the medium-run, especially if the
implementation of the reformed Pact continues not live up to the rhetoric and
commitments undertaken by the Member States.
For an overall judgement of the reform of the Pact, most commentators have
considered it still to imply at least a moderate weakening of the EU’s budgetary
framework. The new version of the SGP in essence makes the already very large
degree of Council discretion explicit. It thereby provides in-built political legitimacy
to the Council when it avails itself of the flexibility enshrined in the rules. In other
words, the institutional balance between rules and discretion has remained broadly
unchanged in legal terms. What has been reduced, however, is the reputation cost to
the Council members of using that discretion. Under the new SGP, the Council faces
less normative obstacles when exerting its discretion, since a lot of the reasoning that
can be employed against a strict implementation of the EDP is now even part of the
legal texts themselves. Even more than under the old SGP, a successful
implementation therefore hinges on the Council making responsible and wise use of
the flexibility at its disposal. The political motivation behind the SGP reform as well
as the first instances of ‘test cases’ with EDP decisions on Germany, France and Italy
at the turn of 2005/2006 raise serious concerns. At the same time, the renewed
ownership and responsibility that the Council has assumed with the current SGP
reform and its share in the ultimate responsibility for the viability of EMU could have
the effect of inducing more compliance. Moreover, policy learning over the past
decade should also support a stronger commitment to sound budgetary policies. For
an overall assessment it is also worth noting that the Commission is not weaker than
before but, rather to the contrary, can engage the Council into more substantial and
enlightened deliberations on improved cognitive grounds.
Similar to the historic experience with the EMS after widening the fluctuation bands
of the Exchange Rate Mechanism, the success of the reformed SGP seems to depend
on two conditions. First, the actors have to internalise the norms of the system (i.e.
above all the deficit reference value). The political capital invested in the reform of
17
the Pact in this sense should help. After all, the SGP is no longer the German ‘dictate’
of 1995/97 but the jointly agreed framework for budgetary policy of 2005, which
finds strong support (indeed the key advocates) among a number of smaller Member
States. Second, the actors need to operate within an appropriate incentive structure
that makes them perceive norm-respecting behaviour as their rational strategy.
Ultimately, only the need to safeguard the viability of EMU can provide a sufficiently
strong collective incentive to resist the short-term individual temptation of free-riding
on the deficit bias under the slack reins of an essentially lax political framework.
5
Conclusion
As the watchdog started to bark and take on the trespassers, its rules of engagement
were changed. Will it now be forced to tug its tail and whine? We started off by
asking why the Stability and Growth Pact was created, what purpose it was to serve
and what underlying conditions supported its creation. The economics literature at the
time stressed the importance of consolidation, externality problems in EMU, central
bank independence and coordination of monetary and fiscal policies. Political factors
range from the incomplete nature of the Maastricht Treaty to German domestic
politics and policy learning. Ideas on the relationship between monetary and fiscal
policy and the role of monetary policy in society more generally had changed over
time and enabled a broad consensus in favour of fiscal discipline. The analysis
indicates that the genesis of the concrete outcome lay in Germany and that its creation
was due to an asymmetric power constellation. These two factors, ideas and power,
explain the origins of the SGP.
Designing rules is one thing, applying them another. A number of countries no longer
act as if the SGP budgetary ceilings are to be taken seriously. In part it may be that
politicians are opportunistic and underrate the repercussions of rising budgetary
deficits as they pursue other domestic objectives. At the same time, it should be
stressed that EMU and the SGP are likely only to have a positive effect on the
economy if structural reforms are implemented and growth revived. Some
governments seem to have ignored the fact that without these reforms, budget deficits
rise anew. They now wonder if the SGP can be seen as a watchdog that barks from
time to time but is safely on a chain. Some have therefore argued that the SGP may
not be the right way to enforce fiscal discipline.
The introduction asked what has changed since 1995-97 and what lessons can be
drawn from the negotiation period and the recent implementation and revision
experience for the future of the SGP. Our analysis suggests that what matters for the
SGP are bargaining power and ideas. Regarding the former, some changes have
occurred. First, Germany has lost some of its bargaining power due to the start of
stage III of EMU in 1999. Germany no longer has the same possibility to threaten not
to join EMU or to create barriers to keep countries out. Second, Germany itself has
gone through a period in which it no longer was the exemplary Member State it once
had been regarding budgetary discipline, partly because of the continued financial
effects of reunification, partly because of changing political preferences and the
erosion of domestic fiscal institutions. Instead of Germany, it was mainly the Dutch
government, aided by Austria and Finland that sponsored the SGP; albeit with less
bargaining power than Germany before. A similar change can be observed regarding
18
the role of ideas. The consensus among politicians on the importance of fiscal
discipline may seem to be fading away under the effects of low economic growth.
However, we argue that there is still strong support for the regime among the main
actors at the expert level. The SGP was created to build credibility. Irrespective of
whether it is a ‘smart’ or ‘stupid’ pact it will only be effective if Member State
governments respect it. It is likely that experts will influence the thinking in
governments along these lines. The role of experts and ideas has remained strong,
even more so after the simplicity of the SGP had to give way for a more complex mix
of political judgement and economic assessment following the 2005 reform.
Back in 1991, and even more so with the rejection of the Constitutional Treaty in
2005, the EU has shown a critical lack of the political will that would be required for
deeper political integration and, ultimately, Political Union. Well-intended visions of
a supranational pooling of fiscal policy competences will thus for the foreseeable
future remain unrealistic. In this situation, it has become clear that the SGP at least
represents the EU’s second best solution for an essentially intergovernmental but fair
institutional framework of economic policy co-ordination. The events of November
2003 and the ECJ decision of 2004 (see above) have brought home one central
message: fiscal policy remains a national responsibility of the Member States. The
institutional reality is torn between the economic need for fiscal discipline and
coordination on the one hand and the political requirement for national discretion on
the other. The reform of the SGP in 2005 has tilted the balance even further in favour
of discretion. By spelling out the degrees of freedom that the Council possesses in the
implementation of the rules, the reform has lowered the reputation cost of putting that
flexibility to use. As the domestic political dynamics behind excessive budget deficits
can obviously not be fully checked at the European level, the time has come to
improve national institutions. The future of the SGP will not be so much a
determining factor for national fiscal policy than vice versa. Ultimately, Member
States will have to realise what it means to have entered a monetary union.
19
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