Balancing Pressures

The introductory chapter lays out the theoretical framework, the puzzles, and the research questions motivating this book. Which economic ideas explain the design of the European Union’s economic policy? What explains the main cleavages underpinning its reforms? What explains the outcome, timing, and direction of these reforms? What explains the adoption of its implementation instruments, the so-called country-specific recommendations? Why does compliance vary? What explains the use of the corrective procedure and is it effective? The chapter provides an overview of how the economy, national politics, and supranational politics shape the entire policy cycle, from the definition of the policy problem to the design of the policy and its implementation. To help readers familiarize themselves with policy technicalities, the chapter concludes by briefly summarizing the primary and secondary laws regulating the policy.

This chapter investigates the policy’s ideational foundations by perusing economic theories and determining which would recommend its provisions. According to some scholars, austerity theories, based on Ricardian equivalence, rational expectations, and perfect capital markets, have inspired its design. For other scholars, these rules reflect neoliberal ideas in support of small government and rejection of Keynesian demand management. The chapter argues that these claims are unconvincing. Austerity theories suggest a diminished effectiveness of expansionary fiscal policies and would recommend looser oversight. Since 2005, policy provisions have accommodated business cycle fluctuations, major structural reforms, and public investments. There are no provisions about the size of governments. The chapter shows that these rules are designed to prevent negative cross-country externalities arising from expansionary fiscal policies adopted by authorities with short-term incentives to boost output at the expense of inflation. This reasoning is based on standard macroeconomic theories and the more realistic assumptions of fiscally illuded voters and policy- and office-seeking politicians.

Economic theories point to the potential problems associated with a monetary union but offer limited insights into explaining how the policy is designed. This chapter employs international relations theories to investigate the sources of the main controversies that have characterized policy design reforms, especially those concerning the degree to which provisions constrain states and empower the Council or the Commission. The chapter uses an original dataset of positions on contested issues from 1997 to 2012. In a way that best reflects the recurrent themes of the book, it shows that a host of economic, supranational, and national factors shape positions. Governments with a greater risk of noncompliance prefer greater discretion and governments with higher voting power prefer more Council involvement in enforcement as their risk of noncompliance increases. National public support for the European Union emerges as the most relevant correlate of positions on the Commission’s empowerment: governments facing a more skeptical public display greater reluctance. Other factors, such as governmental ideology, euro area membership, and the sovereign debt crisis also shape positions.

This chapter assesses the accuracy of procedural and bargaining models in predicting the outcomes of the reforms of the economic governance of the European Union that took place between 1997 and 2013. These negotiations addressed 35 controversial issues and were characterized by high costs of failure. How best should we understand the outcomes of these negotiations? Which factors best explain bargaining success? The chapter confirms the accuracy and robustness of the compromise model, based on country raw influence and the significance of preference centrality for bargaining success. However, a procedural model with a costly reference point performs well, indicating that misestimation of the no-agreement cost may be a reason for its commonly reported poorer accuracy. Procedural models are, however, more sensitive to measurement errors. The chapter also shows how both models contribute to understanding bargaining success and how the conditional influence of the European Parliament should not be ignored.

This chapter investigates in detail the bargaining dynamics surrounding the economic governance reforms as well as their direction and timing. It contrasts expectations derived from traditional theories of European integration, that is, liberal intergovernmentalism and neofunctionalism, with those from more recent postfunctionalist/new intergovernmentalist perspectives. It argues that Council-centred enforcement, which, despite noncompliance, has been a dominant design feature at least until the sovereign debt crisis, does not sit comfortably with traditional theories but can be explained by policy salience and implementation uncertainties. On the other hand, the emphasis that traditional approaches assign to supranational pressures, such as noncompliance, commitment problems, threats of exclusion and veto, issue linkages, path dependencies, and supranational decision-making, allows to adequately account for the overall direction of reforms toward more tightening and delegation, notwithstanding the pooled enforcement in recent ancillary measures. Postfunctionalist theories overall fall short in highly politicized contexts, exactly where they should do most of the explaining.

The second part of the book investigates the implementation of the policy. As far as preventive surveillance is concerned, at its core lay the country-specific recommendations on the macroeconomic policies of the member states. These recommendations are the object of intense negotiations between the Commission and the Council. Why are they a matter of bargaining? What shapes the Council’s propensity to modify the Commission’s proposals and what affects their strengthening or weakening? This chapter employs bargaining and compliance theories to address these questions. Analyzing the recommendations issued between 1999 and 2019, it shows that the Council is rather active in modifying the Commission’s assessments and strengthens four-fifths of the recommending provisions that it decides to modify. Economic and supranational factors dominate this process. Governments balance the pressures originating from the bargaining dynamic within the Council with the need to preserve policy credibility and effectiveness in the face of noncompliance and worsening economic conditions.

Eight months after adoption, less than 60 per cent of the country-specific recommendations are partially or fully implemented, and the performance has worsened after the introduction of the European Semester (ES). This chapter employs political economy theories of reform to explain differences in implementation, analyzing the full set of recommendations released between 2002 and 2019. A combination of economic and electoral pressures, as well as the costs of noncompliance, are associated with these patterns. Proximity to electoral contests lowers the rates of implementation, even though this effect weakens under the ES. In 2002-2010, inflationary pressures acted as drivers of compliance in euro area countries and as obstacles to compliance in non-euro area countries. After the introduction of the ES, the sovereign debt crisis triggered fuller implementation. Moreover, governments adopted especially those actions that were associated with a more established supranational system for sanctioning noncompliance. Raw country power has had different implications. Countries with higher voting power were initially less compliant. Later on, economically larger countries complied more.

At the core of corrective surveillance lies the excessive deficit procedure. This chapter employs theories of bargaining to explain the opening and continuation of this oversight and political economy theories of public spending to explain its consequences for national public finances. Whether a procedure is launched or concluded is shaped mostly by factors related to compliance, bargaining, and national pressures, such as past and expected fiscal performance, ideological positions of governments and commissioners, and public opinion in the surveilled country. As for the consequences of oversight, surveillance has significantly shaped national budgetary processes, counterbalancing the national pressures governments face when they set their fiscal policies. The impact of corrective surveillance offsets that of a two-year shortening of expected government duration, the addition of one party to a government coalition when debt is high, or a leftward shift in government ideology when the risk of replacement is low. Moreover, estimates from exact matching on treatment histories indicate that these effects peak after four to five years.

The concluding chapter begins by summarizing the main findings of how politicians balance pressures arising from the economy, national politics, and supranational politics when they design and implement the economic policy of the European Union. With different emphasis, these pressures resurface across time and cut across the entire policy cycle, from the formation of preferences to the negotiations over legislative and executive measures, the timing and direction of reforms, and the patterns of compliance. The chapter then draws some tentative, yet interesting, insights about the effectiveness, fairness, and responsiveness of the policy. The record of effectiveness is mixed. Long-term trends appear reasonably reassuring, but these dynamics hide large cross-country differences which, rather worryingly, characterize mainly the euro area. There are, however, no glaring indications of unfairness. Concerns about negative externalities have trumped the influence of raw economic power in implementation. Moreover, the policy is not insensitive to changes in public opinion and governmental positions. The chapter concludes by highlighting the usefulness of this theoretical framework.