Abstract
This chapter investigates the forward-looking, intercrisis policy change that occurred in the period 2010–2013 in the regime for economic and fiscal policy coordination of EMU. In particular, it looks into four reforms that, building upon the sudden shift detailed in the previous case study of contingent policy change, have revolutionized the existing coordination regime making it more rule-based and informed by expansionary consolidation principles. They are the European Semester, the Six-Pack Rules, the Fiscal Compact, and the Two-Pack Rules. By resorting to contingent and epistemic learning as theoretical anchors, the chapter analyzes 120 publications produced in the period 2009–2012 by the economists of the European Central Bank and the DG EcFin of the European Commission. The analysis reveals that both paradigmatic and instrumental aspects of the four reforms closely matched the policy input provided by EU’s internal epistemic actors in their scientific publications. The findings contribute to existing literature by pointing to learning mechanisms as causal drivers of paradigmatic policy change and EU integration.
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Notes
- 1.
In fact, “the threat of a no bail out was assumed to prevent extreme fiscal follies” (Larch et al., 2010, p. 5).
- 2.
For comprehensive overviews of EMU reforms after 2010 see: Buti and Carnot (2012); Kamkhaji and Radaelli (2013); De Haan et al. (2014); Commission (2014); European Parliament (2015).
- 3.
“Decisional arenas characterized by crisis-driven functional pushes and Knightian uncertainty generate political and epistemic ambiguity. And the empirical result of this ambiguity is the permeability and malleability of policy paradigms, both at the individual and collective levels, rather than their intervening, exogenous causal power” (Kamkhaji & Radaelli, 2021, p. 12).
- 4.
That is, whether it was the fruit of change-or-die decision making without a shift in the belief system of the involved actors, or it was the outcome of cynical political calculations/brinkmanship about the burden sharing of the upcoming adjustment, or the inevitable result of functional asymmetries and weaknesses enshrined in EMU, or yet again the result of ideational factors.
- 5.
The contingent learning mechanism in fact predicts that after the crisis was cushioned through a shock therapy, more conventional processes of reform and change (and learning thereof) would ensue. The four reforms analyzed below indeed represent these more conventional processes of policy change.
- 6.
“According to article 14(2) and (3), the TSCG needs to be ratified by at least twelve euro area Member States to enter into force among them. When the treaty was signed the envisaged date for its entry into force was 1st January 2013. This objective was attained for twelve euro area Member states: Austria, Cyprus, Germany, Estonia, Spain, France, Greece, Italy, Ireland, Portugal, Finland, and Slovenia” (European Parliament, 2013, p. 7).
- 7.
In more detail, the changes to the letter of the SGP’s “Code of Conduct” introducing the Semester were prepared by the EFC drawing on the 12th of May Commission’s proposal for a comprehensive reform package (Commission, 2010a) and officially enshrined in the coordination regime on September 7, 2010, after the Council endorsed the amendment.
- 8.
RQMV puts the onus of halting sanctions issued under the EDP on the Council. In fact, sanctions are automatically levied by the Commission unless the Council asks for an explicit vote (by qualified majority) to overturn the decision of the Commission.
- 9.
“Swings in perceptions of sovereign risk propagate across euro area countries, despite possibly stark differences in their macroeconomic fundamentals” (Amisano & Tristani, 2011).
- 10.
The presence and influence of functional spillovers in the context of the reform of the regime for fiscal and economic policy coordination are not to be seen as alternative to the causal role played by intergovernmental bargaining. By expanding our focus to also cover reforms taking place in other economic domains of EMU, we do not in fact only find corroborating evidence of the low tractability of the problem of securing the long-term sustainability of EMU, but we can also appreciate how different causal drivers and mechanisms were at play at the same time. In fact, it is not incorrect to say that bargaining elements were kept at a low level in the context of the reforms analyzed in this chapter because the big distributive game was taking place elsewhere, that is, in the context of the design of adjustment programs for countries under financial assistance and, most of all, in the context of the negotiations for the creation and functioning of the ESM and of the banking union—that is, in those areas where the burden-sharing of the EMU-wide adjustment was actually established. In a way, the reform of the coordination regime, granted that all actors broadly approved it in principle, was not the locus of interstate bargaining, but rather that where technical expertise was deployed to fix a crisis of enforcement, credibility, and limited scope and effectiveness of the surveillance framework.
- 11.
According to Google Scholar, Blyth’s book has been cited more than 3200 times since its publication.
- 12.
“Crises are catalysts of reform and change—they initiate a process of policy learning. This is also true for the Great Recession. In its wake an intensive debate started in both the political and the academic arena on how to redress the shortcomings found in the economic and financial system that may have caused the crisis and contributed to its fast and extensive propagation. This debate also encompasses the role of fiscal policy and, in the European context, the role of EU fiscal surveillance in a monetary union.”“…history tells us that deep economic crises initiate a learning process – a search for new policies to avoid future economic calamity. EU is now in the middle of such a learning process.” (Larch et al., 2010, pp. 26 and 45)
- 13.
“The notion of expansionary contractions has helped policymakers frame and respond to the economic problems of the time”, or, more bluntly, “politicians, from both left and right of the political spectrum, are always eager to buy ‘magical’ solutions to economic problems” (Dellepiane-Avellaneda, 2015, p. 399).
- 14.
Although, in fairness, pro-cyclical policies run vis-à-vis revenue windfalls are an aspect that cannot be ignored when looking at the unpreparedness of EMU public finances when the financial crisis started to hit, hence somehow downplaying the pure financial genesis of the crisis.
- 15.
Although the process of reform traced in the previous section started in 2010, I decided to also include 2009 in the analysis for two reasons. First, to show how the switch from the Keynesian tenet of the EERP of 2008/2009 to the consolidation mantra of 2010 is reflected in the epistemic outputs. Second, to show that the prominence of fiscal conservative thinking within EU scientific circles pre-dated 2010.
- 16.
“Our findings indicate that the ECB communicates intensively on fiscal policies in both positive as well as normative terms […] The empirical analysis also indicates that the financial crisis has overall increased the intensity of central bank communication on fiscal policy” (ibid., p. 1).
- 17.
In this respect, it is worth considering the ECB’s role in the process of reform of financial regulation and banking supervision, its participation in the so-called Troika in the context of adjustment programs and its resort to a vast array of non-conventional monetary instruments that, according to some observers, marked a creeping expansion of its de facto inflation targeting mandate in favor of a more interventionist and non-neutral role in monetary policy (Krampf, 2016).
- 18.
When it comes to evaluating its role in the process of crisis-driven policy change, as noted previously, the literature diverges with some authors who consider it to be sidelined by the increased importance of the European Council (Bickerton et al., 2015) and some others who argue that it managed to extend its prerogatives under the new framework for economic governance (Bauer & Becker, 2014). For the present analysis, what matters most is that the Commission initiated and substantially designed (and even passed, in the case of the Semester) both the Six and Two-Pack measures.
- 19.
Un-authored articles published in the capacity of the ECB’s Executive Board.
- 20.
Nonetheless, with regard to the latter topic, the papers dealing with sovereign bond spreads were clearly included in the analysis.
- 21.
- 22.
- 23.
- 24.
- 25.
- 26.
- 27.
The precise references to the publications referenced in this section (and in the table above) are featured in a separate appendix to avoid excessive confusion.
- 28.
Namely, the financial liabilities assumed by governments to rescue banks and the effect of automatic stabilizers.
- 29.
According to Cwik et al. (2009), the multiplier of a discretionary fiscal stimulus can be six times smaller when measured through a New-Keynesian model including price rigidities and rational agents’ expectations rather than when it is measured through a fully Keynesian model. As a result, a discretionary fiscal stimulus can even have negative medium-term impacts on the GDP and consistently crowd out private consumption and investment.
- 30.
Fiscal stimuli should take into account country-specific budgetary “room for manoeuvre,” that is, the initial fiscal position. To work efficiently in the short-run without imposing long-term liabilities, fiscal stimuli need to be timely (i.e. able to avoid typical fiscal lags and reach the economy while the crisis is still ongoing), well targeted (i.e. oriented toward liquidity and credit-constrained households that would consume the extra income rather than saving it), and temporary (i.e. such not to worsen long-term fiscal imbalances/sustainability and crowd out private investment and consumption via Ricardian behaviors).
- 31.
See footnote 10.
- 32.
“We find that the annual change in the government debt-to-GDP ratio is highly statistically significant and negatively associated with the economic growth rate.” “The fact that the change in the debt ratio and the budget deficits are linearly and negatively associated with growth (and with the long-term interest rates) may point to a more detrimental impact of the public debt stock even below the threshold [90% debt-to-GDP ratio]. Hence, targeting a higher debt level to support growth is not a policy option. Any policy with such a target would reduce the leeway of governments before the debt burden has an unmistakably adverse growth impact. In the current economic environment, the results represent an additional argument in favour of swiftly implementing ambitious strategies for debt reduction. If policy makers let high debt ratios linger for fear that fiscal consolidation measures will be unpopular with voters, this will undermine growth prospects and thus will put an additional burden on fiscal sustainability. This debt-based argument thus adds to the positive growth effects of fiscal deficit reduction found in the literature for the long term and frequently also in the short term” (Checherita & Rother, 2010, pp. 15 and 23–24).
- 33.
These publications, if read jointly and longitudinally, can really be considered the EMU blueprint/compendium of expansionary consolidation and the degree to which the content of the reforms matched scientific inputs may even make us question whether the steer of policy change was really in political hands rather than in technocratic ones.
- 34.
Strictly on the technical side of policy coordination and surveillance, and linked to the aim of improving national and supranational fiscal frameworks, a number of papers have also addressed the issues of statistical governance, the use of real-time data for the sake of MTOs, and the unsuitability for monitoring purposes of the cyclically adjusted budget. They are not discussed here merely for reasons of space.
- 35.
The new Six-Pack regulation amending the EDP foresees that “if the 60% reference for the debt-to-GDP ratio is not respected, the Member State concerned will be put in excessive deficit procedure […] if the gap between its debt level and the 60% reference is not reduced by 1/20th annually (on average over 3 years)” (EU Commission, 2011, MEMO/11/898).
- 36.
“Th[e] expenditure benchmark places a cap on the annual growth of public expenditure according to a medium-term rate of growth. For Member States that have not yet reached their MTO, the rate of growth of expenditure should be below this reference rate in order to ensure adequate progress” (EU Commission, 2011, MEMO/11/898).
- 37.
In other words, also implementing the advice stemming from the econometric literature on fiscal policies during good times, the new coordination framework should include dedicated surveillance on the growth of expenditures to avoid wasting revenue windfalls and, in turn, allow for the accumulation of buffers/fiscal space to be used when the cycle would invert and the windfalls become shortfalls.
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Kamkhaji, J.C. (2022). The Influence of Internal Epistemic Actors on the Construction of EMU Expansionary Consolidation Paradigm. In: Policy Learning and the Euro. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-031-04264-5_5
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