Explaining Instability in the Stability and Growth Pact

• Author: Mark Hallerberg,Nicole Rae Baerg
• Published date: 01 June 2016
• Date: 01 June 2016
• DOI: http://doi.org/10.1177/0010414016633230
• Subject Matter: Articles

Comparative Political Studies

2016, Vol. 49(7) 968 –1009

© The Author(s) 2016

Reprints and permissions:

sagepub.com/journalsPermissions.nav

DOI: 10.1177/0010414016633230

cps.sagepub.com

Article

Explaining Instability in

the Stability and Growth

Pact: The Contribution

of Member State Power

and Euroskepticism to

the Euro Crisis

Nicole Rae Baerg1 and Mark Hallerberg2

Abstract

The Stability and Growth Pact clearly failed to prevent the euro crisis. We

contend that the failure was due largely to the ability of the Member States

to undermine the Pact’s operation. The European Commission served as a

“watchdog” to monitor fiscal performance. The Member States themselves,

however, collectively had the ability to change the content of the reports

for individual states. We confirm the expectation that powerful Member

States had the most success in undermining the role of the Commission.

Perhaps more surprisingly, we find supporting evidence for our argument

that governments with euroskeptic populations behind them were also

more successful in weakening the Commission’s warnings. These results

have broader theoretical implications concerning which mechanisms explain

country-specific outcomes under a shared rule. Another contribution is the

creation of a new data set of European Commission assessments of Member

State economic programs and Council of Minister revisions.

Keywords

EU politics and policy, political economy, economic policy

1University of Mannheim, Germany

2Hertie School of Governance, Berlin, Germany

Corresponding Author:

Mark Hallerberg, Hertie School of Governance, Friedrichstrasse 180, Berlin 10117, Germany.

Email: hallerberg@hertie-school.org

633230CPSXXX10.1177/0010414016633230Comparative Political StudiesBaerg and Hallerberg

research-article2016

Baerg and Hallerberg 969

Introduction

The Maastricht Treaty set guidelines for what macro-economic goals

European Union Member States would need to reach to qualify for participa-

tion in the coming common currency, with deficit and debt targets the most

visible. Initially, the expectation was that only a few countries would be able

to participate. When it became clear that there would be an expanded

Eurozone, which would include not only core countries such as Germany and

France but more peripheral countries such as Spain and even Greece that had

traditionally run large budget deficits, there was growing concern that

European-level rules were needed. Otherwise some governments would be

tempted to run fiscal policies that could become unsustainable and leave the

other Member States with the unpalatable choice of either bailing out the

troubled government or letting it suffer from the consequences of a default.

The Member State governments therefore agreed to a Stability and Growth

Pact (SGP) meant to avoid this outcome. Clearly, the need for financial pack-

ages for multiple Member States during the euro crisis means the Pact failed.

This article explores why the Pact failed, and it focuses especially on its

institutional design.

Ongoing research examines how institutional design is related to compli-

ance and the enforcement of rules, and we build on this literature. Scholars

have shown that there are significant benefits to flexibility in rules. The argu-

ment is that, under conditions of uncertainty, countries have a hard time com-

mitting to rules. A lack of flexibility constrains countries even further and, as

a result, countries only agree to shallow commitments. Alternatively, rule

flexibility allows countries to make deeper commitments, which addresses

their commitment problem (Johns, 2013; Kucik & Reinhardt, 2008;

Mansfield, Milner, & Rosendorff, 2002).1 In the European context, scholars

have also indicated that domestic institutions can both help and hinder com-

pliance with EU-level rules (Heipertz & Verdun, 2010; Koehler & König,

2015; König & Mäder, 2013; Richard & Caraway, 2014). Although rule flex-

ibility may allow states to make deeper commitments, Member States also

vary in the extent to which they can exploit flexibility. In other words, the

degree of rule flexibility may not apply equally across all Member States.

This article reports the first empirical evidence that both Member State vot-

ing power and domestic level euroskepticism are systematically associated

with weakening (rather than breaking) EU-level rules.

When are some governments successful at weakening the application of

the rules they have agreed to at the international level? This article docu-

ments the selective weakening of the assessments for Member States under

the SGP both prior to, and during, the euro crisis. Although “growth” is part

970 Comparative Political Studies 49(7)

of the title of the SGP, its primary goal is to keep deficits low to minimize the

likelihood that a fiscal problem in one Member State affects another. The

weakening of the assessments under the Pact meant that the main tool of the

European level to prevent larger deficits and the buildup of debt levels in

Member States was defanged. The ultimate causes to the crises are of course

many and complex, and they include a number of factors highlighted by oth-

ers in this issue such as international and external costs, policy announce-

ments, and concerns about migration (see Bernhard and Leblang; Genovese,

Schneider, and Wassmann; and Walter, in this issue).

Yet, there are three ways that this weakening contributed directly to the

crisis. First, it meant that several large and/or euroskeptic Member States

probably entered the crisis with weaker public finances than had they fol-

lowed the original Commission recommendations. Second, given that we

find that even small, euro-friendly states had the Commission’s text weak-

ened when the big and/or euroskeptic states were receiving milder EU-level

surveillance too, countries such as Greece and Ireland that later received aid

packages also received weaker surveillance whereas other countries weak-

ened and edited the Commission’s recommendations. Finally, one can also

speculate about the indirect effects on Member State behavior. Those Member

States that did not receive aid package had to pay for them. The fact that large

states and especially those with euroskeptic populations entered the crisis

with weaker finances meant that they were less likely and, possibly, less able

to agree to debt restructurings because of the consequences for their own

public finances.

To measure and explain the weakening of the assessment criteria, we

examine the “preventive” arm of the SGP, which requires every European

Union Member State to submit annual macro-economic programs to a supra-

national body, the European Commission, for evaluation. Those programs

include information on deficits, debts, and the economic growth trajectories

of Member States. The Commission, in turn, writes a report on each Member

State that constitutes draft text for the intergovernmental Council of Economic

and Finance Ministers (ECOFIN, or Council) for a formal statement to the

Member States. The key benchmark of the SGP is that Member States should

have a budget deficit of 3% or less. In this article, we refer to the Commission’s

power to comment on national programs and make concrete recommenda-

tions as its “watchdog” function. The Commission may also recommend

“corrective” measures. The Council, based on an initial recommendation

from the Commission, may deem a Member State with deficits above this

figure an “excessive deficit” country. If a Member State ignores the Council’s

ruling, the Council, again with initial Commission recommendation, can

decide to fine a non-complying country. In practice, in the lifetime of the Pact