Fifteen Eighty Four

Governing the European economy does not result from decisions taken by national executives acting in isolation. It is the product of a laborious and frequently frustrating coordination effort orchestrated at the continental level.

It all began on a cold, yet remarkable, winter day of 7 February 1992, with the signature of the Treaty of Maastricht. Twelve heads of state or governments, with their finance ministers, finally agreed on a timetable to adopt the euro as their common currency and set the basis for steering national fiscal policies and governing the European (macro)economy. Since then, European politicians have adopted several legislative measures and an ancillary international treaty designed to put into effect the provisions of this landmark treaty. These were followed by a large number of recommendations and implementing decisions.

These measures are the result of an arduous balancing act. In our book – Balancing Pressures: The Politics of Governing the European Economy – we argue that the government of the European economy requires politicians to undertake the demanding task of managing pressures from the economy, national politics, and supranational politics. Our argument draws from the rich tapestry of theories in international relations, comparative politics, and political economy. And our empirical examination covers the entire policy cycle, from the ideational foundations of the policy to the compliance with executive measures, spanning the period from 1994 to 2019.

Economic pressures: economic theories, uncertainties, and economic dynamics

The economic policy of the European Union (EU) primarily deals with multilateral preventive surveillance and correction of excessive deficits. The former operates mainly through the issuance of country-specific recommendations, the latter via the excessive deficit procedure. The ideational origin of this policy comes from standard applications of macroeconomic theories to the creation of a monetary union. These theories alerted policymakers to the problems associated with such policy initiatives and pressured policymakers to act.

However, economic theories, no matter how robustly corroborated, are simplified pictures of the world. They offer an incomplete understanding of how the economy operates. For instance, no matter how sophisticated they are, they shed no much light on the specific determination of the reference values concerning public finances as set out in the Treaty of Maastricht. These are the results of political compromises that fall outside of economic evaluations.

Additionally, this limited knowledge implies that policymakers operate under significant uncertainty over the trajectory of the economic indicators that this policy aims to oversee, such as those related to national public finances. Such uncertainties and the necessary arbitrariness of these rules shape the positions politicians take during negotiations and implementation. For instance, they caution finance ministers in the Council of the EU against excessive reliance on supranational bureaucrats in policy implementation.

Finally, actual economic conditions affect both negotiations and implementation. For instance, the euro area crisis led national governments to shift their positions towards tighter national constraints. Finance ministers in the Council have intervened more actively in the design of recommendations when addressed to countries in severe economic conditions, and the governments of these latter countries have been more inclined to implement such recommended measures. More obviously, economic dynamics also led to revenue, spending, and open-economy shocks that greatly affected public finances.

National pressures: winning office and adopting policies

Incumbent politicians want to remain in power. To do so, they need to pursue policies that benefit their constituencies. These pressures to win office and pursue policies systematically influence negotiating positions, implementation patterns, and outcomes. The implications are numerous. For instance, the positions governments take during policy reforms are shaped by their economic left–right and pro-European orientations, the level of Euroscepticism among the domestic public, and the degree of politicization of the negotiations. In implementation, governments that display more pro-European inclinations are associated with shorter corrective oversight, while the proximity to elections induces governments to delay the implementation of unpopular measures and to run looser fiscal policies.

Supranational pressures: euro area membership, compliance and negotiations

The supranational pressures facing politicians are associated with membership in the euro area, the expected and actual patterns of compliance, and the context of the negotiations. First, euro area countries are more likely to confront common pressures and, therefore, they tend to share common positions during the negotiations over policy design and common incentives to comply with executive decisions.

Second, compliance looms large over policymaking since it lends credibility to a policy. Noncompliance engenders costs for individual governments and, if pervasive, it undermines the whole policy. The risk of noncompliance, therefore, shapes bargaining positions during the negotiations over policy reforms, and past noncompliance affects both the timing and the direction of reforms. In implementation, the past compliance record features prominently when Council ministers issue a recommendation or open a corrective procedure against a given country. And governments are more likely to adopt a recommended measure if the cost of noncompliance increases. Finally, perhaps unexpectedly, we show that supranational oversight of national budgetary policies indeed engenders fiscal discipline.

The third type of supranational pressure originates from the bargaining dynamic operating at the EU level. Legal provisions and executive measures, such as issuing a recommendation or opening a corrective procedure, result from a bargaining process where preferences, procedures, decision-making rules, threats of exclusion and veto, and linkages across issues play key roles. For instance, factors, such as the divisiveness within the Council, the position of the so-called Council pivotal minister whose support is necessary to adopt a measure, and the position of the Commission, are associated with the nature of the recommendations, the probability of opening a corrective procedure and the duration of the procedure. Supranational roles, such as holding the Council presidency, and a country’s voting power within the Council also shape governments’ negotiating positions.

Effectiveness, fairness, and responsiveness

And finally, is the economic policy of the European Union effective? Is it fair and responsive? In terms of effectiveness, the record is mixed. The long-term trajectories of fiscal sustainability, current account balance, and (EU-wide) economic growth over the past three decades appear reasonably reassuring, but this dynamics hides large cross-country differences that, rather worryingly, characterize mainly the euro area. The hope is that the latest reform, the European Parliament and the Council adopted in the spring of 2024, which explicitly acknowledges this situation, will succeed in reducing such disparities.

Reassuringly, we cannot find glaring indications of unfairness. There is no doubt that the design of this policy is the result of hard bargaining, where countries’ power matters, but there is no evidence of unfairness at the implementation stage. Governments are subject to similar decisions if facing similar circumstances. Actually, larger economies have become, over time, more compliant with the recommendations. They have been subject to more oversight, and they consolidated to a greater extent than smaller economies. In other words, concerns about negative externalities, which are more severe in the case of larger countries, have trumped the influence of raw economic power.

Lastly, we find evidence that policymakers at the EU level are not insensitive to changes in public opinion and governmental positions. Representatives do not ignore their voters and act on their inclinations, whether that entails tabling negotiating positions, adopting executive measures, or complying with recommendations and decisions.

In a nutshell, our research indicates that the European Union is indeed, as many scholars have long argued, a dynamic and adapting political system where outputs, social demands, and decisions interact on an ongoing basis.