The governance of domestic fiscal stability in the Eurozone prior to the financial crises (2000-2007): What lessons for implementation of the TSCG?

Abstract

After its first thorough revision in 2005, the Stability & Growth Pact (SGP) has recently been transformed into a Fiscal Stability Treaty, which in all likelihood will become operational as from January 1, 2013. Part of this treaty is the incorporation of balanced budget rules into domestic constitutions and into national budgeting processes. These rules concern general government public finances and not only central government budgets. This paper discusses the effectiveness of such domestic rules for general government, by looking at the political capacity of EMU member states to domestically implement EMU fiscal rules in the period 2000-2007 (i.e. before the emergence of the financial crises). Compliance with the EMU rules varied considerably between the –then- euro-12. The paper shows that institutional arrangements to enhance fiscal discipline within central government had almost fully converged between eurozone members and cannot explain these compliance differences. Regarding non-central government sectors it is shown that countries with low compliance either used imposed (rather than agreed) internal stability pacts or did not have such pacts at all. Compliance problems are subsequently explained by looking at the political capacity of countries to deliberate the EMU stability paradigm with all actors involved. Four countries are looked at in particular: Ireland, Finland, Germany and the Netherlands. Based on this case analysis it is argued that central governments that had a high level of ideological dispersion and competition (dispersed governments) were better in such deliberation than single-party or stable coalition central governments (non-dispersed or concentrated governments). Political backlash on the EMU stability paradigm can be expected to be more prominent in the latter case; the emergence of a modified EMU paradigm (and the resulting modification of the SGP) is mainly the result of political backlash on the original paradigm in these states. Finally, some lessons are drawn for the implementation of the new Fiscal Stability Treaty