MPIfG Working Paper
03/12, November 2003
Dog that Would Never Bite? The Past and Future
of the Stability and Growth Pact 
Max Planck Institute for the Study of Societies,
and Amy Verdun, University of Victoria, Canada
This paper analyses the
underlying reasons for the creation of the Stability and Growth Pact (SGP) and
its subsequent development in recent years. The paper examines the economic and
political factors behind it, including the role of economic ideas, experts,
politicians, institutional arrangements in the Maastricht Treaty, domestic
politics, and the exceptional position of Germany in the realm of monetary
integration in the EU. It concludes that a set of commonly held beliefs together
with a corresponding power-political constellation explain the creation of the
Das Papier analysiert die grundlegenden Bedingungen
für das Zustandekommen des Stabilitäts- und Wachstumspakts (SGP) und seiner
Entwicklung in den Folgejahren. Es werden ökonomische und politische Faktoren
untersucht, insbesondere die Rolle wirtschaftspolitischer Vorstellungen und den
Einfluss von Experten, Politikern, institutioneller Regelungen im Maastricht
Vertrag, innenpolitischer Vorgänge und die Sonderstellung Deutschlands im
Bereich der Europäischen Währungsunion. Die gemeinschaftlichen
wirtschaftspolitischen Vorstellungen werden als notwendige Bedingung für die
Schaffung des Paktes aufgefasst, und ihr Zusammentreffen mit einer
entsprechenden machtpolitischen Spielkonstellation wird als dessen hinreichende
In 1997 the European Council adopted the Stability and
Growth Pact (SGP) which was inspired by a 1995 memorandum written by the then
German Finance Minister Theo Waigel. The SGP institutionalises the deficit limit
of three per cent of Gross Domestic Product (GDP) laid down in the Treaty on
European Union (TEU) for Member States of the European Union (EU) that
participate in Economic and Monetary Union (EMU). It regulates procedures of
budgetary surveillance and the imposition of financial fines for unauthorised
breeches of the deficit limit. At the time, it was hoped that these sanctions
would effectively serve as a deterrent that was never to be used. Yet in the
second half of 2002, the excessive deficit procedure (EDP) was initiated in the
cases of Portugal, Germany, and France (and it is possible that Italy might be
next). Formally, when the Council decides that an excessive deficit exists, the
country concerned is obliged to reduce its deficit below three per cent of GDP
according to the recommendations of the Council or face sanctions at the end of
a drawn-out procedure.  These ultimate sanctions are serious. They first take the
form of a non-interest-bearing deposit with the Commission of 0.2% of GDP plus a
variable component linked to the size of the deficit. Subsequently, the deposit
is converted into a fine if the excessive deficit has not been corrected after
two years. In other words, the once thought "paper deterrent" (or perhaps a
dozing dog) turned out to be a real factor to deal with, especially as core
European countries find themselves in an economic crisis.
What are the underlying reasons for the creation of the
SGP and what is its immediate purpose? We distinguish between economic and
political reasons. The economic reasons include that the fiscal provisions in
the Maastricht Treaty for maintaining budgetary discipline were not clearly
spelt out and it was felt that additional rules were needed. The political
reasons behind the emergence of the SGP can be traced back to the domestic
circumstances of the Waigel memorandum, based on the perceived need to secure,
in a visible way, a Germanic conception of "stability culture" for the future
EMU as well as to the need to find a political compromise on how to run EMU once
stage III had begun.
The actual purpose of the SGP was to strengthen the fiscal regime of EMU. It
would not only make the existing rules and exemptions more rigorous, concrete,
coherent and credible, but it would also reduce some ambiguities in the Treaty,
such as the originally very imprecise provisions on sanctions. It is noteworthy
that the eventual SGP adopted in 1997 differed considerably from what Waigel had
called for. The SGP demands a balanced budget or even a surplus over the medium
term, whereas the original proposal only suggested a medium term deficit of one
per cent of GDP. In addition, Waigel's proposed automatic sanctions were
replaced by a politicised process.
The SGP has recently received considerable criticism and
will likely remain controversial as it is being applied. In light of that, this
paper poses a number of questions: (1) Why was the SGP created? (2) What purpose
was it supposed to serve? (3) What underlying conditions supported its creation?
(4) Have they changed since? (5) What can be expected to be its future?
The relevant literature on the SGP is dominated by
economists. Few authors discuss the origins of the SGP or the politics of its
creation, which is what we find particularly interesting and intriguing. This
paper seeks to understand and provide an analysis of the outcome of the SGP
negotiations. We argue that the SGP was possible due to a convergence in basic
ideas about the relationship between monetary and fiscal policies held by the
monetary experts in Ministries of Finance, central banks, the Commission and
others in academia and prominent international organisations. Yet there was no
consensus on a specific agreement (if at all). Taking this into account, we seek
to explain the process that led to the convergence that ultimately provided the
basis for the compromise that was found during the Dublin summit in December
1996. Thus, the consensus among experts on principles was a necessary though not
sufficient condition for a political agreement on the SGP. We offer various
power political reasons (e.g. the role of the Bundesbank and Germany as a
prominent Member State) that need to be considered in order to explain the
The paper is structured as follows. The first section
examines why the SGP might be necessary, taking insights from both economics and
politics. The second section describes the actual story of the creation of the
SGP. The two subsequent sections offer the core analysis based on an
actor-centred institutionalist approach. The third section examines the broader
framework in which the SGP was created. Under the heading of "actor orientations"
it focuses on the role of ideas, experts and the anticipated shift in broad
political leaning of Member States governments (from right to left). Section
four provides an analysis of the actor constellation. The fifth section draws
some lessons from the past for the current situation. The final section
2Why Might an SGP be Necessary?
– Lessons from Economics and Politics
2.1 The Economics of the SGP
The Maastricht Treaty has provided the monetary
constitution for EMU. However, its specifications for the future fiscal regime
are incomplete and ambivalent.  It only contains rather loose stipulations on the
excessive deficit procedure (EDP), (TEC Article 104 ex 104c) and budgetary
coordination (TEC Article 99-/103 ex 103). From the viewpoint of economics,
several arguments speak in favour of complementing the fiscal arrangements of
the Treaty (for a detailed discussion see Heipertz 2003). The most prominent
reasons behind more stringent rules are (1) a need for consolidation (2)
concerns about externalities, (3) the credibility of ECB independence and (4)
the need for a more coherent framework of economic policy coordination.
The first difficulty is a general need for
consolidation, resulting from the expansionary stance of fiscal policy in
most of the OECD countries since the "golden age" of Keynesianism and
welfare-state expansion. Soaring interest rates, which were the result of high
inflation rates of the time, reduced investment and contributed to weak growth
and underemployment. Governments found themselves redirecting an increasing
portion of their revenue into debt servicing. Furthermore, ageing populations in
Europe imply that maintaining generous welfare states will be increasingly
expensive and will require a fundamental reallocation of public spending.
Second, there are externality problems related to
EMU specifically.  The most prominent concern was that Member States would
increasingly destabilise each other involuntarily through negative financial
spill-overs of their fiscal policies.  A bond-financed increase in government
spending would cause the money supply in the Eurozone to rise, thereby fuelling
inflationary pressures. In response, the ECB would be forced to increase the
interest rate, depressing investment and consumption. Furthermore, the higher
interest rate would cause the common currency to appreciate and the trade
balance to deteriorate. Another externality effect results from the fact that
participating in a monetary union implies having abandoned national exchange
rates. Thus, the absence of individual national exchange rates entails that the
disciplinary effect affects the whole currency zone, thereby reducing the impact
on the individual "sinner" while increasing it for the others. This effect
should aggravate an already existing deficit bias of public finance (Beetsma
1999). Member States were feared to free-ride on each other in the sense of
under-providing consolidation and overspending on their budgets.  Thus strict
rules on budgetary deficits were deemed necessary. It is noteworthy that the
need for limits on budgets had already been mentioned in the original EMU
blueprint laid out in the "Delors Report" (Committee for the Study of Economic
and Monetary Union 1989). Further justification for limits on budgetary deficits
were spelt-out by the Commission (Commission of the European Communities 1990,
A third concern is that excessive deficits could undermine central bank
independence. In other words, actors at the time were worried that ECB
independence and specifically the "no bail-out" clause  of the Treaty (TEC
Article 101 ex 104 and 103 ex 104c) would be politically endangered by
unsustainable fiscal paths of certain Member States. Sargent and Wallace's model
of debt monetisation (Sargent/Wallace 1981) supports this view. Their study
shows that an unsustainable fiscal path eventually forces the central bank to
buy government bonds. More recently, the Fiscal Theory of the Price Level (FTPL)
argues in a similar direction (Woodford 1994; Leeper 1991). Grossly simplified,
the FTPL states that inflation control by the central bank through the interest
rate is jeopardised by an excessive fiscal stance that disturbs household
expectations and unsettles private sector budget constraints. Public demand
substitutes private demand and artificially expands aggregate demand, eventually
causing the price level to rise. Monetary independence, in particular its
effectiveness and its credibility, needs to be supported through the fiscal
regime in addition to the monetary constitution. 
Fourth, in a monetary union the role of economic policy
changes and coordination becomes pertinent (Begg 2002). The aim of
coordination should be to attain an appropriate policy-mix between monetary and
fiscal policy that is required to obtain an efficient use of these policies. The
fact that the "one-size-fits-all" monetary policy of the ECB is necessarily
destabilising for countries with an inflation rate significantly off the
Eurozone average has increased the need for strategic and coordinated fiscal
counteraction, potentially even going beyond the automatic stabilisers. This
does not always require fiscal retrenchment, especially when there is a danger
of deflation. The coordination issue grows in importance with the likelihood of
asymmetric shocks and increasing divergence between the Eurozone economies.
Currently, a secular growth-shortfall due to structural rigidities is amplified
by a cyclical recession. A strict interpretation of the pact would require a
contraction to attain the extremely serious magnitude of two per cent (with
discretion applying down to 0.75 per cent) until fiscal counteraction would be
authorised.  Until then, governments that have manoeuvred themselves close to
three per cent would have to implement pro-cyclical policies of cutting (investment)
expenditures and increasing (tax) revenues. Many economists have interpreted the
SGP in this way and strongly criticised it for not enabling but – even hindering
– countercyclical moves in these cases (Eichengreen 1996; Eichengreen/Wyplosz
1998). The importance and usefulness of stabilisation policy and even
discretionary measures beyond automatic stabilisation is debatable. Instead of
providing the framework for a coordinated and strategic response to the cyclical
component of Europe's weakness, the SGP is seen to stand for rudimentary and
improvised coordination, only asking Member States to "keep their house in
order" (Issing 2002).
However, this critical view of the SGP underestimates the
degree of flexibility that is built into the legal texts. The pact can be
applied "intelligently" in the sense of allowing the limit to be surpassed for a
number of years without losing credibility. This requires both a co-operative
attitude of the governments concerned and a radical improvement in the
communication of the budgetary situation and medium-term aims. Furthermore, it
is perhaps an unfair criticism to state that the pact is an inferior regime of
policy coordination. After all, the legal documents of 1997 could not transcend
but had to be based on the Treaty, which did not contain any more far-reaching
institutional solution on this issue.
2.2 The Politics of the SGP
The Maastricht Treaty is an incomplete contract as far as
rules on EMU are concerned. The convergence criteria only dealt with the run-up
to EMU; however, there were no rules or arrangements in place for stage III,
except the stipulations of Articles 99 and 104 (ex 103 and 104c; see footnote 3
above). Theoretically there were two options. The first would be the status
quo, relying essentially on voluntary arrangements. The Member States would
all agree to continue to meet the convergence criteria even after EMU had
started. The second option was to impose explicit rules that would elaborate on,
and even go beyond, the Treaty stipulations. This issue was left open precisely
because it was highly contentious and exposed fundamentally different views on
economic policy.  Voluntary arrangements had been the implicit road that was
chosen in the Maastricht Treaty. However, particularly the Germans and the Dutch
favoured a more explicit, rule-based system. The aim was to restrict budgetary
deficits once EMU was fully operational. The fear was that without rules, it
would be very attractive to spend more than the agreed norm, which would lead to
the free-riding problem discussed above. This concern became especially relevant
with respect to a number of (Mediterranean) countries that were making strenuous
efforts to be part of the first wave – against all odds at the outset.  So, the
larger the future membership to EMU was appearing to become and the less likely
a postponement, the more urgent the need for Germany to reinforce at least the
deficit criterion. This situation has been described as an "endgame" for the
transition towards stage III (Crowley 2002).
We find that a central part of the political background of
the pact can be traced back to German domestic politics. The Stability Pact was
a way to comfort public opinion by appeasing the Bundesbank in particular. There
is no doubt that the German public needed reassurance on EMU.  The population had
become extremely anxious about giving up the well-proven Deutschmark (Risse-Kappen
et al. 1999) and replacing it with a new currency that had not proven itself and
would not only include traditionally weak economies, but also lack a tradition
of stability culture.  Politically, there was a risk that the opposition and even
Waigel's own party in Bavaria under Prime Minister Edmund Stoiber would
capitalise on this sentiment and run on an anti-EMU platform (e.g. Frankfurter
Allgemeine Zeitung: 04.11.1995. Note that at this point in time both men were
contenders for party leadership). Besides the general public, the German
monetary authorities did not trust their counterparts in other Member States.
Another factor of mistrust was that the conservative political parties, still in
power in most EU Member States in the mid 1990s, were concerned that once social
democratic parties could come to power they would start pursuing a "tax-and-spend"
policy. Therefore, they were eager to perpetuate their economic views into the
politically indeterminate future. Hence, at the source of the motivation to
propose the SGP, we see a layered prevalence of German mistrust towards European
partners, potential political successors and political discretion in general.
The gradual nature of the process of economic and monetary
integration, especially the experience with the European Monetary System (EMS),
was also important. Cooperation in the context of the EMS implied that most
monetary authorities had contributed to factual convergence in monetary policy
resulting in de facto fixing of exchange rates. What had been happening over the
1980s was a "shadowing" of Bundesbank policies. The resulting convergence
implied that monetary authorities had learnt lessons about economic and monetary
governance. Yet some feared that national governments would become more "relaxed"
once EMU would be fully operational and return to old practices. The fear was
that, without the disciplining factor of exchange rate fluctuations, governments
would move to more expansionary policies, for example tolerate undue wage
increases as well as expand public debt and implicitly destroy the (anti-inflationary)
discipline that had been built up in many countries throughout the 1980s and
Finally, some authors have stressed the fact that EMU was
created with too much emphasis on credibility but much less so on legitimacy
issues (Hodson/Maher 2001; Scharpf 2003; Verdun/Christiansen 2000). The argument
is that EMU was created with a strong monetary authority but with no proper
provisions in other domains; that is, it was asymmetrical (Verdun 1996, 2000).
The SGP negotiations were also used as a vehicle to create more European
integration in the economic domain. The choice of a rule-based and mechanistic
strategy can be traced back to the fact that Germany was the most dominant
country regarding monetary matters, and thus able to push through its opinion.
On the other hand, the SGP does not address the concerns that the French and
others had, namely that the ECB should be flanked by an economic government
(Verdun 2003). Their initial response to Waigel's proposal was positive
partially due to the opportunity it provided for putting the cart before the
horse. The initially suggested "stability council" seemed to be malleable into
the desired "gouvernement économique." This is precisely why the idea of
such a council was dropped on the other side of the Rhine.
Summarising, between 1995-1997 there were sound economic
and political reasons to create a set of rules that would put limits on budget
deficits. It was clear that Member State governments might be tempted to
"free ride" once EMU was fully operational. Without such rules, it would be very
attractive for countries to temporarily run a higher deficit without having to "pay"
for that. The costs of that type of policy would have to be borne by the other
Eurozone countries. Because it was obvious that some rules were necessary, when
Germany insisted on a pact that would impose rules, it was in a very strong
position to make its case.
There are very few accounts of the pact's genesis and
those that exist are mainly descriptive (see for example Stark 2001; Passalacqua
2000; Konow 2002 and Costello 2001). The idea of some sort of "stability treaty"
was in the air in early 1995, being part of contributions to the public debate
 in Germany as well as featuring in informal discussions of experts and
policymakers at the national and European levels. With the beginning of stage II
of EMU (in 1994-95) members of the Monetary Committee started discussing the
idea of more stability oriented rules as the Treaty had stipulated the need for
further legislation (interviews with Members of the Monetary Committee, June and
July 2003). Officials in the German Ministry of Finance were also discussing
this topic among themselves during 1994-95. The Bundesbank, in particular,
liked the idea of further legislation because it went some way towards
addressing its concerns about a lack of stability-orientation in EMU. However,
at no point before November 1995 did any of these informal discussions lead to a
formal proposal on stability oriented rules. In September 1995 Waigel had been
talking to his colleagues informally about his desire to formalise the rules on
budgetary policy in EMU [(Milesi 1998), 95-6 (Stark 2001), 89, and interviews
with Ministry of Finance officials, June 2003]. Waigel made his move at a time
when public opinion was turning very negative on EMU. Pre-empting the opposition,
Waigel announced his proposal for a "Stability Pact"  to the public and his
European partners in November 1995 (Bundesministerium der Finanzen 1995) in the
second reading on the 1996 budget (Waigel 1995b; Waigel 1995a), reacting to
opposition demands for stricter rules that would guarantee the stability of EMU
(Scharping 1995). Waigel was under pressure to gain the lead in this debate that
was becoming politically uncomfortable for the Kohl government. The fear was
that the eurosceptic public opinion could become politicised and, thus, further
mobilised by the opposition. Waigel's behaviour might be seen as an attempt to
pre-empt such a polarisation of the debate on Europe. Therefore, he commissioned
an official in the Ministry at very short notice to write up the ideas on a
Stability Pact that had been discussed for months in order for them to be
circulated among his European colleagues. A second draft, which was completed
within three weeks, further explained the proposal to Waigel's colleagues who,
at first, received it favourably
After the Danish "no" and the French petit oui in
the referenda on the Maastricht Treaty in 1992, there was no question of what
was referred to as "opening Pandora's box" (renegotiating the Treaty). Yet, an
intergovernmental agreement, as originally envisaged by Waigel and his state
secretary, Jürgen Stark, was unacceptable to the other countries. At the same
time, the Commission also realised the dangers of an intergovernmental solution
in the form of a new treaty à la Schengen that would imply its
marginalisation. The Council was prompted to propose a solution within the
Community framework, which was prepared under Commissioner Yves-Thibault de
Silguy and released in October 1996 [COM (1996) 496]. The proposal turned out to
be much closer to the Maastricht Treaty than to the Waigel paper. Crucially, it
did not include automatic fines under the supervision of an independent "Stability
Council," but reduced the sanctions to a discretionary measure of the Ecofin
Council, which evidently comes close to asking turkeys to vote for Christmas (Begg
2003). On the other hand, the Commission proposal also elaborated on the "surveillance
arm" of the pact, more or less designing the SGP as the rudimentary device for
economic policy coordination that we know today.
The Stability Pact dossier went through the various EU
committees and institutions. It was discussed in the Monetary Committee (MC),
the Ecofin Council, the European Council (both prepared by the Committee of
Permanent Representatives, COREPER) and at Franco-German summits, meetings and
workshops. The bulk of work was completed in the MC. Only very few open issues
had to be referred to the ministerial level of Ecofin. The major controversy was
that Germany's partners agreed on the principle of mutual surveillance and
reinforced dissuasion of excessive deficits but not on automatic sanctions. The
focal point of dissent became the clause that was going to stipulate the
exemptions from sanctions, since the lever for political discretion laid here.
Waigel was completely isolated in requiring nothing less than a GDP contraction
of two per cent or worse as a qualification for an exemption. The compromise
reached in the morning hours of the Dublin summit in December 1996 stipulates
that a recession of less than 0.75 per cent "as a rule" does not qualify as
exceptional, whereas a recession of over two per cent automatically does. If the
recession is in between these two figures, it lies with the Ecofin Council to
determine whether or not the recession is exceptional. The result is a rule that
can be overturned by an Ecofin blocking minority of at least 26 out of 87
weighted votes or covering at least six member states [TEC Articles 104 VI (ex-Article
104 C VI) and 205 II (ex-Article 148 II] that refuse to label a budgetary
deficit of over three per cent as excessive, depending on the economic situation
of the country involved. A voting alliance against the SGP is, therefore, a
concrete and not unlikely possibility.
Nevertheless, the SGP has delivered some legal "added
value." Among other things, it has shortened the timeline of the sanctions
mechanism, defined the distribution of the fines (among the "virtuous" member
states), clarified the notion of "exceptional" and "temporary" deficits as
exemptions from sanctions, introduced an urgency procedure, enabled the
suspension of the EDP and, finally, improved the justiciability of the
procedural steps involved. Yet, due to the politicised nature of the EDP, the
fundamental essence of the pact is not a mechanism of "quasi-automatic sanctions,"
but the institutionalisation of a political pledge to aim for low
deficits. In that way the SGP can be seen as an act of "symbolic politics" (Sarcinelli
1987). As a face-saving device for the French, it was renamed "Stability and
Growth Pact," since rising unemployment was increasingly becoming the stumbling
stone for the Juppé government. In the official rhetoric, sound public finances
are not an alternative to growth, but a facilitator of the overall aim of higher
growth and more jobs (European Council 1996).
the Birth of the Stability and Growth Pact
In order to analyse the genesis of the pact, we combine
two explanatory variables. First, we see a fundamental role for specific ideas
about economic policy in EMU that were held by experts and that came to underlie
the regime created. Second, we believe that only a combination of those ideas
and a supporting power-political constellation enabled the actual outcome. To
show this, we discuss the interaction between the realm of experts and the realm
of politicians. These categories are used to differentiate between the two
variables. Within the political sphere, we locate specific national preference
points. These aggregate positions of countries are ultimately composed of the
preferences of individual actors. Therefore, we lower the level of analysis as
far as necessary to arrive at a satisfactory explanation. Additionally, we
discuss the special dynamics of the Franco-German interaction at the core of the
negotiation. Our analysis should explain how and why positions merged, starting
from very different preference points to form a consensus.
We choose an actor-centred, institutionalist perspective.
First, we focus on how ideas came to shape the preferences of actors and,
second, on how their constellation and interaction produced the outcome. The
analytical approach most suited for this endeavour proved to be actor-centred
institutionalism. According to Scharpf (1997), "actors" are defined as
individual or corporate strategic agents (mostly administrative bodies such as
ministries) which are capable of intentional action. They are also internally
organised along hierarchical lines, and are characterised by preference
orientations as well as action resources. Furthermore, they are embedded in an
institutional context, which we use as explanatory shorthand for structural
factors and external influences on the actors themselves, such as the
influential role of financial markets at certain stages in the negotiation
process. We define the executive agents of the negotiating ministries, of the
Commission and of central banks as "experts." They are in contact with non-actor
experts, such as academics, journalists and institutions like the OECD or the
IMF, who shape ideas but not decisions. On the highest levels of deliberations,
we introduce non-expert actors, holding the final and democratically legitimated
decision-making competence – "politicians." The hypothesis is that the
orientations of experts are defined by specific converging "ideas" about
economic policy, influenced indirectly by non-actor experts. Furthermore, the
orientations of politicians are crucially influenced by experts, even if their "ideas"
were initially different. We provide a graph that shows how experts (actors as
well as non-actors) and ideas came to shape politics, thereby converging on the
compromise that enabled the conclusion of the Stability and Growth Pact.
4.1 Actor Orientations
Let us first turn to the broader ideational factors that
help explain why EMU happened. The creation of EMU was the result of policy
learning, convergence in policies but also in ideas about monetary policy-making.
When EMU was first conceived in the late 1960s and early 1970s, the six Member
States were still split on a number of issues. This split was originally
referred to as the difference of opinion of the "economists" versus the "monetarists"
– or to use contemporary language the "coronation" versus "locomotive view" of
economic and monetary union (for a discussion see (Kruse 1980; Tsoukalis 1977;
Dyson/Featherstone 1999). The monetary authorities of the six Member States were
split on how to create EMU (i.e. whether to converge policies first or to move
to further monetary integration and hope that convergence would result). They
were also divided on its main focus (policy objectives) and on the institutional
design of EMU (some wanted immediate transfer of sovereignty to a supranational
institution, whereas others were more cautious). The 1970 EMU plan (also known
as the Werner Plan) came at a time when governments were frequently pursuing
Keynesian policies during down-turns (Committee on the Realization by Stages of
Economic and Monetary Union in the Community 1970).
Though the actual institutional design of EMU as envisaged
by the Delors Committee in 1989 did not differ too much from its 1970 design, a
number of important developments occurred in the years between the two plans.
First, economic and monetary integration had achieved a next level of
integration in both the area of economic and monetary policy-making projects:
The process of completing the internal market was underway, financial markets
had become further integrated and the European Monetary System had been working
for a decade.  Second, as was mentioned above, policy learning had taken place.
Monetary authorities in the Member States had realised that monetary policies
were only successful if they were in line with that of the dominant Member
State, namely Germany. The Deutschmark played the role of anchor currency.
France learnt this lesson in March 1983 when Mitterrand chose to stay in the EMS
and refocus its policies towards that objective. Italy converged in the second
half of the 1980s and was one of the last to keep exchange rates stable and
maintain the lira in the EMS. The EMS witnessed many devaluations between
1979-1983 but much fewer between 1983-1987. After the Basle/Nyborg meetings in
1987 until the EMS crises of 1992/1993, there were no realignments. Third, the
ideas regarding monetary policy-making had changed (see inter alia
McNamara 1998 and Marcussen 2000). Whereas in the 1960s and 1970s Keynesian
principles lay still at the heart of national government economic policies, by
the late 1980s monetarist policies dominated. In the late 1970s and the early
1980s the United States, the United Kingdom and Germany were at the forefront of
this change, which by the late 1980s had taken place in all West European Member
States. The change in belief was that there was no long-term trade-off between
inflation and unemployment and that sound money was important for growth. Hence,
policy-makers started putting more emphasis on the need to keep inflation low to
create an economic climate of low interest rates in which economic growth would
be more likely.
In their effort to proceed with monetary integration, the
governments of Member States were aided by a so-called "epistemic community."
Members of central banks, ministries of finance and academics held similar views
about the main aim of economic and monetary policy-making. There were a few
important venues where experts shared ideas and socialisation occurred. This
took place above all in the Monetary Committee (MC) – now called the Economic
and Financial Committee (EFC) – which consists of representatives of central
banks and Ministries of Finance of the EU Member States (Verdun, Amy 2000), as
well as in other influential EC committees (see Rosenthal 1975 and Kruse 1980)
and international fora. The MC convenes in the "comitology" form of an advisory
committee set up according to Article 114 (ex-Article 109 C) TEC. The members of
the MC meet Haas’ four principles that define the existence of an epistemic
community. First, they shared beliefs for a value-based rationale of social
action. Second, they shared causal beliefs, which are derived from their
analyses of problems which then serve as the basis for understanding the
linkages between policy actions and desired outcomes. Third, they have shared
notions of validity – that is intersubjective understandings that help them
weigh ideas within their area of competence. Fourth, they have a common policy
enterprise and common practices associated with a set of problems to which
competence is directed (Haas 1992: 3). It is no surprise that the Member States
Heads of States or Governments relied on the MC for proposals and suggestions
for action. The literature on epistemic communities indeed suggests that a group
of experts is often called upon when national governments are unable to come up
with a proposal for intergovernmental collaboration. The MC (now the EFC) is an
ideal group to ask for advice as its members can wear double hats: They can act
as independent experts, yet they are fully aware of the political issues at
Common ideas on the purpose of economic and monetary
policies in the 1980s were crucial for the creation of EMU in the 1990s. It can
be seen as a paradigm shift. It was accepted by parties of the political left
and the political right, as well as by major domestic actors. Nevertheless, an
important political change did occur in the 1990s that could possibly have
challenged this new economic and monetary paradigm. Whereas in the late 1980s
many governments in power were of the centre-right, by 1997 this had changed. At
this time, West European governments were typically composed of parties
belonging to the political left. Some observers were concerned that this shift
in political leaning might undermine the paradigm on the basis of which EMU was
created. Yet, it is noteworthy that the period between 1997-2002 did not see any
major changes to the institutional design of EMU. Nevertheless, it is possible
that these left-of-centre parties in government will be less positive to the SGP
principles as they restrict governments’ use of budgetary deficits (traditionally
associated with left-of-centre governments). However, what we argue here is that
the shift in paradigm from monetary to Keynesian policies in the 1980s was so
profound that it stretches beyond the usual day-to-day politics of left versus
right. Indeed it is noteworthy that the parties of the political left witnessed
a major identity crisis throughout the 1990s. The political left that came to
power in the late 1990s had reformed itself and no longer subscribed to the
traditional principles of many years ago (such as re-nationalisation or heavy
tax-and-spend policies). In fact, it had adopted a number of principles that
traditionally were considered typical for the political right (such as a focus
on market principles and limiting the role of the state). Some argue that the
British Labour Party is the epitome of this transformation in politics and
jokingly say that Tony Blair completed what Margaret Thatcher had started.
What mattered at the time was that conservative
governments in power were concerned with their potential left-wing successors
not respecting the monetary and budgetary regime that was being created. However,
we note today that this fear was partly unfounded. In the current situation, we
find results that oppose the conventional wisdom. We see left-of-centre
governments willing to restructure and aim at sound monetary and fiscal policies.
At the same time, the fear that support for strict rules could decline was
indeed justified because we find both some left-of-centre and some
right-of-centre governments who are less inclined to take the SGP seriously, at
least rhetorically. For example, the current French government under Jean Pierre
Raffarin and the Silvio Berlusconi government in Italy seem not to be willing to
comply with the strict reading of the SGP. Thus, these initial findings
challenge the established view that left-wing governments spend, and right wing
governments aim for balanced budgets.
Another change that occurred in the 1990s was economic
growth performance. In the first half of the 1990s growth was sluggish. This was
also the reason why the convergence criteria were not easily met. Some countries
that wanted to be absolutely sure they would be allowed to join EMU (such as
Italy, Spain and Portugal) focused on reforms that they hoped would lead to a
reduction of the budgetary deficit and public debt. Others such as France and
Germany had initially been in a better situation but saw their record
deteriorate over time. All of them found ways to reduce the budget and the
public debt, and were criticised for not playing by the rules (or for engaging
in "creative accounting"). The exclusion from EMU at the outset was such an
effective sanction that most governments – including those of less likely
participants of EMU such as Italy and Spain – were willing and able to proceed
with radical reforms, thereby accepting the straightjacket of the convergence
It was crucial that the actors had learnt certain lessons
and shared certain commonly held beliefs. But those ideas alone were
insufficient to produce the concrete SGP. Having described the changing
orientation of actors, we now turn to the strategic pattern of their interaction,
leading to the conclusion of the Stability Growth Pact.
4.2 Actor Constellation
The figure below presents an overview of the most
important actors, grouped according to their resources and initial orientations
when Waigel issued his proposal in November 1995 as well as the subsequent
convergence. The horizontal axis depicts their politico-ideologically shaped
preferences for or against strict rules for fiscal discipline, whereas the
vertical dimension shows their power resources and decision-making capabilities.
We distinguish between a "political" and an "expert" sphere. Political
decision-makers can of course have considerable relevant expertise, but our
distinction highlights the fact that politicians – not experts – settle the most
controversial issues. The stylised process is that the whole negotiation dossier
is split up into a set of issues (timeline, exemptions from sanctions,
distribution of fines etc.) that are discussed at the expert level. Experts
receive their instructions from politicians but are free to reach agreement
within these bounds. Politicians will, in most cases, simply tick off the
agreements reached among the experts. Only issues on which there is no consensus
move up for discussion at the political level. Here, experts can influence
politicians since they possess intimate knowledge of the relevant issue as well
as detailed information on the bargaining positions of the other players. They
can indicate potential solutions and possibly prevent the discussion from being
deadlocked. We will now briefly discuss each actor in turn.
Initial preferences and subsequent convergence
Actors at the level with the highest resource capabilities
are Member State governments. Their decisive position in the deliberation
process corresponds to the concept of "power politics" (Garret 1994). Agreement
among them leads to decisions that are the basis for laws. The nonetheless
important role of other actors is only indirect via the influence they have on
the orientation of the governmental actors. The actual players in the
form of state actors are either Ministers in the Ecofin Council, Heads of State,
or Governments in the European Council. The preference points on this level
initially cover the entire range between pro and contra Waigel’s proposal –
obviously Germany being on the right end, closely followed by the Netherlands,
whereas France and other Mediterranean states initially found themselves on the
other side.  The German Bundesbank (BBK) figures as a special player with the
resources of an informal veto. We will later discuss in more detail its
double-role between the spheres of experts and politicians. Of the national
treasuries, we only show the two most important ones, the Ministries of
Germany and France. The German Ministry holds a relatively coherent position,
showed as a narrow preference set. On the French side, we find both support and
opposition. For the sake of simplicity, we assume each country to support either
France or Germany, depending on which lies closer to their preference point. 
Each Ministry and each central bank, plus the Commission, had two
representatives in the Monetary Committee (MC), which was crucial in
preparing the ground for the compromises found in the political sphere.  Its
crucial role is best interpreted by the notion of an "epistemic community" as
was mentioned above. In terms of power resources, it lies below national
ministries and the political level, but its importance relates to the fact that
it was the actual forum where the compromise was found. The Commission
(at the time under President Jacques Santer and Commissioner de Silguy) is
placed low in terms of decision-making power. However, it successfully achieved
a solution within the Treaty framework, preventing an international agreement
à la Schengen. Such an intergovernmental arrangement would have marginalised
the role of European institutions. Another success for the commission was the
inclusion of the surveillance procedure in the SGP. Yet, it had to depart quite
considerably from its initial preference, which was not very much in favour of
stricter rules. The European Parliament, with a rather negative stance
towards a strict pact, was unable to bring substantial influence to bear on the
deliberations; therefore, it is placed on the lowest level. Finally, a set of
experts not affiliated to any actor previously described was able to make
its influence felt through informal and professional contacts, communication and
the gradual shaping of ideas that underpinned the slow process of ideational
convergence: The European Monetary Institute (EMI), precursor to the ECB, and
the central banking community with a close affinity to the Bundesbank position,
should be explicitly mentioned as well as institutions such as the OECD,
academic think-tanks, private-sector researchers, academics etc. The influence
of all their reports, papers, speeches and statements combined was not directly
crucial in the decision-making process but, in our view, fundamentally shaped
the orientations of the political actors and other expert actors with high
levels of resources and access to the political sphere.
Initially, actor preferences are widely dispersed., Once
it had changed its view and supported the design of a pact, the Commission was
entitled to make its preference the base for the deliberations in the MC. Here,
we find a surprisingly rapid convergence tilted more towards the right side of
the preference scale, the "German" end. One reason is that a "permissive
consensus" (Lindberg/Scheingold 1970) pre-existed already in the MC, whose
members had already been in favour of a stability-oriented, rule-based model. In
other words, the particular equilibrium solution was not yet determined, but the
solution space and, hence, the type of arrangement were already visible.
The final result shows that Germany benefited from a
privileged position of asymmetric bargaining power, since it had to make
substantially fewer concessions than the countries from the critical side. This
was the case for a number of reasons. First, Germany gave up the anchor-currency
of the preceding regime, the EMS. Therefore, unlike the other countries, it had
to accept the opportunity cost of losing monetary discretion and was able to ask
for a higher price – a fact all too well known from the Maastricht negotiations
(Dyson/Featherstone 1999). Second, the German position resembles Putnam’s
two-level game-constellation with the Bundesbank as an informal veto player
(Putnam 1988). Due to its reputation and popularity, the Bundesbank was
extremely influential on German public opinion towards EMU. If it were to
publicly oppose the entry into stage III, it would make it extremely costly
politically for the Kohl government to press ahead. From this perspective, the
SGP is also a way to reduce public resentment through appeasing the Bundesbank.
The effect this had on the negotiations is that the German preference set is
narrowed through the informal (declaratory) veto exercised in Frankfurt;
therefore, a solution has to lie closer towards the German preference point.
Third, Germany could – though at a much higher price than at Maastricht –
credibly threaten to exit the process towards monetary union. Fourth, the
second-worst threat-scenario was opposition to the membership of "Club Med"
countries, Italy in particular. It took a whole series of Ecofin meetings and
European summits to implement the MC-outcome in the political sphere. But
eventually, convergence took place, feeding through from lower to higher levels
of resources. For the reasons described, the solution is situated towards the
German preference point. In detail, this means a procedural, legal and
especially political strengthening of the existing provisions that in turn can
be traced back to German / Dutch negotiation positions in Maastricht. The German
side had to give in as well. Most importantly, automatic sanctions had to be
dropped from the agreement in favour of political discretion.
We now turn to the institutional context, to be seen as
part of the structural framework for the previously described constellation.
Three parallel processes were crucial in shaping and facilitating the agreement:
first, the Franco-German "axis"; second, a process of political deliberations in
the European Council parallel to the Ecofin negotiations; and third, pressure
from financial markets.
The Franco-German exchange (institutionalised in the 1963
Elysee-Treaty) is on several levels equivalent to a sub-set of the negotiations
on the European scene. Its most important function is a radical reduction of the
number of negotiators involved, thereby decreasing the transaction costs of any
agreement exponentially increasing the chance of finding a compromise solution.
In our view, these summits are important because France and Germany not only
represent different perspectives on these issues, but also different groups of
countries. As happens in other types of bargaining, it is as if France and
Germany are "delegated" to negotiate a settlement.  The actual solution was often
not reached during Franco-German summits or economic consultations, but the
subsequent meetings on the European scene benefited from the prior exchange of
views and signals.
In addition to the Franco-German deliberation process, the
negotiations of the Ecofin Council were seconded by a parallel political process
of summit meetings in the form of European Councils. Konow (2002) stresses that,
unlike the role of the European Council as defined in the Treaty, the Heads of
State or Governments did not confine to providing merely the initial political
impetus. Instead, they punctuated and guided the negotiations throughout the
process, thereby removing important obstacles to compromise, most notably in the
case of the lower end of the definition of a severe recession that would
constitute an exemption from the imposition of sanctions. The European Council
did not only issue strategic political aims, but rather defined operative
solutions in surprising detail and delegated their attainment and the legal
framing to the Ministers of Finance as well as to the Commission.
Finally, financial markets were influential in forcing the
negotiators to agree on highly contentious issues. The fact that the Deutschmark
rocketed against all other currencies involved whenever a deadlock seemed to
jeopardise the course towards stage III, imposed a substantial cost of failure
on all negotiating partners. This contributed to the omnipresent desire to reach
consensus and made all actors involved rather give in on issues that were
credibly posed as conditiones sine qua non by their counterparts, than
leave the negotiation room with empty hands. To summarise, this section has
tried to explain how ideational convergence, facilitated by asymmetric
bargaining power and the institutional context, enabled a political compromise.
from the Theory and the Past for the Current Situation
Reflecting on the analysis of the history, the politics
and the economics of the SGP, what can we learn about the current crisis? In
recent years the budgetary situation of a number of countries, notably Portugal,
Germany, France and Italy has deteriorated. The first three countries are
experiencing the initial stages of the EDP. Why did these problematic budgetary
situations emerge? These countries failed to pursue policies that would lead to
a low budgetary deficit. Part of the reason can be traced back to low economic
growth. But critics would stress that these countries could and should have
reduced their spending when the going was good. In addition, West European
countries need structural reform but governments have put off the necessary
unpopular measures. Germany is still facing additional difficulties because of
the financing of reunification. Critics of the SGP stress that the Maastricht
convergence criteria and the SGP limit both monetary and fiscal policies,
thereby reducing the scope for government policies too much. They argue that
governments are effectively unable to pursue countercyclical policies to
stimulate the economy in a downturn. Although procyclicality is a negative
side-effect, the SGP gives Member State governments a constraint that justifies
the difficult restructuring of labour markets and social welfare states. Even in
the upswing in the late 1990s, the above-mentioned countries avoided these
structural changes. The reforms would have placed their budgets close to balance
or in surplus. This budgetary room for manoeuvre would have allowed cushioning
the subsequent downturn without having to run excessive deficits.
The reaction to this situation has been diverse. Some
politicians have decided to speak out vocally in favour or against the SGP.
Commission President Romano Prodi famously called the pact "stupid" (Le Monde:
18.10.2002). In contrast, and not surprisingly, ECB President Willem Duisenberg
keeps defending the SGP. His successor, Jean-Claude Trichet, can be expected to
represent an equally, if not even more, committed defender of the pact. Member
State governments themselves have also reacted quite forcefully. Some of the
governments, in particular those of smaller Member States, have complained that
they did, in fact, pursue the necessary disciplinary policies to keep their
budgetary deficits under control. The Dutch Minister of Finance, Gerrit Zalm,
even threatened to take the Commission to the European Court of Justice if it
does not hold France to the SGP (NRC Handelsblad, 11 September 2003). In taking
this strong stance, the Dutch are receiving support from other small Member
States such as Austria, Belgium, Denmark, Finland and Spain. They find it unfair
that now that the larger Member States are facing the same difficult situation,
their budgets should be allowed to rise and go beyond the agreed ceiling. This
difference in behaviour between large and smaller Member States reinforces the
view, for some, that the EU works with separate rules – for large and small
Member States. In any case, Ecofin Ministers now may have to face the difficult
decision of whether or not to impose sanctions if excessive deficits persist.
We argued throughout this paper that the purpose of the
SGP is to underline the importance of fiscal discipline, which comes down in
essence to not appropriating the budget for electoral purposes. The SGP was
created to institutionalise that conviction, thereby protecting and
strengthening the credibility of EMU. Even though the sanctions were designed to
scare, the hope was that they would never have to be applied. Indeed the problem
is that the draconian measures that are foreseen, if a country has a prolonged
excessive deficit, are almost too much to actually apply. At the same time we
have argued that EMU still needs to build up its reputation and its credibility.
This credibility is at stake if the formal procedures are tempered with as soon
as they become demanding. Beyond the SGP, EMU’s long-term survival will depend
on having a workable regime of fiscal discipline. There is a risk that EMU will
fall apart if all Member States start overspending, forcing inflation and
interest rates up.
How should the current situation be handled now that
several countries do not meet the requirements? Should the application of the
SGP be relaxed without changing the legal text and hope that in the future
Member States will stick to the rules? The deficits, for example, could be
interpreted as having occurred during "exceptional" circumstances (i.e. reduced
growth because of a major global economic downturn aggravated due to the spring
2003 war in Iraq, SARS, heat waves, floods, etc.). But if this situation in 2003
is deemed exceptional, then surely the future will bring many other cases that
could be labelled "exceptional." Another change would be to redefine the term "budgetary
deficit." "Investment spending" could be taken out of the deficit, thereby
reducing the defined budget. However, that poses the problem that many countries
will define "investments" differently and it could well lead to creative
accounting. Alternatively, should one actually apply the sanctions to countries
such as Germany so that the SGP will finally get some "bite" and have the other
Member States change their behaviour knowing that the fines are serious? Though
this might seem like a wild thought, the German government in principle is in
favour of the SGP. In a sense it would mean that the pact could only be rescued
by at some point applying its rules. Moreover, the critics will still argue that
the SGP is bad for economic growth and that it should not be applied.
The overall problem is that if at this point it is decided
to tamper with the rules, it will be very difficult to build-up another credible
system of rules and expect Member States to adhere to them. Even if the current
rules are imperfect, they apply in the same way and in a transparent manner to
all Member States. On the other hand, exceptions for specific Member States
under unclear circumstances would undermine the rules. Whether or not that would
be fatal to the continuation of EMU depends on what will be created in its place.
Even a better regime would have to deal with rebuilding credibility. Member
States have invested in the rules and have incurred sunk costs. Thus, switching
to another regime would be costly; substituting the SGP by a vacuum even more
We think the success of the SGP depends on the economic
(and political) performance of domestic economies in Europe (in terms of growth
and employment) and how lack thereof is being "sold" to the population. The SGP
can be used in many ways. If it is used to blame the European Union for all evil,
then the SGP will likely come under further attack and potentially collapse (with
the possible negative side-effects on the credibility of EMU). If the
disciplining effect of the SGP is accepted, then credibility will be assured. It
is not unthinkable that a new regime (or system of rules) may be invented to
replace the current rules. But we feel that it would be better if the Member
States chose to make changes to the SGP when it is not under pressure, but
rather when it seems to be doing just well.
The watchdog has begun to bark. At the moment, we are
waiting to see whether it will break loose and bite or whether it will be forced
to tug its tail and whine. Alternatively, there is still the chance that its
barking is already driving the intruders away from the yard. We started off by
asking why the Stability and Growth Pact was created, what purpose it was to
serve and what underlying conditions supported its creation. We examined a
number of economic and political reasons. We listed five economic reasons. First
there was a need for independent consolidation of the ambition to create EMU.
The ambivalences in the Treaty regarding sanctions and the fact that nothing was
formally arranged for the period in which the transition to the euro had taken
place meant that a new arrangement would need to be made. Second, the fear was
that EMU would imply negative fiscal spill-overs. Third, the normal disciplining
effect on national budgets will have disappeared once EMU is fully operational.
A fourth reason is that excessive deficits might undermine price stability.
Finally, given the need for a good policy mix between fiscal and monetary policy,
with monetary policy centralised, more effective fiscal and budgetary policy
coordination is needed. Although the SGP was not intended as a way to do that,
it can be used as an improvised device for that purpose.
We also pointed to a number of political reasons that help
explain the creation of the SGP. First, it was unlikely that Member States would
respect a common objective (namely to keep budgetary deficits below three per
cent of GDP) without binding rules. But on a more mundane level, the German
domestic political situation forced Waigel to demonstrate to an increasingly
eurosceptic electorate that EMU would be rooted in a firmly embedded system of
rules. EMU was created to institutionalise the German model. Germany had
developed a stability culture and wanted to incorporate that into the EU rules
and regulations governing EMU. This German leadership was possible because of
the gradual process of economic and monetary integration (which had the
Deutschmark as an anchor currency). Convergence had taken place throughout the
1980s and the first part of the 1990s with Germany leading the crowd. This
implied that the others had de facto accepted the monetary regime. At the same
time, the type of regime created was supposed to reinforce the independence of
the European Central Bank. In fact, all possible references to a Stability
Council or any other body that could discuss coordination in EMU was quickly
abandoned in favour of rules on budgets. Thus, the original idea launched by the
Werner Committee to create a Centre for Decision of Economic Policy was never
followed up, nor did the French proposals for a gouvernement économique
even get full attention.
The actual case study of the creation of the SGP sheds
light on the more general question of why the SGP was created. The case study
indicates that its very genesis lay in Germany and, eventually, was presented as
a proposal for an international treaty (à la Schengen) to colleagues in
the Ecofin Council. It soon became evident that reopening the negotiations on
Maastricht was a non-starter. The SGP would be secondary law based on the Treaty
(Articles 99-103 ex 103 and 104 ex 104c). Our analysis of the SGP shows the
importance of ideas on the relationship between monetary and fiscal policy, and
that the role of monetary policy in society, in general, had changed over time.
In the 1970s, Keynesian ideas dominated, whereas by the early 1980s these views
were changing. Groups of experts (government officials, central bankers,
Commission officials, monetary experts in the Ministry of Finance, researchers,
journalists, and academics) all contributed to this paradigm shift. This
transition from Keynesianism to monetarism and the convergence of ideas
regarding the purpose of economic and monetary polities were crucial for the
prevalence of a specific model for EMU. It is noteworthy that the SGP was also
brought into being because the ruling conservative parties (or right-of-centre
governments in office in most West European Member States) feared that
successive left-of-centre governments might overturn these decisions once in
power and when seeking re-election.
Our paper has analysed the behaviour of the most important
actors. The ones highlighted here are: Member State governments, the German and
French Ministries of Finance, the Bundesbank, the Monetary Committee, the
Commission, the European Parliament and some non-actor experts such as academics
and researchers working in the research departments of central banks, the IMF,
OECD, and so on. We assume that governments have the highest resource
capabilities. Besides them, there are other players that take part in the "game."
What is remarkable is that in November 1995 the positions on the SGP were quite
dispersed. Positions converged and moved closer to those of the Bundesbank and
the "monetarists" in the German and French Ministries of Finance. The reason for
this, in our view, is that it was understood that the SGP was to
institutionalise the German model, which in the end had the support of a
superior bargaining position. We stress the importance of common ideas and
beliefs among experts about the budgetary regime required by EMU. Yet, those
ideas alone were insufficient to come up with an agreement on the SGP. In the
end power politics is crucial to understand the eventual outcome. In other words,
one could say that a set of commonly held beliefs was a necessary but not
sufficient condition for the creation of the SGP. The sufficient condition was
the simultaneous existence of beliefs together with a corresponding
power-political constellation. This setting was generated by the powerful
position of Germany (which was due to its exceptional standing in the field of
In the introduction we asked what has changed since
1995/97 and what can be expected for the future of the SGP in terms of lessons
and informed speculations. We find that the underlying consensus on the SGP
assumed that the Member States would have incorporated into their objectives to
actually maintain low budgetary deficits. The elites (experts) had fully agreed
on this matter. However, a number of countries no longer act as if the SGP
budgetary ceilings are to be taken seriously. We stressed that in part it may be
that politicians were opportunistic and thought they could get away with letting
the deficits rise as they had numerous other domestic objectives. At the same
time, it is not forgotten that EMU and the SGP can only have a positive effect
on growth if structural reforms are implemented. Some governments seem to have
ignored the fact that without those reforms, budgets deficits rise anew. They
now wonder whether with the SGP they are facing a watchdog that only barks but
does not bite and is fast on a chain, or whether they have created a horrible
unleashed pit-bull terrier that will drive them over the brink of deflation.
Some have argued that the SGP may not be the right pact to enforce fiscal
discipline. But we have stressed that even though that may be the case, its very
effect on credibility depends on how it gets treated when the going gets tough.
At this stage it is too early to speculate boldly about
the future of the SGP. Furthermore, as academics, based on our analysis, and
without the gift of crystal ball gazing, we would suggest that the SGP problems
occurred because of the consensus among politicians about the importance of
fiscal discipline seemingly fading away. Yet we argue that there probably is
sufficient support among the main actors (aided by experts) to support the
regime. We would stress once again that the SGP was created to build credibility.
Irrespective of whether it is a "smart" or "stupid" pact, it will only be able
to do its job if Member State governments do not mess too much with it – at
least in the short run. We think experts agree with this analysis, and that they
will be influential enough to affect the thinking in governments. These should
want to try to at least seem to be applying the SGP and operate within
its framework, even if they undermine it de facto as far as possible.
Time will tell whether our analysis and subsequent speculations are correct.
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Earlier versions of this paper were presented at a
conference at the NYU in London "Building EU Economic Government: Revising the
Rules? 25-26 April 2003, at a seminar of the Max Planck Institute (MPI) for the
Study of Societies, Cologne on 29 April 2003, at the Oberseminar of the Jean
Monnet Chair, of Wolfgang Wessels, University of Cologne on 27 May 2003, at the
19th IPSA World Congress, Durban South Africa, 29 June – 4 July 2003, at the
European University Institute on 3 October 2003, and at the University of Leiden
on 6 October 2003. The authors wish to thank the participants of these
conferences and seminars for their useful comments and suggestions. Special
thanks to Patrick Crowley, Bernhard Ebbinghaus, David Howarth, Kathleen R.
McNamara, Britta Rehder, Armin Schäfer and Fritz W. Scharpf. The authors thank
the MPI in Cologne and the Social Sciences and Humanities Research Council
Canada (Grant 410-2002-0522) for financial support. This paper is based in part
on interviews with 25 key informants, who were close to the actual creation and
/or the current politics of the SGP.
The critical year for the critical case – France – is
This lacuna is related to the fact that the negotiating
parties were unable to make any substantial progress in the Intergovernmental
Conference on Political Union in 1991. The concluding parties seem to have been
aware of the shortcomings and included the possibility of complementary
regulations for the future (TEC Article 99v ex 103v and Article 104 ex 104c,
paragraph 14): "Further provisions relating to the implementation of the
procedure described in this article are set out in the Protocol on the excessive
deficit procedure annexed to this Treaty. The Council shall, acting unanimously
on a proposal from the Commission and after consulting the European Parliament
and the ECB, adopt the appropriate provisions which shall then replace the said
Protocol. Subject to the other provisions of this paragraph, the Council shall,
before 1 January 1994, acting by a qualified majority on a proposal from the
Commission and after consulting the European Parliament, lay down detailed rules
and definitions for the application of the provisions of the said Protocol." (Article
104 ex Article 104c paragraph 14)
Negative externalities are welfare or opportunity costs
not fully accounted for in the price and market system, usually occurring to a
third party not being part of the transaction.
However, recent research suggests that the overall size of
fiscal spill-overs within the euro area can be expected to be rather small as
trade and financial spill-overs to a large extent neutralise each other (Gros/Hobza
The deficit bias is partially counteracted through an
increase in relative prices in the expansionary country. The resulting export
loss should provide and re-internalise part of the necessary discipline.
The no-bailout clause implies that the European Union will
not bail-out a national government if it goes bankrupt (Art 101 ex Art 104; and
Art 103 ex Art 104b).
The logic can be turned on its head. Member States close
to the deficit ceiling could argue that a restrictive monetary stance only
pushes them to and eventually over the limit (due to interest rate payments and
lower growth). Instead of "safeguarding the credibility of ECB independence" (Artis/Winkler
1999), the pact would thereby provide additional ammunition for governments to
exert pressure on the central bank (Willett 1999).
There are only four cases of recessions exceeding two per
cent in the history of the current Eurozone economies: Italy (-2,7 per cent in
1975), Portugal (-4,3 per cent in 1975), Finland (-7,1 per cent in 1991), and
Sweden (-2,2 per cent in 1993) (Eichengreen/Wyplosz 1998).
A third option would be to have a new economic authority
make decisions about these matters. This idea was first raised in the 1970
Werner Report which offered a blueprint for EMU (Committee on the Realization by
Stages of Economic and Monetary Union in the Community 1970). It referred to
this organ as a "Centre of Decision for Economic Policy." In the late 1980s, the
French produced a similar idea when they called for a "gouvernement économique."
The creation of such a body has thus far not taken off due to the fear that that
it might undermine the independence of the ECB.
Ironically, in 1996 it became public that Germany itself had breached the three
per cent limit for the first time in 1995.
According to Eurobarometer data (MM4/95), 65 per cent of
the German public were opposed to a single currency in the first half of 1995
(Commission of the European Communities 1995).
German public opinion was heavily influenced by a "manifesto" of sixty German
economists against the Maastricht Treaty (Frankfurter Allgemeine Zeitung:
11.06.1992) and a ruling of the German Constitutional Court (BVerfG 89, 155) in
1993, demanding EMU to be geared towards monetary stability. Even more prominent
was the continuous stream of criticism coming from the Bundesbank, starting with
(Deutsche Bundesbank 1992).
Influential was a speech given by the President of the German association of
cooperative banks, the Bundesverband der Volksbanken und Raiffeisenkassen,
Wolfgang Grüger, who proposed to conclude an intergovernmental stability treaty
among the future EMU states (Handelsblatt: 09.05.1995).
The military term "pact" had become quite fashionable in German symbolic
politics after two failed attempts at crafting a "Solidarity Pact" for the
financing of reunification in 1993. Note also the "Stability Pact for the
Balkans," originally proposed in 1993. The term "pact" has also been used in
various other Member States in the context of "tripartite social pacts," for
example in Italy, in order to restructure pensions. In this sense the term "pact"
is used to provide a sense of social concertation as it signals collaboration
among various actors (in Germany for example restructuring would require the
collaboration from the social partners – trade unions and employers’
Note that the Bretton Woods system of fixed exchange rates was still formally
operational in 1970 but was starting to show signs of breakdown, which
eventually happened on 15 August 1971. In the following years the snake was
created, which was a system of fixed but adjustable exchange rates in which most
but not all EC Member States (and sometimes a few non-EC Member States)
participated. The snake was not very successful as there were frequent
realignments and the currencies of various countries, notably France, dropped
out a number of times.
One participant described their role as "financial diplomats" (interview with
the authors in July 2003).
The preference set is large since the initially positive response to Waigel’s
proposal has to be seen as rhetoric because it did not include true assent to
its most important component, automatic sanctions.
According to Scharpf (1997), we assume that different positions within a
ministry disappear as consensus is imposed upon the officials. This happens
through hierarchical direction and the "shadow of hierarchy" within the
Formally, the sessions of the European Council as well as of the Ecofin Council
are prepared by the Committee of Permanent Representatives (COREPER) according
to Article 207 (ex-Article 151) TEC, which de iure involves the foreign offices
of the member states in the process. We disregard this peripheral scene of
negotiation on monetary matters and take the de facto preparatory role of the MC
as decisive. The MC convened at two levels. At the higher level, the
representatives of Ministers (state secretaries or junior ministers) and Deputy
Governors of the central banks met. At the lower level, that of the so-called "alternates,"
the committee met to deal with a range of detailed technical issues.
Milesi (1998: 145) quotes a delegation member of the Dublin summit: "C'est un
problème franco-allemand (…) Mettez-vous d'accord entre vous et nous accepterons
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