Since its inception in 1997, the Stability and Growth Pact (SGP) has lived through times both good and bad. It has been berated by politicians, academics, trade unionists and many other participants in the public debate. It has been called simultaneously too rigid and too lax, harmful to economic growth and outright ‘stupid’. At the same time, the constituency has grown in number of those who strongly believe in the merits of a rules-based framework to rein in the fiscal appetite of the executive branches and to bring the issue of the sustainability of public finances to the fore of the political debate. Today, the SGP is the cornerstone of European economic policy coordination and surveillance framework for nationally determined fiscal policies in the single currency area. It is as intimately linked with Economic and Monetary Union as is the European Central Bank or the euro itself. Yet every crisis, be it political or economic, puts to the test the effectiveness, the credibility and the political sustainability of the Pact.

In order to withstand the test of time, it has been important to recall repeatedly and to emphasise the economic and political ‘doctrine’ underlying the SGP, while avoiding dogmatically enforcing its rules without due regard for the specific economic and political circumstances.

In 2004, a combination of economic, political and legal constraints implied that a revision of the fiscal surveillance framework had become unavoidable in order to stop the de facto demise of the Pact.

Presenting intergovernmentalism

Classical European integration theories aimed to explain the phenomenon of integration by focusing on various actors and mechanisms in the integration process. The intergovernmentalist approach formulated in the mid-1960s (Hoffmann 1966) was a realist response to neofunctionalism. Intergovernmentalism argues that national governments are the key actors that determine integration. In other words, whether integration occurs depends on whether or not it is in the interest of national governments. For his theoretical approach Stanley Hoffmann relied on the personality and the euro-sceptic stance of Charles de Gaulle. In the 1960s, the French President had been largely opposed to transferring power to supranational institutions. Thus, Hoffmann concluded, one should look at state interests to explain integration. However, Hoffmann's approach did not clarify how one could identify and enlighten the notion of state interest itself. Twenty-five years later, Moravcsik (1991) opened the ‘black box’ of the state and incorporated the national economic features and priorities of a country as variables that determine ‘national state interests’ as far as European integration is concerned. Though Moravcsik was able to make the overall approach subtler, his liberal intergovernmentalist approach still mainly considers state interests and hence interstate bargaining as key to understanding European integration (Moravcsik 1993, 1998).

Because national governments are the most important actors in this view, most of the integration decisions occur in intergovernmental bargaining arenas, such as the European Council Summits, the Meetings of Council of the EU and other similar scenes, primarily intergovernmental conferences and, to a lesser extent, (intergovernmental) committees that prepare the work of the Council.

This chapter deals with the aftermath of the SGP crisis of 25 November 2003, which led to a legal contest between the Commission and the Council and subsequently a so-called ‘review’ of the SGP. Following the memorable ECOFIN meeting, a case served before the ECJ in July 2004, which unearthed the dual nature of the SGP. The court decision triggered the perceived need for a revision of the SGP, which took place in spring 2005.

The structure of this chapter is as follows. The first section offers an account of these events. The second section provides an analysis, again using our theoretical framework to understand the developments. The events will become understandable mainly from a functional and expertocratic perspective, even though towards the end of the argument we also benefit from the intergovernmentalist and domestic politics lenses once more.

The court case

Commissioner Solbes had evoked the possibility of taking legal action against the Council immediately after the 25 November 2003 crisis. The Commission's legal services reported to him in early January 2004 on the chances of winning before the ECJ. Thus, Solbes felt sufficiently confident when he went public and labelled the Council ‘conclusions’ illegal. The main argument of the Commission was that the Council could not legally have adopted ‘conclusions’ on the basis of Article 104.9 after having failed to come to a decision on the recommendation under Article 104.8.

Primary Law (Articles 99, 104 and EDP Protocol)

Article 99 (ex Article 103)

1. 1. Member States shall regard their economic policies as a matter of common concern and shall coordinate them within the Council, in accordance with the provisions of Article 98.

2. 2. The Council shall, acting by a qualified majority on a recommendation from the Commission, formulate a draft for the broad guide-lines of the economic policies of the Member States and of the Community, and shall report its findings to the European Council.

3. The European Council shall, acting on the basis of the report from the Council, discuss a conclusion on the broad guidelines of the economic policies of the Member States and of the Community.

4. On the basis of this conclusion, the Council shall, acting by a qualified majority, adopt a recommendation setting out these broad guidelines. The Council shall inform the European Parliament of its recommendation.

5. 3. In order to ensure closer coordination of economic policies and sustained convergence of the economic performances of the Member States, the Council shall, on the basis of reports submitted by the Commission, monitor economic developments in each of the Member States and in the Community as well as the consistency of economic policies with the broad guidelines referred to in paragraph 2, and regularly carry out an overall assessment.

6. For the purpose of this multilateral surveillance, Member States shall forward information to the Commission about important measures taken by them in the field of their economic policy and such other information as they deem necessary.

7. […]

This chapter deals with the SGP crisis of 25 November 2003 and the period running up to that dramatic ECOFIN Council. It contains two main sections. The first offers an account of the events; the second an analysis drawing on a composite version of our methodological apparatus, in particular the domestic and intergovernmental approaches with some ingredients of the other two perspectives.

The initiation of EDPs

In April 2002, a centre-right coalition came into power in Portugal. The new government under José Manuel Durão Barroso not only accepted the Commission's critical stance on the budgetary situation but, stating that the socialists had ‘left the country in rags’, Barroso went a step further and asked the nation to ‘make a patriotic effort to save’. The 2002 budget was revised and austerity measures were adopted, including a 2 per cent increase of the VAT rate and a postponement of planned corporate tax cuts besides efforts to reduce public expenditure. Barroso successfully employed the SGP framework and accepted in particular the placing of his fiscal policies under the EDP regime. Portugal was the first country to be found in excessive deficit in 2003 and its government used the SGP as an external constraint for making the consolidation course domestically acceptable (see below). This strategy implied close cooperation between the government and the Commission.

Introduction

Ever since the SGP had been conceptualised it was clear that the proof of the pudding lay in the eating – i.e. the real policy implementation of the framework was key, not the political noise surrounding its inception. Would Member States conduct their fiscal policies in a cooperative way, conducive to sound public finances and monetary stability – or would the fiscal dimension of EMU put either the Member States or the Pact itself under stress? The first years of the implementation of the SGP put the scheme under some pressure right away, but serious difficulties only occurred a few years into its implementation, after the macroeconomic environment had progressively darkened.

This part of the book offers an analysis of the first nine years of the implementation period, from 1999 until late 2008. It is structured as follows. The first section of Chapter 6 offers a narrative of the SGP implementation in the period 1999–2002. The second section of this chapter analyses this first implementation period by choosing from our theoretical framework and combining the thrust of the domestic and intergovernmental approaches that best suit this episode. The next two chapters assess respectively the SGP crisis in 2003 and the reform period up to 2005 – again providing analytical assessments informed by the four approaches developed in Part I of the book.

The year 2009 marked the tenth birthday of Economic and Monetary Union (EMU) in Europe. The Stability and Growth Pact (SGP) is one of the cornerstones of that enterprise. EMU itself is perhaps the most ambitious project of regional integration in the world: the merging of national monetary policies first by eleven, later sixteen, nation states into one is unprecedented in modern history. This phenomenal enterprise is characterised by transferring monetary policy to the supranational level on the one hand while retaining national sovereignty over all other fields of economic policy on the other. However, monetary policy is interdependent with the other areas of economic policy, notably the conduct of public finances. The viability and success of EMU therefore depends on the ability of the participating, but independent, nation states to conduct their fiscal policies in a manner that is compatible with the pursuit of a single, common monetary policy.

In theory, EMU functioning well along these lines is a collective good. We know that, short of subjecting themselves hierarchically to some Leviathan (the state), people as well as nations rely on norms to ensure the reliable provision of collective goods. One could compare it to a club. If members of a club are found not to contribute – i.e. to free-ride – or even to damage the club goods, the group enforces its norms through sanctions. Depending on the club, such sanctions take on various forms, from verbal bullying to brutal fighting.