The European constraints on national budgets

When — in the aftermath of the Eurozone crisis — negotiations were initiated to reform EMU, a contraposition emerged around two different conceptions tor die further development of the monetary union: one based on fiscal discipline and one based on fiscal solidarity (Wasserfallen and Lehner 2017). This contraposition coalesced on the one hand mainly Northern European creditor countries, and on the other mainly Southern European debtor countries. The two coalitions — led respectively by Germany and France — largely reflected the conflicting interests in the aftermath of the Eurozone crisis, with the creditor countries advocating more common rules for ensuring fiscal discipline, and with countries who received bail-outs advocating for rules ensuring solidarity among member states. This contraposition, however, is not only reflective of a situation that emerged during the Eurozone crisis, but also highlights the difference between different economic models, with Northern European economies being more reliant on exports, and Southern economies being traditionally more reliant on domestic consumption.

More importantly, the tension that emerged in the post-Eurozone crisis negotiations is a manifestation of the strain between the spill-over effects of EMU and the historical inheritances of different national economic trajectories.

Even though EMU has not (yet) spilled-over into a fiscal union, since its establishment member states are required to fulfil to the EU-criteria of sound public finances, which mainly consist in public debt not exceeding 60 per cent of the country’s gross domestic product (GDP) and public deficits not exceeding 3 per cent of national GDP. These rules were introduced with the Treaty of Maastricht in 1993 (see Box 28.5) and were strengthened between 2011 and 2012 by giving sanctioning powers to the Commission, in order to ensure stricter adherence to these rules (Laffan 2014). The strengthening ot European budgetary rules, in turn, was accompanied by a wave of austerity measures across all Eurozone countries. Even though formally the EU rules leave member states free to design national taxation and expenditure policies within the given limits, the combination of budgetary thresholds and competition in a common market forms a substantial constraint on the extent to which national governments can tax and spend (Karre- mans and Damhuis 2018).

As a consequence of the provisions set in the Treaty of Maatstricht and of the strengthening of budgetary rules between 2011 and 2012, between the 1990s and today the national parliaments ot the various member states have been introducing new national legislation imposing strict budgetary discipline to the executive (Doray-Demers and Foucault 2017). Such laws serve as the extended arm of the European agreements and restrict the fiscal policy space available to governments. Even though the European brakes on governments’ debt and deficit levels are in theory not a direct constraint on the ways in which governments shape their taxation and spending policies, in practice — because of the functioning of the common market - they work as a straitjacket tor national fiscal policies. In other words, while the functioning of the Single Market represents a sort of an informal brake on governments’ taxation policies, the European budgetary rules work as formal constraints on the governments’ expenditure policies.

As the Single Market facilitates the movement of business across the EU jurisdiction, excessive taxation in one member state brings the risk ot triggering de-location of enterprises to other EU member states (Genschel and Schwarz 2013). Against the background of the European budgetary' rules and the loss of national monetary sovereignty, in turn, this disincentive to increase taxation puts great constraints on governments’ expenditure policies. Thereby, governments are de-facto no longer fully autonomous in pursuing economic and social policies, as the room-for-manoeuvre is restricted by their European commitments. These commitments, in turn, are often criticized for being more functional to the development of some economies rather than others (Johnston and Regan 2016).

According to some authors (e.g. Regan 2017), in fact, the European budgetary rules are particularly constraining for the economies of the South, whose growth has historically relied on national consumption, and which — before the establishment of EMU — have been accustomed to respond to economic downturns by devaluing their currencies. Under EMU, they have thus lost the capacity to devalue their currency and — because ot the budgetary restrictions — they are no longer free to stimulate national consumption by increasing expenditure. Northern European economies, by contrast — like for example the Netherlands and Germany — base their growth more on exports. Having an interest in containing the cost of labour in order to facilitate exports, for these countries the EU’s budgetary rules tend to be more in line with their national strategies tor economic growth. This imbalance became clearly visible in the years following the Eurozone crisis, as Northern European countries such as Germany and (since 2016) the Netherlands started to perform budgetary surpluses, while Southern European countries like Italy continued to struggle with high public debt and government deficits.

The formation and functioning of the European Single Market — and in particular of EMU — has puzzled political economists in Europe and outside, pointing in particular to the difficulty (or impossibility) of reforming the diverse patterns of state intervention in the economy (e.g. Truchlewski 2018). Reforming the patterns whereby national governments tax and spend, in fact, requires a reform of national welfare states, which in most EU member states represent the main category of running expenditures. The reform of national social security provisions has thus been a recurrent theme in the various stages of European integration.

Box 28.5 The Treaties establishing the EEC, EC and EU

The EU does not feature a constitution in the traditional sense, but lays its foundations in a succession of Treaties:

  • 1957 (1958) - The Treaty of Rome: established the European Economic Community and the customs union; proposed a common market.
  • 1986 (1987) - The Single European Act: set the objective of establishing the Single Market by 1992.
  • 1992 (1993) - The Treaty of Maastricht: officially known as the Treaty on the European Union, it expanded the competences of European institutions and laid the foundations for the European Monetary Union.
  • 2007 (2009) - The Treaty of Lisbon: the latest amendment to the constitutional basis of the EU. It strengthened the role of the European Parliament in the EU's legislative process; it further strengthened and formalized political authority at the European level.
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