Lecture 10: EU Fiscal Governance (Franchino 2024) PDF

**Lecture 10: The Politics of Governing the European Economy** **EU Fiscal Governance** **Franchino (2024)** Franchino, Fabio. 2024. "International Oversight of Fiscal Discipline." *European Journal of Political Research* 63(1):281--302. Keywords: **Excessive Deficit Procedure** \| **Oversight...

**Lecture 10: The Politics of Governing the European Economy** **EU Fiscal Governance** **Franchino (2024)** Franchino, Fabio. 2024. "International Oversight of Fiscal Discipline." *European Journal of Political Research* 63(1):281--302. Keywords: **Excessive Deficit Procedure** \| **Oversight** \| **Deficit** \| **Coalition politics** Fiscal discipline is the sustainable balancing of government expenditures with revenues. Effects of political dynamics on national budgeting. +-----------------------------------+-----------------------------------+ | **Research question:** | What is the effect of | | | supranational oversight on | | | national fiscal policy? | +===================================+===================================+ | **Argument:** | The EU excessive deficit | | | procedure (EDP) engenders | | | national lower deficits. | | | | | | Governments under scrutiny adjust | | | their fiscal policies to | | | accommodate its requests because: | | | | | | 1. It generates enough domestic | | | political costs. | | | | | | 2. Noncompliance engenders | | | serious risks of undermining | | | the whole union. | +-----------------------------------+-----------------------------------+ | **Literature:** | [The excessive budget procedure | | | (EDP):] | | | | | | With the Treaty of Maastricht, EU | | | member countries established in | | | 1994 an oversight regime of | | | fiscal discipline, designed as a | | | policy flanking the monetary | | | union. | | | | | | Primary objective: to prevent | | | negative externalities arising | | | from fiscal indiscipline. | | | | | | It features: | | | | | | 1. A supranational monitoring | | | with recommendations, and | | | potential sanctions. | | | | | | 2. Comparability and | | | transparency of public | | | accounts, with guiding role | | | of the Commission. | | | | | | [Political dynamics of fiscal | | | discipline:] | | | | | | **CPR problems and | | | fractionalization in coalitions** | | | | | | 1. Spending programs are a CPR | | | problem. In coalitions (≠ | | | single-party government), | | | parties are held electorally | | | accountable for spending | | | decisions in their areas and | | | can shift the blame on | | | coalition partners for fiscal | | | outcomes in other policy | | | areas. Driven by short-term | | | political gains, they | | | prioritize spending programs | | | providing benefits to their | | | supporters over long-term | | | fiscal sustainability. | | | | | | | | | | | | 2. Executive fractionalization | | | and polarization in | | | coalitions. Theory of veto | | | players : executive | | | fractionalization and (more | | | weakly) polarization lead to | | | weakness and inability to | | | make decisions. | | | | | | | | | | | | 3. Budgetary rules. Maintaining | | | fiscal discipline is easier | | | if (i) the budgetary powers | | | are centralized in the hands | | | of actors with incentive to | | | internalize costs and (ii) if | | | budget constraints limiting | | | the size of the budget are in | | | place. | | | | | | **Electoral effects** | | | | | | Voters tend to reward government | | | parties for recent good economic | | | performance. The executive is | | | tempted to stimulate the economy | | | by increasing deficit spending, | | | targeted on its electoral base, | | | closer to the elections: | | | 'political business cycles'. | | | | | | Put simply, governments run | | | higher deficits in election | | | years. | | | | | | **Partisan effects** | | | | | | Augmented partisan theory of | | | fiscal discipline: governments | | | facing a high risk of replacement | | | manipulate deficits based on | | | ideology : | | | | | | - Right-leaning governments run | | | deficits to constrain | | | successors. | | | | | | - Left-leaning ones reduce | | | deficits to pre-empt | | | criticism. | +-----------------------------------+-----------------------------------+ | **Gap in the literature:** | As the EU excessive deficit | | | procedure has never led to | | | sanctions, it has been considered | | | irrelevant or failing. Hence, its | | | impact is poorly investigated. | +-----------------------------------+-----------------------------------+ | **Hypotheses:** | The oversight of the EDP | | | engenders a reduction of budget | | | deficits. | | | | | | 1. It bears strong **political | | | costs** for parties in | | | government: charges of fiscal | | | irresponsibility by the | | | national mass media and | | | opposition parties. | | | | | | 2. It bears **spillover | | | effects**: noncompliance | | | could encourage emulation and | | | then undermine the whole | | | monetary union. | +-----------------------------------+-----------------------------------+ | **Empirical research:** | Sample: all EU members from 1994 | | | to 2019. | +-----------------------------------+-----------------------------------+ | **Findings:** | Strong support. A full year of | | | oversight during budget drafting | | | leads the government of a | | | eurozone country to reduce the | | | deficit on average by 0.57 % of | | | GDP. | | | | | | These effects peak after 4 to 5 | | | years. | | | | | | Impact of a one-year | | | supranational oversight during | | | budget drafting? | | | | | | 1. Totally offsets the impact of | | | a two-year shortening of | | | expected government duration | | | (as a government's expected | | | time in office draws near the | | | end, it begins to accumulate | | | budget deficits). | | | | | | 2. Fully offsets the impact of | | | adding one party to a | | | governing coalition when debt | | | is high (fractionalization). | | | | | | 3. Offsets the impact of the | | | fiscal policy shift of a | | | government when risk of | | | replacement becomes | | | higher/lower (partisan | | | effects). | +-----------------------------------+-----------------------------------+ Spillover effects = can encourage similar behavior among other governments, potentially undermining the entire regime and leading to broader repercussions. **Main takeaways** - EU supranational monitoring of the budgeting process has offset the expansionary pressures engendered by all these political dynamics. - The impact of one year of monitoring during budget drafting offsets the impact of: - a two-year shortening of expected government duration. - the addition of one party to a government coalition when debt is high. - a leftward shift in government ideology when the risk of replacement is low.