The Impact of the EU’s Economic and Fiscal Policy Measures on the Budgeting Process of Estonia

After the global financial crisis in 2008-2010, the governance framework of the European Union’s economic and fiscal policy has undergone several changes. The Stability and Growth Pact - the core of the EU’s fiscal governance framework - has been reinforced by the “sixpack”, the “two-pack”, the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, and the rules are grounded in the European Semester process. After 10 years since the initial major changes were introduced into the EU’s legislative framework and given the current times of fiscal uncertainty as well as ongoing discussions on revising and improving the Stability and Growth Pact rules once again, it is of utmost importance to understand the impacts these past reforms have had on member states in the first place. The paper serves two purposes. First and foremost, the main goal of the paper is to build on the existing knowledge on Europeanization in order to bring into one single framework a whole set of different policy measures and their potential impact on the member state’s budgeting processes. Secondly, the theoretical discussion is followed by an empirical case study of Estonia. The case study not only illustrated and mapped out potential impacts that the EU’s economic and fiscal governance measures can have on a national budgetary process and demonstrated the potential degree of domestic change in response to these various policy measures, but also provided preliminary insights in the possible mediating factors that could additionally influence domestic adaption.

EU Governments Must not Return to Their Dysfunctional Fiscal Rules

Fiscal rules such as the European Stability and Growth Pact and the German debt brake have been suspended in the Covid19-pandemic in order to provide emergency measures and to overcome the crisis. Now, the controversial debate is back again: When should governments return to fiscal rules? Should they return to fiscal rules, at all? This article argues that it is not so much a question whether governments should return to fiscal rules at all, but to which kind of rules they should return. Following the deficit bias argument and the need for fiscal policy coordination in a monetary union some kind of limitation for government debt and some kind of fiscal rules may easily be justified. However, that does not mean that governments should return exactly to the previously existing rules, because these are economically flawed. Recently the argument for reform has become even stronger due to new empirical evidence about the macroeconomic effectivity of fiscal policy, the experience of the dysfunctionality of the existing rules during the Euro crisis and the fact that the cost of public debt has been reduced dramatically because of persistently low if not negative nominal interest rates.

Steps towards a European Fiscal Union: Has the revised Stability and Growth Pact delivered so far?

Since 2008-09, the European Union (EU) experienced two major economic crises revealing all the flaws of the existing model of economic governance. By leaving the majority of the countries with high levels of deficit and public debt, the two crises have shown that the Economic and Monetary Union (EMU) is indeed an unfinished project where the monetary union alone is not sufficient to safeguard the entire EU economy. To strengthen the EMU and to mitigate future risks that could possibly lead to the collapse of the euro-area, many called for a deeper fiscal integration by creating a central fiscal capacity for the EMU or, in other words, a fiscal union. Due to the present political unfeasibility of such an endeavour, however, concrete steps towards a European Fiscal Union (EFU) have been modest and the revised Stability and Growth Pact (SGP) remains its core building block. As the Pact defines supranational and shapes the creation of national fiscal rules, maintaining its credibility continues to be vital. This article analyses the effects of the fiscal rules on the public finances of the member states. It is assumed that by adhering to the supranational and adopting quality domestic fiscal rules, the member states are better equipped in remaining fiscally prudent, thus also affirming the revamped SGP as a solid base for the furthering of the EFU. The two-track evaluation approach defines dynamic panels for the EFU as a whole and for the selected country groups. It finds certain benevolent effects on budgetary performance at the EFU level, as well as for the countries with higher quality of the fiscal rules.

The European Union fiscal policy framework and fiscal sustainability: challenges for the post-crisis environment

The fiscal policy framework in the European Union was originally agreed upon in the Maastricht Treaty 30 years ago. In the following years it has been supplemented (Stability and Growth Pact) and modified, influenced by the experience of its application practice and external shocks, such as the financial crisis. However, the essence of this framework remained the same - member states are obliged to conduct a disciplined fiscal policy, which, in a nutshell, is assessed by comparing the ratio of budget deficit and public debt to GDP in a given country to the reference values. Even before the outbreak of the Covid-19 pandemic, the need to change the mechanisms for disciplining fiscal policy was widely recognized. High and persistent levels of public debt, pro-cyclicality of fiscal policy, shortage of public investment and the complexity of fiscal rules and their weak enforceability are indicated as unfavorable features of public finance. In 2019 the COVID-19 pandemic came as the biggest shock to the world community since World War II. In the context of the provisions on fiscal discipline, in May 2020 the Commission and the Council activated the general escape clause of Stability and Growth Pact, for the first time ever. This has allowed member states to take the necessary fiscal measures to deal with the crisis. On 19 October 2021, the European Commission adopted a Communication relaunching the public consultation, put on hold in March 2020, on the EU?s economic governance framework. The new governance framework should be tailored to the challenges the EU is facing, including the challenge of achieving a fiscal stance that is appropriate for the euro area as a whole. There is a fairly widespread belief in the need to move away from rigid reference values, which should be replaced by solutions that ensure the sustainability of public debt in the differing circumstances of member states. The proposed options for the revision of the EU fiscal framework, although justified in theory, have a fundamental flaw - they strengthen the position of supranational institutions and, moreover, open the door to discretion and potentially unequal treatment of member states. These proposals can be seen in a broader context - the federalization of the EU, which would limit the sovereignty of nation states.

Italian populists and the Pact

Still on the Stability and Growth Pact, this chapter focuses on the Italian case, the third largest economy in the eurozone. After years of trying to find with Matteo Renzi’s Democrats a “narrow path” that would allow Italy to reduce its public debt, relations between the commissioner and Italy turn into an open political crisis when the Lega–Five Star Movement coalition government comes to power and decides to openly flout budgetary rules. After the Greek summer of 2015, the Italian autumn of 2018 is the most dramatic moment in the cabinet’s life. The chapter explains why, despite Rome’s growing isolation, the Commission ended up not sanctioning Italy.

Discipline, not punish

After the economic and financial crisis, the Commission was given strong powers to intervene in the national budgets of eurozone members. In this first of two chapters on budgetary surveillance, I explain how partisan politics came to neutralize the Commission, which never applied the sanctions written in the treaties. With their “smart reading of the rules,” Juncker and Moscovici succeeded in imposing a politically contextualized reinterpretation of the Stability and Growth Pact, without however challenging the institutions. Their political work, however, would have been impossible without the complicity of conservative and social-democrat actors in the Council and in the Commission.

Avoiding the Inappropriate: The European Commission and Sanctions under the Stability and Growth Pact

Fiscal policy surveillance, including the possibility to impose financial sanctions, has been an important feature of Economic and Monetary Union since its inception. With the reform of fiscal rules in the aftermath of the financial and sovereign debt crisis, coercive provisions have been made stricter and the Commission has formally gained power vis-à-vis the Council. Nevertheless, sanctions under the Stability and Growth Pact for budgetary non-compliance have so far not been imposed. This article asks why the Commission has until now refrained from proposing such sanctions. Using minimalist process-tracing methods, three post-crisis cases in which the imposition of fines was possible, are analysed. Applying an adaptation of normative institutionalism, it is argued that the mechanism entitled “normative-strategic minimum enforcement” provides an explanation of why no sanctions are imposed in the cases studied: Given that the Commission does not perceive punitive action as appropriate, it strategically refrains from applying the enforcement provisions to their full extent.

THE EUROPEAN UNION AND ITALY RELATIONS IN THE CONTEXT OF SUPRANATIONAL FISCAL REGULATION

The article presents a retrospective analysis of relations between the government of Italy and the European Union institutions in the context of supranational fiscal regulation in 2002–2019. The authors analyze the influence of external and internal factors on the state of public finance in Italy, note the reasons that made it difficult to meet the requirements of the Stability and Growth Pact, study the main issues on the agenda in the EU-Italy relations and their evolution. The authors also come to conclusion that unlike the earlier discussions about correcting budget deficit in Italy, current focus of supranational fiscal governance is shifted to preventing it, what challenges the economic sovereignty of Italy and country’s opportunities to conduct a discretionary fiscal policy.