Photo: Nelson Ndongala | Unsplash
Guest Author: Maurice Leipnitz
Maurice is a recent Master’s graduate from the University of Amsterdam, specialising in political economy, finance, and fiscal policy. Drawing on his Bachelor’s thesis and recent heterodox critiques of EU fiscal rules, he develops a novel framework to visualise their impact on domestic politics.
Introduction
With the Treaty of Maastricht, the European Community (EC) undoubtedly took one of the biggest steps in its history towards European integration and the European Union (EU) as we know it today.[1] At the heart of this treaty was the establishment of a common economic and monetary union.[2] In order to create a fair and stable economic area, the EU convergence criteria were created, which stipulate that no member of the Economic and Monetary Union may exceed a debt ratio of 60 per cent and an annual budget deficit of three per cent.[3] The self-discipline of states regarding the public budget stems from the prevailing opinion that a state with a high debt burden must inevitably fear negative economic and political consequences. The fears include an increasing burden on the household budget due to interest charges, an increase in inflation, a decline in economic stability and possibly the occurrence of insolvency.[4] There is a growing number of critics who consider these scenarios to be exaggerated or fundamentally wrong.[5] Particularly against the backdrop of the various transformation processes of the upcoming decades, the current deficit and debt limits within the EU and the adherence to monetarism as their ideological basis are increasingly seen as an obstacle to necessary innovations, investments and social safeguards.[6]
Through this contribution, I seek to shift the focus away from mere economic consequences of the deficit and debt limits of the European Union towards the impact they have on the political realm, specifically on the policy stability of EU member states. The core resulting argument is that the European fiscal rules do not merely impact the economic and fiscal realm but also significantly the political realm. This is visualised with the help of a modified version of Tsebelis’s veto player theory by analysing partisan veto players.
The main idea of the veto player theory is to look at “individual or collective actors whose agreement is necessary for a change in the status quo”[7] in a political system and “their capacity to produce policy change”.[8] The “impossibility for significant departures from the status quo”[9] is called policy stability meaning policy stability is low if preferences of veto players overlap sufficiently to potentially produce significant policy changes and is ultimately high if deviations from the status quo are hardly possible.[10] This is usually visualised in a two-dimensional policy space that can be understood as geometrical space that contains all possible policy options across certain policy dimensions.[11] The two dimensions that span the policy space in our case are a budget dimension – describing the preferred size of the budget – and a policy dimension, which simplifies and combines all other preferences on policies that need to be financed by the national budget into one dimension. This is illustrated in Figure 1.
Fig. 1: Reduction of the legal winset of A and B due to the budgetary limit.
One can see that veto players A and B have circular preference sets due to the assumption that both prefer every point over the status quo that is closer to their respective ideal points.[12] When both preference sets overlap a winset forms where the status quo can be moved to. The policy space is being modified by introducing an upper limit for one of the two dimensions – the budget dimension – representing the budgetary limit imposed by the fiscal rules. It divides the policy space into legal points which comply with EU’s fiscal rules and illegal points which do not. In this example the budgetary limit artificially reduces the winset by excluding politically realisable points that do not comply with the fiscal rules and thus increases the policy stability. It will also be demonstrated that the fiscal rules may affect the positioning of the veto players which alters the winsets with potential and current veto players. Hence, this unique illustration allows to visualise how fiscal rules interfere in the political process.
This framework can be used analytically for real-world examples. For the empirical observation, I use government instability as a proxy for the theoretical concept of policy stability as they are inversely related.[13] Therefore Portugal, a founding Eurozone country and an EU member since 1986, is a highly suitable case as frequent occurrences of government instability since the Treaty of Maastricht allows for their investigation through the dynamics in this particular policy space. Furthermore, as the introduced framework relies on unequivocally identifying the veto players the fact that Portugal is a unicameral parliamentary democracy with a mostly ceremonial president reduces complexity to a minimum. This is because the analysis can largely ignore further institutional veto players and focus on the partisan veto players in parliament as it is the decisive institutional political body. The two periods that will be discussed in the next section are the most noteworthy ones of a wider analysis of the timeframe between the entry into force of the Maastricht Treaty 1993 and the three decades after.
Failure of the Government in 2011
Following the government crisis in 2004, which was caused by the European Council’s decision to propose Prime Minister Barroso (Partido Social Democrata – PSD) as the new President of the European Commission, new elections were held in 2005.[14] The reason for this was criticism regarding the democratic legitimacy of his appointed successor Pedro Santana Lopes.[15] As a result, the Partido Socialista (PS) regained momentum and even won an absolute majority under José Sócrates in 2005.[16] He was able to govern regularly until the 2009 elections, in which the PS won the election but lost its absolute majority.[17] The decision was made to lead a minority government, which also meant that Sócrates was now dependent on the votes of the opposition at a time when Portugal was under severe pressure due to the financial crisis.[18] In 2009, the budget deficit was already around 9.3 per cent, which increased to around 11 per cent in 2010.[19] In the meantime, not only simple sanctions from the EU were threatening, but also a bail-out by the Troika institutions.[20] This would have resulted in a Memorandum of Understanding (MoU), which would have meant massive intervention in national policies.[21] According to his own statements, Sócrates wanted to prevent this with all his might.[22]
Every party was aware there was a risk of a bail-out. The fact that this pressure had an effect is illustrated by the three austerity packages that were passed by the PS despite the critical stance of the largest opposition party, the PSD, in part with its help.[23] The aim was “to avoid criticism when the EC formally analysed the austerity package – and hence to decrease market pressure”.[24] There was also the hope that the ECB would buy government bonds on the secondary market in order to reduce the interest rates on Portuguese government bonds, which had risen massively in the wake of the financial crisis.[25] The practice, known as quantitative easing, was only implemented by the ECB in the eurozone a few years later.[26] In the opinion of many ministers, a fourth programme, which would have entailed further cuts, would have been enough to persuade the ECB to take this step.[27] However, the last austerity package failed due to the resistance of the PSD. At the time, it was the strongest party in the polls and the other parties, particularly the left in parliament, were the fiercest critics of the austerity policy.[28] The increasing centrism of the PS in the previous decade against the backdrop of a strategy to maximise votes has significantly reduced the winset with left-wing parties.[29] Hence, they were even less able to support the PS’s austerity policy. That said, there are relevant overlapping dynamics for this period that lead to both an increase and a decrease in policy stability.
The first observation leads to a reduction in policy stability as illustrated in Figure 2. Starting in the years before the crisis, when the PS oriented itself towards the centre and thus made cooperation with the centre-right PSD and the right-wing CDS-PP (Centro Democrático e Social – Partido Popular) possible in the first place. This led to the adoption of the first three austerity packages. The framework thus explains the increase in the winset due to the shift in the PS through vote-seeking and pressure from the EU to comply with fiscal rules. The shift in the status quo itself as a result of these packages can then be explained by the pressure to move the status quo into the legal area. The mirror image of the PS’s movement is the distancing from the left-wing parties, which is shown in Figure 3. This thus potentially ensured increased policy stability but was obviously compensated by the simultaneous expansion of the PS preference set, overlapping with the PSD and the CDS-PP preferences. The left-wing parties are not veto players in this example, unlike the CDS-PP and the PSD, because they are not fixed support parties.
Fig. 2: The overlapping effects show the shift of PS’s ideal point and the resulting expanded winsets with PSD and CDS-PP.
Fig. 3: Reduction of the hypothetically possible winset of the PS with the parties of the left spectrum due to the movement of the PS.
After the conservative PSD won the elections in 2011 it was able to form a centre-right majority government with the CDS-PP under Prime Minister Passos Coelho, which immediately began to implement the reforms prescribed by the Troika.[30] However, in the following election the coalition lost its majority and after a brief attempt to form a minority government from the previous governing parties PSD and CDS-PP, the government mandate went to António Costa and the PS.[31] The latter formed an alliance of convenience in the form of a minority government with fixed support parties through bilateral agreements with the three left-wing parties Bloco de Esquerda (BE), Partido Communista de Portugal (PCP) and Partido Ecologista Os Verdes (PEV) in order to banish the centre-right coalition from the government.[32] This was given the nickname ‘Geringonça’ (‘rattletrap’), by the right-wing opposition, which increasingly became a self-designation with new connotations.[33] Despite initial doubts, this solution proved to be relatively robust and the Geringonça lasted until the regular elections 2019.[34] This term of office was characterised by a partial rejection of austerity policies, during which wages were increased and further privatisations were prevented.[35] It is clear to see that the PS under António Costa moved back to the left, in contrast to the turbulent crisis years. The government programme is based on four fundamental goals, three of which are symptomatic of the shift to the left. The first literally states that they want to turn away from “austerity policies and the strategy of impoverishment”.[36] The other two are aimed at “defending the welfare state and public services”[37] and reviving investment in education and science.[38] The last of the four objectives, “respect for European and international compromises”[39] in defence of the Portuguese economy, makes it clear why it was not enough for a formal coalition. It was unrealistic that the PS, as one of the two major parties, would support a policy that violated the imposed measures and fiscal rules and marked the decisive dividing line with Portugal’s left-wing parties.
Prime Minister António Costa also confirmed this during the 2019 election campaign, claiming that a coalition with the three supporting parties would be “absolutely impossible”[40], as there would be decisions that the three parties would not be able to accept.[41] He explicitly cited decisions on national debt and relations with the European Union as examples.[42]
The fiscal rules clearly cut the winset between the PS and the other left parties, making a real coalition unlikely, if not impossible. This is illustrated in Figure 4. Cooperation nevertheless is achieved with the PS and the three parties, as the status quo is far enough away from this limit due to the actions of the previous centre-right government, leaving room to manoeuvre. The closer the status quo gets to this limit, the less leeway there is and the more likely it is that the cooperation will fail (Figure 5). This theoretical perspective explains why there was no re-run of Geringonça after the 2019 elections.
Fig. 4: Artificial reduction due to the budgetary limit of the winset of PS and the parties of the left spectrum.
Fig. 5: Artificial reduction due to the budgetary limit of the already decreasing winset by the shift of the status quo closer to the budget limit.
Closing Thoughts
This contribution begins with the increasing critical stance among some economists regarding debt and deficit limits and their underlying theoretical assumptions. The economic consequences of this instrument might be one, if not the main reason, why Europe is falling behind other publicly investing world powers and what holds Europe back in the transformative phase we are currently experiencing. The introduced framework, whose limitations were not discussed further with respect to the word limit, provides structure to the dynamics on the political level and is able to visualise them. Complementary to the economic critique, it shows that deficit and debt limits heavily interfere with day-to-day politics and the entire political landscape. Hence, the EU’s fiscal rules might not just be economically and fiscally but also politically unsustainable. This is demonstrated by showing that the deficit and debt limits of the European Union had both a strengthening and a weakening effect on Portugal’s policy stability. The ultimate realisation of the mechanisms depends on the relative starting position of the veto players, the budget limit resulting from the fiscal rules and the status quo. Additionally, an interesting observation is that cooperation between centre-right parties was less affected by the fiscal rules than centre-left cooperation. The PSD could easily form a coalition with the right-wing CDS-PP when it had a majority, while the PS always chose the path of minority government as it was unable to form a coalition with the left-wing parties. To this day, the EU’s fiscal policy limits seem to separate the social-democratic PS and the left-wing parties and make a hypothetical coalition impossible. The reason for this is probably that left-wing parties generally have an interest in maintaining and expanding the successes of the welfare state and in state intervention in the market.[43] Left-wing parties are also usually the most strongly opposed to privatisation.[44] They often prioritise this higher than a balanced budget.[45] This fundamentally violates the ideas behind the fiscal rules and the economic and financial policy ideals of the European Union. If this could be generalised, it would mean that the fiscal rules of the European Union systematically impede the formation of centre-left majorities. Centre or centre-right coalitions would, thus, become more likely. If this is true, then this may provide a partial answer as to why right-wing parties are increasingly represented in government coalitions. Besides the impact on the economic and the fiscal realm this might be the biggest threat to the EU. It would be an act of irony that the EU itself created these conditions with the objective of European convergence by holding on to outdated economic theories. Thus, if the fiscal rules are not reformed fundamentally, they risk leading to the EU’s economic and political demise, one that could have been avoided.
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[1] Jost and Reitz, 2017, p. 124
[2] ibid.
[3] Hilpold, 2021, p. 34
[4] Heller, 2005, pp. 32-33; Ehnts, 2020, p. 7
[5] Höfgen, 2020; Kelton, 2020
[6] Orphal et al., 2022, pp. 4-6; Höfgen, 2020, p. 82
[7] Tsebelis, 2002, p. 19
[8] Tsebelis, 1995, p. 289
[9] Tsebelis, 2002, p. 2
[10] Tsebelis, 2002, p. 17, p. 21
[11] Tsebelis, 1995, pp. 295-296
[12] Tsebelis, 2002, pp. 20-21
[13] Tsebelis, 2002, p. 5; Tsebelis, 1995, p. 289
[14] Observador.pt, 2014
[15] ibid.
[16] ibid.
[17] Moury and Standring, 2017, p. 667
[18] ibid.
[19] Data.imf.org, 2023
[20] Moury and Standring, 2017, pp. 667-668
[21] Moury and Standring, 2017, p. 661
[22] Moury and Standring, 2017, p. 668
[23] Moury and Standring, 2017, p. 667
[24] Moury and Standring, 2017, p. 667
[25] Moury and Standring, 2017, p. 668
[26] Höfgen, 2020, pp. 93-94
[27] Moury and Standring, 2017, p. 668
[28] ibid.
[29] Moury and Standring, 2017, p. 665
[30] Moury and Standring, 2017, p. 670
[31] Data.ipu.org, 2023
[32] Jacobin.com.br, 2021; Data.ipu.org, 2023
[33] Sn.at, 2019
[34] ibid.
[35] Jacobin.com.br, 2021
[36] Portugal.gov.pt, 2023, p. 5
[37] ibid.
[38] ibid.
[39] Portugal.gov.pt, 2023, p. 5
[40] Observador.pt, 2019
[41] ibid.
[42] ibid.
[43] Wenzelburger, 2009, p. 526
[44] Moury and Standring, 2017, p. 663
[45] Wenzelburger, 2009, pp. 525-526