THE IMPACT OF EU ECONOMIC GOVERNANCE ON THE COMPOSITION OF PUBLIC EXPENDITURES IN THE MEMBER STATES

The work sheds light on the largely under-investigated puzzle of the distributional impact of EU economic governance on the budget structures of the Member States. The overarching research question is: Is the impact of the Stability and Growth Pact neutral to the composition of domestic public spending? In addressing the EU-MS fiscal puzzle the thesis considers three main research questions: 1. when and how the SGP affects the composition of national budgets. 2. if and how the SGP has affected the domestic composition of public expenditures during the Great Recession and Eurozone crisis. 3. if and how the impact of the SGP changes across different domestic political, institutional and economic conditions. The thesis brings together the literature of the domestic determinants of national fiscal policy with that on the Economic and Monetary Union. Firstly, the disaggregate assessment of where the bite of the EU economic governance framework lands back at home sheds some light on how the Pact fulfils its policy objectives of promoting at the same time fiscal discipline and inclusive growth. Within this context, it contributes to the rich debate on the subordination of social objectives to economic ones at the hand of the EU fiscal surveillance regulatory framework. At the same time, it evaluates the claim of a detrimental effect of the Pact on investment and growth, linked to the lengthening and worsening of the severe downturn in the context of the Great Recession and Eurozone crisis, as well as the divergence between core and periphery. Building on the well-established findings on the interplay between (national) fiscal rules and the political, institutional, and economic context the analysis provides a causal empirical assessment over the panel of the EU28 from 1995 to 2018 of whether and under which conditions the EU economic governance framework impacts the structure of the budgets of the Member States. In considering both a synthetic indicator of changes to the budget structure, disaggregated impact on all budget lines (e.g. health, education, social protection, etc.), and on broad components associated with investments, transfers, and the mitigation of inequalities, the analysis provides a rare comprehensive picture of which elements are affected at all and where comparatively the highest toll emerges within the components of national spending. The main results are the following: • EU economic governance is far from being neutral in affecting the budget structure of the Member States; • Its impact on the national fiscal policy mix is heterogeneous over time - increasing substantially with the latest wave of reform - and scope, limited predominantly to Eurozone countries under EDP surveillance and aligning quite poorly with prescriptions of the CSRs; • Budgetary dynamics do not escape the bind of the EDP in times of crisis, rather the framework is the most impactful in such circumstances, generating substantial spending restructuring which is both pro-cyclical and detrimental for inclusive growth, as well as for geographical convergence; • Heterogeneity in the effect of the Pact extends to domestic circumstances, with political characteristics of the government (e.g. small budget distances, high alternation) and a unitary institutional structure as a precondition for any impact to materialise, while in the economic domain, alike for the crisis, the restraint of the SGP materialises especially in countering expansionary pressures such as those of ageing and unemployment. Findings refute the widespread argument within the literature of a limited impact of the supranational fiscal governance framework given the poor track record of compliance with the deficit targets of the Stability and Growth Pact. Conversely, the work contributes a more sophisticated account of the EU economic governance framework. It distinguishes not only membership to the EMU and the Eurozone but also close supranational budgetary surveillance under the Excessive Deficit Procedure. Additionally, it accounts for the heterogeneous effects of the Pact over its life and two substantial reforms. While an effect that runs against fiscal discipline is somewhat confirmed for EU and Eurozone membership, EDP surveillance emerges as the key driver of a consolidation-driven restructuring effect on national budget structures. Such dynamic, however, is far from homogeneous across time and place: being under the EDP leads to changes in the fiscal policy mix only within the Eurozone and after the 2011 reform when excluding the period of the crisis. Second, the analysis investigates the alignment between the effect on the national budget structure of the supranational fiscal rule and the policy coordination within the Semester comparing the distributive effect of the Pact with the Country Specific Recommendations (CSRs) in selected Member States. Overall, the negative impact of the EDP on inequality mitigating measures and investment and specifically on health, education, and social protection, more often than not clashes with the CSRs in the considered Member States. Heterogeneities both in the impact of the EDP on the budget structure in the post-2011 period across the core and periphery and the CSRs imply, however, a more substantial disconnect between the two arms of the EMU for the Southern Member States, supporting the narrative of a particularly detrimental effect of the Pact on social spending and inequality. Third, a further contribution is the granular analysis of dynamics in times of crisis unveiling whether the escape clauses shield domestic budget structures from any shock at the hands of the supranational fiscal rule or rather instead the national fiscal policy mix is affected. The analysis offers a rare detailed account of the cost of the SGP in times of crisis for specific budget components and their relative penalization at the hands of austerity policies, allowing to pinpoint if investments have been preserved at the expenses of social policies and those mitigating inequality, together with the intergenerational distributions of fiscal discipline. The results contradict the hypothesis of national budgets escaping from the claws of the pact during economic downturns. Rather, during the crisis more marked restructuring of the fiscal policy mixes emerges, as the EDP surveillance has a significant and sizeable impact on the budget structure and some of the key budget lines of interest even before the 2011 reform in times of crisis. The analysis reveals that not all spending is equally affected, as while EDP surveillance acts to (nearly fully) contain the recessionary upward push on spending, for example, in the domains of education and social protection, it more than compensates for the crisis for another key budget line such as health. As a result, divergences emerge in the constraining effect of the Pact on transfers, investment, and inequality mitigation. The first is only negatively impacted by the EDP surveillance in times of crisis, while the remaining categories always feel the constraining influence of the Pact which is further strengthened during the Great Recession. The already bleak picture for an inclusive and growth-enhancing investment rich recovery hides substantial divergences between core and periphery explored in details in the dissertation, as southern countries carry the worst prospect in terms of full containment of transfers and slashing of investments, with an intergenerational cost shouldered especially by youth. Finally, the work considers as well the interplay between the supranational level and the national context, identifying how the characteristics of the governing coalition (i.e. ideology, the range within the government and alternation), the federal- unitary institutional nature, along with fiscal rule strength preferences in the Member States, and the demographic and employment conditions affect the transmission of the supranational commitments within the Stability and Growth Pact onto the domestic budget structure. In doing so it uncovers as well which national configurations and conditions are conducive to a (restraining) impact of the SGP on national spending and the fiscal policy mix. Findings show that national political context facilitating changes to the budget structure (i.e. small coalition ranges and high alternations) are associated with a larger impact of the EDP surveillance on the fiscal policy mix, which loses significance under less favourable political conditions. A similar pattern emerges for ideology, with somewhat moderate governments as a precondition for any impact of the EDP surveillance, which is more sizeable on the left side of the spectrum. In the institutional arena unitary countries are more conducive to restructuring their budgets when falling under EDP surveillance, while conversely, national fiscal rule preferences show a complementarity between the extent to which countries prefer fiscal discipline on their own and the Pact, with EDP surveillance affecting more substantially the Member States with a laxer approach to spending. Finally, the demographic pressure and that of high unemployment stiffen the budget structure increasing the barriers against a restructuring effect of the Pact. However, from the opposite perspective - alike for the crisis - the constraining power of EDP surveillance is quite remarkable, containing their budgetary implications. To that effect, the EDP enacts substantial convergence across various levels of unemployment and old-age dependency rate. As such, the thesis confirms that while effects are heterogeneous and dependent on the national context, the Pact for Eurozone countries under EDP surveillance is far from a minor nuisance but rather a powerful force capable of substantially restraining if not annihilating key pressures such as that of demography, unemployment, and even the crisis. The thesis is structured as follows. After introducing the purpose and relevance of the work in Chapter One, Chapter Two situates the analysis within the extant literature on the domestic determinants of the budget structure, fiscal rules, and the EU economic governance, which inform and ground the research questions and hypotheses presented in Chapter Three. From such premises, the methodological approach and research design are outlined in Chapter Four touching on the key empirical challenges and mitigation strategies deployed in assessing such a complex ecosystem. Four empirical chapters follow. Chapter Five uncovers heterogeneities in the effect of the EU economic governance over its different configurations (e.g. Eurozone, EDP surveillance) and subsequent regulatory framework (i.e. initial, post- 2005, and post-2011), together with the (mis)-alignment across the effect of the Pact on domestic budget structures and the prescriptions of the Country-Specific- Recommendations. Chapter Six and Seven are dedicated to the assessment of the effect of the Pact during the Great Recession and Eurozone crisis, evaluating whether - against the expectations derived from the escape clauses - any impact on the budget structure emerges at all during the crisis, considering as well at a granular level where the bite of the EU economic governance at crisis lands across budget lines. Chapter Seven continues along the same line considering the distributional effects on investments, transfers, and inequality mitigation during the crisis, taking a closer look at the social dimension and how the intergenerational balance of spending is altered. Chapter Eight concludes the empirical analysis evaluating the interaction between the Pact and the national context uncovering which political, institutional, and economic domestic configurations are most conducive to the impact of the SGP. Finally, Chapter Nine situates the key findings of the thesis in the context of the reform debate on the Pact and fiscal governance more in general, considering as well the insights and outlook for the future of political and economic integration which can be drawn for the unprecedented challenge of the Covid-19 crisis and (partial) policy evolution for the pandemic response.