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Almost a decade after the last major reform of the European fiscal framework, Eurozone decision-makers have recently engaged in a discussion about the revision of fiscal rules. The pandemic is said to have changed the landscape of European economic policymaking. It has forced policymakers to embrace expansionary fiscal policies to address the diminished economic activity caused by the disruptions in supply and demand. Supporting the recovery of the European economy appeared to overshadow the consolidation of public finances as the predominant concern of the decision-makers. Recent scholarly work depicts the establishment of the Recovery and Resilience Facility as a watershed moment in European fiscal integration, signifying a major shift in the economic policy paradigm of the Eurozone.
The unexpected change of policy stance of many countries – particularly Germany – has made obvious the decline of ordoliberal ideas in the management of European fiscal policy. The ordoliberal tradition had been advocating indirect intervention in the economy via the establishment of an economic constitution. This framework prohibited discretionary fiscal intervention in the economy, endorsing rules-based fiscal discipline.
While there is little doubt that the proponents of Ordoliberalism have much less clout in the Eurozone nowadays, the attribution of the shift to the pandemic overlooks some important developments that had already emerged in the context of the latest European fiscal governance reform between 2010 and 2013. Arguably, the main element of that reform was the establishment of the European Semester, a system of integrated economic surveillance combining pre-existing fiscal and macroeconomic monitoring instruments and newly introduced procedures. Did the European Semester follow in the ordoliberal mold?
An ordoliberal European Semester?
Several important scholars embraced the so-called ordoliberalisation hypothesis: the strengthening of German ordoliberal ideas within EMU after the financial crisis shaped the direction of the 2010-2013 reform of EU economic governance. Different scholars highlighted different aspects of the process: the strategic use of ideas by the German government, the constraining effects of German ideas which reflected the reluctance of the German hegemon or the discursive abilities of the German Chancellor in her attempt to legitimise financial assistance arrangements. Nedergaard and Snaith undertook a thorough examination of the ordoliberal philosophy, pointing out the connections between institutional developments and two core ordoliberal principles: the predictability and constancy of economic policy.
In sharp contrast to the above academic discussion, the German Bundesbank’s harsh criticism of the fiscal framework, cast doubt on the ordoliberal direction of the reform. The rules appeared overly flexible, enabling discretionary fiscal policies.
Weakened fiscal discipline before the pandemic
A study of the underlying economic policy beliefs of Eurozone policymakers participating in the Economic and Financial Committee (EFC) reveals that Eurozone’s shift from Ordoliberalism preceded the pandemic. The findings show that the outbreak of the financial crisis of 2007-2009 weakened the rules-based approach to fiscal discipline. Countries embraced Keynesian anticyclical policy as a temporary measure to stimulate demand and stabilise the economy. But they faced considerable difficulties when they attempted to design their Fiscal Exit strategies. The rapidly deteriorating public finances in most member states damaged the intellectual grip of the fiscal rules in the eyes of policymakers. Instead of being the solution, fiscal rules appeared to be the problem. A new consensus emerged in the discussions of the EFC: fiscal discipline would have to be institution-based. The centralisation of decision-making on budgetary matters would enable the Commission and the EFC to combine long-term fiscal discipline with short-term fiscal discretion.
The above findings challenge the ordoliberalisation hypothesis. Ordoliberalism did not shape the direction of the 2010-2013 reform of the European economic governance. Contrary to the ordoliberal notion of the self-limited state, the reform increased the authority of the executive, allowing direct intervention in the economy by the state. Additionally, the reform opened the way to fiscal discretion effectively undermining the ordoliberal principle of consistent economic policymaking. These developments undermine the economic constitution as they transform the role of the state and impede the function of complete competition. The system of decentralized responsibility, which was favoured by ordoliberals, was turned on its head and was replaced by a system of centralised responsibility. The EMU had therefore abandoned the ordoliberal paradigm long before the outbreak of the pandemic.
An enduring shift?
This analysis offers a new perspective on the examination of the recent course of European fiscal integration. The waning influence of ordoliberalism in the EMU decision-making after the financial crisis highlights the existence of significant continuities between pre-pandemic institutional reforms and the post-pandemic policy response. In this light, the creation of the Recovery and Resilience Facility can be explained as a step in the path of creating a macroeconomic stabilisation function following relevant initiatives that had emerged between 2015 and 2019. What remains to be seen is whether the intellectual shift of EU policymakers to institutions-based discipline will endure, guiding the ongoing discussions regarding the revision of the fiscal framework. Or will the ordoliberal rules-based approach come back with a vengeance, prioritising fiscal consolidation over other policy goals?
Dimitrios Argyroulis is a post-doctoral researcher at the University of Luxembourg. His research interests include the reform of the Stability and Growth Pact after the financial crisis and the pandemic and the independence of the ECB in light of the emerging democratic legitimacy challenges. Dimitrios holds a PhD from the University of Sheffield (2020).
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Dimitrios Argyroulis is a post-doctoral researcher at the University of Luxembourg. His research interests include the reform of the Stability and Growth Pact after the financial crisis and the pandemic and the independence of the ECB in light of the emerging democratic legitimacy challenges. Dimitrios holds a PhD from the University of Sheffield (2020).