In this well-crafted book based on her doctoral dissertation, Charlotte Rommerskirchen delivers a nuanced examination of the contemporary politics of fiscal policy coordination among the member states of the European Union. The Great Recession of 2008–10 and the subsequent European debt crisis provide the policy context. Mancur Olson’s “logic of collective action” provides the analytical frame.
Rommerskirchen offers an evidence-based assessment of commonly heard claims. Although she introduces the usual technical arcana familiar to EU specialists, she relates her findings to larger systemic debates about the importance of fiscal policy coordination in fixed exchange-rate systems and about the limits of market discipline in both fixed and floating exchange-rate regimes. Throughout, she addresses the political dilemmas that become ever more complicated, mainly within Europe but also globally, when deepening interdependence is increasingly asymmetrical.
Rommerskirchen builds and subjects to basic econometric testing new statistical datasets covering fiscal measures undertaken by EU member states between 2008 and 2010, when systemic crisis hit, and then during the “consolidation” years between 2011 and 2014. Woven through methodical chapters that report results, which could otherwise have been quite dry, is a coherent narrative based on 53 personal interviews with officials from various public institutions—from the European Commission to the International Monetary Fund—and with 18 investors, investment fund managers, and market analysts. The basic storyline highlights the peaks and troughs of fiscal collaboration, especially among the 19 current members of the monetary union since 1999 when the Stability and Growth Pact was inaugurated.
The thesis defended here differs from the conventional one, which emphasizes German attachments to fiscal surpluses and austerity, as well as excessive regional reliance on US and Chinese demand. Instead, it seeks to answer three specific questions. Was there demonstrable, systematic evidence of fiscal free-riding during the crisis and consolidation years; that is, did most member states obviously wait for others to stimulate their economies and steer the regional economy back from the brink? Did other kinds of free-riding occur in the aftermath of the crisis, as the bloc as a whole struggled to maintain stability in the face of the rapidly expanding national debts of certain members? Finally, with the advantage of hindsight, can we discern the emergence of meaningful incentives for future fiscal policy coordination in the cause of region-wide growth and stability? The answers are uniformly significant and well articulated, if only partly surprising.
The evidence suggests little “first-order” fiscal free-riding either during the crisis or the consolidation years. The leading countries within the EU took full advantage of their fiscal room for maneuver; that is, they stimulated their economies up to the point where the sustainability of their spending was plausibly threatened by financial market pressures. That same evidence also suggests strongly that neither domestic fiscal proscriptions nor agreed-on rules embodied in the Stability and Growth Pact and the European Economic Recovery Plan of 2008 imposed serious restraints on fiscal policy making.
The failure to enforce common rules aimed at balancing stability and growth objectives across the region led, however, to free-riding of a less obvious sort. National fiscal behavior in practice overemphasized stability, undervalued growth, and disproportionately benefited the strong because of a mutual unwillingness to sanction rule breakers directly. This “second-order” free-riding resulted in a tacit reliance on the supposedly disciplinary workings of financial markets. But today’s financial markets, Rommerskirchen finds, provide little real incentive for countries in a position to stimulate regional expansion to do so, while encouraging deflation and recession in those with high external debts. In this regard, although she does discuss instruments like the European Stability Mechanism, it would have been good to learn more about the actual fiscal effects and political choices implied by rescheduling rather than restructuring those debts.
Is that absence of financial incentives for national fiscal policy makers to consider systemic needs different anywhere else in the world, even where political autonomy is not deeply threatened by the effects of monetary union? Rommerskirchen is skeptical. She calls therefore for the construction, in Europe and beyond, of fairer, more flexible, and more effective political procedures for fiscal policy coordination as economic interdependence deepens. She has in mind something like improved Macroeconomic and Excessive Imbalance Procedures currently evolving inside the EU. She hopes thereby to see the day when not only debtors but also creditors might be subject to explicit and effective sanctions if they refuse to adjust their national budgets in solidarity with one another.
Although her recommendations are debatable, Rommerskirchen’s book should prompt a new generation to ask serious questions about the sources and implications of macroeconomic imbalances, the political limits of flexible exchange rates, and the adequacy of global financial supervision. Such questions are not new, but contexts change. A few years after the Maastricht Treaty was ratified, I had the opportunity to interview a retired senior official of the Bundesbank. “Given the central role the Deutsche Mark played in stabilizing post-war Germany and eventually helping to secure its prosperity,” I asked, “how could you give it up?” He considered the question to be inadequately attentive to the catastrophes of the early twentieth century. In that light, he answered, “You certainly know that the Bundesbank Act could be changed by a simple majority in the Bundestag. But the Treaty,” he went on, “that will never be changed!” A new world beyond politics?
To the contrary, as Rommerskirchen appreciates and notes frequently, nothing in the distributive policy arena she studies is or can ever be beyond politics. Germany is a great power, and for now it lives in an economic policy environment mainly of its own choosing. Even if it may prefer higher interest rates to reward savers and reduce expectations of future inflation, it has an exchange rate vis-à-vis the rest of the world that typically favors German exports, it can heavily influence the terms of regional debt restructuring, and it continues to enjoy significant fiscal room for maneuvering. The consequences seem acceptable to northern European partners, problematic for France, and most difficult for indebted partners in the south. No automatic mechanisms and no autonomous markets exist to resolve the resulting political conflicts. Those conflicts need to be actively managed.
Perhaps the array of policies, procedures, and instruments surveyed in this book will allow Germany and its partners in an inadequately constituted Economic and Monetary Union to muddle through for a while longer. Perhaps the larger global story of great powers jealously guarding their fiscal sovereignty while pretending that not they but rather impersonal market forces constrain the less powerful will remain plausible for a time. But Rommerskirchen’s findings suggest the wisdom of preparing for the day when Europeans will either have to reopen a “treaty that will never be changed” or match its fundamental aspirations with much more than an asymmetric intergovernmental system capable only of weak fiscal policy coordination.
What about the rest of us? Mobile capital, tax havens, ill-managed exchange rates, uneven growth, rising indebtedness, and mounting problems of collective action undercut any plans for retreat to some imagined era of simple interdependence. Fiscal policy coordination hardly begins to describe the depth of the distributive dilemmas facing all of us. As Rommerskirchen may well have concluded her exemplary book, we are all Europeans now.
