David Moloney, Doctor of Philosophy Doctoral Thesis University of Limerick

Undermining the “Community Method”: The role of the European Council and legislative actors in shaping the response of the EU to the European sovereign debt crisis

Supervised by Dr. Frank Häge

Submitted to the University of Limerick, November 2018

Author’s Declaration

I, the undersigned, hereby declare that this submission is entirely my own work, in my own words, and that all sources used in researching it are fully acknowledged and all quotations properly identified. It has not been submitted, in whole or in part, by me or another person, for the purpose of obtaining a doctoral degree. I understand the ethical implications of my research, and this work meets the requirements of the Faculty of Arts, Humanities and Social Sciences Research Ethics Committee.

Student Name: David Moloney

Student Number: 0851345

Signed: ______

Signed (Printed): David Moloney

Abstract: This doctoral thesis describes and explains the bargaining success of the member states and the European Parliament party groups (intra-institutional actors), and the Council of Ministers, the European Commission, the European Council, the European Central Bank and the Parliament (inter-institutional) actors in the negotiations on the European Council’s Task Force report on economic governance and the Six-Pack legislative package on reforming the Stability and Growth Pact. Bargaining success is measured between the policy positions of the inter-institutional and intra-institutional actors and the decision outcomes on a wide range of controversies. Theoretical expectations on the variation in the bargaining success of the actors are developed from a wide range of studies on legislative procedures and bargaining models. The analyses are based on a dataset on the most controversial issues from the 2010 Task Force on economic governance and 2011 Six-Pack negotiations. The descriptive findings indicate that a mainly a North/East axis of member states, a right to centre constellation of party groups, the European Council, the Council of Ministers and European Central Bank shaped the outcome of the negotiations. The explanatory findings indicate that proximity to the European Central Bank and the European Council for member states, proximity to the European Central Bank and to the Council of Ministers and holding the position of rapporteur for party groups, and proximity to the European Council for the legislative institutions increased the bargaining success of the policy actors.

Keywords: Bargaining success; European Union; European sovereign debt crisis; Task Force on economic governance; Six-Pack.

Acknowledgements

I owe an enormous debt of gratitude to my supervisor Dr. Frank Häge at the University of Limerick for guiding me successfully through this research project over the last four years and the viva voce. Dr. Häge provided constant support and patience while always encouraging me to improve my work and teaching opportunities.

I would like to thank Dr. Maura Adshead and Dr. Rory Costello for their invaluable feedback during the progression panels. Their insight contributed to the successfully completion of the research project. Special thanks to Professor Naurin for his help in providing his own data on network capital for this thesis and for agreeing to be the external examiner for the viva voce, Dr. Bernadette Connaughton for giving me the chance to pursue a Ph.D. and Dr. Brid Quinn for her assistance with the University of Limerick’s Faculty of Arts, Humanities and Social Sciences Ethic Committee. I would also like to take the opportunity to thank a former member of the Department of Politics and Public Administration, Dr. Angelos Chryssogelos for making teaching so enjoyable.

This research project would not have happened without the financial support from the University of Limerick’s Department of Politics and Public Administration or the Irish Research Council’s Government of Ireland Postgraduate Scholarship. I wish to pay particular thanks to a former member of the University of Limerick’s Department of Politics and Public Administration, Emeritus Professor Edward Moxon-Browne for making available the research and travel grant available which allowed me to collect the primary data.

On a personal level I would like to acknowledge the friendship and support of a number of former and recent University of Limerick Ph.D. students, Dr. Majka Ryan who was unlucky to have a desk beside me, Dr. Cian Finn for his never ending assistance, Dr. Diarmuid Scully for his encouragement and my trainer Dr. Seán Whitney for never giving up on me.

This research project would have failed, had it not been for the countless number of officials and their assistants from the European Union institutions and member states who gave up their time to help me gain access and to the knowledge that I required. I am truly indebted to each one of them.

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I would also like to recognise the incredible support of my family over the last four years, especially my parents, and my uncles Eamonn and James.

Table Contents

Chapter I Outline of thesis ...... 1 Chapter II Background ...... 14 Chapter III Literature Review and Theoretical Perspectives ...... 23 Chapter IV Methodology ...... 91 Annex - List of Interviews ...... 109 Chapter V Case studies and analyses ...... 112 Part VI Conclusion ...... 263 Bibliography ...... 275

List of Tables Table 1: Constellation of positions in the Task Force ...... 142 Table 2: Factors affecting bargaining success...... 147 Table 3: Meetings of the Task Force...... 153 Table 4: Constellation of positions in the Council during the negotiations on the Six-Pack 180 Table 5: Factors affecting bargaining success...... 186 Table 6: European Council and Council of Ministers meetings ...... 192 Table 7: Timeline of the negotiations in the Parliament...... 199 Table 8: Constellation of positions in the Parliament during the negotiations on the Six-Pack ...... 213 Table 9: The regression coefficients for the effect of each variable on bargaining success . 217 Table 10: Constellation of positions in the trialogues during the negotiations on the Six-Pack...... 243 Table 11: The regression coefficients for the effect of each variable on bargaining success ...... 246 Table 12: Timeline of the negotiations in the trialogues...... 253 Table 13: Task Force recommendations and Commission proposals...... 258

List of Figures Figure 1: The initial positions of the actors on the decision-making rule when deciding to suspend funds...... 95 Figure 2: The initial positions of the actors on the decision-making rule when deciding to suspend funds...... 97 Figure 3: The initial positions of the actors on including a debt criterion in the medium term budgetary objective...... 122 Figure 4: The initial positions of actors on the suspension of funds...... 126 Figure 5: The initial positions of the actors on the introduction of interest-bearing deposits...... 129 Figure 6: The initial positions of the actors on the introduction of RQMV...... 134 Figure 7: The initial positions of the actors to giving greater flexibility in the excessive deficit procedure for member states that had undertaken pension reforms...... 137 Figure 8: The initial positions of the actors on the powers of fiscal councils...... 140 Figure 9: Mean bargaining success of member states and institutions...... 145 Figure 10: The initial positions of the actors to reducing debt by 1/20 per year for 3 years.165 Figure 11: The initial positions of the actors to the stringency in the provision of cash-based fiscal data to the Commission...... 169 Figure 12: The initial positions of the actors to the allocation of the fines collected by the Commission from member states...... 172 Figure 13: The initial positions of the actors on the setting of symmetric thresholds...... 178 Figure 14: Mean bargaining success of member states and institutions...... 184 Figure 15: The initial positions of the actors on the setting of symmetric thresholds...... 202 Figure 16: The initial positions of the actors on linking the inclusion of the debt criteria with the medium term budgetary objective...... 204 Figure 17: The positions of the actors to the allocation of the fines collected by the Commission from the member states...... 206 Figure 18: The initial positions of the actors on the introduction of RQMV...... 207 Figure 19: The initial positions of the actors to reducing debt by 1/20 for 3 years...... 209 Figure 20: The initial positions of the actors to the stringency in the provision of cash-based fiscal data to the Commission...... 211 Figure 21: Mean bargaining success of the party groups and institutions...... 216 Figure 22: Bargaining success and proximity to the ECB...... 219 Figure 23: Bargaining success and holding the position of rapporteur...... 220 Figure 24: Bargaining success and proximity to the Council...... 221 Figure 25: The initial positions of the actors to compelling member state officials to attend hearings in ECON...... 229 Figure 26: The positions of the actors to the allocation of the fines collected by the Commission from member states...... 230 Figure 27: The initial positions of the actors on linking the inclusion of the debt criteria with the medium term budgetary objective...... 231 Figure 28: The initial positions of the actors to reducing by 1/20 for 3 years...... 233 Figure 29: The initial positions of the actors to giving greater flexibility in the excessive deficit procedure for member states that had undertaken pension reforms...... 234 Figure 30: The initial positions of the actors to the stringency in the provision of cash-based fiscal data to the Commission...... 235 Figure 31: The initial positions of the actors on the role of independent institutions in the budgetary process...... 236 Figure 32: The initial positions of the actors on the setting of symmetric thresholds...... 238

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Figure 33: Mean bargaining success of the institutions in the trialogues...... 245 Figure 34: Bargaining success and proximity to the European Council...... 248 Figure 35: Bargaining success and proximity to the status quo...... 249 Figure 36: Bargaining success and proximity to the status quo...... 249 Figure 37: Bargaining success of the European Council and the Commission...... 258

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List of abbreviations

BI Banzhaf Index CAP Comparative Agendas Project Christian Democrats European People’s Party EPP Commission European Commission Conservatives European Conservatives and ECR Reformists COREPER Comité des représentants Committee of Permanent permanents Representatives Council Council of Ministers DEU Decision making in the European Union DG ECFIN Directorate General on Economic and Financial Affairs EAC European affairs committee ECB European Central Bank ECOFIN Economic and Financial Affairs Council ECON European Parliament's Committee on Economic and Monetary Affairs EFC European Financial Committee EFD Europe of Freedom and Democracy EFSF European Financial Stability Facility EFSM European Financial Stabilisation Mechanism EIB European Investment Bank EMI European Monetary Institute EMU Economic and Monetary Union ESM European Stability Mechanism EU European Union GDP Gross domestic product GNI Gross national income Greens Greens–European Free Alliance Greens–EFA IGC Intergovernmental Conference IMF International Monetary Fund LI Liberal intergovernmentalism Liberals Alliance of Liberals and ALDE Democrats for Europe MEP(s) Member (s) of the European Parliament Nordic Greens The European United Left– GUE-NGL Nordic Green Left Parliament European Parliament Presidency Presidency of the Council of Ministers QMV Qualified Majority Voting

RQMV Reverse Qualified Majority Voting SGP Stability and Growth Pact SMP Securities Market Programme Socialists Socialists and Democrats SD SSI Shapley–Shubik index Task Force European Council’s Task Force report on economic governance TEU Treaty on European Union Working Group Ad-Hoc Working Group on Economic Governance

Chapter I Outline of thesis

1.1 The study of the Task Force on economic governance and the Six-Pack

Traditionally European Union (EU) policy has been decided through the so called “Community Method”, a process which involves the European Commission (Commission) initiating legislation and the Council of Ministers (Council) and European Parliament (Parliament) either amending or vetoing it (Wallace, 2005). The role of the intergovernmental European Council, the body where heads of state or government meet, under the “Community Method” was restricted to providing broad policy guidelines and determining treaty reforms. However, with the 2008 financial crisis, “the European Council emerged as the centre of political gravity” as EU leaders met frequently in an effort to stabilise the Eurozone (Puetter, 2012). By 2010 the financial crisis had developed into a sovereign debt crisis, which posed another and arguably more dangerous threat to the stability of the Eurozone. The first member state to suffer from the fallout of the sovereign debt crisis was Greece in March 2010. As the country was heading for a bailout, EU leaders convened in Brussels for a European Council meeting on the 25th and 26th of March, where they agreed to create a Task Force on Economic Governance (Task Force) under the leadership of the President of the European Council, Herman Van Rompuy. The Task Force was charged with providing a set of recommendations, by the next European Council summit on the 28th-29th of October, which improved economic policy-making in the Eurozone (European Council, 2010a). The Commission was also tasked by the European Council at the March summit with developing proposals on economic governance. Anticipating the recommendations of the Task Force, the Commission’s legislative proposals on reforming economic governance contained many of the same elements as those in the Task Force’s final report. Nonetheless it was the European Council that claimed credit for the reforms, despite the Commission’s proposals forming the basis of the Six-Pack. The Six-Pack was up to that point the most comprehensive response to the European sovereign debt crisis. The legislative package contained five Regulations and one Directive. The aim of the Six-Pack was to address the weaknesses in the EU’s economic governance framework which had been exposed during the crisis. The Commission communicated its proposals for the Six-Pack on the 30th of September 2010 to the Council and to the Parliament, as per article 294 of the Treaty on the Functioning of the European Union (European Commission, 2012a and 2012b). There are two central questions that this research project seeks to answer. The first relates to the influence of the European Council vis-à-vis the Commission. The second concerns the extent to which other legislative actors influenced the decision-making outcome.

To answer the first, the claim that the European Council assumed a more influential and powerful role in policy-making through the Task Force in the opening phase of the European sovereign debt crisis needs to be verified. The introduction of Article 13(1), Article 15(1), Article 15(3) and Article 15(6) in the Treaty on European Union provide the foundation for the expectation of the European Council’s growing influence post the Lisbon reforms during the opening phase of the sovereign debt crisis in several studies (Alexandrova et al. 2014; Puetter 2011; Schwarzer 2012; Chang 2013; Niemann and Ioannou 2015 and Da Conceição-Heldt 2016) including this one. Article 13(1) brought the European Council formally into the EU’s ‘institutional framework’. The legal recognition of the European Council, above the Commission, in the EU’s political system, altered the agenda-setting dynamics between the two institutions. This became apparent when the European Council established the Task Force, under Article 15(1), which allowed the member states rather than the Commission to set the EU’s agenda on reforming the Union’s economic governance framework. Under Article 15(1), the European Council could provide ‘the Union with the necessary impetus for its development and shall define the general political directions and priorities thereof’ (Official Journal of the European Union, 2012). The internal organisation of the European Council was improved on through Article 15(3) and Article 15(6), increasing the opportunity for the member states to set the agenda. Under Article 15(3) the European Council would meet twice every six months while under Article 15(6) the President would “drive the work forward” and “facilitate cohesion and consensus”. The regularisation of the European Council meetings and the powers of the President allowed member states not only to set the agenda to reform the EU’s economic governance architecture; it also increased the institution’s ability to act quickly to a crisis (Ibid). By only focusing on the influence of the European Council, through the outcome of the Task Force, and the Commission, through its communications of the 12th of May and the 30th of June on reforming economic governance, when examining the outcome of the negotiations on the Six-Pack, key policy actors would be neglected. Thus, the member states, the party groups, the Council, the ECB and the Parliament are included in this study. Therefore, the extent to which other legislative actors influenced the outcome needs to be answered. This second question can be broken down into three constituent parts; (1) Which member states exercised the most influence in shaping the Council’s collective position? (2) Which party groups were the most influential in shaping the Parliament’s institutional position? (3) Which institution shaped the final decision outcome in the Six-Pack trialogues? The scope and depth for the reforms to the EU’s economic governance framework proposed in the Task Force and the Six-Pack requires detailed research. The reforms proposed

4 in the Task Force that are examined in this thesis are (1) strengthening the debt rule in the Stability and Growth Pact (SGP); (2) suspending the payment of EU budget funds for failing to adhere to the rules of the SGP; (3) the introduction of interest bearing deposits; (4) increased leeway in the excessive deficit procedure for member states that undertook second pillar pension reforms; (5) the introduction of reverse qualified majority voting (RQMV) and (6) the powers of the fiscal councils. In the Six-Pack the major issues were (1) the establishment of the numerical debt criteria; (2) strengthening the debt rule; (3) the provision of cash-based fiscal data; (4) distribution of fines; (5) the introduction RQMV; (6) the symmetric treatment of current account surpluses and current account deficits; (7) economic dialogue; (8) the role of independent institutions and (9) flexibility for member states that implemented second pillar pension reforms in the excessive deficit procedure. The proposals in the Task Force report and in the Six-Pack on RQMV, the power of fiscal councils and the provision of cash-based fiscal data shifted some power away from the Council and the member states to the Commission. Conversely the strengthening of debt rule, the suspension of payments of EU budget funds, the introduction of interest bearing deposits, second pillar pension reforms, the establishment of the numerical debt criteria, the distribution of fines, the role of independent institutions and the symmetric treatment of current account surpluses and current account deficits demonstrated the influence of the member states that could be considered fiscal hardliners in the Council. The inclusion of economic dialogue was an attempt to increase the influence of the Parliament in the EU’s economic governance framework. Studying the negotiations of the Task Force is of particular importance. The Task Force was an inter-governmental body which proposed a serious of reforms to the EU’s governance structures that later formed the basis for the Six-Pack, the Two-Pack, the European Stability Mechanism (ESM) and the Fiscal Compact. As an inter-governmental body, the Parliament did not play a role while the establishment of the Task Force undermined the Commission’s agenda-setting powers. The formation of the Task Force outside of the Community provided a platform for the European Central Bank (ECB) to play an active part in policy which hitherto was unavailable to the institution. The Task Force was therefore a unique decision-making forum within the EU’s policy-making framework. Similarly, examining the Six-Pack negotiations is relevant in their own right. The negotiations on the Six-Pack proposals were conducted under the Community Method, thus allowing the Commission to set the agenda and the Parliament to influence the outcome. The Six-Pack negotiations also allowed member states in the Council to implement, where possible, the Task Force recommendations. The negotiations in the Six-Pack can further enrich the

5 literature on decision-making through providing a detail account of the Community Method process in the Economic and Monetary Union field. The negotiations can also provide clarity to the influence of the intra-institutional and inter-institutional actors in shaping the most comprehensive response to the opening phase of the European sovereign debt crisis. A systematic analysis of the negotiations on the Task Force report and on the Six-Pack through the Council, the Parliament and the trialogues has not been carried out to date. Since the crisis, the literature has taken a broad approach when examining the response of the institutions to the European sovereign debt crisis. A small number of studies investigated the role of the European Council in the crisis (Puetter 2011; Dinan 2012; Crum 2013) while a larger number examined the influence of the Commission (Hodson 2011; Schwarzer 2012; Chang 2013; Bauer and Becker 2014; Niemann and Ioannou 2015; Da Conceição-Heldt 2016). A similar level of attention was directed to scrutinising the role of the European Central Bank during the crisis and the powers that the institution gained (Salines et al. 2012; Mentz and Smith 2013; Yiangou 2013; Chang 2015; De Rynck 2016; Epstein and Rhodes 2016). The literature on the response of the member states to the economic challenges presented by the European sovereign debt crisis can be spilt into two parts. The first part reconstructs the decisions taken by the member states to respond to the crisis (Peet and La Guardia 2014; Meiers 2015; Schimmelfennig 2015) and the reforms undertaken by the programme countries (Featherstone 2011; Nelson et al. 2011; Beblavý et al. 2011; Matthijs and Blyth 2015; Blanchard and Portugal 2017; Henning 2017). In comparison, scholars have demonstrated considerably less interest in the Parliament’s performance during the crisis (Dinan 2012; Chang 2013; Rittberger 2014; and Niemann and Ioannou; 2015). There have been some studies that dealt with the Task Force and the Six-Pack (Buti and Carnot 2012; Chang 2013; Verdun 2015), however as with the previous studies, the literature has focused on the establishment and outcome of the Task Force and the conclusion of the Six-Pack. Thus, while the current range of studies have managed to identify some of the important actors on the European sovereign debt crisis and provided useful information on the background of the Task Force and Six-Pack negotiations, questions remain on the influence of actors in shaping the Task Force report and the final legislative outcome. Furthermore, gaps remain in the literature on the intra-institutional and inter-institutional policy conflicts. Our current knowledge of the Task Force report, the Six-Pack, and the role and influence of the institutions and actors are drawn from these studies or from perceptions formed by reports or from a small number of interviews on the negotiations in the media. This study therefore, takes advantage of documents that were not previously available and interviews with

6 the key decision-makers from the institutions, the member states and the party groups who attended the negotiations to present a detailed and first-hand account of the discussions on the Task Force report and the Six-Pack. With this information, this research seeks to address the research questions as described earlier in this chapter; the influence of the European Council vis-à-vis the Commission and the extent to which other legislative actors influenced the decision-making outcome. The scope of the study is restricted to the negotiations in the Task Force and the Six-Pack. The focus on the Task Force report and the Six-Pack allows for an examination of European Council’s bargaining success on legislation, which could not be facilitated with other legislative packages. Therefore, this thesis does not investigate the bargaining success of the actors in the Two-Pack or the Fiscal Stability Treaty.

1.2 Contributions of the study

The research project makes an important contribution to the growing empirical literature on European economic governance since the crisis, through reconstructing the negotiations that took place in the Task Force and on the Six-Pack. From a non-academic perspective there are several reasons why significant attention should be paid to the Task Force and the Six-Pack. First, the Six-Pack remains to this day, one of the most significant legislative packages designed to respond to the sovereign debt crisis while the Task Force report set the agenda for the negotiations for the Six-Pack, the Two-Pack, the ESM and the Fiscal Compact. Indeed, the Six-Pack is the most important reform undertaken to the SGP since those initiated in 2005. Second, the reforms have increased economic integration in the Eurozone, through reinforcing governance structures. Third, it has been argued that the European sovereign debt crisis has increased tensions between non-Eurozone and Eurozone member states. Through studying the negotiations in the Task Force and in the Six-Pack, further light can be shed on the policy divisions between the Euro opt-outs and Euro opt-ins, which has lent weight to the arguments for a two-tier/speed EU. Fourth this research project will bring transparency to the negotiations on the Task Force and the Six-Pack. Reconstructing the negotiations will address the shortage of information on the influence of the member states, the Commission, the Council, the Parliament and the ECB during the negotiations. A lack of knowledge in this area also increases the public perception that the decisions made at the EU level are down to a small cohort of bureaucrats and/or member states. This adds to the growing perception that a “democratic deficit” exists between the European institutions and citizens throughout the EU. The argument that the Task Force deepened the democratic deficit will be further explored

7 through examining the role Parliament in the Task Force negotiations. Fifth, the focus on the Task Force and the Six-Pack will allow for an in-depth analysis of the differences in the policy positions of the member states and the institutions and formation of policy in the European Council, the Commission, the Council and the Parliament in the field of economic governance. Finally, the reconstruction of the Task Force and the Six-Pack will provide a detail record of EU’s initial efforts to respond to the opening phase of the European sovereign debt crisis. Recording the historic negotiation process, will inform future policy-makers of the decision- making process that led to the radically reformed economic governance structures. The research also makes several academic contributions to the current literature on bargaining in the EU. First, this study will provide a detailed account of the Task Force and Six-Pack negotiations. The current body of literature on the European sovereign debt crisis has thus far not conducted a detailed reconstruction of the negotiations. A detailed reconstruction can provide the basis for further research on the Task Force and the Six-Pack negotiations. Second, the research tests the bargaining success of the member states, the party groups and the institutions that participated in the negotiations. The contribution of literature to our understanding of these negotiations has been exclusively focused on the background and outcome of the Task Force and Six-Pack negotiations to varying degrees. Third, with the attention of the studies on the European sovereign debt on the background and outcome of the Task Force and Six-Pack, there has been no explanation in the variation of the bargaining success of the member states, the party groups and the institutions. To do so the research draws from literature on EU-decision-making, the European sovereign debt crisis and on international relations to develop theoretical expectations. More generally, the research will make broader contributions to our understanding of the nature of the EU post the Lisbon reforms, decision-making in the EU and the role of institutions in shaping the outcomes of negotiations, and how economic power shapes influence in the EU on economic policy. First, the study provides a detailed analysis of the changes wrought to the post Lisbon institutional framework by examining the influence of the European Council after the reforms introduced by the Lisbon Treaty and during the sovereign debt crisis. Several studies have examined the potential influence of the European Council after the Lisbon Treaty, few however have tested the institution’s potential power to shape the outcomes of negotiations. Furthermore, the impact of the emergence of the European Council as an agenda- setter on the power of the Commission to set the agenda has thus far not received significant attention. Second, the literature on the role of the ECB and the sovereign debt crisis has argued that the institution has become increasingly influential in shaping the EU’s response to the

8 crisis. As with the European Council, this research project will test the influence of ECB. Third, the research provides an insight into the role of the Council and the Parliament in decision- making and the shaping of outcomes in negotiations in the area of economic policy, which has been somewhat neglected in the literature. Finally, this research project seeks to establish whether the perception formed during the European sovereign debt crisis, that economically stronger member states shape economic policy is accurate.

1.3 Measuring bargaining success

Mirroring the structure of the case studies, the bargaining success of the actors is divided into two parts. The first part examines the bargaining success of the member states within the European Council’s Task Force. The second part examines the bargaining success of the member states, the party groups and the institutions in the Six-Pack. The spatial model of politics as designed by Bueno de Mesquita et al. (2003), and Bueno de Mesquita and Stokman (1994) provides a conceptual guide for how to measure bargaining success and policy influence. The theoretical modelling framework assumes relevant actors have spatial preferences along continuous issue or ideological dimensions. The framework has been utilised to measure bargaining success of member states, the Parliament and the Council in studies on EU legislative decision-making see Thomson et al. (2006), Thomson (2011), Thomson et al. (2012) and Arregui and Thomson (2014). According to Thomson (2011), the model assumes that actors share the same perception of the political space. The actors within the political space that take positions on issues agree that those are the positions that require a solution and that they also contain the main policy alternatives considered. The actors then choose the policy position which will then either become the institution’s collective position or the decision outcome. The potential capabilities that an actor is willing to mobilise to influence the decision outcome may help determine the success of the actor’s efforts (Thomson, 2011, p.229). Thomson (2011) conceptualised bargaining success as the congruence between the policy demands of the actor and the decision outcomes (Ibid, p.231). Arregui and Thomson (2009) have described the measurement of bargaining success as the level of agreement between the initial policy positions of the actors on an issue in a legislative proposal and the decision outcome on that issue in the final legislative act (Arregui and Thomson, 2009, p.656). Thus, the closer an actor’s initial policy position on an issue to the outcome in the final legislative act, the higher the bargaining success of the actor will be. Conversely, the further

9 the outcome is to the initial policy preference of the actor, the lower the bargaining success of the actor. This approach to measuring bargaining success is the one adopted in this thesis. Thomson (2011) however has questioned the term bargaining success arguing that it is a misleading one, as ‘luck’ has a sizeable effect on transforming the initial policy demand of the actors into the agreed outcome (Thomson, 2011, p.231). Bargaining success according to Thomson implies achievement and causality; if an actor is said to have succeeded in aligning the outcome with their policy preference than this implies that they have achieved the outcome through their actions or resources. However, an actor may equally realise their preferred outcome without availing of their resources or taking action. Thomson contends that this is luck and not power (Ibid). Thomson (2011) draws on Weber’s (2007/1914) classic definition of power and Barry’s (1980) examination of the relationship between luck and power. Weber in his classic text underlined the important difference between power and luck stating that power is an opportunity for actors “to realize their own will in a social action even against the resistance of others who are participating in the action (Weber, 2007/1914, p.247). This according to Thomson suggests that actors have the possibility to realise their preferred policy outcome without having power. The link between the power that an actor can wield in negotiations and the extent to which the decision outcomes reflect the policy demand is not entirely clear cut. For example, the policy position of an actor with little or no power may be the same as the decision outcome because the end result of the negotiations was compromise between the positions of powerful actors or was a result of other powerful actors taking the same position. Similarly, the negotiated outcome may not reflect the powerful actor’s initial powerful due to the actor lacking enough power or because it was not invested in the issue and thus did not really care about the outcome (Thomson, 2011, p.189). Barry’s (1980) study separates power and luck when examining the negotiated outcome and the policy preferences of the actors. According to Barry, there’s no simple link between the power of an actor and their preferred outcomes. If an actor’s power is defined as their ability to align the outcome with their preferred policy, the chances that the outcome corresponds with their preference do not solely depend on their power. Along with an actor’s power, there are other factors that could have influenced the outcome if the actor does not intervene during the negotiations. This according to Barry is luck. An actor with little to no power but with a lot of luck may be able to consistently obtain their preferred policy outcome than an actor that has a lot of power but with little to no luck (Barry, 1980, p.184). To offset luck, the weighted average distance to other positions is tested as a variable in the regression analysis in the sections on

10 the Task Force report, the Six-Pack negotiations in the Council and in bivariate analysis in the EP section of Chapter V. The weighted average distance measures the proximity of a member state or party group to the weighted average position of other member states and party groups. The closer a member state or party groups is to the weighted average position of other member states or party groups, the more likely it is to be successful through luck. Conversely, the further away a member state or party group is the weighted average position of other member states, the more likely it will be successful through power.

1.4 Outline of thesis

Chapter I provides an overview of the contribution of the research to studies on the European sovereign debt crisis and more broadly to the literature on decision-making in the different institutions involved in the Task Force and Six-Pack negotiations. The chapter highlights the role that the research can play in deepening the understanding of scholars and policy-makers of the EU’s decision-making processes. The chapter also provides a summary of the methodological approach taken and has outlined the subsequent chapters of this doctoral thesis. Before the methodological approach can be discussed in detail, a review of the current literature on the European Council and decision-making in the EU is needed. Chapter II of the thesis examines at the development of the financial and sovereign debt crises, and the EU’s response. The aim of the chapter is to underline the scale and seriousness of the problems facing policy-makers and the delay of the EU institutions and the member states in agreeing a common approach to resolving a crisis that had begun in the financial markets and which later threatened the financial stability of non-Eurozone and Eurozone countries alike. Further the goal of the chapter is to underline the importance of the Task Force report and the Six-Pack, as part of the EU’s attempt to maintain the cohesion of the Eurozone and protect the Economic and Monetary Union. The chapter also outlines how the member states were affected by the crisis. Chapter III is divided into three parts. The first part reviews the studies on intergovernmentalism and neo-functionalism. The second part of the chapter examines the rise of intergovernmentalism within the context of the European sovereign debt crisis, paying particular attention to the struggle between the European Council and the Commission over setting the agenda on the EU’s response to the crisis. The third part provides an analysis of the studies on the influence of the supranational, the ECB and the Parliament, institutions during the crisis. The fourth part of the chapter examines the literature on decision-making in the EU.

From the literature on the European sovereign debt crisis, theoretical explanations are developed on the influence of the European Council vis-à-vis the Commission in shaping the EU’s response to the opening phase of the crisis post the Lisbon Treaty when Article 15(1) came into force. Theoretical explanations are also developed from studies on literature on EU- decision-making, the European sovereign debt crisis and on international relations to explain the variation of the bargaining success of the member states, the party groups and the institutions in the Task Force and Six-Pack negotiations. Chapter IV outlines the methodological approach taken in this research project. The Chapter outlines the criteria for the selection of the Task Force and the Six-Pack as case studies and underlines the importance of these reforms to the EU’s economic governance framework. The discussion then moves onto the collection of data. This section details the use of the collected data; for reconstructing the case studies, operationalising the explanatory variables and to test the bargaining success of the inter-institutional and intra-institutional actors. The following section outlines in detail the origins of the primary documents, how the files were accessed, and the value of the information contained in the sources. The collection of data from the interviews also receives significant attention. A breakdown is given of the numbers of the key informants from the institutions, the member states and the party groups. How the variables were operationalised is covered briefly before a lengthy description of the structure of the interviews. Here the specifics of the interviews are extensively covered from the length of the interviews to the identification of the most important issues and how salient they were to the actors. The remaining sections of the chapter outline the rationale for the framework to measure bargaining success, spatial modelling and issues related to data collection. With regards to data collection issues, several solutions were proposed to address missing information. Chapter V presents the qualitative and quantitative analyses of the case studies. The first part of the chapter reconstructs the negotiations in the European Council’s Task Force through focusing on the most important issues as identified by the primary documents and the senior policy-makers. The analysis is split into two parts. In the first part, bargaining success of the member states on the six controversial issues is measured and described. In the second part, a multivariate analysis is then conducted to explain the variation in the bargaining success of the member states. The second part of the chapter examines the most important issues identified by the key-informants and the primary documents when retracing developments in the Council, the Parliament and in the final stage of the Six-Pack negotiations. Similar to the structure of the analysis of the Task Force negotiations, the bargaining success of the member states will be measured and described. A multivariate analysis is then conducted to explain the

12 variation of the member states bargaining success. Likewise, the parts reconstructing the intra- institutional negotiations in the Parliament and the inter-institutional negotiations in the final phase of the Six-Pack negotiations in the trialogues follow the structure of the Task Force and Council sections when reconstructing the negotiations at these stages. There are differences however in measuring the bargaining success of the party groups and the institutions. The bargaining success of the party groups and the institutions is measured by conducting a bivariate regression multi-regression analysis. The results of the analyses of each of the four parts of this chapter are then interpreted. Chapter VI draws on the results of the analyses to support the case why certain actors were influential during the negotiations. These results will clarify the influence of the European Council vis-à-vis the Commission and the intra-institutional and inter-institutional actors in shaping the outcome of the Six-Pack negotiations. The discussion continues with the implications of the findings of the thesis and the theoretical contributions to literature on EU decision-making and on the European sovereign debt crisis.

Chapter II Background

2.1 Background to the negotiations on the Task Force and Six-Pack

The sovereign debt crisis that rocked the Eurozone began in Greece in 2009. The roots of that crisis can be traced to the interest rate rises introduced by the Federal Reserve in 2005–2006, which led to the bursting of the housing bubble in the United States. Faced with staggering losses and increased interbank interest rates, the mortgage giants Fannie Mae and Freddie Mac were bailed out by the U.S. Treasury Department. Hank Paulson, Treasury secretary, and Federal Reserve chairman Ben Bernanke however decided that no such bailout should be extended to the investment bank Lehman Brothers in September 2008. The decision to let Lehman Brothers collapse had serious ramifications on the international economy. Stock markets suffered disastrous declines and banks decided to increase the interbank interest rates along with tightening lending (Marelli and Signorelli, 2017, pp.83–84). In the first attempt to deal with the crisis after Lehman Brothers had collapsed, French President Sarkozy called for the creation of a common European bank-rescue fund, worth around €300 billion at a summit in October with the leaders of the four biggest European economies. This was rejected by German Chancellor Angela Merkel. However, at another summit eight days later, Merkel called for a €1.9 trillion in loan guarantees and capital injections to support the banks. Despite this call, the financial crisis soon morphed into the European sovereign debt crisis. In the run up to the Greek general election in October 2009, Greek Prime Minister, Kostas Karamanlis, undertook a spending spree, in response to major riots. The combination of the decision to increase spending, the riots and a downgrading of Greek debt by Standards and Poor led to a spread in Greek sovereign 10-year bonds of 300 base points over German sovereign 10-year bonds by January 2009. The Commission placed Greece under surveillance for breaking the 3 per cent deficit limit in the Stability and Growth Pact and called on the member stated and Ireland to increase their pace of deficit cutting. Shortly after coming to power the newly elected Greek Prime Minister George Papandreou announced that the Karamanlis administration had left an enormous hole in the budget. For 2010, the budget deficit was 10 per cent of GDP, a figure soon to be revised to 12.7 per cent (Peet and La Guardia, 2014, pp.40–46). The revision in the deficit figures and the downgrade by Standards and Poor led the market to ask whether Greece had the capacity to service its debt, which had been facilitated through low interest rate loans provided by foreign lenders, and to finance its budget payments in full. These questions were not only been asked of Greece, but also of Ireland, Spain and Italy. Banks in Ireland and Spain had suffered substantial losses due to their over exposure to

16 a bubble in the property market that burst in those two member states in 2009. Italy’s problems though different were no less serious. Italy was in the throes of a macroeconomic crisis, which had intensified since the member state had adopted the Euro. The member state was suffering from slow growth and declining competitiveness, leaving the country with no other option but to pay ever higher bond yields before the crisis. With the advent of the crisis, Italy was now faced with escalating interest rates on its debt by financiers who were increasing of the view that the member states debt was unsustainable (Meiers, 2015, p.17). The widening gap between the Greek sovereign 10-year bonds and German sovereign 10-year bonds, eventually forced Athens out of the private capital markets, leaving Papandreou to request EU assistance at the European Council summit in March 2010. The decisions at the March and May European Council summits were critical in shaping the Greek programme, the bilateral loan facility and in escalating the crisis (Jones, 2015, p.53). A week before the March summit, Merkel declared to the Bundestag that assistance was to be linked to “rigorous conditions”, a unanimous decision by the Eurogroup members and the full involvement of the International Monetary Fund (IMF). The German government also began to raise the prospect of sanction procedures against member states that had failed to respect deficit and debt rules. Merkel spoke of excluding “a country from the euro zone if again and again it doesn’t fulfil the requirements” and threw her support behind more automatic and effective deficit reduction procedures. Merkel’s Finance Minister, Wolfgang Schäuble, went even further than the Chancellor. Schäuble stated that Greece leaving the Eurozone, “Grexit”, was not only plausible, but desirable. He stated that a “Grexit” could strengthen the monetary union by reinforcing the Eurozone firewall. Schäuble also floated the idea that member states that broke the rules of the Euro-area should “in extreme cases” have their voting rights suspended for a minimum of one year in the Council and lose EU structural fund payments (Meiers, 2015, pp.19–20). Both proposals later formed the basis of the Germany’s proposals to the Task Force. At the European Council summit, the member states announced that they were ready to pool bilateral loans into a fund that provided financial assistance to Greece. The bailout with the Greek government was to be negotiated by the “troika”, which had been formed in early March and consisted of the Commission, the IMF and the ECB. Merkel built on her statements made in the Bundestag a week earlier. Loans were to be extended at “non-concessional” interest rates, reflecting the risk of lending to Greece, and decision on financial assistance had to be unanimous and include “strong conditionality” to reform. Crucially, the mechanism could only be used as a last resort to avert a Greek default (Peet and La Guardia, 2014, pp.48–49).

Initially the European Council sought only to provide assistance to Greece, however discussions began on establishing a framework for future bailouts and the role that the private sector could play. The threat of the European Council to force financial institutions to shoulder the costs of the bailouts or burden sharing spooked the markets (Jones, 2015, p.54). The markets were equally unimpressed by the announcement of the Eurogroup in early April 2009 that it was prepared to lend Greece €30 billion in the first year of a programme, with the IMF providing an extra €15 billion. Shortly after the statement by the Eurogroup in April, Standards and Poor downgraded Greek debt to junk status, while also cutting its ratings for Portuguese and Spanish bonds. At the start of May, the inevitable bail-out of Greece was approved by the Eurogroup when Papandreou made a formal request for assistance. The total cost of the package was €110 billion, and the funding was to be spread over three years. It was the largest programme to be provided to a single country. Despite the immense scale of the funding, Greek bonds continued to rise beyond 12% and the contagion was spreading. Yields on Irish bonds approached 6% while Portuguese ones crossed the 7% threshold. Stock markets experienced steep falls on foot of the news of the bailout, as investors were concerned about the political and financial stability of a block that accounted for a quarter of global output (Peet and La Guardia, 2014, pp.50–51). The Greek bail-out programme marked the first step in a long and difficult process of preserving the Eurozone. A week after the Greek bail-out was approved, finance ministers met in an extraordinary session of Economic and Financial Affairs Council configuration to approve a temporary rescue mechanism. The European Financial Stability Facility (EFSF) was backed by €500 billion in bilateral loan guarantees with the IMF providing an extra €250 billion on a country-to-country basis. The emergency fund was to end by June 2013 (Meiers, 2015, pp.19–20). Adding additional financial firepower was brought to bear on the markets by the ECB. The establishment of the EFSF gave ECB President Jean-Claude Trichet the political cover needed to purchase through the Securities Market Programme (SMP) sovereign bonds of member states that were under speculative attack on the secondary market. Initially SMP was concentrated at Greece, however the programme was later directed at Ireland and Portugal, and in 2011 at Italy and Spain (Marelli and Signorelli, 2017, p.114). The Task Force on economic governance (Task Force) was also established at the March summit of the European Council. Under the leadership of the President of the European Council Herman Van Rompuy, the Task Force was to propose recommendations to reform the economic governance structures which had been exposed by the European sovereign debt crisis (European Council, 2010a). Attending the Task Force meetings were high level policy-makers

18 from the member states, the ECB and the Commission. The Task Force was able to conduct and conclude the negotiations during a period of relevant calm on the bond markets. The focus of these negotiations in the Task Force was to reduce the risk of another bail-out on the scale of the Greece programme. A tougher sanctions regime was proposed along with increased monitoring and stricter fiscal rules. Germany along with those member states that provided the majority of the EFSF funding accepted that for those proposals to come into force, the Stability and Growth Pact had to be reformed (Peet and La Guardia, 2014, pp.51–53). At the end of September when the negotiations in the Task Force were drawing to a close, the Commission tabled its Six-Pack proposals which were based, in part, on the recommendations by the Task Force. These recommendations would prove to be the basis for the Commission’s Six-Pack proposals. Of course, the Six-Pack or the Task Force proposals could not completely reduce the risk that a member state might need financial assistance in the future. Merkel therefore sought the support of President Sarkozy in October at the G8 summit in Deauville for the creation of a permanent crisis-resolution system and a greater role for the private sector in any future financial assistance programmes. This new doctrine had a negative effect on Irish, Portuguese, Spanish and Italian bonds, which were sold-off by investors. Ireland however was the first victim of the Deauville decision. Interest rates on Irish bonds rose to the 7% cent threshold, making it too expensive for the administration in Dublin to borrow on the markets. The markets were also unhappy with the cumbersome decision-making process in the Eurogroup that Merkel had insisted on at the European Council summit in March and the need for parliamentary ratification in some member states (Henning, 2017 p.110). In November Ireland made a formal request for assistance from the IMF and the EU. The financial assistance package was valued at €85 billion or 54 per cent of Ireland’s GDP for 2010. While Deauville sealed Ireland’s fate, the member state had been in severe difficulties since the summer of 2010. Lower GDP figures were announced in June, there continued to be uncertainty about the scale of the property-related losses of the Irish banks and in September the State guarantee for deposits expired which resulted in a mass exit of private sector funders from the banking system. The expiry of the State guarantee left the Irish banking system heavily dependent on credit support from the ECB (Lane, 2011, p.69). As the Council and the Parliament were preparing their collective positions on the Six- Pack in March 2011, Portugal was heading towards a bail-out. The failure of the government in Lisbon in March 2011 to win parliamentary support for a fourth austerity budget pushed Portugal to a bail-out (Peet and La Guardia, 2014, p.55). The problems of Portugal were

19 however different to those of Greece and Ireland. Greece required a bail-out because of overspending while Ireland needed financial assistance after the banks dragged the member state down. Portugal’s difficulties stemmed from successive current account deficits since the creation of the monetary union, which had only grown after the 2008–9 financial crisis, and a banking system that was more highly leveraged and more dependent on interbank loans than Greece’s. Unlike Ireland, it was the Portuguese state with debt to GDP of 94%, rather than the banks, that increased borrowing costs to a level that forced the country to seek a bailout (Giavazzi and Spaventa, 2011, p.216; Henning, 2017 p.122). The Portuguese government formally applied for a bailout in April and the negotiations on the €78 billion package commenced in May (Peet and La Guardia, 2014, p.57). The delay in the Portuguese bailout was down to national electoral politics. A new government was been put in place in Portugal while in Finland the Eurosceptic party True Finns were gaining in the polls due in part to the cost of bail-outs. There were also difficulties in the European Council with the programme, as Merkel insisted on the involvement of the IMF (Henning, 2017 p.124). At the summit there was a recognition that the EFSF was under-resourced. The resources of the facility used up in the Irish and Portuguese bail-outs as its real lending capacity was not the advertised €440 billion, but €250 billion. The borrowing capacity of the EFSF was restricted as it was supported by only six member states with the highest credit rating of AAA. There was also growing pressure to convert the EFSF from a fund of last resort to a more flexible crisis management tool. Eurozone leaders at the summit therefore agreed a “comprehensive package” that allowed the newly created European Stability Mechanism (ESM) and the EFSF to buy bonds on the primary market only. The EFSF began its bond buying programme in June 2011 after the Finnish elections. The ESM had to wait until 2013, when the mechanism was established. The decision to allow the EFSF buy bonds did not stop Italy from becoming the next member state to feel the heat of the markets. While Greece, Ireland and Portugal could be bailed-out, a collapse of the second largest debtor in absolute terms and third largest economy could sink the Euro (Peet and La Guardia, 2014, p.59). Italy began to get into trouble in July 2011, as the inter-institutional negotiations continued on the Six-Pack. Italy had managed to avoid the fallout from the crisis despite 2 trillion euro in obligations in circulation. This was down to Italy’s debt management skills and the fiscal position of the member state which showed a primary surplus between 2007 and 2011. Italy was however vulnerable on two fronts, the sovereign debt markets and in manufacturing. Foreign financial institutions held a substantial amount of Italy’s debt while the industrial part of the member state’s economy had become heavily dependent on cheap

20 credit, which masked the country’s worsening competitiveness in the Eurozone. Foreign banks soon became wary of the potential risks in the Italian bond markets. By September €103 billion had left the banks in the member state, which were now unable to provide credit for small and medium-sized enterprises. Silvio Berlusconi’s administration was unable shore up the macroeconomic performance of Italy while at the same time stabilize government finances. By November Berlusconi was out of power and the Six-Pack had come into force (Jones, 2015, p.56). Over the next four years the European sovereign debt crisis would ebb and flow. By the spring of 2015, the European sovereign debt crisis petered out as the growth rates in Eurozone and non-Eurozone economies reached pre-crisis levels (Henning, 2017 p.112). This chapter has outlined the background to the European sovereign debt crisis in which the Task Force and the Six-Pack negotiations were conducted. The chapter establishes the importance of the Task Force in providing the basis for the EU’s first legislative response to the crisis through the Six-Pack. The chapter also illustrates the challenges facing European leaders in trying to restore confidence in the bond markets. The next chapter provides the outline for the thesis through summarising the contributions of this doctoral research to the body of literature on the European sovereign debt crisis and more generally on decision-making in the European Council, the Council of Ministers, the European Parliament and in the inter- institutional bargaining arena. The chapter will also outline the contributions that this study will make to our understanding of EU policy-making. The subsequent chapter will also provide a summary of the methodological approach taken in this study and an outline of the remaining sections of this research project.

Chapter III Literature Review and Theoretical Perspectives

3.1 Literature Review and Theoretical Perspectives

The structure of this chapter follows the general outline of the thesis, with the first part examining studies outlining intergovernmentalism and neo-functionalism and the criticism that the two theoretical frameworks have received in the literature. The second part of the chapter examines intergovernmentalism and the European sovereign debt crisis focusing on the studies on the growing influence of the intergovernmental European Council during the European sovereign debt crisis and the shift in the Commission’s power. The section concludes with how the European Council through the post Lisbon framework was able to seize the agenda on the EU’s response to the crisis. The third part of the chapter investigates the literature on the influence of the other supranational, the European Parliament (Parliament) and the European Central Bank (ECB), institutions in shaping the EU’s response to the crisis. The discussion on the Parliament and the ECB ends with a potential explanation on how the two institutions may have exercised influence in shaping the decision outcome in the Task Force and Six-Pack negotiations. Focusing the literature review on studies examining the influence of these institutions is entirely logical. The Task Force was established by the European Council and both the Commission and the ECB participated in the negotiations. The involvement of the Commission and the ECB may have influenced the outcome of the Task Force negotiations. The Six-Pack, which followed on from the Task Force report, was decided under the Community Method. Thus, the Commission, the Council of Ministers (Council) and the Parliament had the potential to influence the final decision outcome at various stages of the negotiations. The part three of the chapter reviews the literature on the factors that potentially influenced the bargaining success of the member states, the Parliament and the Council in the Task Force and in the Six-Pack negotiations. Examining potential factors which may explain the bargaining success of the intra-institutional and inter-institutional actors can facilitate a deeper understanding in any variation identified in the bargaining success of member states, the Parliament and the Council.

3.2 Intergovernmentalism and neo-functionalism

This section begins with a discussion of the broader theoretical debates on liberal intergovernmentalism (LI) and neo-functionalism before turning to examining the literature the powers of the European Council, the Commission, the Parliament and the ECB within the context of the European sovereign debt crisis. Turning to intergovernmentalism first,

Moravcsik (1993) argued in his seminal study that the EU can be analysed as a successful intergovernmental regime that has been structured to oversee, through negotiated policy coordination, economic interdependence (Moravcsik, 1993, p.474). Moravcsik begins his article with a critique of neo-functionalism, contending that the theoretical framework was unable to accurately predict the process and trajectory of the EU’s evolution. Neo-functionalism according to Haas (1964) would lead to an ‘automatic’, ‘gradual’ and ‘incremental’ progression toward deeper integration and an increased level of influence for supranational institutions. Moravcsik however cited the reality of the Union’s development, which had proceeded through a series of fits and starts after a number of intergovernmental bargains (Ibid, p.476). The process of integration has also not reflected the contention by neo-functionalists that integration has spilled over into related policies and sectors or that the influence of supranational officials has increased (Ibid). Along with the empirical critiques leveled at neo-functionalism, Moravcsik also highlighted the theoretical criticism of the framework. Moravcsik pointed to the lack of a clear theoretical core within neo-functionalism, which made it difficult to provide a basis for improvement and precise empirical testing. The failure of neo-functionalism to evolve in line the variation of European integration across member states and issues, and the uneven pace in progressing to the goal of an ever-closer Union, meant that there was provision in the theoretical framework to present a clear direction for revision. Thus, the development of the theory of neo-functionalism became ever more complex, as an increasing number of alternative causal mechanisms and epicyclical modifications were introduced in an attempt to present an ideal description of the EU. As the predictions became indeterminate, it became impossible to conduct precise testing using the model (Ibid). Moravcsik drew on the criticism of neo-functionalism, which argued that the conception of the EU was more in line with theories of international political economy, as a basis for LI. Those theories suggest that the EU should be viewed as an international regime for policy co-ordination, the development of which may be explained through the formation of national preferences and intergovernmental strategic interaction (Ibid, p.480). Reflecting that criticism of neo-functionalism, Moravcsik’s model of LI refines institutional compliance and theory of interstate bargaining, while adding the concept of national preference formation which is grounded in the theories of international interdependence. There are three essential elements to LI, an intergovernmentalist analysis of interstate negotiation, liberal theory of national preference formation, and the assumption of rational state behaviour. Turning to the assumption of rational state behaviour, Moravcsik argues it is based on domestically constrained preferences which imply that co-operation and international conflict can be

26 modelled as process that takes place across two stages. In the first stage, governments define a set of interests, and in the second, they negotiate among themselves in an effort to realise those interests (Ibid, p.481). State-society relations are the basis for the formation of national preferences according to Moravcsik. Liberal theories assume that voluntary associations and private individuals within the civil society space are the most important actors in politics. Politicians at the head of national governments determine state policies and priorities and as they are ‘embedded in domestic and transnational civil society, which decisively constrains their identities and purposes’, the most influential actors on foreign policy are societal groups (Ibid, p.483). The third pillar of LI is interstate negotiation. Moravcsik points to intergovernmentalist theories, which seeks to analyse the EU through the strategies of rational governments based on their power and preferences (Ibid, p.496). Within those theories there are three assumptions about interstate bargaining which offers a basis for analysing decision-making in the EU. First, intergovernmental co-operation in the EU is voluntary. Interdependent nations tend to avoid trade disputes and democratic governments seek to sidestep potential conflicts due to high costs. Thus, important decisions within the EU take place in non-coercive unanimity voting system. Second, EU governments bargain in a relatively information-rich environment. Negotiators are able communicate and possess information about the opportunities and preferences facing their foreign counterparts as well as the most salient technical implications of policies at low cost. Third, the costs of transactions of intergovernmental bargaining are not considered high. Member states can at relevantly low cost can table counter offers or extend numerous offers, as negotiations within the EU are conducted over a long time period (Ibid, p.498). LI was an attempt to provide an alternative theoretical framework to neo-functionalism on the process of European integration. Schmitter (2005), in his study on strengths and weaknesses of the theoretical framework, like Moravcsik (1993) argued in their articles that neo-functionalism could only explain the early years of European integration (1950–1965). For Schmitter, neo-functionalism as articulated by Haas failed to contain a specific temporal component. There was no timeline for when supranational officials would develop projects to expand their authority or when interest groups would organise themselves across national borders or when functional interdependencies became manifest (Schmitter, 2005, p.257). Schmitter also criticises those the assumption made by scholars that Haas had claimed that spill-overs would occur automatically, pointing to the hints that Haas dropped in his study Beyond the Nation-State. Haas, asserts Schmitter, asserted that specific changes had to occur

27 before spill-over developed, such the emergence of national interests at the regional level that were free from national constraints, the development of political autonomy and political competence to allow regional bureaucrats to intervene on issues, the emergence of a crisis of sufficient magnitude caused by unintended consequences and increased economic interdependence between member states (Ibid, p.258). These changes were never transformed into explicit hypotheses, which according to Schmitter, led scholars to unfairly criticise Haas for failing to address the question of what contextual conditions were necessary for spill-over to take place. This view of the failures of neo-functionalism hardened over time as European integration became more controversial and slower (Ibid). Having outlined the issues relating to Haas’s theoretical framework, Schmitter then attempts to classify neo-functionalism. Schmitter considers a problem as it intersects the usual assumptions of comparative politics and international relations. Neo-functionalism not only places a major emphasis on two sets of non-state actors (1) social movements and interest associations at the regional level and (2) the ‘secretariat’ of the organisation involved in providing the dynamic for further integration, the theory also recognises the importance of national states through their involvement of establishing regional organisations and the re- foundation of those bodies by treaty (Ibid, p.257). In terms of the role of the member states, they cannot exclusively set the direction, extent and pace of change; however, they are able to set the terms of initial agreement and can control subsequent events. The unintended consequences that occurs from the delegation of responsibilities to supranational authorities, allows regional bureaucrats in coalition with an ever-changing set of self-organised interests to increase their influence through the external effects that emerge from interdependent activities. This potential influence was captured by Haas in his concept of ‘spill-over’. Haas hypothesized that member state national government might learn, and eventually agree to change their original positions with the support from organised interests and an active and creative secretariat (Ibid). Under this approach, integration is conflictual process and intrinsically sporadic, however it can lead to conditions of democracy and pluralistic representation, which increasingly entangles national governments in regional pressures. Governments therefore end up devolving more authority and conceding a wider scope to regional organisations that they have created in order to resolve those conflicts. Overtime, the citizens of the member states will increasingly shift their expectations to the region and satisfying those hopes will increase the prospect that integration be it economic or social will integration will ‘spill-over’ into political integration (Ibid).

Conversely, Rosamond’s (2005) article argues that there needs to be a revaluation of neo-functionalist theory with the literature on European integration by scholars. Currently, studies tend to over-exaggerate the comparisons between political science and international relations and the past and present in EU studies. By doing so, scholars under-read the literature on neo-functionalism and therefore have assigned the theoretical framework to a pre-historical and marginal place in the unfolding story of EU integration (Rosamond, 2005, p.238). Thus, Rosamond structures his article under three broad steps, first neo-functionalism is situated its “appropriate social scientific context”, second, the article examines how the notion of the over- reliance on the concept of the spill-over effect may have made the theoretical framework obsolete, and third the paper stresses the dynamic rather than the static qualities of neo- functionalism (Ibid). Turning to the first part of the article, Rosamond asserts that neo-functionalism belongs within the body of rationalism. Haas, Rosamond pointed out, argued that the ontology of neo- functionalism is soft rational choice. There are social actors that seek to bring about their value- derived interests, through whatever means are available within the current democratic order. If those goals cannot be fulfilled, then these actors will rethink their values, redefine their interests and choose new avenues in which to peruse them (Ibid, pp.241–242). Rosamond also cites the attempts made by Haas in his final writings to find linkages between constructivism and neo- functionalism. Haas sought to develop ‘pragmatic constructivism’ out of neo-functionalism, which opened up the extent to which neo-functionalism was able to link the change the qualities of actors that undertook the pursuit of objectives within the conditions of societal pluralism (Ibid, p.242). The question of effects of the concept of spill-over on neo-functionalism is examined next by Rosamond, who acknowledges the main criticism of neo-functionalism – namely that it has been only able to account for the early years of EU integration (Ibid, p.244). This according to Rosamond is a result of spill-over, which he describes as the process whereby social actors shifted in the direction of support for further integration. However, Rosamond again argues that this weakness in neo-functionalism is a misinterpretation by scholars. Rosamond points to the careful restatement of neo-functionalism by Haas (2001) and Schmitter (2004), which suggests that certain unions are more likely to undergo the process of automaticity and politicisation i.e. the spill-over effect. This explanation according to Haas and Schmitter is the result of a group of background variables that account for the dynamics leading to a spill-over and the motivations to initiate integration schemes. Thus, critics of neo- functionalism are directed to the contentious examination of these background variables such

29 as the adaptability of participant actors to moments of crisis, bureaucratic styles of decision- making and the rates of transaction between participating units (Ibid, p.246). The third part of Rosamond’s study examined the dynamics of neo-functionalism. Critics have argued that neo-functionalism was static; however, Rosamond argues that the theory has a “tendency towards autocritique” (Ibid, p.247). First, Haas responded to those critics by reasserting the external, ideational preconditions, and societal preconditions of integration. Through this, Haas was able to lay the ground Nye’s (1971) interest in background conditions that could be considered continuous, Schmitter’s (1971) efforts to improve neo- functionalism as a theoretical framework that could explain integration and disintegration and re-orientate neo-functionalism as a theory of ‘background conditions’ (Ibid, p.249). In the second autocritique of neo-functionalism, which was based on Lindberg and Scheingold’s (1971) study on regional integration, Haas responded to this attempt to increase the level of analytical sophistication of the theoretical framework, by acknowledging the emphasis on integration and the logic of spill-over. On the question of the logic of spill-over, Haas argued that it suggested the degrading of the continuous emphasis on integration process, however he stressed this in his own account on neo-functionalism, as it helped to explain the conduct of actors along with the conditions of the foundation of the functioning institutional arena. This, according to Rosamond provides evidence that by the mid-1970s, neo- functionalism was able, despite the later claims, to offer analytical leverage in two similar directions. The first showed a possible way to conceptualise systemic environments in the conditions of complexity while the second the ability to re-formulate a revised theory of regional integration (Ibid, p.250). Having described in LI and neo-functionalism, this section turns to the literature examining the two theoretical frameworks in EU decision-making. Sweet and Sandholtz (1997) availed of neo-functionalism as the basis for a theory of European integration, which they consider as an alternative to the LI framework. Sweet and Sandholtz have argued that rising interdependence that establishes the only important factor that does not definitely determine intergovernmental bargaining or provokes integration. Instead of displacing neo-functionalism, intergovernmentalism relies on the causal argument developed by the neo-functionalists (Sweet and Sandholtz, 1997, p.302). Thus, according to Sweet and Sandholtz, Moravcsik has advanced a theory of intergovernmental bargaining within the EU; however, it is a theoretical framework that does not provide an adequate theory of integration (Ibid, p.314). Sweet and Sandholtz then turn to the positives of neo-functionalism. As with Rosamond (2005), they believe that Haas was right on the crucial questions, such as the development of

30 supranational institutions. Indeed, Sweet and Sandholtz “appreciate” that Haas’s insight on supranational policy-making creates a process of institutionalisation that they consider to be dynamic. However, their support for Haas is not total, Sweet and Sandholtz leave open the question of the extent of the identities of the actors and loyalties shifts from the national to the European level. Regarding their theory, its three constituent elements are prefigured on neo- functionalism: the focus on European rule-making to solve international policy issues, the development of transnational society and the role of independent supranational organisations to pursue integrative agendas (Ibid, p.301). The debate on the relevance of LI and neo-functionalism in EU decision-making was discussed by Tsebelis and Garrett (2001), Hooghe and Marks (2009) and Bulmer and Joseph (2016). Tsebelis and Garrett (2001) outline a unified model of EU politics from the Treaty of Rome (1958) to the Amsterdam Treaty (1999) that pays specific attention on the relations between supranational actors, the Commission, the European Court of Justice (Court), and the Parliament and the intergovernmental Council. Tsebelis and Garrett assert that intergovernmentalists conceive the institutional structure of the EU in a similar way to that of Moravcsik, who cited European institutions as credible commitments to integration rather than examining the detailed interactions between those bodies and their effects on policy (Tsebelis and Garrett, 2001, p.385). Conversely, supranationalists consider the EU institutions, the Commission, the Court and the Parliament, to be independent actors that take actions which affect the direction of European integration. However, Tsebelis and Garrett disagree pointing to the reliance on general neo-functionalist concepts or as they term them “modernised renderings of spill-overs” over the strategies that different actors can avail of and the constraints that they face. Thus, supranationalists do not analyse EU institutions as generators of outcomes that are balanced, which supranationalists consider to be contingent and unpredictable to warrant any specific attention (Ibid). Tsebelis and Garrett also argue that intergovernmentalism and supranationlism also differ on the on how they treat the EU instituions. Supranationalist’s claim that the realities of the treaties generate requires structure and micro-foundations while the intergovernmentalists claim that there needs to be a prior study of the everyday realities that treaties produce in the EU (Ibid). Hooghe and Marks (2009) in their descriptive article outline a research programme that aims to consider new EU developments and theories that explain that progress. Within that context, Hooghe and Marks argue that LI emerged as an alternative approach to neo- functionalism after empty chair crisis of 1965–66. LI according to Hooghe and Marks, can be described as “a family of theories that conceive regional integration as an outcome of

31 bargaining among national states”, while neo-functionalism described a process whereby transnational interest groups demanded supranational authority to reap benefits that were mainly economic. As this process of integration deepened and the influence of supranational institutions increased, more transnational interests would be dealt with by these bodies (Hooghe and Marks, 2009, p.4). In the EU, neo-functionalism focuses on day-to-day policy making, while LI seeks to drive progress through major treaty reform (Ibid). Despite this difference, Hooghe and Marks (2009) contend that there are two commonalities between neo- functionalists and LI. First, both conceive preferences as economic, with neo-functionalists arguing that economic gains drive the demands of transnational interest groups for regional integration, and LI point to the distribution of economic gains among states through European integration. Second, both LI and neo-functionalists pay attention to the distributional bargaining among economic interest groups. Neo-functionalists have contended that these groups would operate in the national and supranational level. Conversely, intergovernmentalists asserted that the groups are more discrete in their lobby efforts, focusing their efforts on national governments in the belief that this route is the best way to exert political influence over EU decision making (Ibid). Bulmer and Joseph (2016) reviewed the literature on the European sovereign debt crisis within the context of neo-functionalism and intergovernmentalism. Bulmer and Joseph argued that the literature (Schimmelfennig (2012, 2014) and Niemann and Ioannou (2015)) has concentrated on the transfer of the responsibility for fiscal policy and the banking union to the EU level. They also cite the work of Epstein and Rhodes (2014) on the banking union as evidence of the spill-over concept been invoked and Niemann and Ioannou study, which contented that weak fiscal supervision and strong monetary integration indicated the need for functional spill-over. Bulmer and Joseph also cite the possibility of the Eurozone breaking up during 2010 and 2011 and the response by European leaders to the crisis through strengthening the economic and monetary union made functional spill-over relevant again. This was evident to Niemann and Ioannou by the role of supranational institutions, financial markets and interest groups in shaping the fiscal and banking regulatory regimes that emerged after the crisis (Bulmer and Joseph, 2016, p.727). Bulmer and Joseph however concede that Moravcsik’s (1993) concept of LI is the default interpretation of integration. Underpinning LI is a domestic form of preference formation, which leads to a specific delegation of power to the EU and interstate bargaining that benefits the larger member states. During the crisis this became apparent when member state governments delegated powers to the supranational institutions. LI was deployed by

Schimmelfennig (2015) to explain the brinkmanship of creditor states such as Germany in determining the rescue terms for member states that were threatening the existence of the euro. Outside of the Eurozone crisis, Bickerton et al. (2015) proposed a new form of intergovernmentalism — ‘new intergovernmentalism’, which was to explore the development of integration post-Maastricht. Bickerton et al. sought to emphasise the deliberative aspect of interstate bargaining as member states worked to build a consensus on key agreements while avoiding the reductionism of LI (Bickerton, 2015). The articles reviewed by Bulmer and Joseph and others on the influence of neo-functionalism and intergovernmentalism during the sovereign debt crisis receive further attention below .

3.3 Intergovernmentalism and the European sovereign debt crisis

Since the beginning of the sovereign debt crisis, several studies have examined the impact of the Euro-area crisis on the Stability and Growth Pact and the Economic and Monetary Union (EMU). The literature is divided between two main arguments, that the crisis has seen the rise of intergovernmentalism or that the crisis has empowered supranational institutions. The studies that support the contention that the EU’s response to the crisis was shaped by intergovernmentalism is split between two sets of studies. The first group (Dinan (2012) and Verdun (2015)) takes a broad approach to the rise of intergovernmentalism during the European sovereign debt crisis while the second set of studies (Hodson (2011); Puetter (2011); Schwarzer (2012); Chang (2013); Bauer and Becker (2014); Niemann and Ioannou (2015); Schimmelfennig (2015) and Da Conceição-Heldt (2016)) examines intergovernmentalism through the influence of the European Council. The rise intergovernmentalism since the start of the sovereign debt crisis runs through articles by Dinan (2012) and Verdun (2015), to varying degrees. Dinan’s (2012) descriptive study examines the EU’s governance structures and institutions during the opening phase of the European sovereign debt crisis. Dinan divides the article into three parts that can; (1) negotiations within European Council summits; (2) the role of the Parliament and national legislatures and (3) the risk of referendums. For the purposes of this research, it is the first section that is the most relevant for this part of the literature review. Under the first part, Dinan reconstructs the negotiations in the European Council summits highlighting the tensions between the Euro-opt ins and Euro-opt outs and the growing influence of Germany in the opening phase of the crisis (Dinan, 2012, pp.87–88). Those tensions according to Dinan are caused by the rise of intergovernmentalism, as all the responses to the Eurozone crisis, bar the

Six-Pack, were shaped by the member states. Even the Six-Pack according to Dinan was influenced by intergovernmentalism, as the Commission was sidelined as the chief mediator by the Council Presidency. The influence of the European Council’s President Herman Van Rompuy and the primacy of Merkel–Sarkozy tandem was further evidence of the rise of intergovernmentalism during the European sovereign debt crisis. Dinan also cites the creation of the European Financial Stability Facility (EFSF), the ESM (European Stability Mechanism) and the adoption of the Euro Plus Pact as further evidence that the major responses to the Eurozone crisis have been intergovernmental (Ibid, p.91). Verdun (2015) applies a historical institutionalist (HI) approach to understand the EU’s response to the crisis. According to Verdun, the HI approach seeks to understand the arbitration of political struggles in the setting that they take place. Within the EU, these political struggles take place in EU institutional structures such as the Council (Verdun, 2015, p.221). Verdun conducts an empirical investigation of several EU institutions created to address the crisis: the EFSF; ESM; the Six-Pack and Two-Pack; the European Semester and the Fiscal Compact, to understand how these bodies took that form that they did (Ibid, p.219). Verdun argues that EFSF is similar to the European Monetary Institute (EMI). In the case of the latter, the EMI was established to prepare for the creation of the ECB while the EFSF was created to prepare for the ESM. The roots of the ESM can therefore be traced to the EFSF. As for the Six-Pack, the Two-Pack and the European Semester, they were built on the Stability and Growth Pact’s operation while the Fiscal Compact is an addition to other treaties (Ibid, pp.225–229). A feature of those developments according to Verdun is intergovernmentalism. The EFSF and the ESM were created through intergovernmental treaties while the Fiscal Compact was an intergovernmental treaty. The Six-Pack, the Two-Pack and the European Semester were driven by EU officials and the leaders of the member states who wanted to national budgetary and fiscal policies to be a common concern (Ibid). There are a number of articles that have examined the rise of intergovernmentalism through studying the influence of the European Council during the sovereign debt crisis. Puetter (2011) explored the role the Council and European Council in reforming economic governance in the opening phase of the European’s sovereign debt crisis, through proposing an alternative framework for the analysis of intergovernmental policy co-ordination called ‘deliberative intergovernmentalism’. ‘Deliberative intergovernmentalism’ has two strands, the first dimension is concerned about the dependence of the intergovernmental relations on the deliberative processes of policy formation. Puetter argues that deliberative processes in the context of intergovernmental policy co-ordination is likely to spread from committee

34 governance – ministers in the Council, to the level most senior decision-makers in the system – the heads of state and government in the European Council. The second dimension relates to the question of the condition in which policy deliberation should develop within the intergovernmental context. Within the Council, policy deliberation can take place in an informal setting such as a lunch or in formal venue such as an expert committee. The institutional features of these negotiation settings may aid or hinder policy deliberations. Informal settings within the European Council and Council have increased policy deliberations. Puetter points to the policy developments in the informal Eurogroup as evidence for this contention (Puetter, 2011 pp.163–165). Having laid out the theoretical framework, he describes the change of the meaning of ‘integration’ in the post-Maastricht context. Puetter argues that as member states seek to ensure that the Economic and Monetary Union is a success, there should be an expectation that the co-ordination of intergovernmental policy will be geared towards collective policy deliberation. Thus, there needs to be close involvement of most senior national and EU decision-makers which naturally leads to the exception that both the European Council and the Council would play an important role in the process (Ibid, pp.166–168). Puetter backs the claim by citing the European Council’s growing influence over macroeconomic policy between the Essen European Council summit in 1994 and the Lisbon European Council in 2000, as evidence of the heads of state and governments growing clout in this policy field. He also points to the emergence of the Eurogroup through the European Council conclusions as conformation that new informal co-ordination procedures have been created. Negotiations in the informal setting increased dramatically during the opening phase of the European sovereign debt crisis as have discussions in the formal setting. Member states not represented at the G20 summits and that are obliged to deliver on the results of the meetings pushed for a common European position, which brought the European Council into the decision-making process. However, as the European Council’s role increased, the Commission’s has decreased. One reason for the decline in the Commission’s power can be attributed to member states not wanting to empower the institution (Ibid, p.162). Schwarzer’s (2012) study examined the changes to the governance dynamics from the institutionalist perspective between 2009 to the end of 2011, which were driven by the European sovereign debt crisis. The article focused on five cases of implicit or explicit institutional change and the depth of that institutional transformation under crisis conditions (Schwarzer, 2012, p.28). According to Schwarzer a typology of five types of institutional change developed by Streek and Thelen (2005) can provide a useful framework in which to examine the transformation in governance dynamics. The first institutional change in the

35 framework is layering. This is the process where new institutional elements are added to old ones. The second institutional change is displacement. Displacement is where the importance of one element of the institutional setup increases over time. The third institutional change is redirection. Redirection occurs when the institutions objectives are changed. The fourth institutional change is drift (Ibid, p.29). Drift is defined as how external developments challenge institutional organisations. The fifth institutional change is depletion. Depletion describes the consequences of institutional break down Schwarzer then applies the typology to examine the change brought to the influence of the European Council, the Parliament, the Commission and the ECB (Ibid, p.30). In line with the structure of this literature review the changes to the influence of the Parliament, the Commission and the ECB are discussed below (Ibid, p.29). Schwarzer argues that then President of the European Council Herrmann Van Rompuy’s role as a mediator between the 27 heads of state and government strengthened the European Council’s position within the institutional structure of the EU. Further Van Rompuy pushed for the European Council to seize the financial and economic crisis agenda by increasing the number of meetings from 4 to 10 per year (Ibid, p.31). This agenda helped to shift the influence towards the European Council outside of the Community Method (Ibid, p.39). Schimmelfennig (2015) argues that Moravcsik’s (1998) LI can help explain the EU’s response to the European sovereign debt crisis. As discussed earlier, LI can be broken down into three stages, the first is the formation of national preferences. Here the economic interests of powerful domestic groups shape national preferences at the international level. The second stage examines the factors that influence an agreement. Those factors are national preferences and bargaining power. The third and final stage is the design of international institutions. These institutions are structured to respond to the type and size of co-operation problems that these organisations are required to manage (Schimmelfennig, 2015, p.178). Thus, argues Schimmelfennig, LI can provide a realistic framework to explain the EU’s response to the crisis, as intergovernmental bargaining is partly based on the diverging interests of the member states. Indeed, the diverging interests were shaped by national preferences which in themselves were a result of the strength of the member states fiscal position and interdependence in the Euro-area. Schimmelfennig then turns to the negotiations within the European Council, arguing that Germany and its solvent allies were better able to realise their policy preferences, specifically in the area of integration, then the southern member states as they had not been so adversely affected by the crisis (Ibid, p.179). Southern member states attempted to counter the influence of Germany and its allies by delaying requests for funding from the ESM, which they

36 hoped would inflict higher costs for the Northern member states. This was countered by a threat from Germany, that fiscally wayward member states would be dumped out of the Euro (Ibid, p.188). Thus, the northern hardliners managed through hard bargaining, to strengthen the Commission’s involvement in the budget planning process of member states and introduce new policies in the form of excessive deficit procedure (Ibid, p.189). The rising influence of the intergovernmental European Council could have potentially diminished the power of the Commission to shape the EU’s response to the opening phase of the crisis through its agenda-setting powers is explored by Schwarzer (2012), Chang (2013), Niemann and Ioannou (2015), and Da Conceição-Heldt (2016). Schwarzer (2012) in his article, details of which can be found in the proceeding pages, argued that European Council challenged the Commission’s role in reforming the EU’s economic governance structures and the institution’s crisis management powers. Schwarzer cited the reported rivalry between Van Rompuy and then European Commissioner President Barroso and that the former oversaw a Task Force to reform the EU’s economic governance structures (Schwarzer, 2012, p.31). Schwarzer also pointed to how the institutional dynamic has changed as the Commission’s influence has diminished. The Parliament no longer views the Commission as a rival or a partner, but lesser body in the new EU political landscape (Ibid). Schwarzer however did agree with Bauer and Becker (2014) that the Commission had gained some new powers, notably in the areas of budgetary and economic policy coordination through the Six-Pack. Also, that the Commission plays an important role in shaping the recuse packages for member states that required assistance from the troika (Ibid). Despite this shift in the institution’s influence, Schwarzer concluded that the intergovernmental nature of response to the opening phase of the European sovereign debt crisis had marginalised the Commission (Ibid, p.39). Chang (2013) argues in her study on fiscal policy co-ordination that the negotiations on the Six-Pack have demonstrated how much the Community Method has been weakened in the name of economic crisis management. Chang draws on the principal-agent theory to argue that the member states – the principals, are unable to allow the agents, the Commission, to control economic policy. Member states are concerned that if such power was to be delegated to the Commission, then the member states could suffer agency loss, as the institution could use its newly acquired influence to pursue policies that the Council opposed (Chang, 2013, p.258). The refusal of the member states to suffer agency loss is evident in the origins of the Six-Pack. According to Chang, the European Council’s Task Force undermined the Commission’s agenda-setting power, through its recommendations for reforming the EU’s economic governance structures. Therefore, the establishment of the Task Force made the European

Council the principal and the Commission the agent (Ibid, p.259). This division of power between the two institutions would remain unaltered when the Commission proposed the Six- Pack and during the negotiations in the Fiscal Compact. In the case of the former Chang points to the influence of the Task Force recommendations on the Six-Pack proposals while in the latter instance, the Fiscal Compact was decided as an intergovernmental treaty rather than under the Community Method. Chang’s conclusions are similar to those of Allerkamp (2010) – see below, that the Commission’s influence in the policy process has decreased while the European Council’s has increased. However, as Chang points out, the Six-Pack and the European Fiscal Compact have strengthened the Commission’s supervisory powers (Ibid, pp.266–267). Niemann and Ioannou’s (2015) contention that the Commission’s influence was diminished during the crisis is harsher than the argument put forward by Schwarzer (2012) and Chang (2013). Niemann and Ioannou argued, details of the study can be found in the subsequent pages, that the Commission was not determined to the push for further integration. The Commission’s laissez-faire approach may have been rooted by the intergovernmental nature of the EFSF and the ESM, limiting the institution’s right to initiate reforms of the EU’s economic governance framework. During the Fiscal Compact negotiations, the institution positioned itself on the ‘winning side’. Yet, when faced by a coalition led by Germany, the Commission failed to realise its preferences (Niemann and Ioannou, 2015, p.209). The weakness of the Commission in the European sovereign debt crisis receives further attention from Da Conceição-Heldt (2016). In this descriptive response to Bauer and Becker’s (2014) study, Da Conceição-Heldt argues that the Commission has undergone a “subtle disempowerment” as decision-making authority has been transferred to both the European Council and the ECB. To support her argument, Da Conceição-Heldt cites the creation of the intergovernmental European Stability Mechanism (ESM), the sharing of supervisory powers with the other members of the troika – the ECB and the International Monetary Fund, and the growing influence of the ECB through the creation of European System of Financial Supervision and the Bank Union (Da Conceição-Heldt, 2016, p.95). Da Conceição-Heldt supports these claims through criticising the research design, theoretical contribution, and empirical findings of Bauer and Becker. First, Da Conceição-Heldt argues that Bauer and Becker fail to define ‘decrease,’ ‘increase,’ or ‘no change’ in the Commission’s competences in different areas of economic governance in the research design (Ibid, p.97). Second, in theoretical contribution, Da Conceição-Heldt points to the failure of Bauer and Becker to embed their findings in the EU institutional context. Thus, the findings are weakened

38 considerably by the failure to recognise the empowerment of the ECB and the strengthening of intergovernmentalism as one of the consequences of the European sovereign debt crisis (Ibid). Finally, Da Conceição-Heldt again refers to the creation of ESM, the sharing of supervisory powers with the other two members of the troika and the growing influence of the ECB as evidence of the weakness in the articles empirical findings (Ibid). Conversely, Bauer and Becker (2014) and Hodson (2011) argued that the European sovereign debt crisis did not diminish the Commission’s influence. Bauer and Becker (2014) in their short and descriptive article argued that the crisis brought a change to the Commission’s role rather than diminishing the institution’s influence. To support this contention, Bauer and Becker cited the Commission’s responsibility for negotiating a memorandum of understanding with a member state that seeks financial assistance from the troika, monitoring developments in economic policy, and providing technical expertise to distressed member states as evidence for the institution’s shift from agenda-setter to a machine for implementation (Bauer and Becker, 2014, pp.161–163). Indeed, Hodson (2011) supported this contention in his descriptive study on governance in the Euro-area in a short overview of the Commission’s influence. Hodson argued that the Commission had continued to set the agenda through initiating debate on the future reforms of economic governance during the Task Force negotiations (Hodson, 2011, p.141). The question of how the European Council managed to seize the agenda from the Commission on reforming the EU’s economic governance architecture is explored by Allerkamp (2010) and Alexandrova (2014). Allerkamp (2010) provides a descriptive account of the European Council’s growing influence by examining the institutions growing agenda- setting powers from its inception in 1974 to the Lisbon Treaty. Allerkamp cites the European Council’s ability to blunt the Commission’s agenda-setting powers through the unanimity rule, the agreement of ‘summit packages’ by the member states, the institutionalisation of the Presidency’s “special responsibility for the agenda of European Council meetings”, and the facilitation of the bodies independence from the Commission through the 2002 Seville reform package and the Lisbon Treaty (Allerkamp, 2010, pp.4–5). Allerkamp pays particular attention to the role of the Presidency in managing the agenda, arguing that since the 1960s, member states have “formalised and extended the Presidency’s agenda‐management responsibilities”. The 2002 Seville reforms however reduced the clout of the Presidency’s capacity to set the agenda in a number through the formularisation of multi‐annual strategic programmes that were to be drawn up by the six consecutive presidencies of the EU (Ibid, pp.6–8). As the European Council’s powers over the agenda have increased since 1974, the Commission’s has

39 decreased. To support this claim Allerkamp points to the Commission’s weakness as a political body, which has allowed the European Council to initiate legislation through the large number assignments that emerge at the conclusion of every summit for the institution. However, Allerkamp concludes that not all is lost for the Commission. While there has been an erosion in the agenda-setting powers of the Commission by the European Council, the latter’s political position has been upgraded by the former. The endorsement of a Commission proposal by the European Council, means that it enjoys the support of the highest political leaders of the member states (Ibid, p.12). Much of the preceding discussion suggests that the power of the European Council to set the agenda has grown since the Lisbon Treaty came into force in 2009. The European Council’s ability to shape the EU’s response to the opening phase of the crisis should be severely limited. Under Article 17(2) of the Treaty on European Union (TEU), the Commission has the sole right to initiate legislation whereas the European Council is restricted to providing “the general political direction and priorities [of the EU]” under Article 15(1) of the same Treaty (Official Journal of the European Union, 2012, p.23 and p.25). The Commission’s ability to set the agenda under the Community Method is further cemented under Article 294(2) of the TFEU. Under the article, only the Commission can submit a proposal to the Council and the Parliament (Official Journal of the European Union, 2012, p.69). The Commission also has an informational advantage through the technical expertise that is available to it across its 33 Directorate Generals such as the Directorate General on Economic and Financial Affairs (DG ECFIN) (European Commission, 2018). Thus, the expertise available in DG ECFIN and the Commission’s agenda-setting powers should have given the institution an advantage over the European Council in shaping the EU’s response to the crisis. Yet, the European Council’s Task Force was established outside of the Community Method, giving the institution the potential to shape future legislation through the collective influence of the heads of state and government (Allerkamp, 2010). Ensuring that the European Council acted as a collective throughout the crisis was Herman Van Rompuy, the institution’s President. Under the Article 15(6) of the TEU the powers of the European Council Presidency are similar to those of the rotating Presidency of the Council of the European Union; however, there are two notable exceptions. The President would chair meetings and drive forward the work of the institutions. The President would also endeavour to facilitate cohesion and consensus among the member states (Dinan, 2013, p.1259). These two responsibilities helped to bring coherence and consistency to the work of the European Council and addressed one of the major deficiencies of the institution; weak leadership. This became apparent during the

European sovereign debt crisis, as Van Rompuy provided stable leadership during a turbulent time (Ibid, p.1270). Indeed, during the crisis, Van Rompuy’s successful mediation of conflicts among the member states, helped to strengthen the European Council within the institutional structure of the EU (Schwarzer, 2012, p.31). Therefore, the changes to the European Council’s mandate and to the powers of the institution’s Presidency under the Lisbon Treaty, and the leadership provided by Van Rompuy during the crisis suggest that the European Council became an influential actor in shaping the EU’s response to the crisis. The changes introduced by the Lisbon Treaty to the powers of European Council through Article 15 is also the foundation for the theoretical expectation of the institution’s growing influence during the opening phase of the sovereign debt crisis in several studies (Alexandrova et al. 2014; Puetter 2011; Schwarzer 2012; Chang 2013; Niemann and Ioannou 2015 and Da Conceição-Heldt 2016) including this one. The potential influence of the European Council may have increased with the establishment of the Task Force. The expectation is: H1: The European Council had more influence than the Commission in shaping the EU’s response to the opening phase of the European sovereign debt crisis.

3.4 Neo-functionalism and the European sovereign debt crisis

Having outlined Haas’s argument at the start of this chapter through the review of Schmitter (2005) and Rosamond’s (2005) studies, this section examines the influence of supranational institutions during the European sovereign debt crisis. The discussion begins with Buti and Carnot’s (2012) and Crum’s (2013) studies on the EU’s deepening involvement in the budgetary affairs of the member states and the growth of federalism, before it turns to the literature (Dinan (2012); Hodson (2012); Salines et al. (2012); Schwarzer (2012); Chang (2013); Yiangou et al. (2013); Rittberger (2014) and Niemann and Ioannou (2015)) that has explored the role played by supranational institutions in shaping the EU’s response to the crisis. The European Council is not the only institution that can potentially set the EU’s agenda. There are several studies that have examined the power of the Commission to set the EU’s agenda such as Pollack (1997), Schmidt (2000), and Rasmussen (2007). Pollack (1997) utilised new institutionalism in rational choice theory to present a unified theoretical approach to the problem of supranational influence. In the third part of the study, which is the most relevant to this research, Pollack addressed the role of the Commission as an agenda-setter in the legislative process. The Commission’s formal agenda-setting power, according to Pollack, depends fundamentally on the amendment and voting rules in the Council. The Commission

41 therefore only enjoys agenda-setting power when a proposal is adopted by the Council and amended by unanimity. On the Commission’s informal agenda-setting power, the institution does not have a formal monopoly on setting the substantive agenda in the Council. The policy expertise in the Commission’s Director-Generals gives the institution however can give the institutional advantage vis-à-vis the Council and other competing agendas (Pollack, 1997, pp.101–102). Pollack describes formal agenda-setting, which consists of the Commission’s right and the Parliament’s conditional right to set the formal agenda of the Council by placing before the institution provisions that can be adopted or amended without much difficulty. In doing so, the Commission and the Parliament are in effect organising the policy options of the member states in the Council. Conversely, informal agenda-setting is the capacity of a “policy entrepreneur” to set the substantive agenda through the ability to define issues and present proposals that can win the backing of the final decision makers rather than use, if available, formal powers (Ibid, p.121). In the case of formal agenda-setting, the Commission in some cases could take the opportunity to exploit the divisions among member states to push through a proposal that is closest to the its own preferred policy, which can also garner a qualified majority in the Council. While the Commission is unable to act without taking into account the preferences of the member states, the institution can within those constraints act autonomously, thus avoiding potential sanction from the member state while setting the agenda for negotiations in the Council (Ibid, p.129). Regarding informal agenda-setting, the influence of the Commission is at its height when member states are without all the information and are uncertain when forming their initial policy preferences. The Commission, like other supranational institutions, in these circumstances may have more information and clearer preferences, thus allowing the entrepreneurial Commission to provide focal points in which the uncertain preferences of the member state can converge (Ibid, p.130). Schmidt (2000) argued that along with agenda-setting, the Commission could leverage its role as guardian of the Treaty establishing the European Community (Treaty on European Union) along with its power to set the agenda to change the positions of some the member states or the default position of the Council (Schmidt, 2000, p.37). In terms of the Commission’s ability to set the agenda, Schmidt utilises the principal-agent framework, which is often used in studies on agenda-setting (Pollack, 1997) and several empirical such as the Commission’s role in breaking ground-handling monopolies, as examples to support her argument (Ibid, p.47). Schmidt’s findings indicate that the Commission can go beyond its agenda-setting powers through threatening legal uncertainty and fragmentation and by pursing

42 a divide-and-conquer strategy in the Council. Thus, the Commission can alter the status quo position of member states unilaterally and increase the chances of its proposal been accepted by the Council (Ibid, p.55). Unlike Pollack (1997) and Schmidt (2000), Rasmussen (2007) argued that the Commission’s agenda-setting power had been checked by the European Council, the Council and the Parliament, in this study on the conditions that formalise informal institutional in the Treaties. To support this contention, Rasmussen’s theoretical focus considers the conditions under which Treaties formalise informal institutional change that occurs between the Treaties and uses the Commission’s right to set the agenda as an illustrative case (Ibid, p.245). Rasmussen cites eight developments that have contributed to the weakening of the Commission’s right to set the agenda since the Maastricht Treaty. First, the Commission is politically obliged to take the positions of the other EU institutions into account through accepting requests to submit proposals from the Council under Article 208 and the Parliament under Article 192 of the Treaty establishing the European Community. Second, the Council and the Parliament have had a tendency through legislative acts to push the Commission to present proposals. Under the procedure, provisions are inserted in acts requesting the Commission to submit by a specific date a proposal with content that reflects the requests of the Council and the Parliament (Ibid, p.249). The increased role of the Presidency is the third development that accounts for the weakness of the Commission’s right to set the agenda. Though the Treaty states that the Council will vote on a Commission proposal, the reality is often different. According to Rasmussen, it is typically the Presidency, rather than the Commission, that tables a compromise throughout the legislative process which is then voted on in the Council. The Commission through its policy expertise may have a significant impact on the tabled compromises; however, it is the Presidency that determines how much it wants to rely on the institution (Ibid, p.250). The fourth development that contributes to the weakening of the Commission is the rise of the European Council as the long-term agenda-setter of the EU. Over the years, the European Council has taken a greater role in shaping the strategic goals of the EU. This change in the agenda-setting dynamics between the European Council and the Commission has resulted in the latter institution assuming a bureaucratic role of fulfilling the agenda of the member states. While the Treaties bar the European Council from tabling a legislative proposal, it is expected that the Commission will adhere to the overall strategy of the heads of state or government (Ibid).

According to Rasmussen, the fifth and sixth developments are the introduction of co- decision in the Maastricht Treaty has led to the Commission losing its general competence to amend of withdraw proposals in conciliation, and the institution’s tendency in the legislative process to avoid amending and withdrawing proposals in general. Another area of weakness is the growth of the trend in the Council to adopt decisions unanimously rather than by qualified majority, which diminishes the value of the Commission’s right to propose. The final area that Rasmussen cites as a weakness for the Commission is the introduction of co-decision. Under the legislative procedure, the Commission is unable to influence the required Council majority if the dossiers go to conciliation (Ibid, pp.250–251). Bailer (2004) argued that member states could increase their bargaining success by strategically choosing a position that was close to the agenda-setter so to be on the winning side in the negotiations, after the national government lobbied the Commission to table a proposal it favoured. The Commission, according to Bailer, is known to react to the demands of the member states before it tables a proposal or to ask for their opinions (Bailer, 2004, pp.102–103). Similarly, party groups may align their positions with that of the Commission to be on the winning side during the intra-institutional negotiations. Despite Bailer’s framework, it is nonetheless difficult to measure the Commission’s bargaining success, as there is no clear point of comparison. Thus, to address this issue, the approach taken will be to measure the influence of the Commission indirectly, by testing whether the success of a member state or the party group is shaped by proximity to the Commission. Turning back to the Task Force and Six-Pack negotiations, the Commission may have ceded influence to the European Council in setting the agenda on how the EU would respond to the crisis during the Task Force negotiations, the institution still had the potential to shape the agenda within the Council and the Parliament through the Six-Pack proposals. The Commission also had a pool of experts in the form of DG ECFIN, which for the most part, could not be rivalled by any member state or party group. Thus, member states and party groups seeking to increase the chances that their preferences would be considered may have aligned their positions with the Commission in order to add greater weight to their arguments. The expectation is: H1a: An actor that is closer to the Commission will have more bargaining success than an actor that has positioned itself further away from the Commission.

Crum (2013) in his article explored the implications of the financial crisis for the relationship between member state governments and monetary integration. Crum argues that

44 the Eurozone crisis has brought to the fore Rodrik’s ‘trilemma of the world economy’ which consists of three so called goods - economic (and monetary) integration, the nation-state and democratic politics. Within the context of the Eurozone crisis these three so called goods can be distinguished as ‘executive federalism’, ‘democratic federalism’ and ‘EMU dissolution’ (Crum, 2013, pp.614–615). Under the first model political control remains with the creditor member states and surveillance is conducted by technocratic institutions such as the Commission. In the second model ‘democratic federalism’, economic competences are centralised with the President of the European Council, the Commission and a European minister for financial and economic affairs taking the decisions. In the third model ‘EMU dissolution’, the monetary union would be dissolved, and competences would be returned to the member states (Ibid). Of the three models, Crum argues that EU’s response to the crisis reflects ‘executive federalism’. Crum cites the efforts made to preserve monetary integration and the requirement that all EMU decisions are subject to intergovernmental decision-making, as evidence to support his contention that the actual handling of the Euro crisis reflects ‘executive federalism’ (Ibid, p.626). Similar to Verdun’s (2015) and Chang’s (2013) studies, Buti and Carnot (2012) in their article pay particular attention to the Six-Pack, Two-Pack and Fiscal Compact. This descriptive study outlining the reforms to the EU’s governance structures in response to the crisis provides an in-depth over view of the legislative packages and the Treaty. Buti and Carnot also provide a brief summary of the background and powers of EFSF and ESM (Buti and Carnot, 2012, p.909). These policy responses according to Buti and Carnot have addressed several weak points in the EU’s governance structures and intensified the EU’s involvement in national budgetary affairs (Ibid, p.910). The role of supranational institutions during the crisis is explored to varying degrees in several studies. Chang’s (2013) study, which has been covered in detail in the proceeding pages, credited the Parliament with saving the Six-Pack from being gutted. Furthermore, Chang argued that the Parliament’s actions helped to reassert the Community Method and strengthen the input of supranational institutions in the area of economic governance (Chang, 2013 p.256). Dinan (2012), Schwarzer (2012) and Niemann and Ioannou (2015) also cited the powers of the Parliament, highlighting the important concessions that the institution won from the Council during the negotiations of the Six-Pack. Dinan’s (2012) article, which like Chang’s (2013) study is dealt with above, outlined the role of the Parliament on the Six-Pack through focusing on the issue of automatic sanctions in the legislative packages (Dinan, 2012, p.93). By doing so, Dinan is able to provide a snapshot of the tensions between the two major party groups the 45

European People’s Party (the Christian Democrats) and the Socialists and Democrats (the Socialists) during the intra-institutional negotiations. Dinan draws on this tension within the Parliament to raise questions about the unity of the EU during the reforms to Union’s economic governance structures (Ibid, p.97). Schwarzer (2012) in his study, further details about the article can be found above, argued that the Parliament has been able to influence the EU’s response to the crisis through several different mechanisms. The extension of the co-decision procedure in the Lisbon Treaty increased the influence of the Parliament’s Economic and Monetary Affairs Committee, allowing the committee to push a supranational agenda in the Six-Pack (Schwarzer, 2012, p.33). Continuing on the theme of the Parliament’s influence is Niemann and Ioannou’s (2015) article, which examined the relevance of neo-functionalist theory for explaining how the EU managed the crisis and the drive towards a more complete EMU. According to Niemann and Ioannou, neo-functionalism is primarily focused on explaining policy-making outcomes and the dynamics of European integration and thus is apt to account for the changes made to the EU’s economic governance framework. Indeed, the neo-functionalist concept of change is summarised concisely in the notion of spill-over. Three types of spill-over have been identified in the literature on neo-functionalism, functional; political; and cultivated spill-over (Niemann and Ioannou, 2015, pp.196-197). The latter - cultivated spill-over is the most pertinent of the three for this review as it concerns the efforts made by supranational institutions to increase their own power. By expanding their influence, supranational institutions become agents of integration as their power will likely increase as the process progresses. Supranational institutions can advance the integration process through promotional brokerage or as acting as policy entrepreneurs (Ibid, p.199). Within the EU the supranational institutions are the Parliament, the Commission and the ECB. The effort by the two latter institutions to increase their power is discussed below. Niemann and Ioannou argue that the Parliament successfully managed to link the ESM with the Treaty while the Fiscal Compact was brought into the Treaties. Niemann and Ioannou also argue that the Parliament was able to make its influence felt in the Six-Pack through adopting a tough stance in the negotiations. The Parliament was able to sell the Six-Pack as a package to the Council, despite the fact that only four of the proposals were to be decided under co-decision. The Parliament also forced the Council to make a wide range of concessions which largely prevented the supranational dimension of the package from being watered down (Ibid, p.210). The Parliament’s actions according to Niemann and Ioannou reflect the attributes of neo-functionalism.

Rittberger (2014) is more skeptical about the influence of the Parliament in reforming the EU’s economic governance structures. Rittberger argues that the interinstitutional bargaining and legitimacy-seeking arguments, that have been applied successfully explain the Parliament’s growing influence, point to the conditions in which the institution fights for more power in the area of economic governance (Rittberger, 2014, p.1174). According to the Rittberger, the legitimacy-seeking explanation is underpinned by the claim the conflicts between the EU’s institutional actors over the distribution of institutional prerogatives is staged against liberal democratic values. Liberal democratic values such as the rule of law are therefore upheld by EU institutions and the member states share a commitment to uphold these values (Ibid, p.1175). Rittberger cites the inclusion of the ‘economic dialogue’ within the Six- Pack and later the Two-Pack as evidence of the Parliament’s partial success in shaping the EU’s response to the crisis. Interinstitutional bargaining is driven by actors that are unhappy with the initial treaty outcome and therefore seek to contest the rules to obtain a more advantageous interpretation of the law through the creation of new informal rules (Ibid, p.1177). Rittberger cites the Parliament’s continuous efforts for a greater allocation of decision- making powers as a driver of the institution’s bargaining efforts in negotiations. Rittberger once again points to the Parliament’s efforts to enhance parliamentary accountability through establishing ‘economic dialogue’. Thus, the Parliament has pursued its institutional self- interest through legitimacy-seeking and bargaining to enhance its powers during the crisis (Ibid, pp.1180–1181). In general, the studies on the European sovereign debt crisis indicate that the Parliament influenced the legislative response to the crisis. The Parliament was excluded from the Task Force; thus, this study focus on how the institution could have influenced the decision-making outcome in the Six-Pack negotiations. However, the recommendations from the European Council’s Task Force provided the basis for the Commission’s Six-Pack proposals. Under the co-decision procedure, the Parliament has formal amendment and veto powers, giving the institution a degree of influence in the Six-Pack negotiations. The Parliament can amend a Commission proposal at Committee stage - Rule 49(3) and in the plenary - Rule 59(3). The Parliament also has the power under in the first reading to reject a draft legislative act Rule 59(1) (European Parliament, 2017, p.36 and p.41). Napel and Widgrén’s (2006), Thomson and Hosli (2006) and Costello and Thomson (2013) have examined the power of the Parliament under the co-decision when compared to the influence of the Council and/or the Commission. Napel and Widgrén’s (2006) examined the distribution of power between the Council and the Parliament under co-decision. Napel and

Widgrén first introduce a model that captures the important elements of intra-institutional decision-making within the Council and the Parliament and then the inter-institutional bargaining (Napel and Widgrén, 2006, p.131). The method of measuring the institutions power and how it contrasts with conventional power index applications is described through a new model that draws on Penrose–Banzhaf (1946) and Shapley–Shubik (1954) power indices (Ibid). Rather than focusing on the preferences of the actors which induce actions, the model makes probabilistic assumptions about players’ actions, rather than preferences which induce actions (Ibid, p.138). The results of the tests conducted utilising the new model indicates that the Council’s high internal quota makes it highly likely that the institution through the status quo bias in the negotiations determines the outcomes (Ibid, p.149). Despite this finding, Napel and Widgrén agree with most scholars that decision-making in the EU has developed in the direction of a balanced bicameral system, which gives neither the Council nor the Parliament a direct procedural advantage. However, at the crucial stage of co-decision, the Conciliation Committee, where there is symmetry between the two institutions, the Parliament is not as powerful as the Council (Ibid, p.150). Similarly, Thomson and Hosli (2006) examined the balance of power among the Commission, the Council and the Parliament in the context of legislative decision-making (Thomson and Hosli, 2006, p.391). Thomson and Hosli avail of data from 21 key-informants that were drawn mostly from the Commission and the Council. The semi-structured interviews were conducted as part of the first DEU project 1999–2001 (Ibid, p.397). To test the Council- centric and supranational views that emerged in the survey results, Thomson and Hosli load a compromise model that generates predictions of decision outcomes based on controversial issues that were deal with by the EU utilising three variables; actors’ relative capabilities, actors’ policy positions on these issues, and the importance they attach to them. Thomson and Hosli then construct two variants of the compromise model, one with supranational estimates and one with Council-centric estimates of the actors’ relative capabilities (Ibid, p.401). The results generated from the compromise model indicate that the Council-centric view on the balance of power under co-decision. This finding does not imply that the Parliament or other actors are marginal. The Parliament may exert an indirect influence on the decision outcomes through influencing the policy positions of the member states during negotiations in the Council (Ibid, p.413). The Parliament also has substantial weight in the decision-making process, even if it is less than that of the Council. Under the qualified majority voting variant of consultation, the Parliament has the weight of a large member state (Ibid, p.414).

Costello and Thomson (2013) in their analysis of the distribution of power among the EU institutions under co-decision formulated a theoretical expectation on the influence of the status quo from Napel and Widgrén (2006) (Costello and Thomson, 2013, p.1027). The results of the multilevel mixed-effects linear regression on the second DEU data set indicates that the influence of the Council and the Parliament is influenced the internal division in the Parliament and the relative proximity to the status quo (Ibid, p.1037). The conservatism of the Council and the radicalism of the Parliament according to Costello and Thomson explains why the latter institution has more power (Ibid). Similar to Thomson and Hosli (2006), Costello and Thomson (2013) argue that the Parliament does have a degree of influence in EU decision-making. Under co-decision, the Parliament has a similar level of power as two or three large member states. Notwithstanding this finding, the power of the Parliament is lower than what the formal procedural rules indicate (Ibid, p.1036). Costello and Thomson also point to the increased prominence of the Parliament to that of the Council. The Parliament is highly visible under co- decision and its members often raise issues that have not been considered by the representative of the member states in the Council working groups. This type of action by the Parliament, according to Costello and Thomson “undoubtedly also affect the contents of adopted legislation”. Observers of EU decision-making often cite negotiations where the Parliament was able to secure important concessions (Ibid, p.1037). Having established that the Parliament influenced the EU’s response to the sovereign debt crisis and how it can influence the legislative outcome, the next question is the power of the institution could increase or decrease the bargaining success of the member states. The literature is uniform on how much the Parliament could increase the bargaining success of the member states; with both Bailer (2004) and Arregui and Thomson (2009) suggesting that proximity to the institution could increase bargaining success. Bailer (2004) develops theoretical expectations on the Parliament’s influence on the bargaining success of a member state based on the institution’s role as a veto player under co-decision (see above) (Bailer, 2004, p.104). Drawing on the data collected between 1999 and 2001 from the first Decision making in the European Union (DEU) data set and the Power, Skill, Information data set, Bailer conducts a multivariate data analysis. The results of the analysis indicate that a member state that shares a position with that of the Parliament does not experience an increase in bargaining success. However, a member state that increases its distance from the position of the Parliament will experience a decrease in bargaining success in the areas of agricultural and internal market affairs (Ibid, p.115). Arregui and Thomson (2009) in their study describing and examining states’ bargaining success in legislative decision making, draw on studies on the co-decision

49 procedure (Crombez (1996); Steunenberg (1997); Tsebelis (2002) and Tsebelis and Garrett (2000)) to develop and test an expectation on the proximity of the Parliament and the bargaining success of the member states (Arregui and Thomson, 2009, p.660). A multivariate analysis of a new DEU data set containing a total of 125 legislative proposals, 69 from the EU- 15 time period and 56 from the post-2004 time period, found as expected that member states have more bargaining success the closer their position was to the Parliament’s under co- decision (Ibid, p.671). A member state could therefore derive influence from its proximity to the Parliament under co-decision procedure, as it increases the potential to shape the position of the Committee and plenary through lobbying. For member states proximity to the Parliament also increases the chances of being on the winning side in negotiations as the Parliament is a veto player (Arregui and Thomson, 2009, p.671). Proximity to the Parliament also adds the weight of two to three large member states to the preferred policy position of the member state (Costello and Thomson, 2013, p.1036). As with the Commission, there is nothing to compare the Parliament’s bargaining success to when measuring the level of the institution’s bargaining success. Therefore, the influence of the Parliament will be tested indirectly to assess whether the success of a member state is shaped by proximity to the institution. Thus, a member state could potentially increase their bargaining success by taking a position that was either close to, or aligned with, the preferred policy of the Parliament. The expectation is: H1b: A member state that is closer to the Parliament will have more bargaining success than an actor that has positioned itself further away from the Parliament.

The Parliament was not the only supranational actor to influence moves to deepening integration in the Euro-area. Another institution that has received attention in the literature on the EU’s response to the European sovereign debt crisis debt crisis has been the ECB. A number of the studies (Salines et al. 2012; Chang 2015; De Rynck 2016 and Krampf 2016) have focused on the ECB’s response to the crisis through mechanisms to stabilise the markets. However, there have been several contributions (Hodson 2012; Schwarzer 2012 Niemann and Ioannou 2015) to the body of literature on the EU’s response to the crisis that have examined the ECB’s influence in shaping the Union’s policy on reforming the EMU’s governance structures. Hodson (2012) argued that the ECB proved to be one of the most hesitant institutions when it comes to increasing the influence of the Community dimension in the EMU policy area. The ECB’s reluctance to increase the Community dimension is down to several factors according to Hodson, such as the focus of the institution on price stability over ‘more Europe’, a narrower

50 mandate compared to other institutions, and the significant policy-making powers that national central banks hold (Hodson, 2012, pp.23–24). Despite these hurdles the ECB has sought to increase its influence in a number of areas. Hodson cites the ECB’s attempts in the face of limited competence under the Treaty to gain a foothold in financial supervisions and the institution’s championing of a rigorous interpretation of the fiscal rules as evidence of the Bank’s efforts to increase its influence (Ibid, pp.29). In the latter case, the ECB’s focus on fiscal discipline was borne out in the institution’s proposals to the Task Force. According to Hodson, the ECB used its then President’s, Jean-Claude Trichet, membership of the Task Force as a pretext to table several informal proposals to strengthen the EMU’s governance framework. The ECB’s recommendations were broadly reflected in the Commission’s Six- Pack proposals. The refusal of the Task Force to back the ECB’s proposals in a number of areas resulted in Trichet failing to endorse the Task Force’s report. Schwarzer (2012), further details of the article can be found above, supports Hodson’s (2012) contention that the ECB’s influence in policy-making has been growing. Schwarzer traces the ECB’s influence to the early stages of the financial crisis in 2007, when the institution emerged as a crisis manager. The ECB’s response to crisis, the launching of securities market programme to buy government bonds for example, increased the institution’s leverage in the Eurozone. The ECB tabled several reforms to the EU’s economic governance framework in the Task Force. Trichet also called for changes to the economic governance structure in several speeches (Schwarzer, 2012, p.34). The ECB has also become directly involved in the disciplining member states. Schwarzer cites the joint letter sent to then Italian Prime Minister Silvio Berlusconi by Trichet and incoming President of the ECB Mario Draghi, in which the acting and future presidents outlined a reform plan for the member state. Draghi and Trichet also reminded Berlusconi of his commitments to introduce structural reforms and place Italy on a fiscally sustainable path. The Draghi and Trichet letter carried more weight than the peer pressure that could be applied by member states in the European Council, as the ECB could have decided not to buy any further Italian debt on the secondary markets (Ibid, pp.34–35). The ECB therefore became a key player in managing the crisis which has increased the institution’s influence in policy-making (Ibid, p.39). Likewise, Niemann and Ioannou (2015), in their study is discussed in detail above, argue that the ECB was an early supporter for deeper integration to strengthen the EMU. Niemann and Ioannou cite the ECB’s involvement in the Task Force, in their brief examination of the institution’s influence on policy-making, as evidence for their contention. Niemann and Ioannou also point to the interaction of the ECB

51 with the European Council and the Eurogroup, and the institution’s legal opinions on EMU – relevant legislation as further proof for their argument (Niemann and Ioannou, 2015, p.211). Unlike Schwarzer (2012), Hodson (2012) and Niemann and Ioannou (2015), Yiangou et al. (2013) argue that the ECB has been able to exercise influence indirectly. Similar to Verdun (2015), Yiangou et al. apply the HI framework to examine the prohibition on the ECB to finance governments’, which led to the institution to push for deeper integration in the Euro area. For a discussion on the HI framework see the review of Verdun’s (2015) study. Yiangou et al. argue that the inability of the ECB to address four weaknesses in the EMU; (1) ‘governance through market discipline’; (2) euro area fiscal governance; (3) ‘own-house-in- order’ and (4) ‘no bail-out’. In the case of the first weakness, the EMU designers believed wrongly that markets would discipline member states with debt and deficit levels above the Maastricht thresholds. In the case of the second weakness, the euro area fiscal governance did not contain any strong incentives that would force member states to abide by the rules of the SGP (Yiangou, O’keeffe and Glöckler, p.228). In the case of the third weakness, the ‘own- house-in-order’ principle implied that policy failure in the Euro area could not be absorbed, resulting in the fiscal problems in Greece, a member state that represented less than 2% of euro area GDP, spreading to other member states. In the case of the ‘no bail-out’ clause, it had no impact on the self-reinforcing framework of the EMU and instead only caused financial instability and contagion in the Eurozone (Ibid, p.229). According to Yiangou et al., member states were forced to address the four weaknesses through building on or redesigning existing institutions. One of the responses to the four weaknesses was the approval of the Six-Pack, which contained minimum requirements for independent national statistical authorities. Thus, the prohibition placed on the ECB by the treaties, forced the member states to address the four weaknesses (Ibid, p.234). The literature is uniform in its finding that the ECB influenced the EU’s response to the opening phase of the European sovereign debt crisis. The ECB, like the Commission, possesses an informational advantage – perhaps even a greater one. The ECB recruits economists with Ph.Ds from the leading universities in the United States and Europe (Hodson, 2012, p.23). This arguably gives the institution a pool of technical experts to draw on that is greater than the Commission’s. The ECB however does not have the same powers as the Commission under the Community Method. Indeed, the ECB can only give an opinion on all proposed Union acts that fall within the institution’s responsibilities – Article 282(5) of the Treaty of the European Union (Official Journal of the European Union, 2012, p.167). Thus, the ECB influenced the reforms of the Six-Pack indirectly. The Six-Pack was decided under the Community Method;

52 however, through the Task Force the institution influenced the broad scope of the package. The ECB’s influence over policy-making changed with the onset of the crisis. As a guardian of the objectives of the EMU, the ECB’s power increased during the sovereign debt crisis as it emerged as a crucial actor in stabilising the Eurozone. The literature however failed to address how the power of the ECB could have translated into influence for the party groups and member states during the negotiations on the Task Force report and during the intra-institutional negotiations in the Council and the Parliament on the Six-Pack. Bailer (2004) findings have indicated that proximity to legislative institutions can increase the bargaining success of the member states. Based on findings of the literature on the influence of the ECB during the European sovereign debt crisis, Bailer’s contention is broadened to include the institution. The influence of the ECB as an alternative source of policy to that of the Commission, may have added greater weight to the policy positions of a certain cohort of member states that shared the policy position of the Bank. Thus, it would have been entirely logical for member states to take positions that were close to, if not aligned with, the ECB in order to increase the chances of outcome reflecting their preferred policy during the negotiations on the Task Force report. Similarly, member states and party groups that had broadly common policy positions with the ECB may have taken positions on specific issues during the negotiations on the Six-Pack that were either close to, or aligned with, Banks in order to increase their bargaining success. Epstein and Rhodes (2016) hint of such an alignment between the member states and the ECB when arguing that the Bank became an important actor to those member states that were leading the charge for deeper economic integration since the crisis (Epstein and Rhodes, 2016). This was also the case for Members of the European Parliament (MEPs) on the Parliament’s Committee on Economic and Monetary Affairs. Senior Parliamentary officials have indicated that the ECB worked closely with certain MEPs from party groups that shared the policy positions of the institution (Interviews 24 and 49). If member states and the party groups considered proximity to the ECB as a potential factor in increasing their bargaining success, then the Council and the Parliament may have likewise utilised the influence of ECB to increase the weight of their policy positions by taking positions that were close to aligned with the Bank in the trialogues. Thus, the ECB’s handling of the crisis and the depth of its expertise may have added creditability to the policy positions of the member states, party groups and the institutions that shared the Bank’s positions on reforming the EU’s economic governance structures. The expectation therefore is that: H1c: An actor that is closer to the ECB will have more bargaining success than an actor that has positioned itself further away from the ECB.

3.5 Conclusions

The literature on the European sovereign debt crisis can be divided into two broad categories; (1) the influence of intergovernmental and supranational institutions and (2) theories availed of to support the intergovernmental and supranational approach in the literature. In the first category, the literature is divided between the influence of the European Council vis-à-vis the Commission and power of the two other supranational institutions, the Parliament and the ECB. In general, the literature suggests that the European Council and the Parliament were influential while the studies on the ECB are more uniform in their findings that the institution did play a substantial role in shaping the EU’s response to the crisis. Supporting the contention that the European Council was more influential than the Commission were Puetter (2011), Dinan (2012), Schwarzer (2012), Chang (2013), Niemann and Ioannou (2015), Verdun (2015) and Da Conceição-Heldt (2016). Puetter (2011) cited the establishment of the Eurogroup while Chang (2013) and Verdun (2015) pointed to the Six-Pack and the Fiscal Compact as evidence of the European Council’s influence in the shaping the EU’s response to the opening phase of the European sovereign debt crisis. The establishment of the EFSF and the ESM is also considered by Dinan (2012), Verdun (2015), Da Conceição-Heldt (2016), and Niemann and Ioannou (2015) to be a conformation of the European Council’s influence during the crisis. While Schwarzer (2012) argued that Van Rompuy’s stewardship of the European Council during the period of instability in the EMU was the key factor in the institution’s influence. Bauer and Becker (2014) and Hodson (2012) countered Puetter et al.’s arguments by citing the new powers that the Commission had gained from the European sovereign debt crisis (Bauer and Becker, 2014) or that the institution continued to set the agenda through initiating debate on the future reforms of economic governance during the Task Force negotiations (Hodson, 2012). Thus, the main difference between the former and latter groups is that Puetter et al. focus on the legislation and mechanisms that were introduced to respond to the crisis whereas Hodson et al. are less reliant on the same legislation and mechanisms when making their case for the Commission. Hodson et al. arguments are therefore less robust than the ones put forward by Puetter et al. Dinan (2012), Chang (2013), Schwarzer (2012) and Niemann and Ioannou (2015) cited the gains made by the Parliament in the Six-Pack negotiations as evidence that the institution had managed to influence the EU’s response to the opening phase of the crisis. Rittberger (2014) also pointed to the Six-Pack as evidence of the Parliament’s influence. For Rittberger, the concessions that the Parliament gained during the negotiations in the Six-Pack was evidence

54 of how little influence the institution had. Thus, the difference between Dinan et al’s. and Rittberger’s findings, centers on how much influence the Parliament exercised during the negotiations on the Six-Pack. The literature on the ECB is split between the studies on institution’s direct influence (Hodson 2012; Schwarzer 2012 and Niemann and Ioannou 2015) through the Task Force and indirect (Yiangou et al., 2013) influence on policy-making, the Six-Pack for example, via the monetary financing prohibition placed on the Bank. Thus, Yiangou focuses on the potential influence of the ECB in the Community Method while Hodson et.al examine the actual influence of the ECB on policy-making outside of the co- decision procedure. A number of theories are availed of to support the intergovernmental and supranational approach taken in the literature. Alexandrova et al.’s (2014) examined the European Council’s influence through agenda-setting while Puetter (2011) applied deliberative intergovernmentalism to his study on the institution’s influence during the sovereign debt crisis. Schimmelfennig’s (2015) study examined the response of the member states to the crisis through the liberal intergovernmental framework while Chang (2013) draws on the principal- agent theory to examine how member states managed to weaken the Commission as an agenda- setter. HI underpinned both Verdun’s (2015) study on the EU’s response to the crisis and Yiangou (2013) et al. study on the ECB. Providing the theoretical for Crum (2013) and Niemann and Ioannou’s (2015) supranational influenced studies are the theories of federalism and neofunctionalisim. The literature indicates that the European Council was more influential in shaping the EU’s response to the opening phase of the European sovereign debt crisis than the Commission. The goal of this thesis is test whether the findings in the descriptive studies on the influence of the European Council through examining in depth the role of the European Council and the Commission in the negotiations of the Task Force and in the Six-Pack. Thus far, there has been little in the way of a detailed analysis of how the European Council seized the agenda from the Commission and the extent of the European Council’s influence vis-à-vis the Commissions’. There are three ways in which this question will be addressed in the thesis. First, the thesis will outline in detail how the European Council seized the agenda through the reconstruction of the Task Force negotiations. Second, the research will provide a descriptive comparison and analysis of the recommendations in the Task Force and the Commission’s Six-Pack proposals. Third, the thesis will test Hypothesis 1 in the regression analysis in the sections on the Task Force report, the Six-Pack negotiations in the Council and in bivariate analysis in the Parliament and trialogue sections of this research. Thus, this thesis will provide a

55 comprehensive account of how the European Council seized the agenda and the institution’s influence vis-à-vis the Commissions’ on the negotiations in the Council and the Parliament on the Six-Pack and the final decision outcome in the trialogues. The literature therefore provides a variety of theories that are useful in examining whether the response to the opening phase of the European sovereign debt crisis was driven by intergovernmental or supranational institutions. Indeed, this research project is interested in whether the intergovernmental European Council or the supranational Commission assumed a more influential and powerful role in policy-making through the Task Force. However, the approach is different to that taken in the studies discussed in this literature review. This research project seeks to examine the influence of the European Council and the Commission through examining the closeness of the outcome of the Six-Pack on the most controversial issues in the negotiations to the Task Force recommendations. To solve that question, the influence of the intra-institutional actors in the Council and the Parliament and the institutions must be measured. If the decision had been made to only focus on the Commission’s and European Council’s struggle to set the agenda on how the EU was to respond to the opening phase of the crisis within the context of the negotiations on the Task Force report, then key policy actors would have been neglected. Thus, omission of member states, party groups, the Council, the ECB and the Parliament would leave out important actors that shaped the Task Force recommendations and outcome of the Six-Pack negotiations. The European Council, the Council and the Parliament do not accept the Commission’s proposals without question. During the negotiations in the Task Force, member states pushed their own policy preferences and in some cases were successful in aligning the recommendations of the Task Force with their own policy preferences. Similarly, in the Council, member states sought to shape the Commission proposals to reflect their own policy preferences. In both the European Council and the Council, the institution’s collective positions were formed by the member states. As Chang (2013) and Schimmelfennig (2015) have argued some member states were the key drivers seeking to reform the EU’s economic governance framework generally and more specifically the preferences of the member states and their bargaining power shaped specific elements of the transformation of the Union’s economic governance structures. Thus, the approach of examining the policy differences of the member states allows for a greater understanding of how the positions of the European Council and Council and the influence of member states on shaping the most important issues within the Task Force and Six-Pack negotiations.

The Parliament, like the Council, represents different interests and only acts as a cohesive unit when a collective position has been formed. The construction of the Parliament’s collective position on the Six-Pack was done in the Committee on Economic and Monetary Affairs (ECON) between the party groups. Party groups therefore that were successful in shaping the content of the rapporteur’s report, were by extension, shaping the Parliament’s policy preferences in the trialogues. Thus, by examining the influence of the party groups, our understanding of how the Parliament’s position on the most important issues within the negotiations is further deepened. Similar to the negotiations in the European Council and Council, this approach also helps to identify the most influential intra-institutional actors within the process. Once the Parliament had formed its collective position, it acts as a cohesive actor in the trialogues. The literature Dinan (2012), Chang (2013), Schwarzer (2012) and Niemann and Ioannou (2015) has pointed to the concessions that the institution achieved during the trialogues, thus underlying the influence of the Parliament at this stage of the negotiations. Along with the Council, the Parliament, the intra-institutional actors, the ECB played a role in shaping the output of the Task Force and the Six-Pack through its input into the negotiations. The influence of the ECB in shaping the EU’s response has been outlined in several studies (Hodson 2012; Schwarzer 2012; Yiangou et al. 2013 and Niemann and Ioannou 2015) that have examined the institution’s role in the Task Force and the Six-Pack. The Task Force recommendations, in part, formed the basis of the Six-Pack and as the negotiations in the Task Force were conducted outside the Community Method, the ECB had a platform that was not usually available to the institution to shape the Union’s legislative response to the opening phase of the crisis. By ignoring the role of the ECB, the Council, the Parliament, the member states and the party groups in shaping the Union’s legislative response to the crisis, the study would in effect be presenting a distorted picture of the influence of the European Council and the Commission. As demonstrated above, each of these actors played a role in shaping the Six- Pack through the negotiations in the Task Force and on the Six-Pack within the Community Method structure. Thus, to measure the influence of the European Council and the Commission from the inception of the Task Force to the outcome of the Six-Pack negotiations, all actors that the literature indicated were influential in both negotiations must be examined. Taking into account all of the actors that were involved in the negotiations also allows for a clearer understanding of the negotiations. By just measuring the influence of the European Council and the Commission based on the how closely aligned the Task Force recommendations and the latter’s communications are to the final decision outcome, then this

57 study would fail to take into account the negotiation process. Consensus on the most important issues in the Task Force was not reached in the first day of the negotiations, or in the Parliament or in the Council or in the trialogues on the Commission’s Six-Pack proposals. If the intra- institutional and intra-institutional actors had acted in such a fashion than examining the influence of the European Council and the Commission could be justified. However, as the discussions did not follow such a pattern, this study would have presented a false narrative of the policy process within the Task Force and during the Six-Pack negotiations. The theoretical relevance of the second question, which concerns the extent to which other legislative actors influenced the decision-making outcome of the Six-Pack, can be found in a large body of literature on EU-decision-making (Arregui and Thomson 2009; Bailer 2004; Bailer and Schneider 2005; Bailer 2010; Dür and Mateo 2010; Hug and König 2002; Leuffen et al. 2014; Schneider et al. 2010; Mattila 2004; Hosli et al 2011; Tallberg 2008 and Warntjen 2013), the European sovereign debt crisis (Da Conceição-Heldt 2016; Dinan 2012; Chang 2013; Niemann and Ioannou 2015; Puetter 2011; Schwarzer 2012 and Verdun 2015) and on international relations (Schelling 1960; Putnam 1988 and Keohane and Nye 1989), which is availed of to provide the foundation from which to develop theoretical expectations to examine the variation in the bargaining success of the actors that shaped the outcome of the Task Force and Six-Pack negotiations.

3.6 The role of the Council in decision-making

The literature on the power of the Council under the co-decision procedure (Napel and Widgrén’s (2006); Thomson and Hosli (2006) and Costello and Thomson (2013)) is uniform in its conclusion that the institution exercises the most influence. The argument in the three articles has been outlined in the section on neo-functionalism and the European sovereign debt crisis, thus only the findings in this section will be examined. Napel and Widgrén (2006) found that as a consequence Council’s high internal quota increases the chances that the outcome is determined by the status quo inherent in the negotiations (Napel and Widgrén, 2006, p.149). Similarly, Thomson and Hosli (2006) found that the Council-centric view on the balance of power among the Commission, Council and Parliament is the more accurate depiction of recent legislative decision-making (Thomson and Hosli, 2006, p.413). The findings support those studies of EU decision-making, that the interests of the member states are important when shaping the decision outcomes. This according to Thomson and Hosli may seem oblivious, and yet a number of studies (Selck and Steunenberg, 2004) have suggested that the Parliament and

58 the Council are on an equal footing (Ibid). Furthermore, many of the key informants interviewed viewed the Commission and the Parliament to be more powerful than the Council. Likewise, Costello and Thomson (2013) found that the Council exercised more influence under the co-decision procedure than the Parliament. The Council’s bargaining success derives from the institution’s relative proximity to the status quo and by internal division in the Parliament. Thus, the Council’s conservatism and the institution’s informational advantage on the splits in the Parliament, divisions in the plenary are in public whereas rifts in the Council are not generally known as meetings are held in private, increases the Council’s bargaining success (Costello and Thomson, 2013, p.1037). Bailer (2004) has argued that proximity to an influential institution can increase the bargaining success of an actor. This argument is extended in this research to the proximity of the Council and its influence on the bargaining success of the party groups. As has been noted earlier, the most notable problem with Bailer’s framework is how to measure the bargaining success of the relevant institution, in this case the Council, as there is no point of comparison. The approach that this research takes to address this issue will be to measure the influence of the Council indirectly, by testing whether the success of the party group is shaped by proximity to the institution. The Council under the co-decision procedure has formal amendment and veto powers. The Council therefore has the potential to influence the content of the outcome of the Six-Pack negotiations. The Council can amend a Commission proposal under Article 294 of the Treaty on the Functioning of the European Union. The Council does so after the Parliament has taken a collective position on the issue. Thus, party groups can derive influence from their proximity to Council under co-decision procedure, as they have the opportunity to shape the position of ministers from the national party that is a member of the party group in the plenary. Thus, the expectation is that: H2: A party group that was closer to the Council’s position will have more bargaining success than a party group that has positioned itself further away from the Council.

3.7 Factors that may explain the bargaining success of actors

This section examines the literature on the potential factors that may explain the bargaining success of member states during the negotiations on the Task Force report and during the Six-Pack negotiations and of party groups and the Council and the Parliament during the negotiations on the legislative package. From those studies, expectations are developed on

59 the bargaining success of the actors. Testing potential factors that can explain bargaining success is an essential part of answering the second question that this study seeks to address, namely how the legislative actors influenced the outcome of the Six-Pack. The literature on the European sovereign debt crisis, which is discussed earlier in this chapter, identified the important actors that shaped the Task Force recommendations and the outcome of the Six- Pack. Having identified the actors, the next question is which of these actors were the most influential. To answer that, the factors that had a potential impact on the bargaining success of the actors need to be identified in the literature, discussed and tested. In doing so, the research is addressing a major gap in the body of literature on the European sovereign debt crisis, how certain actors were more influential than others in shaping the EU’s response to the opening phase of the sovereign debt crisis. This part of the chapter therefore begins with an analysis of the factors that may explain the variation in the bargaining success of the member states in the Task Force and Six-Pack negotiations, explanatory variables were developed from studies on the proximity of influential institutions (Bailer, 2004) that had been identified as such in the literature on the sovereign debt crisis. Bauer and Becker (2014) and Hodson’s (2012) have studied the role of the Commission during the crisis, while Hodson (2012), Schwarzer (2012), Yiangou et al. (2013), and Niemann and Ioannou (2015) have examined the role of the ECB. Studies on the influence of the Parliament (Dinan 2012; Chang 2013; Schwarzer 2012; Niemann and Ioannou 2015 and Rittberger 2014) and on the European Council (Da Conceição-Heldt 2016; Dinan 2012; Chang 2013; Niemann and Ioannou 2015; Puetter 2011; Schwarzer 2012 and Verdun 2015) were also availed of as the basis for the theoretical expectations. Similarly, literature on the proximity to the status quo (Bailer 2004; Napel and Widgrén 2006; König et al. 2007; Costello and Thomson 2011; Costello and Thomson 2013), network capital (Naurin and Lindahl 2008; Naurin 2007 and Naurin and Lindahl 2010), voting power (Shapley and Shubik, 1954), the EU budget status (Carrubba 1997 and Wagner 1988) domestic constraints (Schelling 1960; Putnam 1988 and Winzen 2012) government deficit/surplus (Keohane and Nye 1989) salience (Thomson, 2011) and weighted distance (Arregui and Thomson, 2009). Likewise, studies on the influence of the Presidency (Tallberg 2003; Tallberg 2004; Schalk et al. 2007; Warntjen 2007; Warntjen 2008; Thomson 2008; Häge and Naurin 2013) and salience (Thomson, 2011) were availed of for this research project. For the Parliament, explanatory variables are developed from the studies discussed previously on proximity to the influential institutions, the Commission, the Council, the European Council and the ECB, and closeness to the status quo, salience and the weighted vote. The theoretical foundation for the explanatory variable on the influence of the rapporteur

60 as policy entrepreneurs (Benedetto 2005 and König et al. 2007) is drawn from discussions on the role of the rapporteurs (Benedetto 2005; Høyland 2006; Costello and Thomson 2010; Costello and Thomson 2011; Rasmussen 2011; Finke 2012; Finke and Han 2013; Hix and Høyland 2013) within that body of literature. For the inter-institutional negotiations, the theoretical basis for the explanatory variables are drawn from the studies discussed earlier on proximity to the European Council, the ECB and the status quo and salience. Tallberg’s (2008) study draws from theories in international relations literature on state power, negotiation theory and institutional theory and theories of negotiation and leadership to explain three types of bargaining power in the European Council. The first two categories, state sources of power and institutional sources of power, are the most relevant for this study (Tallberg, 2008, p.692). The first of type of bargaining power is state sources of power. State sources of power have two elements; (1) aggregate structural power and (2) issue-specific power. Tallberg describes aggregate structural power as a state’s total capabilities and resources – economic and military strengthen, size of its population and territory, administrative capacity, political stability and technological development (Ibid, pp.689–688). Within international relations greater aggregate structural power will prevail as states with superior resources can through a mixture of threats and promises can bring other parties into line. In the European Council, aggregate structural power has the potential to affect the legitimacy of a member state’s claims, the resources that it can commit and the range of alternatives that it can pursue (Ibid, p.690). Tallberg characterizes issue-specific power as the resources invested by a state on a particular issue, the engagement of the state to the issue and the alternatives for a state to a negotiated agreement on the issue (Ibid, p.692). Tallberg cites the influence of France and the United Kingdom as European military powers on discussions on security issues in the European Council as evidence of issue-specific power in the institution. Institutional sources of power are another type of bargaining power that the member states can draw on to influence negotiations (Ibid, p.693). The first power resource in this category is the power of the veto. Exercising a veto can, according to Tallberg, strengthen the position of a state that does enjoy structural power. Though rarely used, the key informants indicated that it was a very effect measure as member states that wielded the veto often prevailed (Ibid, p.694). The second power resource in this category is the power of the chair. Tallberg cites multilateral bargaining which suggests that the chairmanship of international bodies can constitutes a power platform for states (Ibid, p.696). Within the European Council, representatives of small and medium-sized states tended to rank the office as the most

61 important source of power. According to Tallberg small and medium-sized states are unable to rely on structural power to influence the negotiations in the European Council (Ibid, p.697) Tallberg concludes that structural capabilities, economic strength and population are the most dominant power resources that member states can deploy in the institution (Ibid, p.703). As the ‘big three’, Germany, France and the United Kingdom are the states that can rely on these power resources during negotiations. Thus the ‘big three’ member states are considered to be the agenda setters within the European Council. Indeed, the dominance of the larger member states has been reinforced through the 2004 enlargement of the EU (Ibid). According to Tallberg, the 2004 enlargement has shifted negotiations from plenary meetings at the European Council summits to mini-lateral and informal sessions that are dominated by the larger member states (Ibid). The influence of smaller and medium sized member states has been further diminished in the European Council, through the establishment of a semi- permanent president of the institution. Smaller and medium sized member states now longer have the platform in which to influence the agenda of the European Council. The creation of the office of President of the European Council has also had other effects. Tallberg argues that office will strengthen the European Council vis-à-vis other institutions, especially the Commission (Ibid). Availing of the same data that Tallberg (2008) gathered from senior bureaucrats and former heads of state and governments, Tallberg and Johansson (2008) investigated whether the increasing party politicisation of the EU extends to the European Council (Tallberg and Johansson, 2008, p.1222). The data collected for the article focused on negotiations on the employment chapter the Lisbon agenda. Theoretically Tallberg and Johansson underpin their article with two alternative theories of coalition formation ‘the partisan hypothesis’ and ‘competing expectations’ (Ibid, pp.1224–1225). Three factors are derived from the two alternative theories; (1) salience of issue on the left–right dimension; (2) partisan composition of the European Council and (3) ‘cohesion and mobilisation of transnational parties’ (Ibid, pp.1226–1228). Based on the data, Tallberg and Johansson concluded that it is rare for negotiations to be conducted along party lines in the European Council. Thus, governments in the European Council collaborate on the basis of shared concerns rather than on ideology (Ibid, p.1237). The dominance of the national interests also ensures that European party groups are unable to form coalitions on ideological lines within the European Council (Ibid). The small number of issues on the European Council’s agenda that are important on the left–right dimension further weakens the ability of the party politicisation in the institution (Ibid).

The findings in Tallberg’s (2008) study underlined the importance of the Presidency of the European Council for small and medium sized member states. The meetings of the various Council formations are managed by the Presidency, which rotates between member state governments every six months. The main responsibility of the Presidency is to chair those discussions at ministerial level downwards, preparing agendas and representing the Council in discussions with other partners in the majority of areas with the exception of Common Foreign and Security Policy. Here the High Representative of the Union for Foreign Affairs and Security Policy is the President of the Foreign Affairs Council (Europa, 2018). The literature preceding study dealt primary with the role of the Presidency as a broker rather than its potential power to shape the agenda or influence the legislative decision-making outcomes. Tallberg (2003) began to address this gap in the research by developing a conceptual framework that distinguishes between three forms of influence agenda-shaping: agenda- setting, agenda-structuring and agenda exclusion. Tallberg underpins this conceptual framework by drawing on theories of bargaining and decision-making (Tallberg, 2003, p.1). Tallberg also draws on the instruments available to each Presidency and examples of how the office has shaped outcomes in EU policy-making (Ibid). Turing to the first of the three forms of agenda-shaping, agenda-setting, Tallberg argues that agenda-setting is a function of policy entrepreneurs. A Presidency can set the agenda in a number of ways. The Presidency can bring attention to an issue by placing it on the six-month programme. The Presidency can also place an issue on the agenda in informal meetings in its home state (Ibid, p.6). The second form of agenda-shaping is agenda-structuring. Tallberg describes agenda-structuring as the capacity to structure decision-making by moving items up or down on a political agenda (Ibid, p.8). In the EU the holder of the Presidency can move issues up or down on an agenda based national preferences such as regional or socioeconomic priorities (Ibid, p.9). Agenda exclusion is the third and final agenda-shaping power that a Presidency can exercise. According to Tallberg, the Presidency can prevent an issue been placed on the agenda through blocking it or forgetting about the dossiers (Ibid, p.12). The Presidency can engage in three forms of agenda exclusion; (1) remain silent on a subject; (2) exclude items from the decision agenda and (3) presenting impossible compromise proposals. Tallberg argues that the Presidency, with these powers, is an ‘agent of change’ which can set the agenda and influence the outcome of negotiations (Ibid, p.17). Schalk et al. (2007) apply a cooperative bargaining model to estimate the bargaining strength of the Presidency using data from the first decision-making in the European Union data sets, a data set containing 162 issues from various EU policy areas from 1999–2000 to 63 empirically estimate presidency-based power in the Council (Schalk, Torenvlied, Weesie and Stokman, 2007, p.229). Schalk et al. distinguish between ‘Presidency Effect’, ‘Adoption Stage Presidency’ and the ‘Voting Stage Presidency’. Underlining these stages are two key processes that may increase the influence of the Presidency. The first process concerns the decentralised negotiations in the Commission during the agenda-setting stage, of the negotiations, in the Committee of Permanent Representatives and the adoption of the proposals. The second process is the voting stage where member states seek to influence the decision-making outcome (Ibid, p.232). Similar to Tallberg (2003), Schalk et al. found that holding the Presidency was influential. The findings suggest that a member state that is holding the Presidency at the voting stage, rather than at the earlier stages of the bargaining process, will have more of an opportunity to leave their domestic mark on the outcome of the negotiations (Ibid, p.245). Tallberg (2004) argued that the Presidency has can unlock irreconcilable positions, secure efficient agreements and allow the member state holding the office to shape distributional outcomes through informational and procedural resources (Tallberg, 2004, p.999). Tallberg draws on rational choice institutionalism and general bargaining theories to present a framework of the powers that the Presidency possess to influence the decision-making outcome (Ibid). The powers of the Presidency are then demonstrated through the French and Germany Presidencies during the negotiations at the 2000 intergovernmental conference (IGC) and on the Agenda 2000 respectively (Ibid). According to Tallberg, a Presidency enjoys access to privileged information on the preferences of member state governments and boasts an asymmetrical control of the negotiating process (Ibid, pp.1003–1004). Despite these advantages the Presidency, Tallberg argues that there are brokerage constraints on the office (Ibid, p.1005). Formal common decision rules such as qualified majority voting (QMV) and unanimity makes it difficult for the holder to promote its favored outcome or to construct an agreement (Ibid). The powers Presidency are also constrained by informal rules: the norms of effectiveness and neutrality (Ibid, p.1006). Even with these formal and informal constraints, the French and German Presidencies managed to steer the negotiations in the direction of their preferred outcome in the Agenda 2000 and IGC 2000 negotiations (Ibid, p.1019). Likewise, Warntjen (2008) found that the Presidency has the power to shape the final decision-making outcome at the end of negotiations in his empirical analysis on a large-n data set – the first Decision making in the European Union (DEU) dataset (Warntjen, 2008, p.315). Warntjen develops a counterfactual outcome based on general bargaining models to establish whether a member state exercised disproportionate influence though holding the office of the Presidency (Ibid, p.316). The two general bargaining models that Warntjen relies on are the 64 compromise model and the pivot model. The counterfactual model consists of the positions of the member states, however it does differentiate between member states that hold the Presidency. In a case where a holder of the Presidency wields an excessive amount of influence, this would according to Warntjen indicate that the Presidency is powerful (Ibid, p.320). In the pivot model, a member state is considered to be influential if an outcome consistently deviates from the predication towards the preferred policy preference of member state and this change is not a result of the influence of another member state (Ibid). Similar to Schalk et al. (2007) and Warntjen (2008), Thomson’s (2008) study draws on the first DEU dataset to examine the influence of the Presidency in terms of the timing of decision-making and content of the legislation adopted (Ibid, p.595). According to Thomson, there is no evidence to suggest that the influence of a Presidency on the decision outcomes can be affected by the office holder’s timing of the agenda. The workload of a Presidency is mainly influenced by the Commission’s proposals that were introduced during other presidencies and the progress achieved on the dossiers (Ibid, pp.611–612). The involvement of the Parliament and the decision rule in the Council are factors that can determine the duration of decision- making and which a Presidency cannot control (Ibid, p.612). Likewise, there was no evidence to support the contention that the influence of a Presidency is greater under a fast-tracked co- decision proposal (Ibid). The findings of the regression analysis do support Tallberg’s (2004) argument that the influence of the Presidency on decision outcomes is shaped by QMV in the Council and by their extreme positions (Ibid, p.612). The influence of the Presidency has also been examined briefly with other factors in studies (Arregui and Thomson, 2009 and Häge and Naurin, 2013) that have sought to explain the variation of the bargaining success of the member states in the Council. Warntjen’s (2007) descriptive study examined the impact of 35 Presidency on the Council’s legislative activity in the environmental policy field from 1984 to 2001. Warntjen develops theoretical exceptions based on the level of salience attached to an issue by the Presidency is one of several means that the office can avail of influence the pace of decision- making (Warntjen, 2007, p.1136). The results of the bivariate analysis and multivariate regression analysis indicate that the Presidency does have the capacity to steer the EU’s legislative agenda on environmental policy (Ibid, p.1154). The evidence however is inconclusive on whether there are differences in the performance of the Presidency in the environmental policy field based on the size of the member state (Ibid). Arregui and Thomson (2009) in their study describing and examining states’ bargaining success in legislative decision making, draw on international bargaining literature and on the

65 studies discussed in this section of the literature review to develop and test expectations on the influence of a Presidency (Arregui and Thomson, 2009, p.655). A multivariate analysis of a new DEU data set containing a total of 125 legislative proposals, 69 from the EU-15 time period and 56 from the post-2004 time period, found that the Presidency had an impact on the bargaining success of the member states that held the position before enlargement (Ibid, p.672). Member states post enlargement did not derive any bargaining success from holding a Presidency. Arregui and Thomson argue that with more member states in the Council, more time needs to be spent by a Presidency to facilitate an agreement over pursing its own policy preferences (Ibid). The influence of holding the Presidency on a member state’s position in the Council’s internal co-operation network was examined by Häge and Naurin (2013) in their study on the inter-institutional linkages that have been created through the establishment of the co-decision procedure in the Council (Häge and Naurin, 2013, p.953). Häge and Naurin expand the relais actor hypothesis – actors that co-ordinate the inter-institutional relations within one institution have an informational advantage over other actors from the same institution proposed by Farrell and Héritier (2004), to test expectations on the influence of the Presidency (Ibid, p.968). Availing of data on the levels of co-operation in various working parties and senior committees of the Council in 2003, 2006 and 2009, Häge and Naurin found no evidence that holding the Presidency under co-decision enhanced a member state’s position in the Council’s internal co-operation network (Ibid, p.966). The remaining literature on the Presidency is descriptive. Bengtsson et al. (2004) examined the management of the agenda by the Danish, Swedish and Finnish presidencies to prove whether the Presidency amplified the national concerns or whether it silenced national interests through subordinated them in favor of common European concerns (Bengtsson, Elgström and Tallberg, 2004, p.311). The performance of the Nordic member states is divided between how well the countries managed the agenda and their effectiveness as ‘honest brokers’. The analysis of the performance of the three member states as mangers of the agenda, supports the contention that the Presidency provided a platform for the Nordic governments to promote their national interests (Ibid, p.330). Bengtsson et al. cite the priority given by the Danish Presidency to issue of enlargement and the focus of the Swedish Presidency on security affairs. Likewise, the Finnish Presidency paid particular attention to issue of security. All three presidencies also placed a special emphasis on Nordic concerns (Ibid, p.325 and p.328). When key national concerns were under threat, Bengtsson et al. found that Denmark and Sweden took a decidedly more partisan approach to the negotiations (Ibid, p.330). In generally the literature

66 indicates that the Presidency is an influential factor that may explain the variation in the bargaining success of the member states. A chair during negotiations can acquire knowledge on the preferences of the negotiators thereby allowing it to construct a viable compromise. A chair can also utilise this information to promote its interests and to propose a number of agreements that will benefit the negotiators. From those options, the chair can advance an agreement that is close as possible to its own preferred legislative outcome (Tallberg, 2004, pp.1001–1002). In the Council, the chair is the Presidency which is held on a rotating basis by a member state every six months. The main role of the Presidency is to chair meetings in the different Council configurations from ministerial level down, preparing agendas and representing the institution in trialogues and the Conciliation Committee (Wallace, 2005, p.60). According to Tallberg (2003) the Presidency can structure the agenda, exclude issues from the agenda and set the agenda. By availing of its agenda-structuring powers, the Presidency can place a greater emphasis on some issues over others. Under agenda exclusion a Presidency can avoid taking a position or prevent it been placed on the agenda or stalling the development of policy in a particular area for six months. The power of agenda-setting allows the Presidency to highlight specific problems that the holder requires to be dealt with and develop solutions that can be applied, with the aid of the Commission, to problems (Tallberg, 2003, p.512). As a broker in discussions between different representatives of the member states, the Presidency has access to privileged information on the preferences of those actors (Schalk, 2007). The Presidency can give its holder informational advantage and the power to broker an agreement between member states. Such information allows the holder to know the positions of the parties involved in the negotiations, thus allowing the Presidency to tailor a compromise that is beneficial to it and to the other member states (Tallberg, 2004, pp.1005–1007). The Presidency therefore has certain advantages that a member states can exploit to derive influence during negotiations in the Council. Thus, the expectation is that: H3: A member state that holds the Presidency will have more bargaining success than the member state that did not hold the Presidency.

The Presidency is one of a number of factors that has been considered in the literature that can potentially explain the variation of the bargaining success of member states in the Council. One of those factors is economic strength. As noted at the start of this section, Tallberg’s (2008) study found that economic strength and population are the most dominant power resources that member states can deploy in the European Council (Ibid, p.703). Bailer

(2004) develops theoretical expectations on economic strength from Keohane and Nye’s (1989) study on international relations. Keohane and Nye argued that in international negotiations, economic power is an important power resource for a state (Bailer, 2004, p.101). Drawing on the data from the first DEU data set and the Power, Skill, Information data set, Bailer conducts a multivariate data analysis. The results of the analysis indicate that economic resources do not always guarantee bargaining success for member states. In general, the literature on economic strengthen indicates that it can explain the variation of a member state’s bargaining success in the Council. Having considered other factors such as GDP, this study seeks to capture economic strength of the member states in the Council through macro-economic performance. Macro-economic performance of a member state is another aspect to which economic power can influence negotiations in the Council. According to Moravcsik (1993), governments act rationally on the question of European integration. The threat of a non-agreement for some states forces rational governments with worse outside options or unattractive alternatives to seek a compromise which is against its interests. An actor’s weak bargaining power is determined by the actor’s dependency on a cooperative agreement and limited exit options in negotiations (Keohane and Nye, 1989, p.45). Conversely, an actor’s superior bargaining position is derived by the independence of the actor to the negotiated outcome (Ibid). Thus, an actor is less reliant on a cooperative solution. In inter-state negotiations at the regional level, states that do not have a credible exit strategy and are dependent on their counterparts in a policy field, are in a comparably weaker position during negotiations (Ibid). As a result of the crisis the macro-economic performance of a number of Southern member states deteriorated sharply compared to that of the Northern and Eastern fiscal hawks. This left the Southern member states either more receptive to reforming the Stability and Growth Pact or weakened their ability to prevent any changes to the status quo in favour of the positions advocated by the fiscal hawks. The expectation is that: H4: A member state with a good macro-economic performance will have more bargaining success than a member state with a poor macro-economic performance.

Turning to another factor that may explain the variation in a member state’s bargaining success is EU budget status. Research by Mattila (2004) and Hosli et al. (2011) has indicated that net-contributors to the EU budget status are less likely to face opposition from member states that are net-recipients. Mattila’s (2004) study examined the voting records of 15 member states in the Council across a 12 and a half-year period (from 1995 to 2000) or 180 observations

(Mattila, 2004, p.36). Mattila develops theoretical expectations on the influence of a member state’s EU budget status on how it will vote in the Council from Carrubba (1997). Carrubba argued that financial transfers between EU countries allows are side-payments from richer member states to poorer countries in the Union for more pro-integration policies (Ibid, p.34). The results of analyses present contradictory findings. The results of the bivariate analyses indicate that net-beneficiaries are less likely to vote against a majority in the Council than net- contributors to the budget. The multivariate analysis does not support the results of the bivariate analyses (Ibid, p.46). The findings in Hosli et al. (2011) study are more definitive than those in Mattila’s (2004) article. Hosli et al. examine the voting patterns of the Council across 1,358 acts over a 2-year period between May 2004 and the end of December 2006 (the EU 25) (Hosli, Mattila and Uriot, 2011, p.1255). The analyses of the government vote choices in the Council are based on ordered logistic regression analysis. The analysis explains the tendency of member states to vote yes, no or to abstain (Ibid, p.1249). Similar to Mattila (2004), Hosli et al. develops theoretical expectations based on Carrubba’s (1997) framework on the influence of a member state’s EU budget status on how it will vote in the Council (Ibid, p.1253). The results of the ordered logistic regression analysis indicate that older member states that are net-recipients are more likely to support the Council majority. Among the new EU member states the trend is reversed. Net-recipients support the Council majority less frequently (Ibid, p.1267). In general, the literature on the EU budget status of a member state can explain the variation of a member state’s bargaining success in the Council. Wagner’s (1988) theory of economic interdependence provides a potential framework to explain the bargaining success of net-recipients in the Council. Economic interdependence is defined by Cooper (1985) as the measure of the value of economic transactions between a country and the rest of the world or between two countries scaled by total financial assets or national output (Cooper, 1985, p.1197). Wagner argues that economic interdependence can be a source of bargaining power only in a context where economic resources are exchanged for political support. Aid rather than economic sanctions is considered to be a source of bargaining power for countries that are economically interdependent, as such sanctions usually fail. Furthermore, in the EU, member states are unable to place economic sanctions on each other. These economic resources can come from an economically strong country in the form of aid to purchase political concession from an economically weak country. An economically strong state can only extract such concessions by threatening to cut off existing support rather than promising to reduce new aid. However, the reduction of potential aid does not have the same

69 effect as cutting actual assistance. Moreover, cutting off existing support costs a country nothing whereas new funding does (Wagner, 1988, p.462). During the negotiations on the Task Force report and the Six-Pack, net-contributors may have exercised this potential leverage over net beneficiaries knowing that the member states that were the hardest hit from the crisis were more than ever reliant on EU funds to support domestic programmes. Thus, the uncertainty of when the crisis was going to come to an end and the extent of the economic instability in some countries, the opposition of net- beneficiaries to the reforms of the EU’s economic governance framework that were championed by the net-contributors could have been weakened. Therefore, the prospect of net- contributors securing an agreement in the Task Force and the Council for a proposal may have increased. The expectation is that: H5: A member state that is a ‘net-payer’ of the EU budget will have more bargaining success than a member state that is a ‘net-beneficiary’.

Another factor that may explain the variation of a member state’s bargaining success is network capital. Arregui and Thomson (2009) in their study describing and examining states’ bargaining success in legislative decision making, draw on studies on network capital to develop and test expectations on the influence of this variable (Arregui and Thomson, 2009, p.658). Network capital is described by Naurin 2007, and Naurin and Lindahl 2008 as the breadth and depth of the co-operation networks that the actor is embedded in (Ibid, p.658). The results of the multivariate analyses indicate that network capital increases the bargaining success of the member states (Ibid, p.672). Naurin’s (2007) working paper on network capital was the first study to develop a theoretical framework for co-operation patterns in the Council. Naurin collected data from the representatives from all the member states represented in the lower level working groups to COREPER between 2003 and 2006. The policy areas covered by the working groups and COREPER included economic policy, foreign and security policy, justice and home affairs, agriculture, the environment and the internal market (Naurin, 2007, p.6). The results of a multidimensional scaling of the data indicate that cooperation patterns in the Council working groups follow a North-South and East-West geographical pattern (Ibid, p.20). Naurin and Lindahl’s (2008) study on coalition-building in the Council before and after enlargement availed of the same data and approach as Naurin’s (2007) article. Thus, unsurprisingly Naurin and Lindahl’s (2008) conclusions are similar to those of Naurin’s (2007), the Eastern member states that joined the Union in 2004 are closer the net-contributing liberal market Northern

70 member states than the market-regulating net-receivers of the South (Naurin and Lindahl, 2008, p.77). Continuing the examination of the effect of network capital on coalition formation is Naurin and Lindahl’s (2010) study on the flexible integration and the political status of Euro opt-outs. Naurin and Lindahl test the contention that the decision by Denmark, Sweden and the United Kingdom not to join the Euro is free-riding and thus has led the exclusion of these member states from informal networks, which has resulted in low levels of network capital (Naurin and Lindahl, 2010, p.485). Naurin and Lindahl develop theoretical expectations on the free-rider effect from Adler-Nissen’s (2008) study on Danish and British opt-outs. Adler- Nissen argued that the autonomy won by member states that are tied to the common rules in a specific field will result in a loss of influence (Ibid, p.487). The empirical analysis in Naurin and Lindahl’s study relies on the data collected by Naurin (2007) and data collected in 2009 from all of the member states in 11 working groups in the Council across a broad range of policy areas. Thus, the three surveys were conducted before the 2004 enlargement and after the 2004 and 2007 enlargement of the EU (Ibid, p.490). The findings indicate that the free-rider hypothesis is not valid for Denmark, Sweden and the United Kingdom. Indeed, all three Euro- outsiders have high levels of network capital (Ibid, p.505). In general, the literature underlines the importance of network capital as a potential explanation for the variation of the bargaining success of the member states in the Council. The empirical evidence and data collected from the interviews tend to support Naurin’s (2007) and Naurin and Lindahl’s (2008) contention that co-operation levels are in line with geographical divisions in Europe. The levels of co-operation between the member states may explain the bargaining success of different coalitions within the Council during the negotiations on the Task Force report and the Six-Pack. In general member states were divided into two separate coalitions in the negotiations. The first coalition contained member states from mainly Northern and Eastern Europe that sought to improve the EU’s economic governance framework. The second coalition consisted of a majority of member states from Southern Europe that wanted to minimise or reject the reforms. The expectation is that: H6: A member state with a high level of network capital will have more bargaining success than a member state with a low level of network capital.

Bailer (2010) considered domestic constraints as a bargaining power resource in the Council in her article reviewing literature that determines bargaining success. Bailer draws on literature on bargaining at the international level (Schelling, 1960 and Putnam, 1988) and studies on bargaining power in the EU (Hug and König 2002; Bailer and Schneider 2005 and

Schneider et al. 2010) in this brief review on the research on domestic constraints. Turning to the literature on the influence of domestic constraints on the bargaining success of the member states, Hug and König’s (2002) study examines the influence of domestic constraints on government preferences at the Amsterdam IGC. Hug and König’s analysis focuses on the importance domestic institutions, referendums and the approval of parliament, by developing a model of the negotiations at Amsterdam based on an assessment empirical specificities of the Amsterdam Treaty and of the two-level games literature (Hug and König, 2002, p.449). Hug and König develop theoretical expectations based on two-level game literature and empirically derive the ratifying actor’s preferences in the fifteen member states (Ibid). The findings from the empirical analyses indicate that those domestic ratification constraints, the preferences of the ratifying actors and the ratification constraints influenced the outcome of the negotiations. Member states that preferred that sought to retain the status quo on a certain issue were more likely to succeed in moving the bargaining outcome closer to their ideal point, if the domestic actors required to ratify the agreement also favoured the status quo (Ibid, p.471). Likewise, Slapin (2006) examined the preferences and tested the bargaining strength of the member states at the IGC that led to 1997 Treaty of Amsterdam. Slapin develops theoretical expectations on the influence of domestic constraints, among other hypothesis, from Schelling’s (1960) and Putnam’s (1988) studies on bargaining at the international level (Slapin, 2006, p.55). Slapin avails of the same data as Hug and König (2002), the preferences of the 15 member states, the Commission and the Parliament and also separate expert opinion in another data set on the preferences of the pivotal party in each member state’s parliament (Ibid, pp.60– 61). The hypothesis is then tested using the calculations of the bargaining strengthens of the member states. The findings indicate that domestic constraints confer bargaining power to the larger member states only (Ibid, p.55). Similarly, Dür and Mateo (2010) in their quantitative examination on bargaining power during the negotiations on the EU’s financial perspective for 2007–13 found that domestic constraints could be utilised by a member state as part of a hard- bargaining strategy (Dür and Mateo, 2010, p.557). Dür and Mateo however found that only certain member states can credibly employ the hard-bargaining strategy (Ibid, p.565). Hosli (2000) in her study of the EMU utilised a data base containing the preferences of the member states on moving towards a monetary union and Putnam’s (1988) “win-set” in order to examine whether domestic constraints influenced the bargaining success of the member states (Hosli, 2000, p.746). From the analysis, evidence was found to support the existence of two-level dynamics and to back the claim that Germany’s position on the EMU was influenced by the Bundesbank (Ibid). 72

Conversely within the Council, no evidence has been found to support the contention that domestic constraints increased the bargaining success of member states. Bailer and Schneider’s (2005) study on the importance of constraints in legislative bargaining assessed the relevance of the Schelling conjecture empirically and demonstrated that two-level game models were no better at predicting bargaining success than standard multilateral bargaining models (Bailer and Schneider, 2005, p.154). Bailer and Schneider then ‘embed’ the Schelling conjecture within a multi-actor Nash bargaining model which provides the baseline model to predict power in three different interpretations of the two-level game. The first two-level variation of the Nash bargaining model refers to situation where a government has to confront a powerful European Affairs Committee (EAC). The second measure is the divergence of the preferences of the EAC and the government while the third is the threat of an actor to the bargaining outcome (Ibid, pp.162–163). Bailer and Schneider then apply this model to analyse the conditions in which the expectation of domestically constrained governments makes sense when examining EU decision-making (Ibid, p.154). This allows Bailer and Schneider to assess whether domestic constraints make a difference to the bargaining success of the member states (Ibid, p.163). Likewise, Schneider et al. (2010) found that domestic constraints did not play a particularly important role in shaping the bargaining success in legislative decision-making (Schneider, Finke and Bailer, 2010, p.85). Availing of the data in the first DEU data set, Schneider et al. tests the accuracy of competing bargaining models such as the Nash Bargaining Solution in predicting bargaining outcomes based on Barry’s distinction between ‘power’ and ‘luck’ (Ibid). While the influence of domestic constraints was minimal, the models that accounted for salience were on average for more accurate in predicating bargaining success (Ibid, p.99). Thus, with the exception of Bailer and Schneider’s (2005) and Schneider et al. (2010) studies, weight of the literature on domestic constraints indicates the factors potential importance in explaining the bargaining success of the member states. Throughout the literature, Putnam’s (1988) two-level games model of international negotiations is often applied when testing the influence of domestic actors in the ratification of negotiated outcomes in EU policy. Within the ratification process, Putnam (1988) considers domestic constraints an important element in the two-level game that characterises negotiations at an international level (Putnam, 1988, p.436). National actors push for governments to adopt policies that correlate with their own policy preferences. To assume power, parties must take on board these policy concerns during election time. When in power the parties must then strike a balance between the preferences of domestic actors and international obligations. This balancing act manifestos itself through a two-stage bargaining process at the international level

(Ibid). During the negotiation phase (level one), the contracting parties that are involved in the negotiations may strike a deal which leads to a possible agreement. In the second stage, the ratification phase (level two), the contracting parties and their respective domestic actors then discuss whether to ratify the agreement reached during the negotiations. Consulting domestic actors is not restricted to the ratification phase however. Negotiators will confer with those actors before discussions take place at the negotiation stage. The possible ratification hurdles during the ratification phase will also have an impact on how the negotiations are conducted. If those hurdles are too high, it may result in an agreement that was reached at the negotiation stage to be rejected. The consequence of such a development might bring the negotiations to an early conclusion, without a deal been reached (Ibid). At the ratification phase, the only constraint is the requirement that the agreement must be ratified by both sides. Therefore, to win domestic support, negotiators at level one must reach an agreement that won the backing of the majority of the national actors. This is known as a ‘win-set’. Both sets of negotiators require these ‘win-sets’ to overlap to ensure that the agreement is ratified (Ibid, p.441). A large overlap will boost the chances of a deal been reached while a small overlap will increase the prospect that the negotiations will end in failure. The size of the ‘win-set’ also has an impact on the outcome of negotiations. The larger the ‘win- set’, the weaker the bargaining power of the negotiator in level one. The size of the ‘win-set’ is determined by the strength of the domestic constraints. Thus, if the domestic constraint is low, the win-set will be large (Ibid). This two-level game can be applied to intra-institutional negotiations in the Council, where the negotiators are the member states and the domestic actors are the national parliament’s EAC. These parliamentary committees are designed to monitor and scrutinise the work of government representatives in the Council. Depending on the powers that have been conferred, EAC can access information on the position of the member states and restrict a minister’s room for manoeuvre in the Council through the enforcement of parliament’s policy preferences before the negotiations commence (Winzen, 2012). Therefore, an EAC may have had a considerable degree of influence over what a member state could agree to in the Task Force and in the Council. However, a strong EAC can also increase the bargaining power of a member state in negotiations. Faced with a difficult internal ratification process in parliament, member states have may leveraged concessions from the other negotiators. Thus, a powerful EAC could have also been considered an advantage in the Council during the negotiations of the Task Force Report and the Six-Pack. The expectation is that:

H7: A member state with a strong EAC will be more successful than a member state with a low ratification hurdle.

Several studies (Bailer 2004; Arregui and Thomson 2009; Bailer 2010) have considered voting power as a factor that my explaining bargaining success. Bailer (2004) develops theoretical expectations from the proponents voting power indices such as Shapley–Shubik index (SSI) and (Shapley and Shubik, 1954) and the Banzhaf Index (BI) (Banzhaf, 1965) (Bailer, 2004, p.102). According to Bailer, the BI considers the number of scenarios in which a winning coalition can be turned into a losing one by an actor (Ibid). Conversely the SSI provides an estimate of how a losing coalition is turned into a winning one by the presence of an actor (Ibid). The BI disregards the sequence in which actors join or leave a coalition whereas the SSI captures the order that an actor joins a wining coalition (Ibid). For her study, Bailer considers the SSI to be the more adequate mechanism to measure voting power in the Council as the Council is characterised by a hierarchical system of moving the discussion from the working groups to COREPER (Ibid). Drawing on the data from the first DEU data set and the Power, Skill, Information data set, Bailer conducts a multivariate data analysis. The results of the analysis indicate that the bargaining success of the member states is not influenced by the number of votes that a member state has (Ibid, p.116). Similarly, Arregui and Thomson (2009) availed of the SSI to capture voting power in their study describing and examining states’ bargaining success in legislative decision making. The results of the multivariate analyses indicate that voting power does not influence the bargaining success of the member states (Arregui and Thomson, p.672). Likewise, Bailer (2010) considered voting power as a bargaining power resource in the Council in her descriptive article reviewing literature that determines bargaining success. Bailer draws on literature on the literature by the proponents of voting power indices (Shapley and Shubik 1954; Banzhaf 1965) and studies on voting distributions in the Council after a number of enlargement rounds (Widgrén 1994 and Widgrén 2004) in this brief review on the research on domestic constraints (Bailer, 2010, p.745). Generally, the literature underlines the importance of voting power as a factor that may explain bargaining power in the Council. The majority of the literature (Bailer 2004: Arregui and Thomson 2009) also indicated that the SSI was the best mechanism in which to capture voting power in the Council. Shapley and Shubik (1954) argued that the power of an actor depended on the opportunity that they have of being critical to the success of a winning coalition (Shapley and Shubik, 1954, p.787). In a scenario where a coalition consisting of an even number of members

75 votes, the chairman of the group has no power if they are only allowed to break ties (Ibid). However, if the coalition consists of an unequal number of members, then the chairman has exactly the same number of votes as the ordinary members as their vote is “pivotal”. This means that the chair can turn a possible losing coalition into a winning one as often as the vote of the other members of the group (Ibid). If a coalition has a majority, then the outcome is not changed by extra votes. A minimal winning coalition is only necessary for any vote (Ibid). Within the Council, Widgrén (1994) and Widgrén (2004) have found that of redistribution of votes has favored the large member states and the second tier, in terms of size, member states such as Spain. Large member states therefore had more voting power and this had the potential to alter the bargaining success of a coalition within the Council thus shaping the institution’s collective position. The expectation is that: H8: A member state with more voting power will have more bargaining success than a member state that does not.

The literature on salience is divided into two groups of studies. In the first category, the literature (Warntjen 2013; Leuffen et al. 2014) examines how the factor can be measured in EU decision-making. In the second category, the studies (Bailer 2004; Arregui and Thomson 2009) seek to explain the bargaining success of actors by testing salience. Warntjen compares the measure of salience based on the three different types of data sources, media coverage, text analysis and expert interviews, using legislative proposals covering a wide range of policy areas (Warntjen, 2013, p.168). According to Warntjen the importance that an actor attaches to an issue is known as salience (Ibid p.169). This importance can be based inter alia on the attention that the issue receives from core constituencies, the political attention that the issue receives and its estimated policy impact (Ibid). Warntjen also underlines the importance of recognising that salience has an issue specific and actor-specific component. Thus, some policies may be considered to more important than others; however different actors might differ on the policies relative salience (Ibid). In terms of measuring salience, Warntjen argues that the estimates for salience by experts in interviews are the least ambiguous measure. This approach captures data on the issue-specific and actor-specific aspects of the salience of a legislative proposal. It is however an expensive and, in some cases, an impossible approach when seeking to generate data on past legislative proposals (Ibid, p.180). In contrast measuring salience through media coverage or the text of the legislative proposals is inexpensive and the information in most cases is easy to acquire. Despite these advantages, Warntjen does not

76 believe that the legislative proposals or media coverage are enough to provide an unambiguous substitute for interview-based measures of salience (Ibid). Leuffen et al. (2014) in their study test the ability of three models to explain salience based on theoretical frameworks developed from literature on structure / interest diversity (Moravcsik 1993 and 1998; Arregui and Thomson 2009), capacity (Klüver, 2011) and power (Schure and Verdun 2008; Carrubba 1997) (Leuffen, Malang and Wörle, 2014, pp.619–621). Leuffen et al. outline two definitions of salience as introduced by Thomson and Stokman (2006) and the closely related understanding of the concept by Achen (2006). In the first of two interpretations of salience, Thomson and Stokman (2006) distinguish between two interpretations of salience that is utilised in the bargaining models. Under the first interpretation, salience the amount of the potential capabilities that an actor is willing to mobilise in an attempt to influence the decision outcome. The second interpretation is the extent in which actors experience utility loss when the decision outcome that they favor differs from the actual decision outcome (Ibid, p.617). Leuffen et al. believe that the second definition is analytically more fundamental, as it defines the conditions of behavioural expectations. Thus, Leuffen et al. follow Thomson et al. (2006) and consider the term salience to mean ‘importance’ or ‘intensity’ (Ibid, p.618). On the basis of the data from the second DEU data set, the results of the ordinary least squares regression indicate that on issues relating to common fisheries policy, national salience is strongly impacted by interest groups (Ibid, p.617). Similar administrative experience, the length of a member state’s EU membership, has an impact on the formation of salience (Ibid, pp.628–629). In their respective studies, Arregui, Stokman and Thomson (2004), Thomson and Stokman (2006), Thomson and Hosli (2006), Thomson (2011) Thomson et. al (2012) Costello and Thomson (2013), availed of the following framework in which to measure salience. Under the framework in both these studies, the policy experts in the interviews were asked to estimate the level of importance on a salience scale that ranged from 0 to 100. A score of 0 indicates that the issue was of no importance to the actor. A score of 50 indicates that the issue was of average importance to the actor, and thus it was willing to use arguments but not power politics to convince its opponents. A score of 100 indicates that the actor considered the issue to be of the highest importance (Thomson and Stokman, 2006, p.42). The estimates for the levels of salience in the first and second DEU data sets were collected using this framework. In the second group of studies, salience has been tested among other factors to explain the variation of bargaining success. Bailer (2004) developed a theoretical expectation from Bueno de Mesquita and Stokman’s (1994) conceptualisation of salience. Though unlike Bueno

77 de Mesquita and Stokman, Bailer considers salience not to be part of an actor’s power, but a power resource that at a certain moment in the negotiations can be mobilised (theoretically) to allow an actor to hold out from other power resources (Bailer, 2004, p.105). Drawing on the data from the first DEU data set and the Power, Skill, Information data set, Bailer conducts a multivariate data analysis. The results of the analysis indicate that the bargaining success of an actor is not influenced by the level of salience that they attach to an issue (Ibid, p.116). Likewise, after the results of the multivariate analyses, Arregui and Thomson (2009) concluded that salience had no impact on the bargaining success of the member states (Arregui and Thomson, p.672). Thus, Thomson’s (2011) contention is correct, salience seems to be an important factor for explaining the decision-making processes and outcomes (Thomson, 2011, p.47). According to Thomson (2011), a high level of salience turns potential influence into actual influence, as an actor that considers an issue to be of the highest importance will mobilise a high proportion of its potential resources to shape the decision outcome. Different actors may attach varying levels to a given issue. Additionally, any actor may attach different levels of salience to two or more issues that are controversial in the negotiations (Thomson, 2011, pp.44– 45). Thus, an actor that is willing to invest a proportion of its resources on an issue that it considers to be of the highest importance may be successful in the negotiations. The expectation is that: H9: An actor that attaches a high level of salience to an issue will have more bargaining success than an actor that attaches a low level of salience to an issue.

Rapporteurs have been seen to play an increasingly important role for, and within, the Parliament as the institution’s power in the majority of policy areas in the EU is now equal to that of the Council (Hix and Høyland, 2013). Rapporteurs are nominated by the committee when it draws up a report or an opinion. The main role of a rapporteur is to produce a text on the basis of the discussion in a committee, which will form the basis of the Parliament’s position on legislative proposals. Benedetto’s (2005) study on rapporteur’s as legislative entrepreneurs’ draws literature on the power of the Parliament and specialist legislators to develop a theoretical expectation on the influence of the rapporteur (Benedetto, 2005, p.68). Availing of data collected on the SOCRATES programme, passed in 1994 and 1995, and the SAVE II programme for energy-saving measures, passed in 1999 and 2000, Benedetto found that rapporteurs are the most powerful of actors in the Parliament when influencing legislative

78 outcomes (Ibid, p.85). The influence of the rapporteur however is dependent on their ability to build a consensus across the ideological divide in the Parliament (Ibid). The influence of the rapporteur is further underlined in Finke’s (2012) study on coalition-building in the Parliament. Finke formulates hypotheses about the factors that determine the composition of legislative coalitions in the Parliament from literature on legislative bargaining (Diermeier et al., 2008) and presidential systems where the executive is not elected by the legislature (Cox and McCubbins 1993) (Finke, 2012, p.489). To test the empirical arguments in the article, Finke draws on data from the Official Journal of the European Union and the Legislative Observatory to compile a data set containing the information on 28,979 of the 29,795 votes scheduled during the Parliament’s sixth term (Ibid, p.488). The results of the regression analyses indicate that despite the proportional rules of procedure in the plenary, rapporteurs emerge as primus inter pares, due to the link that they provide between the Council and the Parliament (Ibid, p.508). The reports of the rapporteur provide the basis for political conflict within the plenary. Rapporteur’s are the essential member of a coalition headed by party group leaders that seek to pull the Commission’s draft proposal further from the floor median (Ibid). This option is supported through the open rule amendment process – the mechanism that allows each committee member to propose amendments to the draft report which must be approved by simple majority. This approach is only successful if supported by strategic considerations that are credible. Similar to the Presidency, a rapporteur has access to high level of information which other MEPs do not. Thus, rapporteurs can map out the institution’s strategy vis-à-vis the Council (Ibid). The influence of the rapporteurs can also be constrained according to Finke. Rapporteurs must convince their colleagues to abandon the Parliament’s median position for strategic purposes and maintain their credibility when bargaining with the Council. A rapporteur’s influence is constrained by the trust that their colleagues place in them as honest agents of the interests of a coalition of party groups and the choice of strategically favourable coalition options (Ibid, p.509). Høyland’s (2006) study examined the level of activity of rapporteurs under the co- decision procedure whose national parties are represented in the Council against those rapporteurs with no presence in the Council during the fifth session of the Parliament (Høyland, 2006, p.30). Høyland presents a model of the co-decision procedure as a signalling game with more than two senders (McCarty and Meirowitz, 2007) to predict the contrasting levels of involvement as a function to assess whether actors are represented in the Parliament or the Council or only in the former institution (Ibid). The results of regression analyses of the data

79 set consisting of every co-decision report that the Commission tabled between 1999 and 2003 or 372 co-decision reports indicate that MEPs whose national party is represented in the Council are more likely to become a rapporteur (Ibid, p.45). In other words, national parties in the Council have a higher number of co-decision parties than those not represented in the Council (Ibid). The results also indicate that national governments represented in the Council may be transmitting information or policy preferences to the party groups in the Parliament (Ibid). Similarly, Costello and Thomson (2011) found that a rapporteur that has partisan ties in the Council can affect the bargaining strength of the institutions in the trialogues. Costello and Thomson reach this conclusion by examining the composition of the negotiating delegations (Costello and Thomson, 2011, p.1). Theoretical expectations are formulated from Schelling’s paradox of weakness – ‘the power to constrain an adversary may depend on the power to bind oneself’, and agency-drift explanations such as ex post power – which allows legislators in inter-cameral negotiations to shape the decision outcome in their favour, on how the Parliament’s choice of a rapporteur influences the institution’s bargaining success (Ibid, p.4 and p.6). The results of the regression analysis of the data from the first DEU data set, indicate that the influence of the negotiators in a bicameral setting is shaped by how credible their claims are of been constrained by their parent chamber (Ibid, p.1). With regard to partisan ties, Costello and Thomson found a weak correlation between the affiliation of a rapporteur with a governing party and greater bargaining success for the Parliament (Ibid, p.15). Costello and Thomson did not find a link between the bargaining success of the Parliament and the size of the rapporteur’s party group or the tabling of an amendment by a rapporteur (Ibid). The Parliament’s bargaining success was however negatively affected by the extremity of the rapporteur’s position and if the rapporteur has a leadership role (Ibid). Likewise, Finke and Han (2013) examined how dependent the rapporteur’s powers are on their partisan ties to the Council through analysing legislative reports authored between 2004 and 2009 (Finke and Han, 2013, p.133). Finke and Han develop theoretical expectations on agenda-setting power of the rapporteur from literature on the information asymmetry under alternative amendment rules (Austen-Smith and Riker 1987; Gilligan and Krehbiel 1989) (Ibid, p.139). The linear regression results on the theoretical expectations indicate that the influence of a rapporteur can be undermined if their national party is represented in the Council. According to Finke and Han, rapporteurs like other MEPs can be approached by their national government and thus their credibility as an honest broker is undermined (Ibid, p.148). Partisan

80 representation in the Council can also aid a rapporteur that seeks to form a coalition in the Parliament through accessing sensitive information that is not available to every MEP (Ibid). Costello and Thomson’s (2010) study develops and tests expectations from the literature about the conditions on informational theory of legislative committees and studies intra-institutional bargaining in the Parliament to examine the influence of rapporteurs on the Parliament’s opinions and the factors that motivate that influence (Costello and Thomson, 2010, p.219). Under the informational theory of legislative committees, committees provide reliable information as agents of the plenary to the Parliament without affecting the content of the institution’s collective position (Ibid, p.235). The results of the regressions analysis based on the data collected from the first DEU data set indicate that the Parliament’s position aligns with the policy position of the median MEP regardless of the rapporteur’s party group or national affiliations (Ibid). Another implication of the informational theory is that the composition of the Parliament’s legislative committees generally reflects the membership of the plenary. The Parliament’s legislative committees also give rapporteurs the potential to influence decision outcomes through setting the institution’s agenda via a report on the legislative proposal. This agenda-setting power is constrained by the open amendment rules that are present at both the committee stage and in the plenary (Ibid). Despite the constraints placed on the rapporteur’s potential agenda-setting powers, rapporteurs can avail of information advantages to influence the Parliament’s opinion (Ibid). Conversely, there is no evidence to suggest that the influence of the rapporteurs on the Parliament’s opinions is driven by the interests of the party groups in the plenary. This according to Costello and Thomson may be a result of the complexity of many legislative proposals which gives rapporteurs a degree of autonomy from party group’s leadership and makes rapporteurs more receptive to the potential influence of other actors, such as national actors (Ibid, p.237). Turning to the literature on early agreements, Rasmussen (2011) tests whether these deals are likely to occur when the position of the rapporteur deviate those of the Parliament (Rasmussen, 2011, p.41). Rasmussen derives theoretical exceptions from the theory of principal–agent (Strom, 2000) and bicameral bargaining (Tsebelis and Money, 1997) to provide an analytical framework to explain why early agreements occur in the legislative process (Ibid, p.46 and p.48). The results of the logistic regression of data collected on 487 co- decision files that had their first reading between 1 May 1999 and 30 April 2004 or five years after the Amsterdam Treaty came into force, indicates that rapporteur has a degree of influence (Ibid, p.61). There is a higher chance of negotiation process ending if the rapporteurs are from the largest groups in the Parliament. Likewise, if the negotiators are from the Parliament and

81 the Council are from the same member state than there is a higher chance that an agreement will be fast-tracked (Ibid). The literature therefore suggests that the rapporteur has a potential role in shaping the Parliament’s collective position and the decision outcome. Benedetto (2005) and König et al. (2007) have argued that rapporteurs have assumed the role of legislative entrepreneurs in the Parliament (Benedetto, 2005, p.67). Mintrom (1997) defined policy entrepreneurs as actors that seek to drive dynamic policy change through attempting to win support for ideas for policy innovation (Mintrom, 1997, p.739). Tallberg (2002) has proposed a framework on the influence of policy entrepreneurs. Tallberg has argued that where negotiations are plagued by competing solutions, imperfect information or uncertainty policy entrepreneurs can bring about an agreement by tabling proposals that act as “focal points” around which bargaining can converge (Tallberg, 2002, p.7). In contrast to other actors, policy entrepreneurs pursue collective and private gains through an asymmetrical advantage of ideas and information (Ibid). Policy entrepreneurs draw their influence from reputed impartiality, symbolic legitimacy, policy expertise or political creativity (Ibid). Thus, the expectation is that: H10: A party group that holds the position of rapporteur will have more bargaining success than the party group that did not hold the position of rapporteur.

Proximity to the status quo has been considered by studies on intra-institutional (Bailer 2004; Costello and Thomson 2011) and inter-institutional bargaining (Costello and Thomson 2013; Napel and Widgrén 2006; König et al. 2007) as a factor that may influence the bargaining success of the actors (Costello and Thomson, 2013, p.1027). Bailer (2004) develops theoretical expectations from Tsebelis (1999), and Tsebelis and Chang (2001) to test whether an actor that adopts an extreme position will ensure that the decision outcome is close to the status quo (Bailer, 2004, p.103). According to Bailer, taking an extreme position on issues that are to be decided under qualified majority voting situations is effectively a waste of time as the majority of the member states can ignore the laggard (Ibid). The Council however seeks to accommodate all interests in an effort to reach a consensus amongst all of the member states. Bailer cites Mattila and Lane’s (2001) findings that between 75 and 80 per cent of all proposals in the Council were voted unanimously as evidence of the efforts made to reach a consensus (Ibid). The uncertainty over the intentions of a member state is another factor in increasing the effect of the extreme position. Modest member states may face problems in assessing whether the positions of some member states have been strategically exaggerated for the purpose of

82 increasing bargaining success. Drawing on the data from the first DEU data set and the Power, Skill, Information data set, Bailer conducts a multivariate data analysis. The results of the analysis indicate that a member state that takes an extreme position will experience a decrease in their bargaining success (Ibid, p.116). Turning to the literature on bargaining success and proximity to the status quo, Napel and Widgrén (2006) and Costello and Thomson (2013) have tested the influence of the status quo on the bargaining success of the Commission, the Council and the Parliament. A detailed discussion on their articles can be found in the section on the role of the Parliament during the European sovereign debt crisis and thus they are briefly discussed here. Costello and Thomson in their analysis of the distribution of power among the EU institutions under co-decision formulated a theoretical expectation on the influence of the status quo from Napel and Widgrén (2006) (Costello and Thomson, 2013, p.1027). Costello and Thomson argue that if two actors are on the same side of the status quo, the actor that is further from the status quo is in a weaker bargaining position as they have more to lose if the negotiations collapse (Ibid). The results of the multilevel mixed-effects linear regression on the second DEU data set indicates that the influence of the Council and the Parliament is influenced the internal division in the Parliament and the relative proximity to the status quo (Ibid, p.1037). The conservatism of the Council and the radicalism of the Parliament according to Costello and Thomson explain why the latter institution has more power (Ibid). Similarly, Napel and Widgrén’s (2006) examined the distribution of power between the Council and the Parliament under co-decision. The results of the tests conducted utilising the model that captures the important elements of intra-institutional decision-making within the Council and the Parliament and then the inter-institutional bargaining, indicates that the Council’s high internal quota makes it highly likely that the institution through the status quo bias in the negotiations determines the outcomes (Ibid, p.149). The high internal quota within the Council promotes institutional status quo bias. According to Napel and Widgrén, it is highly likely that the respective pivots of the Council and the Parliament prefer opposite changes to the status quo (Ibid, p.150). Thus, as the quota is kept constant or increases for expanding membership in the institutions, fewer proposed policy changes get implemented resulting in a decrease in the influence of the intra-institutional actors (Ibid). Likewise, König et al. (2007) in their empirical analysis of conciliation committee bargains found that the position of the status quo was an important factor in the negotiations (König, Lindberg, Lechner and Pohlmeier, 2007, p.281). König et al. avail of Tsebelis and Money’s (1994) study on bicameralism to formulate theoretical expectations on the bargaining

83 outcomes reached in the conciliation committee (Ibid, p.288). Availing of data from the first DEU data set, the results of the tests conducted utilising the ordered probit model indicates that the Parliament has a higher level of bargaining success than the Council, if the latter is further from the status quo (Ibid, p.284). The remaining studies either outline the mechanics of how operationalise the status quo (Thomson, et al. 2006; Thomson 2011) or have briefly discussed and / or examined the influence of the status quo on bargaining outcomes (Stokman and Thomson 2004; Thomson and Hosli 2006; Tallberg (2008) Arregui and Thomson 2009; Thomson 2009; Costello and Thomson 2010; Costello and Thomson 2011). Thus, the literature in general indicates that the status quo is a factor that may explain bargaining success. Thomson and Stokman (2006) describe the status quo as the current legislation until changed. In many cases the status quo and the reference point are the same and thus the current legislation would continue to prevail if a Commission proposal was not passed (Thomson and Stokman, 2006, p.39). An actor that seeks to retain the status quo can do so if it is a veto player. Tsebelis (1999) defines a veto player as a collective or individual actor whose agreement is required to change the status quo (Tsebelis, 1999, p.593). For a significant policy change to occur all, it first must be approved by all of the veto players. This becomes more difficult to achieve with a greater number of veto players and the increased ideological distance that arises with such a large number of actors (Ibid). Within the Task Force a member state may have threatened to refuse to sign off on the recommendations in the report, if the status quo was not retained. For the Task Force recommendations to have an effect, the member states had to endorse the recommendations. As Bailer (2004) argued, the Council often strives to reach a consensus on an issue. This may have also been the case with a number of issues during the negotiations on the Six-Pack. Within the Parliament, a number of party groups have sought the retention of the status quo on a number of issues while during intra-institutional negotiations the Council’s proximity to the status quo may give the institution the edge in the negotiations, as it has less to lose if they fail than the Parliament (Napel and Widgrén, 2004). Thus, the expectation is that: H11: An actor that is closest to the status quo will have more bargaining success than an actor that is further away from the status quo.

Another factor that may explain the bargaining success of the actors in the Task Force and the Six-Pack is the weighted average distance. The theoretical basis for the weighted average distance draws on the first part of Barry’s (1980) study on the separates power and luck when examining the negotiated outcome and the policy preferences of the actors. Barry’s

84 contention is that there is no straightforward link between the actors’ preferred outcome and its power. If the power of an actor is defined as their capacity to shape the outcome so that it reflects their preferred policy, there is a possibility that their preference and outcome aligning is not solely depended on their power. According to Barry there are other factors along with the power of the actor that could have influenced the outcome in the case where an actor does not intervene during the negotiations. Barry describes this as luck. Luck is when an actor with little to no power is able to regularly able to achieve their preferred policy outcome compared to an actor with a lot a power who is unable to consistently shape the decision outcome to their benefit (Barry, 1980, p.184). Bailer (2004) has argued the proximity to certain institutions can increase the bargaining success of the member states. This argument is extended to the proximity of an actor to the rest of the actors in the Council or the Parliament as measured by the average weighted distance. Conceptually, lower average weighted distance indicates more support and therefore more bargaining success for the actor. The expectation is that: H12: An actor with more support will have more bargaining success than an actor with less support.

3.8 Conclusions

The literature on the factors that may explain the variation in the bargaining success of the actors can be divided between studies on that focus on factors that may explain bargaining success in the Council, the rapporteurs and the legislative institutions. In general, the literature in the first category suggests that holding the Presidency, economic strength, EU budget status, network capital, domestic constraints and voting power influenced the bargaining success of the member states. The literature on the Presidency is divided between the member states that benefit from holding the office (Bengtsson et al. 2004; Tallberg 2008; Tallberg and Johansson 2008; Arregui and Thomson 2009;) and how the Presidency influences the decision-outcome (Tallberg 2003; Tallberg 2004; Schalk et al. 2007; Warntjen 2007; Warntjen 2008; Thomson 2008; Häge and Naurin 2013). Thus, the main difference the category headed Bengtsson et al. is whether member states that held the Presidency derived bargaining success or influence whereas the Tallberg 2003 examined where the Presidency was the most influential in the negotiations. The literature on economic strength (Bailer 2004; Tallberg 2008) is far more cohesive. Both studies focus on whether economic strength can explain the variation in bargaining

85 success of the member states. Similarly, the approach in the literature on the effect of the EU budget status (Mattila 2004; Hosli et al. 2011) does not differ. Conversely, the literature on network capital can be divided between studies that provide the theoretical framework (Naurin 2007; Naurin and Lindahl 2008 and 2010) and the effect of the variable on the bargaining success of a member state (Arregui and Thomson 2009). Therefore, the main difference in the literature is the formation of the theoretical framework for network capital and testing how the variables effect bargaining success in the Council. Studies on domestic constraints are divided into three categories. In the first category the literature on domestic constraints is reviewed (Bailer, 2010), in the second category the effect of the factor is tested in the European Council (Hosli 2000; Hug and König 2002; Dür and Mateo 2010; Slapin 2010) and in the third category the effect of the variable is tested in the Council (Bailer and Schneider 2005; Schneider et al. 2010). Thus, these studies are divided between testing domestic constraints at two difference levels of the Council and a descriptive review of the literature. Likewise, the literature on voting power can be divided into two categories; a review of the literature (Bailer 2004) and the effect of the variable on bargaining success in the Council (Arregui and Thomson 2009; Bailer 2010). Thus, the literature can be broken into two parts; a descriptive review of the studies on voting power and a theoretical and methodological framework for the variable to explain the variation in the bargaining success of the member states. Turning to the other variables that may explain the variation in bargaining success of the member states, the party groups and the institutions, the literature on weighted average distance is not that extensive. Indeed, the theoretical basis for the variable draws on the literature (Barry, 1980) on power and luck. As with a number of factors, the literature on salience can be split into two groups. In the first category are studies that seek to explain how bargaining success can be measured (Warntjen 2013; Leuffen et al. 2014), while the second group seeks to explain the bargaining success of member states by testing salience. Thus, the literature provides a theoretical and methodological framework to test salience. The literature on the rapporteurs is divided between testing their influence as policy entrepreneurs (Benedetto 2005; Costello and Thomson 2010), their influence in coalitions in the Parliament (Rasmussen 2011; Finke 2012) and the influence of their partisan ties (Høyland 2006; Costello and Thomson 2011; Finke and Han 2013). The literature is therefore divided between areas in which a rapporteur can exercise influence over shaping the outcome. The literature on the proximity to the status quo has been considered by studies on intra-institutional (Bailer 2004; Costello and Thomson 2011) and inter-institutional bargaining (Costello and Thomson 2013; Napel and Widgrén 2006; König et al. 2007) as a factor that may influence the bargaining

86 success of the actors. Both the literature on intra-institutional and inter-institutional bargaining provides a theoretical and methodological framework to test the status quo. The theoretical contribution of the study is twofold. First, the study will test whether the contention that the European sovereign debt crisis facilitated the rise of the intergovernmental European Council while weakening the supranational Commission’s ability to set the agenda. This expectation, developed from the literature on the role of the institution’s during the crisis on the European Council’s growing influence as an agenda-setter, will be tested both inside and outside the Community Method and through the co-decision procedure. The study will also test the influence of the other supranational institutions that have been identified in the literature, the ECB and the Parliament. In the case of the former, this study provides a new theoretical framework in which to test the influence of the ECB by expanding Bailer’s (2004) argument that proximity to certain institutions can increase the bargaining success of intra-institutional actors. The study also tests the influence of the Parliament in reforming economic governance by revaluating Bailer’s (2004) and Arregui and Thomson’s (2009) contention that proximity to the Parliament increases the bargaining success of the member states and (Napel and Widgrén’s 2006; Thomson and Hosli 2006; Costello and Thomson 2013) on the role of the institution under the co-decision procedure. The study also provides a theoretical framework drawn from literature on the influence of the inter- institutional actors (Napel and Widgrén’s 2006; Thomson and Hosli 2006; Costello and Thomson 2013) to test the influence of the Council on the bargaining success of the party groups during the intra-institutional negotiations in the Parliament. Second, this research will make a number of contributions to the body of literature on the explanatory variables for the Six-Pack negotiations. The research builds on the literature on economic performance (government deficit/surplus) (Bailer 2004; Tallberg 2008) and EU budget status and studies on bargaining within the Council (Mattila 2004; Hosli et al. 2011) by contributing a new theoretical foundation based on the studies of Moravcsik (1993) and Keohane and Nye (1989) for testing the explanatory variable on economic performance. Similarly, the research develops a new framework based on Wagner’s (1988) theory of economic interdependence for testing the explanatory variable on EU budget status. Likewise, the research adds to the literature on economic governance by developing a new framework to test network capital based on the levels of co-operation in the Council’s Economic Policy Committee. For the remaining variables, the research adds to the limited literature on voting power and domestic constraints success (Arregui and Thomson 2009 and Bailer 2010) by examining the impact of these factors on bargaining success outside of negotiations in the

Council under the Community Method. The research has also demonstrated the possibility of examining the influence of the Presidency held by one member state rather than testing multiple Presidencies which a substantial amount of the literature on this explanatory factor focuses on (Arregui and Thomson, 2009 and Bengtsson et al. 2004). With regard to the contribution to the literature on the intra-institutional negotiations in the Parliament, the research will examine the influence of holding the rapporteurship on the bargaining success of the party groups. Currently, the literature on the influence of the rapporteur (Benedetto 2005; König et al. 2007; Costello and Thomson 2010; Finke and Han 2013) is primarily focused on the actor’s ability to shape the outcome of negotiations rather than its impact on the bargaining success of party groups. The research will also expand the theoretical framework for the status quo to include intra-institutional and inter-institutional actors. The theoretical framework for the status quo has been developed and tested for intra- institutional bargaining (Costello and Thomson 2013; Napel and Widgrén 2006; König et al. 2007), while the explanatory variable in studies examining the effect of the status quo in intra- institutional bargaining is somewhat underdeveloped (Bailer 2004; Costello and Thomson 2011). The literature on salience (Bailer 2004; Arregui and Thomson 2009) has generally centered on availing of the theoretical framework to explain the variation in the bargaining success of intra-institutional actors. Similar to the approach taken with the status quo, the theoretical framework is extended to both intra-institutional and inter-institutional negotiations. Studies on measuring support in terms of the weighted average distance and a theoretical framework to test the explanatory variable are not particularly abundant. Equally, research on the effect of the proximity of a party group to the collective position of the Council on its bargaining success is under-developed. Thus, like the explanatory variables’ economic performance (government deficit/surplus) and the EU budget status, the research introduces a new theoretical framework in which to measure support of an actor within the institution. Thus, the literature provides a variety of theories that can be utilised to test influence of the intergovernmental and supranational actors in shaping the outcome of the Task Force report and the outcome of the Six-Pack. The studies provide the basis in which to test the influence of the Council and the Parliament on the bargaining success of the party groups and member states respectively. This section of the chapter therefore provides the theoretical framework in which the first goal of this research project can be addressed, the influence of inter-institutional and intra-institutional actors in shaping the Task Force report and the legislative outcome of the Six-Pack. Likewise, the study provides the theoretical basis for the expectations to explain the variation in the bargaining success of the inter-institutional and

88 intra-institutional actors. Testing a range of factors that could potentially explain the bargaining success of the member state is essential when trying to address the second goal of this thesis, how the actors influenced the outcome of the Task Force report and the legislative outcome of the Six-Pack.

Chapter IV Methodology

4.1 Introduction

This chapter outlines the methodology for this research project. The first of the chapter outlines the interview structure and the issue dimensions. The second section of the chapter discusses the criteria for the selection of the cases. The third part outlines the collection of data. The fourth section discusses the primary sources. The fifth part outlines the background of the key informants. The sixth section discusses the operationalisation of the explanatory variables. The seventh part discusses why spatial modelling was chosen for this research. The eight section outlines the issues with the collection of data. The conclusion summarises the main points of the chapter.

4.2 Interview structure and issue dimesons

The spatial model of politics as designed by Bueno de Mesquita et al. (2003), and Bueno de Mesquita and Stokman (1994) provides a conceptual guide for how to measure bargaining success and policy influence. The theoretical modelling framework assumes relevant actors have spatial preferences along continuous issue or ideological dimensions. The framework has been utilised to measure bargaining success of member states, the Parliament and the Council in studies on EU legislative decision-making see Thomson et al. (2006), Thomson (2011), Thomson et al. (2012) and Arregui and Thomson (2014). According to Thomson (2011), the model assumes that actors share the same perception of the political space. The actors within the political space that take positions on issues agree that those are the positions that require a solution and that they also contain the main policy alternatives considered. The actors then choose the policy position which will then either become the institution’s collective position or the decision outcome. The potential capabilities that an actor is willing to mobilise to influence the decision outcome may help determine the success of the actor’s efforts (Thomson, 2011, p.29). On each of the controversial issues that are identified, experts were asked to indicate the initial preferred policy preferences of each stakeholder after the European Commission (Commission) had tabled its proposal and before the Council of Ministers (Council) or Parliament formulated its collective position on an issue continuum ranging from 0-100 (Thomson, 2011, p.38). 0-100 represents the full range of the bargaining space on an issue and the policy extremes that characterise the endpoints of each policy scale (Ibid, p.40). The key informants or the experts were senior policy-makers from the member states, the institutions

93 and the Parliament who were involved in the negotiations (Ibid, p.35). For each initial policy preference given, interviews were asked to give a thorough explanation and provide evidence to support their judgements on the estimated position of the actor on the issue continuum (Ibid, p.41). Similarly, the experts were then asked to indicate the status quo and the outcome – if there was a change to the status quo, on the issue continua. The status quo refers to the current policy which continues unless an agreement is reached on a Commission proposal to change the legislation (Ibid, p.43). The key informants were asked to provide a through explanation and evidence for their judgements on the estimated positions of the status quo and the outcome. The experts were then asked for their judgments on the level of importance that each actor attached to each controversial issue on a salience continuum ranging from 0-100. Salience refers to the intensity of the policy positions of the actor (Achen, 2006, p.92). An actor that attaches a level of salience to an issue turns potential influence into actual influence. Actors that attach a high level of salience to an issue are in affect investing a high proportion of its potential to shift the decision outcome closer to their desired policy preference (Thomson, 2011, p.44). There is potential for actors to have differing levels of salience on a given issue. Likewise, it is possible for any given actor to attach differing levels of salience to two or more controversial issues (Ibid, p.44). The two extreme salience scores on the scale were represented as 0 – the issue was of no importance and 100 – the issue was of extreme importance. A score of 50 denotes that the issue was of average importance to the key informants. This signifies the point where the stakeholder will refrain from using power politics and instead try to convince their opponents through arguments. Where the estimates for the level of salience attached by an actor did not align with one of the salience extremes or the average, the senior officials gave scores ranging from 0-100 on the scale in units of ten (Ibid, p.45). In line with the Thomson’s (2011) framework, the experts were asked to provide estimates for the positions of the member states, the party groups, the Commission, the Council, the European Central Bank (ECB), the Parliament, the status quo and the outcome for 15 of the most important issues in the Task Force and Six-Pack for this research project. The experts were asked to provide an estimate of the level of salience for each issue that an actor had taken a position on. The experts were asked to provide a through explanation and evidence to support their judgments on the positions of the actors and the level of salience that they attached to a given issue. The six issues in the Task Force are; (1) strengthening the debt rule in the Stability and Growth Pact (SGP); (2) suspending the payment of EU budget funds for failing to adhere to the rules of the SGP; (3) the introduction of interest bearing deposits; (4) increased leeway in the excessive deficit procedure for member states that undertook second pillar pension

94 reforms; (5) the introduction of reverse qualified majority voting (RQMV) and (6) the powers of the fiscal councils. The nine issues in the Six-Pack are; (1) the establishment of the numerical debt criteria; (2) strengthening the debt rule; (3) the provision of cash-based fiscal data; (4) distribution of fines; (5) the introduction RQMV; (6) the symmetric treatment of current account surpluses and current account deficits; (7) economic dialogue; (8) the role of independent institutions and (9) flexibility for member states that implemented second pillar pension reforms in the excessive deficit procedure. Figure 1 is an example of how to represent a controversial issue spatially. The figure shows the policy positions of the member states and the institutions on one of the most important issues in the negotiations in the Task Force, the decision-making rule when deciding to suspend funds. The Commission tabled a proposal for the introduction of RQMV to strengthen the sanctions regime. At one policy extreme on the scale (100) are the member states and institutions that supported the use of RQMV to overturn a Commission decision to impose fines. Taking an intermediate position at 50 on the scale are Austria, France, Ireland, Italy and Portugal, which wanted the decision to impose fines overturned by a simple majority. At the other policy extreme (0), Spain wanted the retention of the status quo or the use of qualified majority voting to overturn a fine.

ES/Status quo AT/FR/IE/ BE/BG/CY/CZ/DE/DK/EE/ IT/PT EL/FI/HU/LT/LU/LV/MT/ NL/PL/SE/SI/SK/UK/ECB/ COM/ Outcome

0: QMV to be 50: Simple 100: Reverse applied when majority to be majority to be voting on the applied when applied when voting adoption of voting on the on the adoption of enforcement adoption of enforcement measures. enforcement measures. measures.

Figure 1: The initial positions of the actors on the decision-making rule when deciding to suspend funds. Note: AT: Austria; BE: Belgium; BG: Bulgaria; CY: Cyprus; CZ: Czech Republic; DK: Denmark; EE: Estonia; FI: Finland; FR: France; DE: Germany; EL: Greece; HU: Hungary; IE: Ireland; IT: Italy; LV: Latvia; LT: Lithuania; LU: Luxembourg; MT: Malta; NL: The Netherlands; PL: Poland; PT: Portugal; SI: Slovenia; SK: Slovakia; ES: Spain; SE: Sweden; UK: United Kingdom; COM: Commission; ECB: European Central Bank.

The interviews lasted on average 60 minutes, with some taking only 30 minutes while others ended after 90 minutes. 40 senior member state officials who participated in the negotiations either worked in the permanent representations in Brussels or in Ministries of Finances. 7 senior Commission officials that were involved in the discussions worked at varying levels of the Directorate General for Economic and Financial Affairs. This was also the case with the 7 senior Council officials in the Economic and Financial Affairs configuration who observed the negotiations. In the first round of interviews that took place between the 30 of May to the 3 of June in Brussels and by phone from June until late August 2016, senior policy-makers were asked to rank the salient issues that had been identified from the documents. In total 22 interviews were conducted with senior officials from the Council, the Parliament, the Commission, member state permanent representations and ministries of finance in the first round. The key informants were then asked to judge the position of the main policy options on an issue continuum. The policy referred to the positions of the member states, party groups, the institutions, and the status quo, and the final decision-making outcome. The final decision- making outcome in the intra-institutional negotiations is the Council’s common position and the Parliament’s collective position respectively, and the compromise reached between the institutions in the trialogues is the inter-institutional outcome. From these positions, the senior bureaucrats were asked to identify the most extreme policy options, which defined the endpoints of each issue continuum utilised to represent the controversial question (Thomson, 2011, pp.38–41). The second round of interviews were arranged in Brussels between the 10 and the 20 of October and by phone from late October 2016 to April 2017. In total 59 senior bureaucrats were conducted with senior officials from the member state permanent representations, ministries of finance, the Commission, the Council and the Parliament in the second round. 9 of the interviews were with senior officials who had spoken in the first round. Key informants were asked to judge the preferences of the actors that had been identified as been the most salient during the negotiations in the first round. The key informants were then asked to judge the level of salience that member states, party group and the institutions attached to the controversial issues in the negotiations for the first time in the second round of interviews (Ibid, 2011, p.45). Figure 2 is an example of a salience scale. It depicts the level of importance that member states attached to the introduction of reverse qualified majority voting during the negotiations in the Task Force. Between 0 and 50 on the scale are Greece, Hungary, Ireland Malta and

Poland. These member states considered the issue to be either of low or average importance. The importance that the remaining member states attached to the issue ranges from 60 to 100 on the scale.

HU/EL IE MT/PL IT/ AT/CZ/ CY BE/BG/ LU UK DK/EE/ /DE ES/FI/ FR/LT/ /SK NL/PT LV/SE/ SI

0: Issue was 10 50: Issue 60 70 80 90 100: Issue of low was of was of high importance. average importance. importance.

Figure 2: The initial positions of the actors on the decision-making rule when deciding to suspend funds.

Note: AT: Austria; BE: Belgium; BG: Bulgaria; CY: Cyprus; CZ: Czech Republic; DK: Denmark; EE: Estonia; FI: Finland; FR: France; DE: Germany; EL: Greece; HU: Hungary; IE: Ireland; IT: Italy; LV: Latvia; LT: Lithuania; LU: Luxembourg; MT: Malta; NL: The Netherlands; PL: Poland; PT: Portugal; SI: Slovenia; SK: Slovakia; ES: Spain; SE: Sweden; UK: United Kingdom; COM: Commission; ECB: European Central Bank.

4.3 Criteria for the selection of the cases

The research project makes an important contribution to the growing empirical literature on the roles of the European Council, the European Commission (Commission), the Council of Ministers (Council) and the European Parliament (Parliament) in deepening and reforming fiscal and economic coordination in the EU during the sovereign debt crisis. Thus, this research is focused on examining the influence of the European Council vis-à-vis the Commission and legislative actors in shaping the decision outcomes through examining the negotiations on the Task Force and the potential influence of the report’s recommendations on the Six-Pack and the Six-Pack intra-institutional and inter-institutional negotiations. Therefore, the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union was excluded from the research. Likewise, the Two-Pack was also omitted. The literature and the data collected from key informants have pointed to a potential link with the recommendations in the Task Force report and the Six-Pack. No such link has been identified in the literature or in the interview data between the recommendations in the Task Force report and the Two-Pack.

4.4 Collection of data

The aim of the doctoral thesis is to understand which actor had the most influence in shaping the EU’s response to the European sovereign debt crisis through the Task Force report and the Six-Pack. The first step in the process was the identification of relevant primary documents from the institutions to begin the process of identifying the most important issues. In the second step, data was collected from the first round of interviews with senior bureaucrats to determine the most important issues in the negotiations. With the controversial issues having been identified, a second round of interviews with the key informants was conducted. From the interview data the policy positions of the member states, party groups, the Commission, the ECB, the Parliament and the Council were identified on the policy scales and explained by the senior officials. The interview data allowed for the identification of the final decision-making outcome and the status quo. In addition, the data on the importance of each issue was also collected. Moreover, the collected data from the interviews filled in the missing details that were apparent in the documents and brought clarity to certain aspects of the negotiations. Though not complete, the data collected from the primary documents did provide the basis for further exploratory research through the interviews and provided the information required to reconstruct the intra-institutional and intra-institutional negotiations chronologically and in detail. Data from the interviews with the senior bureaucrats was also collected to operationalise some of the explanatory variables. The remaining variables were operationalised through data collected from a range of secondary sources. In the final step, the collection of data from both primary and secondary sources facilities the analysis of the bargaining success of the inter- institutional and intra-institutional negotiations actors through testing the explanatory variables.

4.5 Primary sources – documents

With the rationale for the selection of the case studies now outlined, this section describes the collection of data. Three different sources were used to collect information from during the negotiations the Task Force and on the Six-Pack. The primary sources consisted of documents from the Commission, the Council, the Parliament, the European Council and the European Central Bank. Another primary source were the interviews conducted with senior officials the member states, the Commission, the Council and the Parliament that were directly involved in the negotiations.

The first step in collecting primary documents began by identifying documents relating to the negotiations that shaped the final report of the European Council’s Task Force’s report. As there were no documents available on the Council’s online repository for documents, a letter was sent to the Council’s General Secretariat requesting the release of reports from six ministerial meetings of the Task Force and the seven meetings of senior officials in the Sherpa Committee. Those meetings took place between May and October of 2010. The General Secretariat released seventeen contributions submitted by the member states, four by the Commission and one from the European Central Bank. The assistance of the European Ombudsman was required after the General Secretariat refused to furnish one submission from a member state. The document was eventually released after the intervention of the European Ombudsman. The General Secretariat also released a further seventeen documents from the Sherpa Committee. These files were summaries of the meetings written by the chair of the Sherpa Committee and drafts of the Task Force report. After the completion of the interviews, the General Secretariat unearthed detailed minutes from four Task Force and five Sherpa Committee meetings. The next step in the collection of data was the identifying the primary documents from the negotiations on the Six-Pack. Utilising the official online-database database for European Union legislation known as Eurlex, information could be gathered on date of the transmission of the Commission proposal to the Parliament and Council, on the legislative procedure that the six cases were adopted under, the meetings of the plenary and committees and the legislative decision-making outcome of the negotiations. While useful in terms of providing an overview of the procedure, Eurlex provides only a limited number of links to primary documents relating to each case. This information includes the Commission proposal, press releases from the Council and the legislative act. More documents were however available on the Council Register and the Parliament’s Legislative Observatory. All of the documents on the online-databases are available in English. The documents that were accessible on the Council Register included those that were made available through Eurlex along with the agendas and progress reports from the Committee of Permanent Representatives in the European Union and ministerial meetings, Presidency compromises and A-item and I/A-item notes. Where documents were listed as partially or not accessible or where there was a reference made to a document in the text of file which was not available on the Council’s public register, a formal request was made to the General Secretariat for access to those documents. Twenty-seven freedom of information requests were also submitted to the finance ministries and treasuries of the member states for

99 minutes of the Task Force and Six-Pack meetings. Only the Finnish Ministry of Finance responded positively to the request and the minutes for all the meetings of the Task Force and Six-Pack were released. Minutes were also released by a member state official at the conclusion of an interview. With the documents from the Council and from two member state officials, a detailed chronological narrative was reconstructed on the formation of the Council’s collective position. The documents also shed light on the position of the Presidency and the Council during the trialogues. Likewise, the documents collected from the Parliament’s Legislative Observatory allowed for the reconstruction of a detailed chronological narrative of the institution’s decision- making process during the negotiations on the Six-Pack. The documents from the European Parliament's Committee on Economic and Monetary Affairs included minutes from the committee meetings; amendments proposed by MEPs and adopted committee reports. The information gathered from these documents allow for the negotiations within Committee on Economic and Monetary Affairs to be reconstructed chronologically. Other sources of information utilised were the results of the votes and the minutes of the proceedings from the plenary. The result of the votes provides information on whether a roll call vote was required, and the breakdown of the votes cast on a proposal in the plenary. The minutes of the proceedings provides information on how each MEP who was in attendance voted on the proposed legislative package. With this data, the cohesiveness of each of the party groups can be measured in the first reading. A request to access documents and minutes from the trialogue meetings was submitted to the Parliament’s transparency unit. The transparency unit provided four-column-tables, feedback notes and room documents. No minutes were drafted at these meetings; however, the four column tables were used as a basis for discussions. The four column tables were divided between the Commission proposal, the common position of the Council and the institutional position of the Parliament, and the compromise text for each article in the legislative package. The feedback notes provide a general summary of the discussions and the progress made on the most important issues. The room documents are outlines of the Parliament’s institutional position on the most important issues prepared for MEPs who were attending the trial trialogues. Thus, the documents from the transparency unit assisted in the reconstruction of the trialogues. While the documents from the Parliament and Council database provide a substantial amount of information on the inter-institutional and intra-institutional negotiations, they are not perfect. First, some of operationalisation of the issues are quite complex and the documents

100 fail to provide a clear explanation of the how the Commission operationalised a number of the Task Force recommendations. A notable example of this issue is the agreement reached in the Task Force on the flexibility of the excessive deficit procedure for the former Eastern Bloc member states that had implemented second pillar pension reforms. Here the Task Force recommended that “specific attention should be paid to the impact of pension” without clarifying exactly how that would be done in terms of legislation (European Council, 2010a). Second, the positions of the member states are also missing the minutes taken in the Task Force and during the negotiations on the Six-Pack. Where positions were recorded the underlying reasons as to why the member states delegations supported or opposed an issue was not included in any of the notes. Likewise, the Parliament documents do not include any information on the underlying reasons as to why the party groups supported or opposed a Commission proposal. Nor do the documents shed any light on the ideology divide between the differing positions of MEPs from the same party group on issues when amendments were tabled in the Committee on Economic and Monetary Affairs.

4.6 Primary sources – interviews

Interviews were considered essential for this research project, as they allowed for a better understanding of the issues. The interviews also allowed for any gaps in the documents to be filled through probing the reasoning behind the different positions that the intra- institutional and inter-institutional actors held during the negotiations. This is especially true in the Council, where the decision-making process is not public. According to Thomson et al. (2012), only a few Council officials were willing to divulge such information in a standardised questionnaire to researchers whom they have never met in person. The interview structure for this research project is discussed in detail in the section on issue dimensions. Prospective interviewees were contacted initially by email and later by phone if necessary, by phone. Invitations to participate and information sheets about the research project were sent to officials a month and half before the interviews were to commence. The contact details for the MEPs could be accessed on the Parliament’s website. The contact details for the members of the economic and financial affairs units of the member states were retrieved from the individual website of each of the Permanent Representations to the EU. The contact details for Commission, Council and Parliament officials were accessed through the EU’s ‘Who is Who’ directory. Contact details for policy-makers from the member state ministries of finance

101 could be found on the respective websites. However, in number of cases it was simply not possible to contact the key informant through this approach. The key informants interviewed for this research were drawn from the 26 member states, the Commission, the Parliament and the Council. No interview was secured with any policy maker from Romania. Three senior bureaucrats were contacted, however all declined to participate in the interviews. Nor could an interview be arranged with any senior official from the European Central Bank. In response to an interview request, the Bank’s Media Department stated that “the bank does not comment on policy”. The key informants were senior officials directly involved in the negotiations. The key players were sought out due to their intimate knowledge of the discussions and of the issues. The senior policy-makers in the negotiations who were representing their respective institution or member state, could provide a detailed account of the factors that influenced the position of those actors. Indeed, in some cases, the senior policy-makers were able to access internal files and reports which proved extremely useful during the discussions. In total 63 senior policy-makers participated in the research project. 40 were senior member state officials from the permanent representations in Brussels or the ministries of finances. The 7 senior Commission officials that were involved in the discussions worked at varying levels of the Directorate‑General for Economic and Financial Affairs. Likewise, the 7 senior Council officials from the Economic and Financial Affairs configuration and the 9 policy-makers from the Parliament directly participated in the negotiations.

4.7 Dependent and Explanatory variables

In line with Arregui and Thomson (2009), the dependent variable in the spatial model of politics is the distance between the position of each actor and the decision outcome on each issue. Thus, where the decision outcome aligns with the position of the actor, as shown in for the Netherlands in Figure 1, the dependent variable has a value of 0. In a case where the outcome is further from the position of the actor, as is the case for Austria in Figure 1, the dependent variable has a higher value (50). Arregui and Thomson have argued that this is the most appropriate approach when measuring the proximity between the decision outcomes and the positions of the actors relative to the potential distance that they could have been. A substantive difference in policy between the actors on one issue, as represented by a distance of 100 scale points, could signify a modest difference on another issue. However, on both issues where an actor’s policy preferences are judged to be at 100 scale points away from the decision

102 outcome, the actor will have a low level of bargaining success given the distribution of actors’ positions (Arregui and Thomson, 2009, p.664). To operationalise the explanatory variables, data was collected from a range of sources. For the Task Force, the proximity of the member states to the Commission, the ECB, and the status quo was calculated from the estimates of the distance of the member states to the institutions as provided by the senior bureaucrats during the interviews. To operationalise the salience variable, the judgements of the senior policy-makers of the level of importance that each member state attached to the issues on six salience continuums ranging from 0-100 were utilised. For the remaining variables the data was derived from secondary sources. The voting power variable was operationalised through the SSI figures for the member states complied by Antonakakis et al. (2014). The figures used to operationalise the average weighted distance were drawn from data provided by Eurostat on the population of the member states for 2010 and 2011 (Eurostat, 2018). The weighted average distance was used to measure the support of member states in the Task Force. The weighted average distance of a member state to the position of all other member states in the Task Force was calculated utilising population of the member states. A member state that is closer to the weighted average position of the other member states in the Task Force, indicates that they are successful through luck rather than power. Conversely, a member state that is further from the weighted average position of the other member states in the Task Force, indicates that they are successful through power rather than luck. An example of the whether a member state is powerful or lucky can be found in Figure 4: The initial positions of actors on the suspension of funds. On this issue, Germany is between two groups of member states that consists of the Task Force and is the only member state with an initial position that aligns with the outcome. Germany is also the only member state to be close to the weighted average position of two groups of member states on the issue. Thus, it is more likely that Germany’s bargaining success is a result of luck rather than power. The macro-economic performance variable was operationalised using the 2010 figures provided by Eurostat on the general government deficit/surplus figure for each member state as calculated by as percentage of GDP. Likewise, the 2010 estimates of member state’s annual EU budget status as expressed as a percentage of GNI in 2010 as presented in the Commission’s EU’s Financial Report for 2015 were availed (European Commission, 2015; Eurostat, 2016). The aggregated score from five dimensions: binding character, upper chamber, influence mechanisms, scope, and decentralisation as calculated by Karlas (2012) was utilised to operationalise the EAC variable. For the operationalisation of the network capital variable, the

103 data collected by Naurin and Lindahl (2010) and Naurin (2015) on the levels of co-operation between member states in the Economic Policy Committee were employed. The Council Six-Pack dataset retained most of the variables in the Task Force dataset, albeit with some changes. The data to operationalise the macro-economic performance, voting power, weighted average distance and the EU budget status variables were taken from the same sources, however 2011 figures were used rather than those for 2010 (European Commission, 2015; Eurostat, 2016). As the majority of the Six-Pack was negotiated in 2011 using figures from that year was more appropriate. In addition to the variables from the Task Force dataset, the Council Six-Pack dataset included a variable on the proximity of the member states to the Task Force outcome. The Task Force variable is referred to as the European Council). Similar to the approach taken with measuring the proximity of the member states to the Commission and the ECB, the data was operationalised through calculating the distance of the actor’s policy position in the Six-Pack from the position agreed by the European Council on the Task Force recommendations and the issues that were discussed in the Council during the Six-Pack negotiations and the position of the Parliament. The Presidency variable was also included in the Council dataset. To operationalise the variable a score of 0 was assigned non-holders while a score of 1 was assigned to the member states that held the office during the negotiations. The Parliament Six-Pack and inter-institutional Six-Pack datasets contained far fewer explanatory variables than either the Task Force or Council datasets. The literature review indicated that only a smaller number of explanatory variables were applicable for this research project. As with the Task Force and Council dataset, salience and the status quo were operationalised through interview data. Conversely proximity to the Commission, the Council, the ECB and the European Council were operationalised through calculating the distance of the party groups from each of the variables. Similar to the Presidency variable in the Council Six-Pack dataset, scores of 0 and 1 operationalised the rapporteur variable in the Parliament Six-Pack dataset. 0 was assigned to the party group that did not hold the position of rapporteur during the negotiations on one of the salient issues in the Parliament. For the party group that held the position of rapporteur a score of 1 was assigned. The scores 0 and 1 were used to operationalise the rapporteur variable in the dataset. To operationalise the average weighted distance in the Parliament data set, the approach outlined for the Task Force data set was followed with one change. For the Parliament data set, the number of seats that the party group held replaced the population.

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4.8 Why spatial modelling?

Princen (2012) has outlined four advantages of the decision-making in the EU approach, which is utilised in this research project to measure and explain the bargaining success of the intra-institutional and inter-institutional actors in the Task Force and Six-Pack negotiations. First, Princen argues that the DEU approach allows for the identification of single-dimensional issues. This is important as one issue could contain multiple dimensions and thus the same numerical estimate given for an actor’s position on that issue could ‘reflect different combinations of positions on the underlying constitutive dimensions’ (Princen, 2012, pp.624–625). Thus, the DEU approach allows for the identification of clear issues that will remain stable throughout the negotiations. Second, with the DEU approach allows for the identification of the relevant actors in shaping the collective positions of the institutions and the final decision-outcome (Ibid, p.625). Third, the DEU approach provides clear and stable estimates for the preferences and level of importance attached by each actor to an issue throughout the negotiations (Ibid). Fourth, the focus on the formal part of the decision-making process reduces potential shifts in preferences, participants, issues and institutional rules which ultimately make it unclear what to include in the analysis (Ibid, p.627).

4.9 Data collection issues

With regard to conducting interviews with senior officials from the member states, it became clear after having contacted all 27 member states permanent representatives in Brussels that the senior officials who were directly involved in the negotiations were no longer in their positions. There was a mixed response from the permanent representatives for the contact details of those key informants. A request to access the list of the officials who participated in the Task Force and in the discussions on the Six-Pack was submitted to the General Secretariat of the Council. The General Secretariat released a list of participates however in a number of cases the contact details were removed. The General Secretariat argued that the “release of their personal data would undermine the protection of privacy and the integrity of the individuals concerned. As a consequence, the General Secretariat has to refuse access”. A confirmatory application was submitted to the Council, yet it too was rejected. Fortunately, one of the key informants had kept a list of names and thus contact was established with those officials through the Ministries of Finance and the European departments attached to various offices of Prime Ministers and Chancellors. The list also provided a number of names and

105 contact details for Commission, Council and Parliament officials. Those details however were also available through older versions of the EU’s directory ‘Who is Who’, which were accessible online. Despite these difficulties, interviews were conducted with senior policy- makers from the 26 member states. Another difficulty faced was in accessing documents containing information that was needed for the interviews. The assistance of the European Ombudsman was required after the European Council refused to furnish all the documents that had been requested from the institution on the negotiations in the Task Force. The documents were only released by the European Council on the 16 of December 2015, just over a year after the European Ombudsman had been contacted. It also took two requests for the General Secretariat to release the minutes taken during the negotiations on the Task Force. Issues also arose with the collection of data from the interviews. In some cases, the senior bureaucrats were unable to estimate the position of the member states on the issue dimension. The inability of key informants to determine the stance of a member state, should not imply that they should be treated as missing values. Member states may not have had a strong position or policy preference on a particular issue and thus might have accepted any outcome. The negotiations in the Task Force on providing greater leeway for member states in the excessive deficit procedure that had undertaken second pillar pension reforms, supports this contention. Senior officials from Spain, Italy, Portugal, Malta, Belgium and Greece stated in the interviews that their respective member states took a neutral position on this question, see Figure 7. Likewise, on the issue of the distribution of fines in the Six-Pack in Figure 13, the positions of four member states are missing. Widgrén and Pajala (2006) argued that where the actors are neutral, the missing values should be calculated as the mean between the Council’s collective position and the Commission proposal on an issue where there were four or less policy positions missing (Widgrén and Pajala, 2006, p.252). However, in the Task Force, the Commission did not have the exclusive right to initiate legislation as the institution has under the Community Method. Further, imputation of values in the dataset is only valid where a position of an actor is truly missing. Thus, the imputation of values should not be undertaken when a member state or institution did not take a stance at all on an issue. Moreover, the evidence from the primary sources indicates that difficulties with recollecting a position of a member state, is the key factor in explaining missing values. Thus, on issues where the policy positions of less than four member states are missing, the actors are dropped from the analysis. Where an issue is missing four or more policy positions, Widgrén and Pajala assumes that this implies a blocking minority (Ibid).

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However, on the issue of the distribution of fines this was a purely Eurozone issue. The negotiations and decisions were conducted in the informal gathering of Eurozone member states, as the issue directly affected Euro-area countries. The senior policy-makers that represented the Czech Republic, the United Kingdom and Hungary, which held the Presidency, did not seek to block developments in the Eurozone. Instead, the negotiators for the member states did not consider the issue to be one that affected their interests. The other missing member state was Ireland. The member state is in the Eurozone; however, the senior official was unable to recollect the position of Ireland on the policy scale. Therefore, in the policy scale that is illustrated in Figure 7, Spain, Italy, Portugal, Malta, Belgium and Greece are dropped from the analysis. Likewise, Ireland, Czech Republic, the United Kingdom and Hungary were dropped from the issue dimension which is outlined in Figure 13. Similarly, problems arose with the party groups. No key informant from the now defunct Europe of Freedom and Democracy (EFD) party group could be identified nor could the positions of the party group be estimated or explained by the senior-policy-makers from the Parliament. Thus, the EFD was excluded from the analysis. The key informant for the European Conservatives and Reformists (ECR) could only make a judgement of the party group’s position on one issue, the setting of symmetric thresholds – Figure 17. Thus, the ECR is omitted from the analysis of the five other issues. Likewise, the Alliance of Liberals and Democrats for Europe (ALDE) were excluded from the analysis of two issues, the allocation of the fines and decision-making rule when deciding to suspend funds (the introduction of RQMV) – Figure 19 and Figure 20 respectively. The key informants indicated that the party group did not take positions on the issues as two of its MEPs were in charge of the dossiers. The European United Left–Nordic Green Left (GUE-NGL) and the Greens–European Free Alliance (Greens–EFA) were excluded from the analysis of one issue, the stringency in the provision of cash-based fiscal data to the Commission – Figure 22. For both party groups, the issue was not considered to be of importance. Likewise, there are data problems with the European Council. The European Council only took positions on two issues that emerged in the Six-Pack negotiations in the Council and the Parliament, and three in the trialogues. In the case of the missing values of the European Council on the remaining issues in the Six-Pack, the positions of the institution are treated as missing values or “.” in the data set and therefore they are not included in the models on the intra-institutional negotiations or on the inter-institutional negotiations.

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4.10 Conclusion

This chapter began with a summary of the structure of the issue dimensions and interviews as outlined by Thomson (2011). The section also provided an example of the one of the most important issues on a policy and salience scale. The section also outlined the background of the key-informants and information about the interviews. The chapter then moved to the criteria for the selection of cases. Here a brief discussion was had on the rationale for choosing the Task Force and the Six-Pack. The chapter then turned to outline where the data was collected and its importance in analysing the bargaining success of the intra- institutional and inter-institutional actors. Next the operationalisation of the explanatory variables is discussed which is then followed with a summary of Princen’s (2012) assessment of the DEU approach. The chapter ended with a discussion on data collection issues. In the next chapter, the negotiations in the Task Force and in the Council, Parliament and trialogues on the Six-Pack are reconstructed separately by focusing on the most important issues as identified by the key-informants and the primary documents. The bargaining success of the actors is measured in the Task Force and in the Council, Parliament and trialogues. Potential variations in the bargaining success of the actors in the Task Force and in the Council, Parliament and trialogues are explained through testing the explanatory variables. The results will then be interpreted from the tables and graphs produced from the analysis of the explanatory variables.

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Annex - List of Interviews

All interviews conducted by David Moloney.

Interview 1 with senior member state officials (30 May 2016).

Interview 2 with senior member state official (31 May 2016).

Interview 3 with senior member state official (31 May 2016).

Interview 4 with senior member state official (31 May 2016).

Interview 5 with senior member state official (01 June 2016).

Interview 6 with senior member state official (01 June 2016).

Interview 7 with senior member state official (01 June 2016).

Interview 8 with senior Parliament official (02 June 2016).

Interview 9 with senior Parliament official (02 June 2016).

Interview 10 with senior member state official (02 June 2016).

Interview 11 with senior member state official (03 June 2016).

Interview 12 with senior member state official (03 June 2016).

Interview 13 with senior member state official (07 June 2016).

Interview 14 with senior member state official (08 June 2016).

Interview 15 with senior member state official (08 June 2016).

Interview 16 with senior member state official (10 June 2016).

Interview 17 with senior member state official (28 June 2016).

Interview 18 with senior Member State official (23 August 2016).

Interview 19 with senior member state official (24 August 2016).

Interview 20 with senior Parliament official (07 October 2016).

Interview 21 with senior Parliament official (10 October 2016).

Interview 22 with senior member state official (10 October 2016).

Interview 23 with senior Parliament official (10 October 2016).

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Interview 24 with senior Parliament official (11 October 2016).

Interview 25 with senior Commission official (12 October 2016).

Interview 26 with senior Council official (12 October 2016).

Interview 27 with senior member state official (12 October 2016).

Interview 28 with senior member state official (13 October 2016).

Interview 29 with senior Council official (17 October 2016).

Interview 30 with senior Council official (17 October 2016).

Interview 31 with senior member state official (18 October 2016).

Interview 32 with senior member state official (18 October 2016).

Interview 33 with senior Commission official (18 October 2016).

Interview 34 with senior Commission official (19 October 2016).

Interview 35 with senior member state official (19 October 2016).

Interview 36 with senior member state official (19 October 2016).

Interview 37 with senior member state official. (19 October 2016).

Interview 38 with senior Parliament official (20 October 2016).

Interview 39 with senior Parliament official (26 October 2016).

Interview 40 with senior member state official (27 October 2016).

Interview 41 with senior member state official (28 October 2016).

Interview 42 with senior member state official (28 October 2016).

Interview 43 with senior member state official (01 November 2016).

Interview 44 with senior member state official (17 November 2016).

Interview 45 with senior member state official (18 November 2016).

Interview 46 with senior member state official (21 November 2016).

Interview 47 with senior member state official (22 November 2016).

Interview 48 with senior member state official (23 November 2016).

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Interview 49 with senior Parliament official (25 November 2016).

Interview 50 with senior member state official (30 November 2016).

Interview 51 with senior member state official (02 December 2016).

Interview 52 with senior member state official (06 December 2016).

Interview 53 with senior member state official (08 December 2016).

Interview 54 with senior member state official (08 December 2016).

Interview 55 with senior member state official (09 December 2016).

Interview 56 with senior member state official (15 December 2016).

Interview 57 with senior Parliament official (20 December 2016).

Interview 58 with senior member state official (23 January 2017).

Interview 59 with senior member state official (27 January 2017).

Interview 60 with senior member state official (30 January 2017).

Interview 61 with senior member state official (27 March 2017).

Interview 62 with senior member state official (30 March 2017).

Interview 63 with senior member state official (05 April 2017).

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Chapter V Case studies and analyses

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The Bible – The European Council’s Task Force Report on Economic Governance

5.1 Structure

The analysis of this research project is split into four parts. It begins with this chapter on the European Council’s Task Force and continues with the intra-institutional negotiations in the Council of Ministers (Council) and the European Parliament (Parliament) on the Six-Pack and then concludes with the inter-institutional negotiations between the Council, the Parliament and the European Commission (Commission) on that legislative package. The overarching goal of this chapter is to reconstruct the negotiations chronologically through the most important issues from the Task Force on economic governance (Task Force) report to the conclusion of the Six-Pack trialogues. A further aim of this chapter is to provide an insight into the positions of the 27 member states, the European Central Bank (ECB) and the Commission, where given, on those issues. By doing so, this chapter seeks to achieve one of the main objectives of this thesis, namely identifying the most influential member states and institutions by measuring how close their individual positions were to final decision-making outcome on each issue. Finally, the chapter outlines the establishment of the Task Force and the Commission’s response to this new decision-making forum through reconstructing the negotiations from the available primary data. This discussion will therefore form the basis for the analysis on the influence of European Council and the Commission in the section on the negotiations in the Council on the Six-Pack and in the trialogues. The aim of this research is twofold; (1) to examine the influence of European Council vis-à-vis the Commission in shaping the EU’s response to the opening phase of the debt crisis and (2) the influence of the intra-institutional and inter-institutional actors shaping that response legislatively. The issues that were selected had to meet these criteria and to have been important to the key-informants. Accordingly, this chapter focuses on issues that are considered to be important. Therefore, neither the negotiations on the European Stability Mechanism (ESM), an intergovernmental agreement, or the brief discussions on Eurobonds are relevant to assessing the influence of the Task Force report on the Six-Pack. Thus, the most important issues that this research will examine are (1) the inclusion of the debt criteria in the Stability and Growth Pack; (2) the suspension of EU payments to a member state that continued to break the rules of the Stability and Growth Pack; (3) the strengthening of the sanctions regime through the introduction of interest bearing deposits; (4)

114 the establishment of the reverse qualified majority voting procedure; (5) greater flexibility in the excessive deficit procedure for member states that implemented second pillar pension reforms; (6) the powers of fiscal councils (Interviews 1, 2 3, 4, 5, 7, 11, 29 and 34). The attention given to both political and technical issues facilitates an in-depth and detailed reconstruction of the first steps made by the leaders of the member states to respond collectively to the European sovereign debt crisis (European Council, 2010b, pp.1–3). However, before those goals can be achieved, there is a need to examine why two issues that might be considered important in the Task Force report were omitted from this chapter. Due to the broad nature of the discussions in the Task Force, the establishment of the (ESM) and to a far lesser degree Eurobonds were coved in the negotiations. In the case of the ESM, the European Council began consulting with Eurozone member states after the Task Force report was presented to the assembled heads of state or government at the October summit in 2010 (European Council, 2010a, p.2). Those consultations, which concluded with the European Council’s decision of the 25th of March 2011 to revise Article 136 of the Treaty on the Functioning of the European Union. This allowed for the establishment of the ESM on the 27th of September 2012, after the Treaty on establishing the mechanism was ratified by the then 16 members of the Eurozone (Official Journal of the European Union, 2011; Council of Ministers, 2012). With regards to Eurobonds, the subject made a fleeting appearance in the negotiations. Luxembourg proposed a blue bond, however this issue failed to get any traction among the member states and thus it did not form the basis of the Task Force’s recommendations to improve economic governance. Therefore, neither the negotiations on the ESM, an intergovernmental agreement, or the brief discussions on Eurobonds are relevant to assessing the influence of the Task Force report on the Six-Pack. However, the goals of this research can be achieved by examining the six most important issues that were identified in the interviews with senior policy-makers as being the most important in the Task Force and which required a legislative response (Grand Duchy of Luxembourg Ministry of Finance, 2010).

5.2 Background to the report

The roots of the Task Force lie with the Greek crisis of March 2010. As Greece headed towards its first of three bailouts, the European Council met on the 25th and the 26th of March 2010 to discuss a coordinated response to strengthen the Eurozone in the face of further challenges. EU leaders that attended the summit agreed to use the “instruments for economic

115 coordination offered by Article 136 of the Treaty on the Functioning of the European Union” (European Council, 2010c, p.5). The instruments under Article 136, allowed member states that were members of the Eurozone “to strengthen the coordination and surveillance of their budgetary discipline” and “to set out economic policy guidelines for them, while ensuring that they are compatible with those adopted for the whole of the Union” (Official Journal of the European Union, 2012, p.106). Using the powers to “define the general political direction and priorities [of the EU]” under Article 15.1 of the Treaty on the European Union, the European Council requested that the Commission present proposals that make use of the instruments in Article 136 by June 2010. The European Council at the March summit also requested that then President of the European Council, Herman Van Rompuy, “establish, in cooperation with the Commission, a task force with representatives of the member states, the rotating presidency and the European Central Bank”. The Task Force was charged with presenting to the European Council a set of measures by the end of 2010 that would meet the “objective of an improved crisis resolution framework and better budgetary discipline, exploring all options to reinforce the legal framework” (European Council, 2010c, p.6). However, the establishment of the Task Force was not met with universal acclaim, then President of the Commission José Manuel Barroso was most unhappy to see the right of initiative shifting from his institution to the European Council. The Commission was also concerned about the direction that the Task Force might take. Could a body made up of politicians without the requisite technical expertise be able to recommend the right reforms for the Stability and Growth Pact (Interviews 19 and 34)? On the 6th May, Nicolas Sarkozy, President of the Republic of France and Angela Merkel, Chancellor of the Federal Republic of Germany, issued a joint letter to the President of the Commission José Manuel Barroso and Van Rompuy outlying how to strengthen the Euro-zone. The letter, submitted on the eve of the third Euro area summit of heads of state or government, also clarified the respective roles that the Task Force would play in bringing this goal to fruition. The Task Force would have the power to assess all of the contributions submitted by the Commission and the member states (Sarkozy and Merkel, 2010). A day after the joint letter was issued, heads of state or government met in Brussels for the third Euro area summit. In their statement after the meeting the leaders empowered the Task Force to: broaden and strengthen economic surveillance and policy coordination in the euro area, including by paying close attention to debt levels and competitiveness developments;- reinforce the rules and procedures for

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surveillance of euro area Member States, including through a strengthening of the Stability and Growth Pact and more effective sanctions; - create a robust framework for crisis management, respecting the principle of Member States' own budgetary responsibility (European Commission, 2010a).

Van Rompuy who had overall responsibility for the Task Force informed the assembled leaders that work of the Task Force would be accelerated and that the Commission would present its own proposals on the 12th of May (Interview 34). In its wide-ranging submission to the Task Force, the Commission proposed that there should be an effective implementation of the debt criterion in the excessive deficit procedure, which aimed to incentivise member states to execute prudent economic policies. There should also be greater consideration given to the EU budget to help enforce the rules of the Stability and Growth Pact. In addition, the introduction of interest-bearing deposits should be considered for member states that failed to make sufficient progress towards their medium-term budgetary objectives (European Commission, 2010b).

5.3 Negotiation process and policy positions of the actors

Shortly after the submission of the Commission communication, the Task Force had its first meeting on the 21st of May. Van Rompuy in a letter to finance ministers and to the then Presidents of the ECB and Euro-group Jean-Claude Trichet and Jean-Claude Juncker and Commissioner for Economic and Monetary Affairs and the Euro, Olli Rehn, stated the Commission’s 12th of May communication and any proposals submitted by the member states before the first meeting of the Task Force were to be placed on the agenda. The letter also informed the representatives that the Parliament was to be only informally consulted during the process. Further, Van Rompuy reminded officials and ministers that the Task Force had been given a deadline of the next European Council summit scheduled for the 28th-29th of October to present a report setting out measures to improve economic policy-making in the EU (Council of Ministers, 2010a).

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In terms of organisation, the Task Force was structured along the lines of a Council configuration. The majority of the negotiations took place in the Sherpa Committee which acted as the main preparatory body. The Sherpa Committee was to be chaired by President of the Euro Working Group Thomas Wieser, with representatives of the European Council, the ECB and the Commission. For the member states, senior officials from ministries of finance and financial counsellors from the permanent representatives in Brussels were in attendance. The Sherpa Committee reported to the configuration of ministers and presidents in the Task Force consisting of the Presidents of the Commission, European Council, the Commissioner for the Directorate-General for Economic and Financial Affairs (DG ECFIN) and finance ministers. These meetings at ministerial level were chaired by Van Rompuy and acted as the final decision-making body in the Task Force structure (Ibid). In total, the two levels of the Task Force met 13 times between May and October to discuss the issues. The inexperience of Van Rompuy himself, and his office, in attempting to organise the Task Force in a similar fashion to that of a Council configuration, nearly brought negotiations to an end after the first ministerial meeting. The failure by Van Rompuy to approve minutes, despite the calls by some member states, later lead to time wasting at a number of meetings at the start of the negotiations. Time had to be dedicated to going over what had been discussed in previous meetings. In an attempt to restore confidence in the Task Force and ensure that the report was ready for the European Council summit in October, Van Rompuy started to circulate conclusions of the previous meetings mid-way through the Task Force without the prior approval of ministers or state secretaries. Having been ambushed with minutes of meetings that were not agreed to at the previous meetings, several delegations threatened to pull out of the Task Force unless the documents were withdrawn. While Van Rompuy managed to save the Task Force from the brink of collapse, its standing was further diminished by the President and some minister’s ignorance in discussing technical issues at a political level. When the Commission announced its Six-Pack proposals, just before the presentation of the Task Force report in October, interest among most delegations had evaporated. By this stage, ministers opted to send their deputies or state secretaries, as many felt that the process was a waste of time (Interview 19). In advance of the negotiations, Van Rompuy’s letter laid out the agenda for the first meeting of the configuration of ministers and presidents, which mirrored most of the Commission’s 12th of May communication to the Task Force. Within the context of ‘reinforcing preventive action’, Van Rompuy suggested that ministers and state secretaries could consider linking ‘EU financial instruments and the EU budget’ with a member state’s

118 medium-term budgetary objective. At the ‘corrective level’, Van Rompuy called for additional measures, along with those presented in the Commission submission to the Task Force. The President of the European Council reiterated that the suspension of the disbursement of EU funds could be considered along with the introduction of new measures to improve the excessive debt procedure, voting rights and a lower decision threshold than qualified majority voting to adopt a Commission recommendation when applying sanctions. Van Rompuy also recommended that developments in competitiveness levels should be monitored through an adequate set of indicators - one such indicator could observe the level of current account surpluses in the Euro-area, and that consideration should be given to establishing a permanent instrument for crisis management in the Euro-zone (Ibid; Interview 30). The response by ministers and state secretaries to Van Rompuy’s letter elicited different reactions at their first meeting on the 21st of May. Echoing the first German proposal (20/05/10), which had been submitted in advance of the meeting, Slovakia called for the (temporary) suspension of voting rights for member states that failed to adhere to the recommendations for excessive-deficit reduction. This issue was pushed by German Finance Minister Wolfgang Schäuble at the behest of his then coalition partners, the Free Democratic Party. However, Germany was to remain isolated on this issue throughout the negotiations (Interview 56). Other fiscal hawks in the Council, such as the Netherlands, viewed the proposal as simply unworkable. Sanctions had to be credible, and the suspension of voting rights was just too extreme to be ever used as a penalty against a member state (Interview 41). While for others, such as Luxembourg, the issue was just too toxic to discuss (Interview 35). With virtually no support for the proposal from a number of fiscal hawks, the negotiations shifted quickly to other unrelated penalties; more credible sanctions and how those sanctions could be applied (Council of Ministers, 2010b; Interviews 14 and 28). As the proposal was dropped so quickly, no other member state or institutions other than Germany, Finland, France, Slovakia and the ECB took positions on the issue (Interviews 14 and 28; Schäuble and Lagrade, 2010, pg.4; European Central Bank, 2010, p.7). As the temporary suspension of voting rights was not viewed as credible, the negotiations shifted to more plausible penalties such as interest-bearing deposits and the freezing of funds from the EU budget for a limited time. To trigger these sanctions, the debt criteria as laid out in the annexed protocols on the excessive deficit procedure of the Maastricht Treaty (1992), now Article 1 of Protocol 12 on the excessive deficit procedure in the Treaty on European Union (2012), had to be operationalised. While in the Stability and Growth Pact there

119 was a necessity to treat deficits and debt symmetrically, it placed far too much weight on the former rather than the latter (Official Journal of the European Union, 1992, 1997 and 2012). Figure 3 outlines the positions of the member states and the institutions on the inclusion of the debt criteria through the medium-term budgetary objective. The extreme positions on the scale are 100 – the inclusion of a debt criterion of 60% and 0 – no specific debt target. The inclusion of the debt criteria, a 60% debt ceiling, in the excessive deficit procedure was somewhat less important than the move to link the debt criteria with the medium-term budgetary objective. The issue was the first item on the agenda of the inaugural Sherpa Committee meeting, which commenced its work on the 1st of June under the chairmanship of Wieser (Council of Ministers, 2010c). There was a broad agreement among the member states that a greater emphasis should be placed on achieving the medium-term budgetary objective through the inclusion of the debt criteria. Member states with debt levels above 60% of GDP were to be required to undertake a faster adjustment path to reduce debt to below that level (Council of Ministers, 2010d). Supporting the inclusion of the debt criteria during the first meeting were the Netherlands, Portugal, Belgium, Germany, Sweden, Slovakia, Slovenia, Denmark, Finland, Poland, Lithuanian, the Czech Republic, Estonia, Latvia and Cyprus. In the view of Germany, Finland, Slovakia and Denmark there was a need to calm the markets that were worried about the unsustainability of high debt, while Sweden and Portugal argued that action needed to be taken to reduce the debt levels that had built up during the crisis (Interviews 14, 27, 31, 40, 55 and 56). For Belgium, the Netherlands, Lithuania, Latvia, Poland, the Czech Republic and Estonia, it was simply about respecting the rules of the treaty and economic logic. Member states with high debt should reduce it below the 60 per cent threshold, and if this was done during times of economic growth, when the level of inflation increases, then in absolute terms there should be a corresponding fall in the level of debt (Interviews 10, 12, 28, 41, 47, 51, 60 and 63). The position of Slovenia and Cyprus was based on treating deficits and the debt criteria equally (Interviews 6 and 52). These member states were also backed by the ECB. The institution wanted the debt criteria to play a central role in the reforms of the Stability and Growth Pact. In the eyes of the ECB, this aim could be achieved by making the debt criterion binding thus reducing any potential to weaken it. The ECB was judged to have taken an extreme position at 100 on the scale (Interview 33). The other extreme on the scale is 0 or the status quo. Here Italy led the charge against placing greater significance on debt. Italy was supported by France, Greece, and to a lesser degree Spain, Malta, Ireland, the United Kingdom and Hungary. Italy argued strongly that the

120 medium term budgetary objective calculation already included debt sustainability and therefore it made no sense to count it twice (Interview 45). An argument that reflected Hungary’s concerns (Interview 42). French support for Italy’s position was motivated by the absurdity of forcing member states with high debt levels to undergo more reforms to reach a government debt level below 60 per cent (Interview 48). With such high debt, Greece reiterated its stance that it was simply unrealistic to bring government debt below 60%, a position that Malta shared (Interview 22). Though the member state had substantially less debt than Greece, with a level of 68 per cent GDP, Malta was concerned that bringing debt to below the 60 per cent threshold required tax increases, which could prove to be counterproductive (Interview 43). Spain and Ireland argued that there was no economic rationale to reduce debt at such a fast pace (Interview 50 and Interview 54). Though not bound by the medium-term budgetary objective, the United Kingdom called for a less rigid approach on reducing debt (Council of Ministers, 2010d; Interview 32). Those member states that opposed the inclusion of the debt criteria received a boost when the Commission took to the floor to oppose it. The Commission argued that the Stability and Growth Pact already had a separate procedure for the debt criteria. Thus, the inclusion of the 60 per cent criteria in the article was unwarranted, as a “high level” in the text was sufficient to force member states to reduce their large debts (Interview 33). The Commission was judged to have taken the extreme position of 0 on the scale. Both Austria and Bulgaria waited until the second Sherpa Committee meeting on the 23rd of June to intervene on this issue (Council of Ministers, 2010e). The two member states were receptive to the need to include the debt criteria. Austria supported placing greater weight on the debt criteria in the Stability and Growth Pact (Interview 19). However, the member state did want clarity on the pace of the adjustment path towards the medium-term budgetary objective, a position shared by Portugal and the United Kingdom. For Bulgaria it was obvious that highly indebted member states posed a significant risk to the stability of the Economic and Monetary Union (Interview 44). These Member states were judged to have taken the extreme position of 100 i.e. in support of the inclusion of the debt criteria on the scale. Negotiations on the inclusion of the debt criteria ended by the third Sherpa Committee meeting before the summer recess on the 12th of July. In the chair’s report, Wieser stated that a general consensus on the inclusion of the debt criterion in the preventive arm of the Stability and Growth Pact was reached. Member states were now required to undertake a faster adjustment path towards the medium-term budgetary objective, where government debt exceeds 60 per cent of GDP (Council of Ministers, 2010f). A general consensus was also

121 reached among ministers and state secretaries at their meeting on the 12th of July on this issue (Council of Ministers, 2010g). Discussions on the wording of the text on the inclusion of the debt criterion in the Task Force report continued until the 18th of October (Financial counsellor note, 2010a). Thus, the agreement reflected the position of the member states seeking to include the debt criteria at 100 on the scale. While the negotiations concluded in the Task Force on the inclusion of the debt criteria through the medium-term budgetary objective, Italy and Greece were to later try to reopen the question during the discussions on the Six-Pack in the Council (Interview 30; Council of Ministers, 2011a).

MT/UK/HU/FR/IT NL/PT/EE/BE/DE/SE/SK/SI/DK /EL/ES/IE/COM /CY/LT/LV/PL/BG/AT/LU/FI/ Status quo CZ/ECB/Outcome

0: No specific debt 100: The inclusion of the target. debt criteria for member

states with debt above 60 per cent.

Figure 3: The initial positions of the actors on including a debt criterion in the medium-term budgetary objective.

The initial meeting of the Task Force also dealt in-depth with one of the options that could strengthen the sanctions regime in the Stability and Growth Pact. This is illustrated in Figure 4 which outlines the positions of the actors on the temporary suspension of funds from the European Union budget for those member states that fail to meet the debt criteria (Council of Ministers, 2010b). The extreme positions on the scale are 100 – suspension of all funds from the EU budget and 0 – no suspension of funds. The first group of member states to support the suspension of all funds were Slovenia, Hungary, Poland, Lithuania, Latvia and the United Kingdom. The Eastern member states took to the floor to argue that all funds from the budget should be considered, not just Cohesion Funds (Ibid). These member states argued that the cost of suspending only Cohesion Funds were higher for net-beneficiaries than for net-contributors

122 to the EU budget, such as Netherlands or Denmark. Further, the suspension of Cohesion Funds could have a disproportionate effect on non-Eurozone member states, the “outs”, who, unlike some Euro countries, the “ins”, were not the source of the European sovereign debt crisis. Thus Slovenia, Hungary, Poland, Lithuania, and Latvia could only support the suspension of all funds from the Union budget as it was the fairest approach (Interviews 6, 10, 28, 42 and 63). The United Kingdom was supportive in principle of using all funds from the EU budget. However, its priority during these discussions, and throughout the negotiations on sanctions, was to make clear that under Protocol 15 of the Treaty on the Functioning of the European Union, the United Kingdom was exempt (Interview 32). Between the first and fourth Sherpa Committee meetings on the 1st of June and the 30th of August, respectively, support increased for the inclusion of all funds from the budget, despite the political constraints that existed (Council of Ministers, 2010d, 2010e, 2010f, 2010h). At 100 on the scale were Portugal, Estonia, the Czech Republic, Bulgaria, Slovakia, Malta, Cyprus, Denmark, Austria, the Netherlands, Finland, Sweden, Luxembourg and the ECB backing a broader approach to the suspension of funds (Council of Ministers, 2010d and 2010e). Portugal, Estonia, the Czech Republic, Bulgaria, Cyprus, Romania joined Poland et al. in supporting the equal treatment approach by arguing that there should be no discrimination in the use of funds from the budget (Interviews 27, 40, 43, 44, 47, 51 and 52). Austria, Denmark, the Netherlands, Finland, Sweden, Luxembourg and the ECB were also supportive of the use of all funds from the EU budget. However, the reasons differed from those put forward by member states in receipt of Cohesion payments. In the case of Finland, it was not simply enough to improve the sanction regime for the Eurozone; there was also a necessity to instil fiscal discipline in future members of the Euro-area (Interview 14). For Sweden, the EU had a bad record when it came to sanctions and there was a need to impose costs on member states that did not follow the rules (Interview 55). The Netherlands was also supportive, as this proposal represented a credible sanction, whilst Luxembourg and Denmark contended that there needed to be consequences for not respecting the rules on debt (Interviews 35, 41 and 46). Austria argued that a broader range of sanctions allowed for the right response to be given to violations of the Stability and Growth Pact (Interview 19). Institutional support for suspending all funds came from the ECB, which argued that it was an important element in strengthening the sanctions regime (Interview 33). Taking an intermediate position on the scale at 50 were the Commission and Germany. Unlike other member states that could be judged as hardliners, Germany had already considered the legal difficulties in trying to suspend all funds from the EU budget and thus

123 supported a more restrictive approach, the suspension of just cohesion and structural funds. Further, the suspension of only these types of funds had a clear economic rationale, which did not exist for other EU supported programmes (Interview 56). The suspension of cohesion and structural funds was the preferred option for the Commission. The institution felt that interest bearing deposits could only worsen the budget deficit of a member state compared to suspending funding for certain programmes. Further the Commission believed that the suspension of funding was also a far more effective deterrent. While the Commission, or to be more specific, the DG ECFIN, were successful in ensuring that such measures were included in the Task Force report, two major stumbling blocks remained. Internal opposition within the Commission coupled with technical difficulties pertaining to the legality of suspending cohesion and structural funds in the Stability and Growth pact meant that it was not possible to include these measures in the Six-Pack or Two-Pack. Thus, the institution was left with no option but to focus on the introduction of interest-bearing deposits (Interview 33). On the other extreme of the scale at 0 were Greece, Belgium, France, Italy and Spain. The member states sought to maintain the status quo by arguing that there should be no suspension of funds. Greece signalled its strong opposition to any form of sanctions, arguing that preventative measures such as the introduction of surveillance and monitoring mechanisms did not have the same negative impact on the economy as the freezing of payments (Interview 22). The negative impact that the suspension of funds could have on the budget deficit and on programmes in the member states was the primary reasons why Belgium, France, Italy and Spain rejected this attempt to freeze subsidies. In the case of Belgium, the member state’s two main regions, Flanders and Walloon, were heavily dependent on funding from the EU budget, while France argued that the suspension of payments to programmes could never reduce a member state’s deficit to zero. Instead, the introduction of such a measure was likely to lead to only one outcome, an increase in a member state’s deficit (Interviews 12 and 48). This sentiment was echoed by Italy, which contended that the proposed sanctions were not coherent. The aim of suspending funds from the Union budget was to ensure that central government put its finances on a sustainable path. However, in reality, freezing payments from EU programmes hit local government and citizens who were dependent on this type of funding (Interview 45). As with the member states supporting the suspension, Spain invoked the equality argument by pointing out that those who were in receipt of a substantial amount of funding were going to be disproportionally affected compared to countries that received a comparatively smaller amount. Thus, Spain could not support the suspension of funds (Interview 50). However, by the third and fourth Sherpa Committee meeting on the 5th of July and the 30th of August,

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France, Greece and Spain, dropped their opposition to the Commission proposal. As it became impossible to reach a compromise with Germany on this issue, France no longer continued to fight the recommendation. Spain also moved from totally opposing the proposal to cautiously supporting the Commission. Spain required clarity on whether funds that had already been committed to certain EU programmes would be suspended. Opposition from Greece was reduced to expressing concern about where this policy was heading (Council of Ministers, 2010f and 2010h). The questions raised on whether it was legally feasible to suspend funding to certain EU programmes were addressed at the fourth Sherpa Committee meeting on the 30th of August. Advisors from both the Commission and the Council Legal Services held that to avoid changing the Treaty on the Functioning of the European Union, a conditionality rule on compliance had to be introduced through secondary legislation, with the Stability and Growth Pact requirements in a subset of the regulations on EU expenditure. Such an approach could be pursed if the conditions were found to be “necessary and proportionate for the achievement of the objective pursued by the policy in question”. However, this legal condition, according to the report authored by Wieser, reduced the capacity to establish a link between most of the EU funds under shared management programmes and the implementation of the Stability and Growth Pact (Council of Ministers, 2010h, p.7). Based on those legal conditions, the conditionality rule could only include rural development and Cohesion and Structural Funds, as both financial programmes were connected to sound fiscal policies of the member states. The Council Legal Service also argued that any agreement on the suspension of funds could only come into force after a settlement had been reached on the forthcoming Financial Perspective, to avoid recovering funding. Despite the arguments of some member states that a broad approach should be taken when dealing with the EU budget to ensure fairness and the different obligations that others had under the Stability and Growth Pact, there was a need, which was widely shared, that rapid progress was required to improve measures in the Eurozone. Agreement was therefore reached on the conditionality rule, which eventually formed the second phase of the new sanctions regime for the corrective arm of the Stability and Growth Pact, at the penultimate meeting of the ministers and state secretaries on the 27th of September (Council of Ministers, 2010i, p.4, 2010j). Thus, the final decision-making outcome reflected the position of Germany and the Commission at 50 on the scale. Attention now turned to the introduction of interest-bearing deposits in the preventive arm.

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BE/EL/FR/IT/ COM/ DE AT/DK/PT/LV/LT/EE/ ES/Status quo Outcome BG/PL/CZ/NL/FI/CY

/SE/LU/HU/UK/RO/SK/ SI/ECB

0: No 50: Suspension 100: Suspension of suspension of of limited range all funds from the funds. of funds. EU budget.

Figure 4: The initial positions of actors on the suspension of funds.

Note: AT: Austria; BE: Belgium; BG: Bulgaria; CY: Cyprus; CZ: Czech Republic; DK: Denmark; EE: Estonia; FI: Finland; FR: France; DE: Germany; EL: Greece; HU: Hungary; IT: Italy; LV: Latvia; LT: Lithuania; LU: Luxembourg; MT: Malta; NL: The Netherlands; PL: Poland; PT: Portugal; SI: Slovenia; SK: Slovakia; ES: Spain; SE: Sweden; UK: United Kingdom; COM: Commission; ECB: European Central Bank

Issue Six: How Issue Six: How The suspension of funds from the EU budget represented a stepping up of the excessive salient salient (important) was deficit procedure in the corrective arm,(important) however was for some member states sanctions were also the proposal that the proposal that Issue Six: How salient (important) neededcashed basedin the preventive arm of thecashed Stability based and Growth Pact. During the crisis, it became fiscal data be fiscal data be was the proposal abundantlyprovided to theclear that sanctions cameprovided into force to the at too late of a stage to havethat an cashed effect based on the Commission for Commission for fiscal data be budgetarythe policies of the member states.the This was viewed by the ECB, the providedCommission, to the the EP/COM/ECON EP/COM/ECON Commission for Parliament/EPP/PES/ALD and the Council as one /EPP/PES/ALDof the major weaknesses in how the Stabilitythe and Growth EP/COM/ECON/E PactE/ Greens operated – (Interview 33). FigureE/ 5 Greens depicts – the measure that many member states supported EFA and EFA and PP/PES/ALDE/ GUE/NGL? GUE/NGL? Greens – EFA and to rectify this weakness, interest-bearing deposits of 0.2 per cent. These depositsGUE/NGL? were to be imposed on member states that failed to respect the medium-term budgetary objective (Council

of Ministers, 2010b). The extreme positions on the scale are 100 – the introduction of interest-

bearing deposits and 0 – no interest-bearing deposits. The issue on whether to introduce deposits was considered at the first and third meetings of the Sherpa Committee on the 1st of

June and the 5th of July and was supported by both the Commission and the ECB (Council of

Ministers, 2010d and 2010f).

The policy had originated from Finland and it was later included in the member states’

proposal to the Task Force as an alternative to suspending Structural and Cohesion Funds if a member State broke the debt ceiling in the Stability and Growth Pact. Finland also argued that interest-bearing deposits strengthened the preventive arm (Interview 14 and Finnish Ministry

126 of Finance, 2010). Poland argued that interest-bearing deposits could achieve the same outcome as the suspension of funding from the EU budget (Interview 28). Interest-bearing deposits were also considered by both member states as an opportunity to create a fairer sanctions regime between the “ins” and the “outs”, as non-Eurozone countries faced the prospect of losing Cohesion and Structural funding. Bulgaria and Latvia also considered interest bearing deposits to be a much-needed measure to strengthen the Stability and Growth Pact (Interviews 44 and 63). The idea that interest-bearing deposits could be used to strengthen the Stability and Growth Pact was shared by Cyprus, the Czech Republic and Hungary. However, in the case of the latter two member states, the support for interest-bearing deposits was muted. As a non-Eurozone member, the Czech Republic was less vocal than Poland or Bulgaria while Hungary had some concerns that such a measure may have a negative impact on the member state’s GDP figures (Interviews 42 and 51). Thus, the positions of the member states were judged to reflect one of the extremes, 100, on the scale. Likewise, the push by Spain, Italy, Germany, Lithuania, Malta, Austria, Luxembourg, Denmark, Sweden, Slovakia, Slovenia, Finland, the Netherlands, Estonia, Ireland and Sweden for interest-bearing deposits to strengthen the Stability and Growth Pact was judged to be in line with 100 on the scale. Support by the member states was driven by a number of factors, including making the preventive arm comparable with the corrective arm by giving it more teeth (Germany, Denmark, Slovakia, Sweden, Slovenia, Ireland and Austria); using interest- bearing deposits as an incentive for good budgetary policies (Estonia, Spain and Finland); and as a first step in a credible sanctions regime (the Netherlands and Lithuania) (Interviews 6, 10, 13, 14, 19, 31, 36, 40, 41, 47, 50 and 54). While having been supportive, both Malta and Luxembourg were not vocal, as the former was sympathetic to the concerns of its Mediterranean neighbours, while the latter held the Presidency of the Eurogroup and thus needed to be viewed as a neutral broker. Malta’s allies in southern Europe supported the fines, judging that the issue was not going to be dropped and therefore did not want to waste resources on a fight they could not win, as was the case for Italy (Interview 45). Interviewees judged that the policy preference of these actors corresponded to 100 on the scale. On the other end of the scale at 0, Malta’s and Italy’s Mediterranean allies resisted the introduction of interest-bearing deposits and thereby sought to maintain the status quo. For Greece, as with suspension of funds from the EU budget, the focus should be on how to avoid sanctions by monitoring debt levels while France considered the measure to be too punitive due to the potential for negative interest rates (Interviews 22 and 48). For Portugal, the member state considered interest bearing deposits to be absurd and that the sole purpose of the proposal 127 was to punish those countries that were considered economically incompetent. The negotiators for Portugal were concerned that the member state was going to be the first in the Eurozone to lodge an interest-bearing deposit. The strong resistance put up by Portugal was underlined by its lobbying of its own delegation of MEPs to the Parliament and its belief that this was a crusade led by fiscal hawks against those in difficultly. The introduction of interest-bearing deposits was considered to be its biggest failures in the negotiations (Interview 27). Opposition to this measure was not restricted to Mediterranean member states, as both Belgium and the United Kingdom opposed interest bearing deposits. Like Portugal, Belgium was concerned that it might have to lodge a deposit with the Commission, as at the time the member state was quite far away from its medium-term budgetary objective (Interview 12). The United Kingdom approached the issue from a practical standpoint. The member state did not see the point of fining a country that could not pay. Such a move was counterproductive and only antagonised the United Kingdom (Interview 32). With a clear majority in favour of the introduction of interest-bearing deposits by the third meeting of the Sherpa Committee, negotiations concluded with an agreement that was in line with those member states at 100 on the scale (Council of Ministers, 2010g). Ministers and state secretaries signed off on the wording on the proposal on the 18 of October (Financial counsellor note, 2010a). Deposits now formed the first part of a two-stage approach in the new sanctions regime. Member states that failed to meet the medium-term budgetary objective in the preventive arm of the Stability and Growth Pact, now had to lodge an interest-bearing deposit with the Commission (European Council, 2010b). The progress on these issues was reported to the assembled leaders by Van Rompuy at the European Council summit on the 17th of June. The European Council agreed with the proposals to strengthen the sanctions regime in the preventive and corrective arms of the Stability and Growth Pact. The new sanctions regime was designed to be progressive and to also consider the obligations of the member states under the Treaties and their Eurozone status. The European Council agreed with the aim of the sanctions; to ensure that member states met their medium-term budgetary objective. Before moving onto other issues, the European Council called on the Commission and Task Force to operationalise these orientations as quickly as possible (European Council, 2010d, pp.4–5).

128

BE/EL/FR/PT/ AT/BG/CY/CZ/DE/DK/EE/ES UK/Status quo /FI/HU/IE/IT/LT/LU/LV/MT/ NL/PL/SE/SI/SK/COM/ECB/ Outcome

0: No interest - 100: Interest- bearing bearing deposits deposits.

Figure 5: The initial positions of the actors on the introduction of interest-bearing deposits.

The progress on these issues was reported to the assembled leaders by Van Rompuy at the European Council summit on the 17th of June. The European Council agreed with the proposals to strengthen the sanctions regime in the preventive and corrective arms of the Stability and Growth Pact. The new sanctions regime was designed to be progressive and to also take into account the obligations of the member states under the Treaties and their Eurozone status. The European Council agreed with the aim of the sanctions; to ensure that member states met their medium-term budgetary objective. Before moving onto other issues, the European Council called on the Commission and Task Force to operationalise these orientations as quickly as possible (European Council, 2010d, pp.4–5). As noted earlier, automatic sanctions had come to nothing due to political and legal issues. However, there was still a need to improve the automaticity of the imposition of sanctions, interest-bearing deposits, which had been agreed to in the early Sherpa Committee meetings. A compromise was thus reached between some fiscal hardliners that wanted voting rights to be suspended and most of the member states that sought a less politically sensitive option. Thus, sanctions would be applied quasi-automatically through RQMV (Interview 1). Despite the general support for the concept of quasi-automatic sanctions, no actor had proposed RQMV until the Commission did so at the fourth Task Force meeting on the 6th of September, which was attended by ministers and state secretaries (Council of Ministers, 2010k).

129

Under RQMV, sanctions applied to Eurozone members, placed in the excessive deficit procedure in the preventive arm of the Stability and Growth Pact, were deemed adopted unless the Council decided by a qualified majority of member states to reject them. Thus, member states needed at least 255 weighted votes out of a total of 345 votes, representing two thirds of the Council, a qualified majority, under reverse qualified majority voting, rather than 91 votes under qualified majority voting, to block the imposition of sanctions by the Commission (European Commission, 2014; European Parliament, 2011a). The issue of whether or not reverse qualified majority voting was to be introduced when imposing interest bearing deposits is detailed in Figure 6. The positions of the member states and the institutions are split into 3 groups. The extreme positions on the scale are 100 – the application of RQMV when voting on the adoption of enforcement measures and 0 – qualified majority voting (QMV). Support for the proposal began to emerge at the fourth Task Force meeting. Here Finland, Germany and Denmark took to the floor to argue that RQMV was a much-needed mechanism, which could improve fiscal discipline and implement sanctions far more effectively. Thus, the introduction of RQMV aimed to avoid a repeat of the 2003 debacle. Germany and France avoided sanctions for breaking the deficit criteria in the Stability and Growth Pact in 2003, when the Council voted against the recommendations of the Commission to impose fines on the two member states (Interviews 14, 31 and 56). Those member states were joined by Greece, Belgium, Slovenia, Cyprus and Malta at the fifth meeting of the Sherpa Committee on the 21st of September and were placed at the extreme position of 100 on the scale. All three countries viewed the new proposed voting procedure as an opportunity to level the playing field between larger and smaller member states (Interviews 6, 12, 22, 43 and 52). Slovakia also took to the floor in support of the Commission’s proposal as it considered the measure to be essential in strengthening the Eurozone, while Luxembourg wanted to avoid a repetition of 2003. Indeed, Junker wanted to rectify his previous mistake of voting to oppose the implementation of sanctions against Germany and France when he was minister of finance (Interviews 35 and 40). Non-Eurozone members also continued to take positions on this issue, with Poland, Hungary and the United Kingdom joining Denmark in arguing that RQMV was a political message that had to be sent to the markets, that the Eurozone was serious about applying sanctions, and that the new voting mechanism was a strong and powerful tool to strengthen the economic governance framework (Interviews 28, 31, 32 and 42; Finnish financial counsellor note, 2010b). Also judged to be at an extreme position on the scale at 100 were the ECB, the Netherlands, Sweden, the Czech Republic, Latvia, Lithuania, Estonia, Bulgaria and Romania.

130

These member states and the institution joined both Eurozone and non-Eurozone members in supporting the Commission’s proposal on RQMV at the penultimate meeting of ministers and state secretaries on the 27th of September (Finnish financial counsellor note, 2010c). The Netherlands viewed the new mechanism as an opportunity to diminish the role of the Council in the decision-making process on sanctions and thereby strengthening the role of the Commission (Interview 41). Outside the Eurozone, Estonia argued that RQMV was as close to automaticity as possible (Interview 47). Latvia, Lithuania, Bulgaria and Romania cited the 2003 fiasco as a source for their support along with viewing the new voting procure as a much- needed measure to strengthen economic governance in the Eurozone (Interviews 10, 44 and 63). Sweden and the Czech Republic also made clear their support for the new voting procedure. Sweden, which had preferred market pressure as a device to ensure member states strengthened their public finances, opted to support RQMV as it considered that the new procedure could, in the end, be a viable threat like the markets. Though supportive of RQMV, the Czech Republic made it clear that this was conditional on applying QMV before a decision was made in the Council on whether a member state should be placed in the excessive deficit procedure (Interviews 13, 51 and 55; Council of Ministers, 2010j). This level of support from the member states, along with that from the ECB, strengthened the Commission’s hand in the negotiations. As for the rationale behind the support for RQMV by the two institutions, the ECB and the Commission wanted the Stability and Growth Pact to be as water tight as possible. Officials from DG ECFIN wanted the new voting procedure to ensure that the Council could not vote down sanctions. Under RQMV, member states would find it much harder to build a coalition within the Council to oppose any Commission proposal for a sanction than under QMV (Interviews 25 and 33). Thus, the underlining reason for the support for the introduction of RQMV among these member states and institutions was to make it more difficult for member states to overturn a Commission decision on sanctions in the Council. The introduction of such a measure strengthened the sanctions regime in the Stability and Growth Pact. Opposition to RQMV was led by France, which fought the proposal until the end of the negotiations, with support from Spain, Portugal, Italy, Austria and Ireland in the Sherpa Committee and the configuration of ministers and presidents. At 50 on the scale were France Portugal, Italy, Austria and Ireland. France wanted simple majority in the Council to overturn the Commission’s decision to impose sanctions. Indeed, the French position was driven by a fundamental question on how much discretion the Council had under the new voting procedure (Interview 48). The support of Portugal for the use of simple majority was driven by concerns

131 that reverse qualified majority voting made it virtually impossible for smaller member states to build a coalition to oppose the Commission (Interview 18). This was a position shared by Austria, which also argued that the Commission was not sufficiently apolitical to treat both larger and smaller member states fairly (Ibid). Ireland also shared the concerns of both Austria and Portugal that reverse qualified majority voting prevented smaller countries from forming a bloc to overturn a Commission proposal. Italy also considered the political dimension when supporting qualified majority voting. For Italy reverse qualified majority voting was an attempt to diminish the Council’s role in the political process (Interview 45; Finnish financial counsellor note, 2010c). Moving down the scale to the other extreme at 0, Spain pushed for the retention of QMV or the retention the status quo. The member state considered the new voting mechanism to be a considerable change to the previous procedure, and thus treaty change was required. By seeking the retention of the status quo, Spain wanted the Council to have the capacity to overturn the fines – though not to the extent that shifted the power to impose sanctions from the Commission back to the member states, which France and its allies were seeking (Interview 50). The preference of these member states for simple majority over QMV was based on the shift of power to impose fines from the Commission to the Council. Under QMV, it is easier for member states to reach a blocking minority to oppose sanctions (45% or 35% population), than under simple majority (50% and any population %) or under RQMV (55% and 65% population) (Council of Ministers, 2017b). In an attempt to meet the concerns of those states opposing the introduction of RQMV, both the Commission and the Council Legal Service prepared arguments on this question before the final Sherpa Committee that was to take place on the 12th of October (Finnish financial counsellor note, 2010d). The Commission in its non-paper on RQMV argued that, as the procedure was adopting ‘implementing measures’ in the sense of Article 291 of the Treaty on the Functioning of the European Union and not legislative acts, there was a legal basis. The legal basis for 'implementing measures' within the context of Article 291 was confirmed by former Advocate General Poiares Maduro in Case C-133/06, European Parliament v. Council (delegation of legislative power), and by the European Court of Justice (Court) in relation to comitologie decisions since the 1970s. The Court in Prerogatives of the Parliament1 confirmed

1 C-46/86 - Romkes v Officier van Justitie, Case C-417/93 European Parliament v Council of the European Union - Consultation of the Parliament, Case C-156/93 European Parliament v Commission of the European Communities; - Respective powers of the Council and the Commission Case C-303/94 European Parliament v Council of the European Union. 132 that the legislator could set up a specific procedure for adoption of implementing measures, which was different from the procedures provided for in the Treaty on the Functioning of the European Union (European Commission, 2010c). The Commission also argued that it was simply another voting modality, which did not depart from the normal QMV procedure nor alter the institutional balance. Indeed there was nothing new about reverse qualified majority voting; it was no different to the implementing decisions found in Regulation 1225/2009, article 9(4) on anti-dumping (Ibid).The Council Legal Service also stressed the precedent of the new voting procedure in the Regulation on anti-dumping and the judgement of the Court in C-303/94 European Parliament v Council of the European Union, which stated that “the provisions implementing the basic regulations or directives may be adopted according to a different procedure as provided for in those regulations or directives”. Thus, under Article 291(2) of the Treaty on the Functioning of the European Union, as interpreted by the Court, the Council could adopt procedural modalities, voting procedures, that were different to those laid out in the Treaties when exercising implementing powers. On this basis, the Council, through an implementing procedure, could reject the recommendation by the Commission to impose sanctions by RQMV (Council of Ministers, 2010l). Despite the combined efforts of the Commission and the Council Legal Service, France, along with the other member states, continued to hold out against the introduction of the new voting procedure. The frustration of a number of member states and the Commission boiled over at the last Sherpa Committee meeting on the 12th of October. The Commission, the Netherlands, Germany and Sweden accused France of delaying the implementation of the new procedure in the forthcoming Six-Pack, after the member states pushed for a vote in the Council to decide whether RQMV could be initiated. With time running out and against the strong objections of France, the other member states agreed to a German proposal that the issue be settled at the final meeting of ministers and state secretaries on the 18th of October. Wieser, chairing the Sherpa Committee, agreed to this request (Finnish financial counsellor note, 2010d). At the 18th of October meeting with ministers and state secretaries, France finally agreed to RQMV after the other member states tabled a compromise. Under this convoluted agreement, the Council adopted a recommendation for policy measures after five months of inaction by a member state to address its deviation from the adjustment path towards the medium-term budgetary objective. The recommendation set out a deadline to address the deviation based on a Commission proposal that had its legal basis in Article 121.4 of the Treaty on the Functioning of the European Union. At the same time, the member states imposed an

133 interest-bearing deposit by RQMV (Finnish Financial counsellor note, 2010a). Since sanctions would now be such a remote possibility through the length of time and numerous steps that needed to be taken before sanctions would be on under RQMV, France could support the text knowing that it cost the member state next to nothing while at same time win plaudits from the fiscal hawks, namely Germany, in the Council for taking a tough stance on the issue. With France dropping its opposition to reverse qualified majority voting, Ireland, Austria, Spain, Portugal and Italy all rowed in to support the new procedure (Interview 30). Thus, the Task Force agreed to the introduction of reverse qualified majority voting in line with the preferences of the member states at 100 on the scale.

ES/Status quo AT/FR/IE/IT/ BE/BG/CY/CZ/DE/DK/EE/ PT EL/FI/HU/LT/LU/LV/MT/ NL/PL/SE/SI/SK/UK/ECB/ COM/Outcome

0: QMV to be 50: Simple 100: RQMV to be applied when majority to be applied when voting voting on the applied when on the adoption of adoption of voting on the enforcement enforcement adoption of measures. measures. enforcement measures.

Figure 6: The initial positions of the actors on the introduction of RQMV.

RQMV was not the only issue that required a substantial amount of time to resolve. The question of taking the costs of second pillar pension reforms into account in the excessive deficit procedure remained an open issue until the very last Sherpa Committee and ministerial and state secretaries’ meetings. The two extreme positions that were held by the member states are described in Figure 7. The extreme positions on the scale are 100 – attention should be paid to the impact of the mandatory establishment of second pillar pension systems and 0 – the rejection of any permanent or temporary deviation from the medium-term budgetary objective for member states that had undertaken second pillar pension reforms. At 100 on the scale is Poland, which raised the issue at the second Sherpa Committee meeting on the 23rd of June,

134 where the member state argued that reforms to the pension system were one of the contributing factors to the high debt levels of certain countries and that those costs should be taken into account in any future reforms of the excessive deficit procedure (Council of Ministers, 2010e). Poland continued to push the issue at the ministerial and state secretaries meeting on the 12th of July. Poland, with the support of Slovakia, repeated its earlier assessment that the costs associated with reforming pension systems had the potential to increase government debt above the 60 per cent of GDP threshold, thus raising the prospect that member states could be placed in the excessive deficit procedure (Finnish financial counsellor note, 2010e); a position supported by France, Hungary and Romania (Council of Ministers, 2010e). The importance of the issue was underlined at the fourth Sherpa Committee meeting on the 30th of August where a joint letter signed by Poland, Hungary, Romania, Slovakia, Bulgaria, the Czech Republic, Latvia, Lithuania, and Sweden on pension schemes was presented (Council of Ministers, 2010h). The letter outlined the difficulties that member states were having with the introduction of these reforms, which was leading to a deterioration in the statistics, compiled under the European system of national and regional accounts, on government debt and deficit (Djankov et al., 2010). In an attempt to defuse the matter, Weiser proposed that the European Financial Committee could examine this issue at its next meeting on the 20th and 21st of September (Council of Ministers, 2010m). Before the presentation of those findings on the costs of pension reforms, Wieser’s third draft of the Task Force report proposed that a degree of flexibility should be shown for member states that had incurred the cost of establishing a second pillar. Thus, the net cost of such reforms could be taken into account before the excessive deficit procedure was launched. Equal consideration should also be given, during the launch and the abrogation of the excessive deficit procedure, to a partial or total reversal of previously implemented pension reforms (Council of Ministers, 2010n). Wieser’s proposals were welcomed at the penultimate meeting of the Sherpa Committee meeting on the 5th of October by Poland, Hungary, Romania, Bulgaria, the Czech Republic, Latvia, Lithuania, Estonia and Slovenia. These member states had all already undertaken pension reforms several years before the Task Force and had felt the effects of the transformation to a second pillar pension system. However, these states still maintained their position of seeking an indefinite exemption in the excessive deficit procedure (Interviews 10, 28, 42, 44, 47, 51 and 63). Likewise, Cyprus, Ireland, France and Sweden also signalled support for the Poland and et al. position. For Cyprus and France, if a member state had established a second pillar, then they should be compensated. Ireland and Sweden were also supportive, arguing that if

135 such reforms put the public finances on a stable path then those countries that undertook these changes to their pensions systems should benefit (Interviews 48, 52, 54 and 55). Sweden, however, stipulated that its support was conditional on these reforms being evaluated by the Commission or the International Monetary Fund (Interview 55). At the polar opposite on the scale at 0 were Denmark, Austria, and Luxemburg. Denmark did not want loopholes in the excessive deficit procedure, Austria viewed it as an opportunity to manipulate the deficit figures, and Luxembourg argued that such changes could be undertaken within the current rules of the Stability and Growth Pact (Interviews 19, 31, and 35). Also taking the same position were Finland, the Netherlands, the United Kingdom, the ECB and the Commission. For Finland, there was already an agreement in the Stability and Convergence Programme framework to take into account the cost of these reforms, while the Netherlands was strongly against the leeway that Poland and its allies wanted in the excessive deficit procedure. Indeed, the Netherlands felt that this was cheating on the debt criteria, which could not outweigh the questionable benefits (Interview 14). Finally, the United Kingdom did not want the excessive deficit procedure undermined in anyway. Both the ECB and the Commission joined those member states in opposing Wieser’s proposals. The two institutions questioned the longevity of the second pillar pension reforms undertaken or that were to be implemented, arguing that member states could reverse the changes to their pension systems and still maintain a degree of flexibility in the excessive deficit procedure (Interview 32). Thus, Denmark, Austria, Luxemburg, Finland, the Netherlands, the United Kingdom, the ECB and the Commission sought to maintain the status quo or a temporary deviation from the medium- term budgetary objective for member states that had undertaken second pillar pension reforms – 0 on the scale. The most interesting position was that of Germany, which had initially opposed weakening the excessive deficit procedure by taking into account the costs of establishing a second pillar pension system and sought to maintain the status quo. However, a late intervention by the then Polish Minister of Finance Jacek Rostowski convinced Schäuble that due to the importance of the reforms, such flexibility should be given (Interview 56). Maintaining neutrality during the discussion were Spain, Italy, Portugal, Malta, Belgium and Greece (Interviews 12, 27, 43, 45 and 50). Attention now turned to reducing the text that had been proposed by Wieser in the third draft of the Task Force report. Germany, having been convinced by Poland of the need for some flexibility, proposed the following text into the report: “Specific attention should be paid to the impact of pension reforms in the implementation of the SGP [Stability and Growth Pact],

136 such as the setting up of a mandatory second pillar, on debt and the deficit” (Finnish financial counsellor note, 2010f). The paragraph reflected the position of the Eastern European member states and thus the final decision-making outcome was estimated on the scale to reflect their preferences at 100. The Council had commissioned a report on second pillar pension reforms, which was presented at the 16th to 17th December European Council summit (European Council, 2010e). The paper argued that the path to the medium-term budget objective should be far more flexible when taking into account the costs of pensions. Further there should be a degree of flexibility in the excessive deficit procedure for member states that had undertaken pension reforms (Council of Ministers, 2010o).

AT/DE/DK/FI/LU/NL/UK/ EE/LV/LT/PL/BG/ ECB/COM/Status quo RO/HU/SI/SK/SE/CZ/ FR/IE/CY/Outcome

0: Opposed any 100: Specific attention should be paid to the permanent or temporary deviation impact of pension from the medium- reforms in the term budgetary implementation of the objective for member SGP, such as the setting states that had up of a mandatory undertaken second second pillar, on debt pillar pension and the deficit for an reforms. indefinite period.

Figure 7: The initial positions of the actors to giving greater flexibility in the excessive deficit procedure for member states that had undertaken pension reforms. Note: AT: Austria; BG: Bulgaria; CY: Cyprus; CZ: Czech Republic; DK: Denmark; EE: Estonia; FI: Finland; FR: France; DE: Germany; HU: Hungary; IE: Ireland; LV: Latvia; LT: Lithuania; LU: Luxem bourg; NL: The Netherlands; PL: Poland; SI: Slovenia; SK: Slovakia; ES: Spain; SE: Sweden; UK: United Kingdom; COM:

Commission;Issue Six: How ECB: European Central Bank. salient (important) was the proposal that

cashed based fiscal data beAnother provided toissue that was left to the end of the negotiations was the establishment of fiscal the Commission for councils, which was discussed during the debate on the fourth draft of theIssue Task Six: HowForce salient report the (important) was the thatEP/COM/ECON/EPP was presented at the last Sherpa Committee meeting on the 12th of proposalOctober. that The cashed issue is /PES/ALDE/ Greens based fiscal data be illustrated– EFA and in Figure 8. These councils were to be created at the national providedlevel with to the the aim of GUE/NGL? Commission for the helping to reinforce fiscal governance by providing independent forecasts,EP/COM/ECON/EPP/P assessments and ES/ALDE/ Greens – analysis on domestic economic policy matters (Finnish financial counsellorEFA note, and GUE/NGL? 2010d).

137

The extreme positions on the scale are 100 – fiscal councils with binding opinions and 0 – the status quo. At an intermediate position – 50 on the scale - are Estonia, Slovenia, Latvia, Lithuania, Poland, Malta, Austria, the Czech Republic, Bulgaria and France. Estonia initiated the opposition to fiscal councils, arguing that these bodies should not have the power to issue binding opinions, as to do so could constrain policy-making (Interviews 15 and 47). Indeed Slovenia, Latvia, Lithuania, Poland and Malta also shared this view (Interviews 6, 10, 28 and 43). Malta in particular was concerned about the impact that binding recommendations could have on policy-making (Interview 43). Austria doubted the value of the recommendations issued on budget policy, while the Czech Republic opposed giving fiscal councils such powers on the basis of the member state’s previous experience with these types of organisations during the Communist era (Interview 19 and 51). Like Austria, Bulgaria also had a negative experience with fiscal councils as the member state had difficulty in establishing a truly independent body (Interview 44). French opposition was driven by the potential changes that fiscal councils may bring to the budgetary process. Future governments could be required to present their expenditure plans to fiscal councils prior to their parliament seeing them (Interview 48; Finnish financial counsellor note, 2010d). Conversely, at one extreme on the scale – 100 - were those member states that had already established fiscal councils with the power to issue binding recommendations and wanted those bodies to be retained in the final Task Force report. Denmark, Finland and the Netherlands argued that fiscal councils provided non-biased expert advice. The member states pointed to the improvements brought by fiscal councils to the national budgetary processes in their countries (Interviews 14, 31 and 41). Sweden also echoed the improvements that fiscal councils could bring at the national level. Only these bodies could generate enough public interest or peer pressure on a member state to force a government to act. The Commission could not exercise such influence through a press release or even by taking a member state to the European Court of Justice (Interview 55). Likewise, the role of the Commission was central to the support for fiscal councils by Germany. For that member state, the Commission had become too politicised on the question of supervision and thus there now needed to be a credible body that was independent and as influential as that institution (Interview 56). Luxembourg, Greece, Portugal, Belgium and Cyprus endorsed Germany’s position (Interviews 12, 22, 27, 35 and 52). So too did Italy. The member state viewed fiscal councils as a watchdog for government activities and as a body that could strengthen fiscal policy-making (Interview 45). Strengthening fiscal policy-making was for Spain, Slovakia and Hungary key to their backing for fiscal councils (Interviews 40, 42 and 50). The United Kingdom expressed cautious support

138 for fiscal councils. In principle, this body could enhance policy making. However, the member state already had established the Office for Budget Responsibility and did not want to give this body powers to issue binding recommendations (Interview 32). Ireland too was cautious. However, the impending EU-IMF programme made the member state more amenable to the proposal (Interview 54). Both the Commission and the ECB cited strong evidence for their position, arguing that where fiscal councils existed and exercised influence in a member state, that there was a positive impact on the policies of the government. No actor supported the status quo – 0, as all of the member states and institutions accepted the concept of fiscal councils. The strength of the arguments put forward by those member states advocating for weak fiscal councils and the Commission’s unwillingness to push the issue, meant that the final decision-making outcome reflected the preferences of those actors that wanted toothless bodies (Interview 33). Ministers and state secretaries agreed to the wording on fiscal councils when presented with the final draft of the Task Force report on the 18th of October (Finnish financial counsellor note, 2010a). Just over a month before Van Rompuy was to present the Task Force report at the European Council summit in October 2010, the Commission informed member states and the institutions at the fifth Sherpa Committee meeting that a package of six regulatory legislative proposals, referred to as the Six-Pack, was to be tabled on the 29th of September. The Six-Pack built on the pervious Commission submissions to the Task Force, on the 12th of May and the 30th of June, and represented “a comprehensive and coherent package of reforms to strengthen existing tools and extend them for coordinating economic and fiscal policy in the EU” (European Commission, 2010d).

139

Status quo AT/BG/CZ/EE/FR BE/CY/DE/DK/EL/ /LV/PL/SI/UK ES/FI/HU/IE/IT/LT/ Outcome LU/MT/NL/PT/SE/ SK/COM/ECB

0: No fiscal 50: Fiscal 100: Fiscal councils. councils with councils with non-binding binding opinions opinions.

Figure 8: The initial positions of the actors on the powers of fiscal councils.

Just over a month before Van Rompuy was to present the Task Force report at the European Council summit in October 2010, the Commission informed member states and the institutions at the fifth Sherpa Committee meeting that a package of six regulatory legislative proposals, referred to as the Six-Pack, was to be tabled on the 29th of September. The Six-Pack built on the pervious Commission submissions to the Task Force, on the 12th of May and the 30th of June, and represented “a comprehensive and coherent package of reforms to strengthen existing tools and extend them for coordinating economic and fiscal policy in the EU” (European Commission, 2010d). Following on from the Commission announcement, Van Rompuy presented the Task Force report at the European Council summit which took place on the 28th and 29th of October. The assembled heads of state or government endorsed the report and called for a “fast track approach to be followed on the adoption of secondary legislation needed for the implementation of many of the recommendations”. Leaders set a deadline of summer 2011 for the Council and the Parliament to reach an agreement on the Commission’s proposals, thus ensuring that the new surveillance framework was implemented as soon as possible. The Council was also asked to report back on the impact of pension reforms on the implementation of the Stability and Growth Pact by December, when the next summit was to be held. With the negotiations now completed in the Task Force, the next step in the process was to implement

140 the report legislatively through the Six-Pack (European Council, 2010a). The section now turns to the results of the analysis of the Task Force negotiations. The first part of the results section discusses the bargaining success of the member states in the Task Force. In the second part, the results of explanatory regression analysis on the variation in the bargaining success are discussed.

5.4 Results

Table 1 illustrates the constellation of positions on the six most important issues in the Task Force. The table indicates that the bargaining success of the member states mainly follows a North/East – South cleavage. This finding is based on examining the positions of the member states across the six issues along the East-North-South dimension. The East-North-South dimension has been found in previous studies to be a relevant factor when explaining cleavage patterns in the Council (Mattila and Lane 2001; Mattila 2004). Breaking the cleavage patterns down by issues, a North-East-South – East-South cleavage is apparent in issue one, the linking of the inclusion of the debt criteria with the medium-term budgetary objective. Other cleavage patterns are also discernible. There is an economic performance (strong-weak) cleavage and a less distinguishable net-recipient/net-contributor cleavage pattern. In the case of the latter cleavage, the addition of the Eastern member states in the group of Northern member states makes it less clear cut. The cleavage patterns on issue two – the suspension of fines reflects the more traditional North-South cleavage and also an East-North-South cleavage. The economic performance cleavage is also apparent, though stronger with the North-South cleavage than the East-North-South cleavage. The net-recipient/net-contributor cleavage is weak due to the Eastern European member states joining the Northern member states on this issue. The cleavage patterns in issue three are similar to those in issue two. A North-South cleavage is discernible as is the economic performance cleavage with the North-South cleavage. Likewise, there is also a net-recipient/net-contributor cleavage distinguishable with the North-South cleavage. An East-North-South cleavage is apparent, and an economic performance cleavage is also evident. As with the previous issues, a net-recipient/net-contributor cleavage is not particularly clear.

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Table 1: Constellation of positions in the Task Force.

Constellation of positions Issue: The inclusion of the Status quo Outcome debt criteria in the • Eastern, Northern • Eastern and South medium-term and Southern member states: budgetary objective. member states: (MT/UK/HU/FR/IT/ (NL/PT/EE/BE/D EL/ES/IE). E/SE/SK/SI/ DK/CY/LT/LV/ PL/BG/AT/LU/FI/ CZ). Suspension of fines. Status quo Outcome • Eastern, Northern and • Northern and • Northern Southern member Southern member member states: states: state: (AT/DK/PT/LV/LT/ (BE/EL/FR/IT/ (DE). EE/BG/PL/CZ/NL/FI/ ES). CY/SE/LU/PT/HU/ UK/RO/SK/SI/). The inclusion of the Status quo Outcome debt criteria in the • Eastern, Northern • Northern and medium-term and Southern Southern member budgetary objective. member states: states: (AT/BG/CY/CZ/ (BE/EL/FR/PT/UK). DE/DK/EE/ES/FI/ HU/IE/IT/LT/LU/ LV/MT/NL/PL/ SE/SI/SK). Introduction of Status quo • Northern Outcome RQMV. • Southern member and • Eastern, Northern and state: Southern Southern member (ES). member states: states: (BE/BG/CY/CZ/DE/ (AT/FR/IE/ /DK/EE/EL/FI/HU/ IT/PT). LT/LU/LV/MT/NL/ PL/SE/SI/SK/UK). Flexibility in the Status quo Outcome excessive deficit • Eastern, Northern • Northern member procedure for and Southern states: member states that member states: (AT/DE/DK/FI/LU/ undertook pension (EE/LV/LT/PL/ NL/UK). reforms. BG/RO/HU/SI/SK /SE/CZ/FR/IE/ CY). Powers of fiscal Status quo Outcome • Eastern, Northern and councils. • Eastern, Southern member Northern states: and (BE/CY/DE/DK/EL/ Southern ES/FI/HU/IE/IT/LT/ member LU/MT/NL/PT/SE/ states: SK). (AT/BG/CZ /EE/FR/LV PL/SI/UK).

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Note: AT: Austria; BE: Belgium; BG: Bulgaria; CY: Cyprus; CZ: Czech Republic; DE: Germany; DK: Denmark; EE: Estonia; EL: Greece; ES: Spain; FI: Finland; FR: France; HU: Hungary; IE: Ireland; IT: Italy; LT: Lithuania; LU: Luxembourg; LV: Latvia; MT: Malta; NL: The Netherlands; PL: Poland; PT: Portugal; RO: Romania; SE: Sweden; SI: Slovenia SK: Slovakia; UK: United Kingdom.

Table 1 illustrates the constellation of positions of the member states along the East- North-South dimension and whether their initial positions were aligned with the status quo, or the outcome, or neither on the six most important issues in the Task Force. The table indicates that the bargaining success of the member states mainly follows a North/East – South cleavage. This finding is based on examining the positions of the member states across the six issues along the East-North-South dimension. The East-North-South dimension has been found in previous studies to be a relevant factor when explaining cleavage patterns in the Council (Mattila and Lane 2001; Mattila 2004). Breaking the cleavage patterns down by issues, a North- East-South – East-South cleavage is apparent in issue one, the linking of the inclusion of the debt criteria with the medium-term budgetary objective. Other cleavage patterns are also discernible. There is an economic performance (strong-weak) cleavage and a less distinguishable net-recipient/net-contributor cleavage pattern. In the case of the latter cleavage, the addition of the Eastern member states in the group of Northern member states makes it less clear cut. The cleavage patterns on issue two – the suspension of fines reflects the more traditional North-South cleavage and also an East-North-South cleavage. The economic performance cleavage is also apparent, though stronger with the North-South cleavage than the East-North-South cleavage. The net-recipient/net-contributor cleavage is weak due to the Eastern European member states joining the Northern member states on this issue. The cleavage patterns in issue three are similar to those in issue two. A North-South cleavage is discernible as is the economic performance cleavage with the North-South cleavage. Likewise, there is also a net-recipient/net-contributor cleavage distinguishable with the North-South cleavage. An East-North-South cleavage is apparent, and an economic performance cleavage is also evident. As with the previous issues, a net-recipient/net-contributor cleavage is not particularly clear. On the proposal to introduce reverse qualified majority voting the constellation patterns are not dissimilar from those in the previous issues. There is a North-South cleavage and with that cleavage, an economic performance cleavage and a net-recipient/net-contributor cleavage. An East-North-South cleavage is clear and an economic performance cleavage is also evident. Again, a net-recipient/net-contributor cleavage is not very distinguishable here. The only

143 cleavages apparent in issue five are the East-North-South cleavage and the economic performance cleavage. The majority of the Northern member states on this issue are grouped together. The East-North-South cleavage is apparent in both groups of member states on the sixth issue, the powers of fiscal councils. A net-recipient/net-contributor cleavage is disguisable in the first of these groups while in the second constellation of member states the economic performance cleavage is apparent. Turning to measuring the bargaining success of the member states individually, Figure 9 graphs the mean level of bargaining success of the member states, the ECB and the Commission on the six issues that were identified as controversial during the negotiations in the Task Force. The bargaining success of the member states is measured on a policy scale ranging from 0-100 (distance to outcome). The closer a member state to the outcome on the policy scale, the higher its bargaining success. To control for luck, the weighted average distance of each member state to the other positions in the Task Force is tested as a variable in the regression analysis. Slovenia, Poland, Latvia, Estonia, the Czech Republic and Bulgaria are grouped together at the top of Figure 9 with an average level of bargaining success of 91.67. Behind this grouping of member states are Slovakia, Sweden, Lithuania and Cyprus with an average level of bargaining success of 83.33. Following the four member states are Romania2 and Germany with an average level of bargaining success of 75. The next group of member states is led by the Netherlands, and consists of Luxembourg, Hungary, Finland, Denmark and Austria. These member states have an average level of bargaining success of 66.67. The ECB also achieved this average level of bargaining success. Moving down the scale to 50, Malta, Ireland and Belgium have an average level of bargaining success of 60. Just below those member states is the Commission with an average level of bargaining success of 58.33. At the midway point in the graph are Portugal, France and Italy with an average level of bargaining success of 50. Below the three member states are the United Kingdom, Spain and Greece. The United Kingdom has an average level of bargaining success of 41.67 while Spain and Greece have an average level of bargaining success of 40. With the exception of Cyprus, Malta, Ireland and Belgium, the highest levels of bargaining success are among those member states from Northern and Eastern Europe. The levels of bargaining success in Figure 9 therefore indicates that member states that sought to radically reform the EU’s economic governance structures were mostly successful in doing so. In

2 The level of Romania’s bargaining success is not entirely accurate, as the position of the member state is clear for only 2 issues. 144 relative terms, bargaining success of the member states at 50 and below was low, indicating that these countries exercised very little influence in shaping the outcomes of the Task Force negotiations.

SI PL LV EE CZ BG SK SE LT CY RO DE NL LU HU FI DK AT ECB MT IE BE Commission PT IT FR UK ES EL

0 20 40 60 80 100 Mean Bargaining Success

Figure 9: Mean bargaining success of member states and institutions.

Note: SI: Slovenia; PL: Poland; LV: Latvia; EE: Estonia; CZ: Czech Republic; BG: Bulgaria; SK: Slovakia; SE: Sweden; LT: Lithuania; CY: Cyprus; RO: Romania; DE: Germany; NL: The Netherlands; LU: Luxembourg; HU: Hungary; FI: Finland; DK: Denmark; AT: Austria; MT: Malta; IE: Ireland; BE: Belgium; PT: Portugal; IT: Italy; FR: France; UK: United Kingdom; ES: Spain; EL: Greece; ECB: European Central Bank; Commission: European Commission.

Having described the cleavage patterns of the member states in Table 2 and the bargaining success of the member states in Figure 9, the next part of the analysis explains the variation in the bargaining success of the member states. Table 3 presents the results of the multivariate analysis of the factors that determined bargaining success of the member states in the Task Force. The variables are divided into three categories; (1) endogenous power resources; (2) exogenous resources of power and (3) endogenous and exogenous resources of power. According to Bailer (2004), endogenous power resource variables are the circumstances in which the negotiations are conducted in and the personal attributes of the negotiators (Bailer, 2004, p.100). The endogenous power resources in this category are proximity to the ECB, the

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Commission, the status quo and network capital. Bailer (2004) argues that exogenous power resources consist of variables that are shaped by a member state’s environment and thus challenging to modify during negotiations (Ibid). The variables that fall into this category are voting power, EU budget status, domestic constraints and government deficit/surplus. The third category contains both endogenous and exogenous power resources; salience and the weighted distance variable. In Model 1 the endogenous variables are run then separately the exogenous factors in Model 2. In Model 3 both the endogenous and exogenous variables are run together to see whether the results remain consistent with those in Models 1 and 2. Salience is then added in Model 4 and finally the weighted distance variable in Model 5 as control variables. In general, the main reason for running multivariate models is to control for the effect of other variables. Comparing the results of models that include and exclude a particular variable allows for an investigation of the different types of relationships that exist between a number of explanatory variables and the outcome variable. Estimates for Model 5 indicate that two endogenous power resources, proximity to the Commission and to the status quo had a statistically significant negative effect on the bargaining success of the member states in the Task Force. Therefore, the results do meet the expectations of Hypothesis 1a, that a member state would experience an increase in their bargaining success the closer their position was to the policy preference of the Commission in the Task Force. However, the results do not meet the Hypothesis 11, that an actor that is closest to the status quo will have more bargaining success than an actor that is further away from the status quo. Thus, member states with positions that were aligned with that of the Commission and supported the retention of the status quo experienced a decrease in their bargaining success vis-à-vis member states that were not aligned with the Commission or sought to retain the status quo. The remaining endogenous variables proximity to the ECB and network capital was found not to have a statistically significant effect on the bargaining success of the member states. Therefore, the results do not meet the expectations of Hypothesis 1c, that an actor that is closer to the ECB will have more bargaining success than an actor that has positioned itself further away from the ECB, or Hypothesis 6, that a member state with a high level of network capital will have more bargaining success than a member state with a low level of network capital.

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Table 2: Factors affecting bargaining success.

(1) (2) (3) (4) (5) VARIABLES Model 1 Model 2 Model 3 Model 4 Model 5

Closeness ECB -0.129** -0.143** -0.143** -0.0652 (0.0450) (0.0499) (0.0500) (0.0613) Closeness Commission -0.0328 -0.0229 -0.0236 -0.355** (0.0491) (0.0498) (0.0499) (0.119) Closeness Status Quo -0.734*** -0.715*** -0.716*** -0.499*** (0.0498) (0.0551) (0.0572) (0.112) Network Capital 1.731 1.378 1.375 0.799 (4.813) (4.989) (5.009) (4.593) Voting Power -2.270^ 0.0556 0.0504 0.0314 (1.227) (0.882) (0.884) (0.870) EU Budget Status 3.550* 1.548 1.543 1.405 (1.790) (1.549) (1.558) (1.406) Domestic Constraints 2.005 1.445 1.441 1.362 (1.390) (0.990) (1.001) (0.918) Govt Deficit/Surplus 0.473 0.238 0.243 0.199 (0.596) (0.353) (0.363) (0.323) Salience -0.00543 0.0126 (0.0779) (0.0785) Average Weighted Distance -0.0171** (0.00573)

Constant 96.29*** 66.97*** 88.60*** 89.07*** 181.1*** (6.855) (9.748) (9.475) (12.16) (29.39)

F 80.77*** 5.30** 42.46*** 37.25*** 30.55*** N 151 151 151 151 151 R-squared 0.493 0.113 0.513 0.513 0.574 Note: Dependent variable is absolute value of 100 minus the distance of the position to the outcome during the negotiations in the Task Force. Linear regression models with robust standard errors. The models show the regression coefficient and robust standard errors in parentheses. ***p < 0.01; **p < 0.05; *p < 0.10.

Conversely, none of the exogenous variables, voting power, the EU budget status, domestic constraints and government deficit/surplus, were found to improve the bargaining success of the member states. The results therefore do not meet the expectations of Hypothesis 8, that a member state with more voting power will have more bargaining success than a member state that does not, Hypothesis 5, that a member state that is a ‘net-payer’ of the EU budget will have more bargaining success than a member state that is a ‘net-beneficiary’, Hypothesis 7, that a member state with a strong EAC will be more successful than a member state with a low ratification hurdle, or Hypothesis 4 that a member state with a good macro-

147 economic performance will have more bargaining success than a member state with a poor macro-economic performance. Likewise, salience was found not to have a statistically significant effect on bargaining success of the member states. Therefore, the results do not meet the expectations of Hypothesis 9, that an actor that attaches a high level of salience to an issue will have more bargaining success than an actor that attaches a low level of salience to an issue. Turning to the average weighted distance which acts as a control variable for luck in the multivariate analysis, this factor was found to be negative and significant. This implies that the further a member state is from the other member states, the less likely they are to be successful. This is what we would expect, in line with Hypothesis 12, that an actor with more support will have more bargaining success than an actor with less support. One finding of note in Table 2 is the results of the average weighted distance. The negative result may be a result of the positions of the member states found in Figure 4: The initial positions of actors on the suspension of funds. On this issue, there are two groups of member states at the policy extremes, with Germany in the middle with an initial position that aligns with the outcome. As Germany is at an equal distance between the two groups, the member state has the same level of low support from the rest of the members of the Task Force. Thus, on this issue, Germany’s average weighted distance is 3.888, which is the lowest of all of the member states Thus, it is luck and not power that can explain the bargaining success of the member state.

5.5 Conclusions

The results of the multivariate analysis show that proximity to the policy positions of the Commission decreased the bargaining success of the member states. The weakness of the Commission’s influence can be attributed to the establishment of the Task Force outside of the Community Method and to a lesser degree to its experts in DG ECFIN. Thus, the Commission lost the formal power to set the agenda in the Task Force, leaving the institution in a weaker position vis-à-vis the ECB. The loss of formal agenda-setting powers would have left the Commission a less influential actor in the eyes of member state policy-makers seeking powerful allies in the Task Force. The Commission however had a body of experts in DG ECFIN that could offset its loss of formal agenda-setting powers. This potential strength was in fact a weakness for the Commission. Some Northern member states were concerned that the large number of officials in DG ECFIN, which hailed from Southern Europe, were softening

148 the Commission’s stance on debt reduction. Northern senior bureaucrats pointed to the Commission’s benign approach to the increasing levels of debt and high deficits in Southern member states as evidence of the institution’s attitude to those breaking the rules in the Stability and Growth Pact (Interview 59). Thus, the loss of agenda-setting powers and a perceived weakness in DG ECFIN, left the member states in the Task Force to seek an alternative source of expertise to help influence the final decision-making outcome. From a theoretical point of view, this can be interpreted as the expert advice not being credible, because the expert is perceived to be biased. Thus, the expert loses its informal agenda-setting power. The Commission’s diminished power as an agenda-setter is discussed at the end of this chapter in more detail. The weakness of the Commission and the rise of the European Council also reflects the findings of Allerkamp (2010), Alexandrova et al. (2014), Puetter (2011), Schwarzer (2012), Chang (2013), Niemann and Ioannou (2015) and Da Conceição-Heldt (2016) that the power of the latter institution has increased to the detriment of the former. The changed institutional dynamic as demonstrated by the establishment of Task Force means that the perceived understanding of EU decision-making has changed since Article 15(1) of the Treaty on European Union came into force. The results of the analysis also indicate that another endogenous power resource had a statistically negative effect on the bargaining success of the member states in the Task Force. Bailer (2004) argued that the member states that seek to retain the status quo can do so by taking an extreme position (Bailer, 2004, p.103). The Council tends to find a consensus by accommodating all the interests of the member states. Thus, a member state that takes an extreme position can help to preserve the status quo on an issue that is of particularly important or sensitive. The evidence from the interviews does not support Bailer’s contention. The Task Force was established to propose a set of recommendations to reform economic governance during a period of great fiscal instability. Thus, it was virtually impossible for member states to argue for the retention of the status quo, when the existing provisions of the Stability and Growth Pact had completely failed to prevent the European sovereign debt crisis. Further, the member states that were seeking to leave the Stability and Growth Pact untouched, for the most part had pursed policies that had indirectly sparked the debt crisis in Europe. With regard to the contribution of the findings on the influence of status quo to the literature on intra-institutional bargaining, the results are not in line with the majority of the studies that tested the variable. Bailer (2004) found that a member state that took an extreme position in an effort to ensure that the outcome is no different to the status quo will experience

149 a decrease in their bargaining success (Bailer, 2004, p.116). The rest of the literature on the influence of the status quo on bargaining success examined the explanatory variable in the context of inter-institutional bargaining (Costello and Thomson 2013; Napel and Widgrén’s 2006; König et al. 2007) found that the closer the Council was to the status quo, the higher its bargaining success. The findings on the influence of the status quo are therefore only valid to the negotiations that take place within the Council and in policy areas where a majority of member states are driving the agenda for reform. Likewise, the average weighted distance was found to have a statistically negative effect on the bargaining success of the member states in the Task Force. As the literature is sparse on the theoretical framework, it is too early to draw conclusions on its validity when measuring the bargaining success of the member states. With regard to the remaining explanatory variables, proximity to the ECB, network capital, voting power, the EU budget status, domestic constraints, economic performance (government deficit and surplus) and salience the results for the most part are in line with the findings in the existing literature. On the proximity to the ECB, the results indicated that the institution did not have an impact on the bargaining success of the member states. The findings do not support the contention that that the ECB’s influence in policy-making has been growing directly (Schwarzer 2012; Hodson 2012) or indirectly (Yiangou et al. 2013). As with the average weighted distance, it is too early to draw conclusions on the validity of a theoretical framework based on one case. In relation to network capital, the findings run counter to results in Arregui and Thomson’s (2009) study on bargaining success. Arregui and Thomson found that network capital has a modest but statistically significant effect on the bargaining success of the member states (Arregui and Thomson, 2009, p.670). A possible explanation for the differences between the results in this research and Arregui and Thomson’s might be the size of the datasets utilised to explain bargaining success in the Council. Arregui and Thomson availed of the DEU II dataset which contained the positions of member states across on 57 issues whereas in this part of the research, only 6 issues were examined. Thus, the validity of both findings on the influence network capital depends on particular conditions. Turning to voting power the results support the findings in Arregui and Thomson’s (2009) and Bailer’s (2004) that voting power had no impact on the bargaining success of the member states in the Council. The literature on influence of the EU budget status of a member state (Mattila 2004; Hosli et al. 2011) did not test the explanatory variable in the context of bargaining success, rather it focused on the how the factor effected voting in the Council. As with the other factors that the previous research has ignored, it is too early to draw conclusions on the validity of this 150 explanatory variable based on one case study. Turning to domestic constraints, the findings do mirror those in other articles that tested the explanatory factor in the Council (Bailer and Schneider 2005; Schneider, Finke and Bailer 2010). The results of the multivariate analysis however do not mirror the findings in the literature that examined the domestic constraints in the European Council (Hosli 2000; Slapin 2010; Dür and Mateo 2010). As this part of the research examined the Task Force, which was set up by the European Council, then the studies on the influence of domestic constraints is more relevant in that context. One possible explanation for the difference in the findings on the influence of domestic constraints between this research and the other studies that examined the explanatory factor within the context of the European Council is the number of actors that those studies take into account. This study based domestic constraints on the power of the European Affairs Committee (EAC) in each member state parliament. The current body of literature considered other factors such as referenda and EACs. In relation to economic performance (government deficit and surplus), the findings do not contradict or support pre-existing theoretical frameworks as it has not received any attention in the studies examining bargaining success in the Council. Thus, it is too early to make a judgement about the validity of the theoretical framework when examining bargaining success in the Council. On the influence of salience, both Bailer (2004) and Arregui and Thomson (2009) did not find any evidence that the explanatory factor influenced the bargaining success of the member states in the Council. The results of the multivariate analysis in this study support that contention in a different context. The quantitative evidence on the bargaining success of the member states as illustrated in Figure 9. Of the top ten member states in Figure 9, member states with an average level of bargaining success ranging from 91.67 to 83.33, 9 are net-recipients while one, Sweden, is a net-contributor. At the bottom end of Figure 9, there are only three member states, Greece, Spain and the UK, that have an average level of bargaining success of less than 50. The other 5 member states that are net-recipients that make up the bottom 10 have an average level of bargaining success of more than 50. Thus, in Figure 9, the member states with the highest average level of bargaining success and the lowest level of bargaining success were net- recipients while the majority of the member states in the middle of Figure 9 were net- contributors. Therefore, this balance between net-recipients that experienced both high and low levels of bargaining success and net-contributors that experienced high to average bargaining success meant that the EU budget status had no effect either positively or negatively on the bargaining success of the member states.

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Similarly, member states with low to average voting power and weak to average EACs make up the top 10 and bottom 10 of Figure 9 while member states with high levels of voting power and strong EACs make up the middle of Figure 9. Thus, like the EU budget status variable neither voting power or domestic constraints effect bargaining success in the Task Force. A similar picture is apparent with economic performance (government deficit/surplus), salience and proximity to the ECB. Member states that had a smaller deficit for 2010 in the top 10 of Figure 9 had a higher average level of bargaining success than the member states in the bottom 10 which had larger deficits. Member states with budget deficits that vary in size make up the middle section of Figure 9. Thus, economic performance had no impact on the bargaining success of the member states. Likewise, member states are split between the member states that achieved a higher average level of bargaining success in the top 10 of Figure 9 and attached higher levels of salience to an issue than member states at the bottom half with lower levels of bargaining success considered the issues to be less salient. The remaining member states in Figure 9 attached varying levels of salience. As with the other explanatory factors, this is a possible explanation as to why salience had no positive or negative impact on the bargaining success of the member states in the Task Force. Turning to the factors that had a negative impact on the bargaining success of the member states, the results of multivariate analysis is arguably less accurate than the qualitative evidence. The Commission across the six issues that were examined in the qualitative section of the Task Force section was on the winning side on three occasions. Thus, the multivariate analysis on the influence of the Commission should be neutral. i.e. neither negative or positive. As the position of the Commission across the six issues was based on the data of the key informants, the conclusions will be based on the results of the multivariate analysis. On the influence of the status quo, the qualitative evidence and the multivariate analysis align as it is clear in the reconstruction of the Task Force negotiations that the majority of the member states sought to reform the EU’s economic governance structures. The qualitative evidence also provides an explanation as to why the average weighted distance had a negative impact on the bargaining success of the member states. On issue two - the suspension of funds, Germany has no support from any member state in the Task Force, and yet its position is the one that is adopted as a recommendation.

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Table 3: Meetings of the Task Force.

Timeline of the negotiations of the Task Force Report Date of submission or meeting: Relevant subject in submission or meeting: Commission -12.05.2010 • Inclusion of the debt criterion. Sanctions – suspension of EU funding and interest-bearing deposits. Germany - 20.05.2010. • Suspension of voting rights (temporarily). • Increased budget surveillance. • More effective sanctions in the excessive deficit procedure. • Medium-term budgetary objectives – inclusion of the debt criteria. Task Force meeting - 21.05.2010. • Suspension of EU funding. • RQMV. • Suspension of voting rights (temporarily). Netherlands - 29.05.2010. • Increased budget surveillance. • Pecuniary and nonpecuniary sanctions for not meeting the Medium-term budgetary objectives. • Suspension of EU funding. Austria - 31.05.2010. • Increased budget surveillance. • More effective sanctions in the corrective arm of the Stability and Growth Pact. Poland - 31.05.2010. • Inclusion of the debt criteria. • Suspension of EU funding – equal treatment. • Flexibility for member states in the excessive deficit procedure that had undertaken second pillar pension reforms. Sherpa Committee meeting - 01.06.2010. • Medium-term budgetary objectives – inclusion of the debt criteria. • Suspension of EU funding. • Interest-bearing deposits. • Increased budget surveillance. Bulgaria - 01.06.2010. • Increased budget surveillance. • Inclusion of the debt criteria. Romania - 01.06.2010. • Sanctions – equal treatment. • Increased budget surveillance. Finland - 02.06.2010. • Interest-bearing deposits. • Suspension of EU funding. • Increased budget surveillance. Slovakia - 02.06.2010. • Increased budget surveillance. • Medium-term budgetary objectives – inclusion of the debt criteria. • Suspension of EU funding – equal treatment. • Suspension of voting rights (temporarily). Slovenia - 02.06.2010. • Increased budget surveillance. • Suspension of EU funding - equal treatment. • Inclusion of the debt criteria. Sweden - 03.06.2010. • Increased budget surveillance. • Medium-term budgetary objectives – inclusion of the debt criteria. • Sanctions in preventive arm of the Stability and Growth Pact. • Automatic sanctions.

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Task Force meeting - 07.06.2010. • Suspension of EU funding. • Medium-term budgetary objectives – inclusion of the debt criteria. • Flexibility for member states in the excessive deficit procedure that had undertaken second pillar pension reforms. Luxembourg - 10.06.2010. • Increased budget surveillance. • More effective sanctions in the Stability and Growth Pact. ECB -10.06.2010 • Sanctions – suspension of EU funding. • Inclusion of the debt criteria. Commission - 17.06.2010. • Inclusion of the debt criterion of the excessive deficit procedure. Commission - 18.06.2010. • Operationalising the alert mechanism. • The surveillance cycle under the European Semester. Sherpa Committee meeting - 23.06.2010. • Sanctions – suspension of EU funding and interest-bearing deposits. • Medium-term budgetary objectives – inclusion of the debt criteria. Commission - 29.06.2010. • Requirements for national fiscal frameworks in the EU budgetary surveillance framework. Commission - 30.06.2010. • Operationalising the debt criterion. • Sanctions - suspension of EU funding and interest-bearing deposits. Sherpa Committee meeting - 05.07.2010. • Sanctions – suspension of EU funding and interest-bearing deposits. Estonia - 05.07.2010. • Focus on macro-surveillance. Italy - 05.07.2010. • Sanctions – suspension of EU funding. • Inclusion of the debt criteria. Slovenia - 07.07.2010. • Increased budget and debt surveillance. United Kingdom - 09.07.2010. • Increased budget surveillance. • Sanctions – suspension of EU funding. • Inclusion of the debt criteria. Task Force meeting - 12.07.2010. • Sanctions – suspension of EU funding and interest-bearing deposits. • Medium-term budgetary objectives – inclusion of the debt criteria. France - 22.07.2010. • Medium-term budgetary objectives – inclusion of the debt criteria. • Sanctions – suspension of EU funding and interest-bearing deposits. Germany - 22.07.2010. • Medium-term budgetary objectives – inclusion of the debt criteria. • Sanctions – suspension of EU funding and interest-bearing deposits. • Suspension of voting rights (temporarily). Denmark - 27.08.2010. • Medium-term budgetary objectives. Sherpa Committee meeting - 30.08.2010. • Sanctions – suspension of EU funding and interest-bearing deposits. • Flexibility for member states in the excessive deficit procedure that had undertaken second pillar pension reforms. Task Force meeting - 06.09.2010. • RQMV. Sherpa Committee meeting - 21.09.2010. • Sanctions – suspension of EU funding.

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Germany - 23.09.2010. Submission was draft of • Need for the numerical benchmark for Task Force report with comments. assessing whether the debt is declining on a satisfactory pace. Task Force meeting - 27.09.2010. • RQMV. • Sanctions – suspension of EU funding. Commission - 29.09.2010. • Six-Pack proposals tabled. Sherpa Committee meeting - 05.10.2010. • Flexibility for member states in the excessive deficit procedure that had undertaken second pillar pension reforms. • RQMV. • Sanctions – suspension of EU funding. Cyprus - 11.10.2010. Submission was draft of Task • Medium-term budgetary objectives – Force report with comments. inclusion of the debt criteria. • Sanctions – suspension of EU funding (equal treatment) and interest-bearing deposits. • RQMV. Sherpa Committee meeting - 12.10.2010. • RQMV. • Fiscal Councils. • Sanctions – suspension of EU funding. Task Force meeting - 18.10.2010. • Medium-term budgetary objectives – inclusion of the debt criteria. • Sanctions – suspension of EU funding (equal treatment) and interest-bearing deposits. • Flexibility for member states in the excessive deficit procedure that had undertaken second pillar pension reforms. • Fiscal councils. • RQMV. Task Force report published - 20.10.2010. • Proposals on the controversial issues laid out. European Council summit - 28-29.10.2010. • Endorsement of the report. European Council summit - 16-17.12.2010. • Endorsement of Council report on the flexibility for member states in the excessive deficit procedure that had undertaken second pillar pension reforms.

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Putting the Bible into practice - The negotiations on the Six-Pack in the Council

5.5 Structure

The aim of this chapter is to reconstruct the negotiations of the Six-Pack chronologically in the Council of Minister’s (Council) Economic and Financial Affairs (ECOFIN) configuration. At the end of the negotiations in the Task Force, the European Commission (Commission) proposed a legislative package comprising 5 Regulations and 1 Directive. The Commission’s proposals sought to operationalise most of the recommendations of the Task Force. Thus, this section of the case study focuses, in part, on the most important issues from the Task Force report that needed a legislative response. However not all of the issues that were identified as important in the Task Force were covered in the Six-Pack. The issue of suspending funds to member states that did not adhere to requirements of the Stability and Growth Pact could only be dealt with in the negotiations on the forthcoming Financial Perspective. Therefore, this issue is not included in this section. A further five issues from the Task Force report were covered by Six-Pack provisions, but three of them did not exhibit the required level of conflict in Council to be included in this section. In general, analysing bargaining success on issues that were identified as not been sufficiently controversial would have been problematic. Member states that do not consider issues to be controversial are less likely to take positions. Issues where more than four member states do not takes positions will according to König and Proksch (2006) risk affecting the qualified majority threshold in the Council (König and Proksch, 2006, p.225). The retention of issues with more than four issues missing also raises questions on the imputation of missing values in the dataset. As discussed early in Chapter 4, imputation of missing values should only occur when the data i.e. the positions are truly missing, not when a member state did not take a stance on an issue. Turning to the issues that were discussed in the Task Force and are not examined in this section of the chapter, no member state attempted to reopen the agreement reached on the introduction of interest-bearing deposits in the Task Force and thus it was not included in this section. Yet, there was a brief attempt to reopen the agreement on providing a degree of breathing space for member states that had implemented second pillar pension reforms and were now facing the prospect of being placed in the excessive deficit procedure. Poland with the support of only Latvia and Romania tried to extend that agreement to include ending an

156 excessive deficit procedure for member states that had implemented second pillar pension reforms and with debt below 60%. The agreement in the Task Force allowed the impact of second pillar pension reforms on debt and the deficit of a member state to be taken into account, for an indefinite period of time. Poland, Latvia and Romania now wanted to go further by pushing for a termination of the excessive deficit procedure for member states that had undertaken second pillar pension reforms. In effect member states that had undertaken these second pillar pension reforms would be exempt from the excessive deficit procedure. This was not acceptable to the rest of the Council or the Commission and thus discussions on the Polish proposal ended without much debate (Council of Ministers, 2011a). Therefore, based on the very limited discussion in the Council on this issue, and reflected in the minutes of two member state delegations and by the judgements of senior officials, Poland’s attempt to reopen the agreement reached in the Task Force is not included as an important issue in this analysis. There was also a limited attempt by Slovakia and the Netherlands to open the agreement reached in the Task Force on the power of fiscal councils through the proposal for the creation of independent fiscal institutions in the proposal on the Six-Pack (Interview 30). However, there was no support for such a move in the Council. Thus, the Council’s collective position reflected the decision in the Task Force. Therefore, member states did not have to establish fiscal councils or independent institutions that issued binding recommendations. The two remaining issues that were discussed in the Task Force are included briefly in the reconstruction of the Six-Pack negotiations and included in the dataset. The first issue was the inclusion of the debt criteria, a 60% debt ceiling, through the medium-term budgetary objective. The medium-term budgetary objective is a budgetary target that each member state must meet through implementing sound fiscal policies (European Commission, 2018). The Task Force had agreed to include the debt criteria in the medium-term budgetary objective. Italy and Greece however attempted to reopen the issue during the Council negotiations on the Six-Pack by tying it to the establishment of the debt benchmark. The two member states announced that they would only drop their opposition to the medium term budgetary objective, if the proposed list of factors outlined in Article 2(c) of the Regulation on speeding up and clarifying the implementation of the excessive deficit procedure was expanded or certain factors dropped. To launch the excessive deficit procedure, the Commission, in its report, was required to take into account a list of factors outlined in Article 2(c). The list of factors influenced whether a member state met the criteria of the debt benchmark. Failure to meet the debt benchmark would trigger the excessive deficit procedure. Italy and Greece argued that the list of factors as proposed by the Commission was too narrow and therefore increased the

157 chances of a member state been placed in the excessive deficit procedure. The two member state argued that debt was affected by many different factors and those variables should be accounted for in the proposed list. The issue would only be resolved when the Council adopted its collective position at the ECOFIN meeting on the 15th of March (Council of Ministers, 2011a). Likewise, the campaign by Belgium, Luxembourg and the Netherlands to increase the power of the Commission through extending the application of reverse qualified majority voting (RQMV) requires attention. The Task Force had agreed that RQMV would be applied when deciding to impose an interest-bearing deposit on a member state that failed to adhere to the debt criteria. RQMV was later extended in the Council’s Ad-Hoc Working Group on Economic Governance3 (Working Group) to other sanctions outlined in the Regulation on effective enforcement of budgetary sanctions; non-interest-bearing deposits – Article 4(1) and fines – Article 5(1). The Working Group also reached an agreement to extend RQMV to the Regulation on enforcement measures to correct excessive macroeconomic imbalances in the euro area; the recommendation by the Commission to the Council to impose a fine after the establishment by the Council that no effective action has been taken in accordance with Article 3(1) (Benelux, 2011). Belgium, Luxembourg and the Netherlands argued that it was possible to extend the voting procedure to other areas within the draft Regulation on budgetary surveillance in the Euro area and to the draft Regulation on the prevention and correction of macroeconomic imbalances. The extensive discussion on the issue in the negotiations and the reference made in the interviews underlines the importance of extending RQMV (Council of Ministers, 2011a). The four remaining issues discussed in this chapter are new controversies that only arose in the Council negotiations. The first controversial issue was the inclusion of the debt criteria through the establishment of an automatic debt reduction benchmark in Article 2, paragraph 1a of the Regulation on the excessive deficit procedure. According to the proposal, member states that exceeded the reference value, the debt to GDP ratio of 60%, were required to reduce their debt by 1/20 per year over a period of 3 years. A number of member states were concerned that the reduction of debt by 1/20 per year over a period of 3 years was too rigid and that the Commission had failed to take into account other relevant factors that affected the debt levels of a member state.

3 The Ad-Hoc Working Group on Economic Governance was established specifically for the Six-Pack. 158

The second controversial issue was the provision of cash-based fiscal data. The Commission had proposed, under Article 3.2 of the draft Council Directive on budgetary frameworks, that member states were required to provide cash-based fiscal data at a monthly rate for local administrative units and for the federal or central government. A number of member states argued that they could not provide data from local administrative units and therefore wanted to provide this data at a quarterly rate. The third controversial issue was the distribution of fines collected by the Commission. The institution had proposed, under Article 4 of the draft Regulation on macroeconomic imbalances in the euro area that fines of 0.1% of GDP that had been imposed on a member state for failing to address excessive imbalances, would be allocated to member states that were not subject of the excessive imbalance procedure or were in excessive deficit. A number of Eurozone member states argued that the fines should go to the new stability mechanism. The fourth controversial issue was whether macroeconomic imbalances should be treated symmetrically or asymmetrically in Article 3.2. The Commission had proposed that the macroeconomic imbalances should be treated asymmetrically, due, in part, to the opposition voiced by Germany in the Task Force. Asymmetric treatment of current account surpluses would allow member states to continue to focus on the export side of the economy over reforms to stimulate domestic growth. If there was symmetric treatment, then member states with high current account surpluses faced the prospect of being investigated and even be placed in the excessive imbalance procedure after a decision by the Council. Once placed in the excessive imbalance procedure, the member state was required to adopt an action plan of policy measures. In the case of member states with high current account surpluses, these measures included, for example implementing a domestic stimulus package, to correct the imbalances within a certain timeframe. The remaining major issues discussed during the Six-Pack negotiations in the Council were political issues; (1) the establishment of a debt benchmark – the reduction of debt by 1/20 per year over 3 years if debt to GDP was above 60%; (2) the provision of cash-based fiscal data; (3) the distribution of fines collected by the Commission and (4) the symmetric treatment of macroeconomic indicators, specifically current account surpluses and current account deficits (Interviews 1, 2 3, 4, 5, 7, 11, 29 and 34).

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5.6 Background to the Six-Pack

With the conclusion of the negotiations in the Task Force, the next step was to implement as much of the report as possible legislatively through the Commission’s Six-Pack proposals. In an attempt to expedite the process in the Council’s Working Group, the former chair of the Sherpa Committee and then President of the European Financial Committee (EFC), Thomas Wieser, argued that this body should prepare a report on a number of issues that were left open in the Task Force (European Financial Committee, 2010). The report would in effect form the basis of the negotiations, thus reducing the influence of the Working Group in shaping the Council’s collective position. Wieser cited the provision under Article 134 of the Treaty on the Functioning of the EU that allowed the EFC to provide opinions on its own initiative. However, the failure of the member states to agree with the proposals laid out in the report reduced the influence of the European Financial Committee on the negotiations in the Six-Pack (Interviews 3 and 58). The influence of the European Central Bank (ECB) in the discussions was also questioned before they began. Italy raised strong objections before the Working Group commenced its work on the institution’s role as an observer. The member state argued that the ECB could use the opportunity to push policy and thus should not be allowed to attend the negotiations. This was met with no support and the institution was able to participate in the discussions (Interview 13). Negotiations commenced when the Working Group was formally established and given a mandate by the permanent representatives committee that dealt with economic issues (COREPER II) on the 18th of November (Council of Ministers, 2010p, p.2). The Working Group was to work through the Commission’s Six-Pack proposals and forward conclusions of the meetings or issues that could not be resolved to COREPER. At the beginning of the negotiations, directors or heads of units from the ministries of finance or treasuries of the member states attended. However, once a general approach had been agreed to by ECOFIN ministers the configuration of those participating altered significantly. As the negotiations became more technical, a number of member states opted to draft in experts from their capitals (Interviews 3 and 13). As two pieces of legislation dealt with the Eurozone, the draft Regulations on the budgetary surveillance in the Euro area and on enforcement action to correct excessive macroeconomic imbalances in the Euro area, Belgium, then holding the rotating Presidency of the Council, decided that informal coordinating meetings should be held. These informal gatherings were to be restricted to Eurozone countries. Furthermore, these informal gatherings

160 were to be held before the Working Group meetings, which all of the 27 member states attended (Interview 58). Despite assurances from the Council Legal Service that these informal meetings did not constitute a preparatory body and the full debriefing that was given by the Belgium Presidency, a number of non-Eurozone member states wished to participate. Those member states were the Czech Republic, Sweden, the United Kingdom, Poland and Denmark (Interview 29). The five member states argued that the decisions made in these informal meetings could have an indirect effect on their own economic policy. The Belgium Presidency countered this point by stressing that all of the member states in the Working Group could participate in the discussions on the results of the informal Eurozone gatherings. The controversy soon disappeared as it became clear that only a small number of these informal meetings were to be held during the Hungarian Presidency. Since Hungary was not a member of the Eurozone, there was a gentlemen’s agreement allowing the Belgium Presidency to chair the informal gatherings. Hungary was to chair the Working Group meetings (Interviews 3, 13, 17 and 58).

5.7 Negotiation process and policy positions of the actors

At the inaugural meeting of the Working Group under the Belgian Presidency on the 24th of November, the Belgium Presidency reminded delegations on a number of occasions that the aim of these meetings was to avoid opening up issues that had been previously discussed in the Task Force. Instead the focus was on the Commission’s legislative proposals that had been communicated to the Council on the 29th of September 2010. Thus, the remaining gatherings of the Working Group under the Belgian Presidency should be “result orientated” to meet the deadline of the upcoming European Council summit, which was scheduled for the 16th – 17th of December. The remaining meetings of the Working Group chaired by Hungary, when that member state assumed the rotating Presidency of the Council, were to work on reaching a general approach in the Council by the 20th of February, as the Parliament’s Committee on Economic and Monetary Affairs was scheduled to take its position in April. As for the organisation of the Working Group meetings, the Belgium Presidency granted the Commission’s request that the upcoming talks discuss two draft Regulations. Draft Regulation amending Regulation 1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies, hereafter known as the draft Regulation on surveillance and coordination of economic policies, the preventive arm of the Stability and Growth Pact; and the draft Regulation amending Regulation 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure, hereafter known as the

161 draft Regulation on the excessive deficit procedure, the corrective arm of Stability and Growth Pact (Finnish financial counsellor note, 2010g). The other four proposals would be discussed in other Working Group meetings at a later date. Before opening the floor for input from the member states, the Belgium Presidency identified the major issues that needed to be dealt with during the meetings of the Working Group under both the Belgian and Hungarian Presidencies. Those issues were the establishment of a numerical benchmark to reduce debt; the operationalisation of the debt criteria, the allocation of fines, the application of RQMV, the frequency of the collection of cash-based fiscal data and the symmetric treatment of current account surpluses and current account deficits. With the major issues now having been identified, a limited number of member states gave feedback with Poland pushing for the costs of establishing a second pillar pension scheme to be taken into account, and Portugal and Germany arguing that certain issues that were discussed in the Task Force required further political guidance during Council negotiations (Finnish financial counsellor note, 2010g). Following through with its commitment to the Commission, the Working Group discussed draft Regulations on surveillance and coordination of economic policies and on the excessive deficit procedure on the 1st/2nd and 9th/10th December (Council of Ministers, 2010q and 2010r). With regard to the draft Regulation on the excessive deficit procedure, the issue of establishing the numerical debt criterion is illustrated in Figure 10. The draft Regulation on the excessive deficit procedure was the only part of the Six- Pack to be decided under the Consultation Procedure. Article 2, paragraph 1a of the Regulation dealt with the inclusion of the debt criteria through the establishment of an automatic debt reduction benchmark. According to the proposal, member states that exceeded the reference value, the debt to GDP ratio of 60 per cent, were required to reduce their debt by 1/20 per year over a period of 3 years. The extreme positions on the scale are 100 – The reduction of debt by 1/20 per year over a 3 year period and 0 – No automatic reduction of 1/20 required. The majority of the member states that rejected any attempt to water down the Commission’s proposal for an automatic debt benchmark are at 100 on the scale. Under the proposal for a benchmark – Article 2.1a, debt be reduced automatically by 1/20 per year for three years, if the debt to GDP ratio was not falling sufficiently quickly, for a member state with a debt-to-GDP ratio of more than 60 per cent. Realising that certain variables, such as high private sector debt, could hamper a member states’ ability to meet the target set down in the automatic benchmark, the Commission argued that these other relevant factors should be considered when a country

162 failed to reduce its debt below the 60 per cent of GDP threshold (European Commission, 2010e, p.5; Finnish financial counsellor note, 2010h). Opposition to any watering down of the debt criterion was driven by equality for Finland. The member state argued that no matter what the circumstances were, the debt reduction target should be met (Interview 14 and 53). While the Netherlands, Sweden, Denmark, Estonia and Slovenia, as they had done so in the Task Force, made it clear that debt and deficits needed to be treated equally. The crisis had shown that curbing deficits did not prevent an increase in debt (Interviews 6, 41, 46, 47 and 55). The benchmark addressed this weakness in the Stability and Growth Pact. For Germany, the Czech Republic, Lithuania and Latvia, the introduction of an automatic benchmark lowered the possibility of quasi political interference at the national level and strengthened the Stability and Growth Pact through reducing the room for manoeuvre by member states when required to reduce their debt (Interviews 10, 36, 51 and 63). Support for the proposal also came from Slovakia and Luxembourg; both viewed high debt as dangerous and argued that it had to be brought down (Interviews 35 and 40). Belgium considered the benchmark to be useful in reducing debt to a manageable level (Interview 12). Poland argued that the automatic reduction of debt was in line with the debt break in the member states’ constitution while Bulgaria supported the proposal on the basis that the 1/20 rule provided the framework needed to manage member states with high debt (Interview 44 and 60). Further support came from Malta and Austria. The Maltese based their support on their ability to meet the target and on whether it was worth supporting Italy et.al (Interview 43). For Austria the reduction of debt by 1/20 per year for 3 year was secondary to the inclusion of debt criterion, the 60 per cent debt ceiling. As one of only six triple A rated member states in the EU at the time, which had to give guarantees to ensure that the European Financial Stabilisation Mechanism (EFSM) received an investment grade rating, it was essential for Austria that funding for the instrument was reduced. Another factor influencing Austria’s position was that it was one highest contributions per head of population to the EFSM (Interview 19). For both the Commission and the ECB, the proposal allowed for the reduction of debt at a regular and consistent level. Further, the proposal addressed one of the major weaknesses in the Stability and Growth Pact, the lack of a proper debt rule (Interview 33). Taking an intermediate position on the scale at 50 were Cyprus and Ireland. While both states did not oppose the benchmark outright, their negotiators argued that there should be greater flexibility in reducing debt by 1/20 per year over 3 years. Ireland, for example, pushed for the impact of falling GDP on debt to be taken into account in the benchmark (Interviews

163

52 and 54). Moving down the scale to 0 were France, Italy, Spain, Portugal, Hungary, Greece and the United Kingdom. These member states argued that there was no requirement to reduce debt by 1/20 per year over three years. France initially led the charge against the establishment of an automatic benchmark. The member state presented its own paper on the issue, which laid out a less strict procedure to reduce debt. The arguments underlying this paper and France’s overall position on the issue related to the automaticity of the benchmark. France considered that the pace of debt reduction, as outlined in the proposal, placed huge pressure on highly indebted countries, especially Italy. The member state had a debt to GDP ratio of 120 per cent. Italy, as well as Greece, was now required to have budgetary surpluses of 3 per cent to 4 per cent a year to meet the debt reduction targets. While Italy and Greece were relying on France to take the fight to the Commission, both member states did make their opposition to the establishment of the benchmark known to the rest of the Council (Interview 48). For Italy, Spain, and Portugal, their opposition was driven by the mechanical nature of the reduction of debt, the 1/20 per year for three years, as laid out in the proposal. In the view of these member states, the path of reduction was affected by many different factors which included private debt, instability and liabilities (Interviews 27 and 50). Also opposing the benchmark, but for different reasons, were Greece, the United Kingdom, and Hungary, which was officially neutral. In the eyes of Greece, it was simply impossible to meet the targets laid out in the benchmark with debt to GDP at 170 per cent (Interview 22). Likewise, the United Kingdom strongly resisted the Commission’s proposal for an automatic benchmark. The member state found it unacceptable that the Commission could dictate how much, and by when, the United Kingdom’s debt should be reduced (Interview 32). Despite holding the Presidency, Hungary, did not take the floor on the issue, although it did not support the establishment of the benchmark either, arguing that it should be left to the markets to pressure a member state to reduce its debt. As no agreement could be reached, the Belgium Presidency marked this as issue that required further attention (Interviews 42 and 59). After several more meetings of the Working Group, the Presidency stated in a note to finance ministers on the eve of their 15th of March ECOFIN meeting that for an agreement to be reached on this provision in Article 2.1a there needed to be concession on the Commission’s proposed list of other relevant factors in Article 2(3) of the same Regulation (Council of Ministers, 2011b). The ministers at the ECOFIN meeting agreed with the assessment of the Presidency and made concessions in Article 2(3). The agreement paved the way for the Council to adopt, as its collective position, the establishment of the benchmark – the reduction of debt by 1/20 per year for three years (Council of Ministers, 2011c).

164

FR/IT/ES/PT/ CY/IE FI/SE/DK/BE/NL/DE/AT/ HU/EL/UK SI/SK/LV/LT/EE/BG/CZ/ Status quo MT/LU/PL/COM/ECB/ Outcome

0: No 50: Flexibility 100: automatic in the reducing Reduction reduction of debt by 1/20 of 1/20 per 1/20 required. per year over 3 year over a years. 3 year period.

Figure 10: The initial positions of the actors to reducing debt by 1/20 per year for 3 years.

Note: AT: Austria; BE: Belgium; BG: Bulgaria; CY: Cyprus; CZ: Czech Republic; DK: Denmark; EE: Estonia;

EL: Greece; ES: Spain; FI: Finland; FR: France; DE: Germany; HU: Hungary; IE: Ireland; IT: Italy; LV: Latvia;

LT: Lithuania; LU: Luxembourg; MT: Malta; NL: The Netherlands; PL: Poland; PT: Portugal; SI: Slovenia; SK:

Slovakia; SE: Sweden; UK: United Kingdom; COM: Commission; ECB: European Central Bank.

Issue Six:

How salient Issue Six: How An issue linked to the reduction(important) of debt was the higher adjustment path for member salient was the states(important) towards was the medium-term budgetaryproposal objective. that The Commission in Article 5.1 of the the proposal cashed based Issue Six: that cashed draft Regulation on surveillance and coordinationfiscal data be of economic policies proposed thatHow member salient based fiscal provided to the (important) statesdata bewith a high level of debt should beCommission required to undertake a faster adjustment pathwas thetowards provided to the the medium-term budgetary objectivefor in the economic good times or conversely a moreproposal limited Commission EP/COM/ECO that cashed for the N/EPP/PES/A based fiscal effortEP/COM/ECO in economic bad times. Italy and Greece now sought to tie the requirement of a higher LDE/ Greens – data be adjustmentN/EPP/PES/AL path for member states withEFA and debt over 60 per cent towards the mediumprovided-term to DE/ Greens – GUE/NGL? the budgetaryEFA and objective with the establishment of the benchmark. Italy and Greece statedCommission that they

GUE/NGL? for the could agree with Article 5.1 as proposed if the list of other relevant factors in ArticleEP/COM/E 2(c), as tabled by the Commission in the Regul ation on the excessive deficit procedure, wasCON/EPP/P kept. Both ES/ALDE/ member states argued that the reduction path as laid out in the Commission’s proposalGreens – was EFA and affected by many different factors under Article 2(c). Thus, the retention of the listGUE/NGL? of other relevant factors as proposed by the Commission reflected economic realities. Support for

Italy’s and Greece’s joint position came from Spain and Latvia. Both member states took to the floor to highlight the effects of private debt and the costs of pension reform on their debt levels (Finnish financial counsellor note, 2011a; Interviews 22, 45, 48 and 50). Having made

the case in the Working Group meetings on the 1/2 and 9/10 December, Italy and Greece decided to pursue the issue right up to the end of the negotiations in March 2011, when the Council was moving towards its collective position. However, with no support at the informal

165 meeting of ministers on the 14 of March, Italy and Greece finally dropped their opposition to Article 5.1 in exchange for the retention of the Commission’s original list of factors (Council of Ministers, 2011a). The final meeting of the Working Group under the Belgian Presidency on the 17th of December was a one day affair which focused, along with other issues, on Article 2, Chapter One, and on Article 3, Chapter Two, of the Commission’s draft for a Directive on budgetary frameworks (Finnish financial counsellor note, 2010i). The Commission proposed under Article 2 that independent national bodies be given a mandate to analyse elements of the budget process, while under Article 3, member states were to be required to provide cash-based fiscal data at a monthly frequency for both the national or federal level and the subdivisions of government or local level (European Commission, 2010f). The issue of independent national bodies was linked to the negotiations that had been conducted in the Task Force on fiscal councils (Interview 30). As such, the member states that took the floor at the meeting reiterated their previous positions, with Slovakia using the Directive as leverage to push for the establishment of an independent institution domestically, while the Czech Republic made clear that it wanted an explicit guarantee from the Council Legal Service that there was no legally binding requirement to establish such bodies. The Council Legal Service was able to offer such an assurance (Finnish financial counsellor note, 2010i). Figure 11 outlines the policy positions of the member states on the provision of cash- based fiscal data. The extreme positions on the scale are 100 – Cash-based fiscal data at a monthly frequency for both central government and each subsector and 0 – No requirement to submit cash-based fiscal data. At one extreme, 0 on the scale are the Czech Republic, France, and the United Kingdom, which took to the floor across the first two meetings of the Working Group in 2011 – 11th/12th and 19th/20th of January (Council of Ministers, 2011d and 2011e). These two Working Group meetings under Karman, were continuing the work on Article 2 and Article 3 of the draft Council Directive, which had commenced at the end of 2010. The United Kingdom also opposed the provisions in the draft article as well as the proposed Directive, arguing that this was an attempt by the Commission to micromanage fiscal policy at a national level (Interview 32). A view shared by the Czech Republic, which argued that the proposals impinged on the fiscal autonomy of the member states. The member state did not want the obligation of collecting cash-based fiscal data to be imposed by the Commission (Interviews 11 and 51). As for France, the country had a better accounting system than the one proposed by the Commission. Thus, France considered the introduction of a cash-based system to be a

166 retrograde step (Interview 48). Accordingly, these member states sought the retention of the status quo. At 50 on the scale are Denmark, Spain, and Germany. All three member states had voiced their concerns about the impact of the proposed Directive on their local level administrations at the final meeting of the Working Group in 2010 (Finnish financial counsellor note, 2010i). For the two larger member states, the central issue was the availability of the data at the regional and Länder levels. In Spain, which was under pressure from other member states and institutions to get a handle on the budget deficits in its regions, it was simply not practical to provide cash-based fiscal data at the proposed rate due to issues with its IT infrastructure (Interviews 50 and 62). Likewise, in Germany, the costs of setting up an IT system needed to collect the data was deemed too expensive. A number of Länder had different systems and to consolidate the data streams was viewed by the Federal Ministry of Finance as too costly (Interview 36). Denmark on the other hand had no issues with collecting the data. However, this was done through an accrual basis. Thus, for Denmark to meet the requirements in this section of the Directive, the member state had to revert back to an older cash-based system. Like France, Denmark considered such a move to be a costly retrograde step (Interviews 31 and 46). At the first two meetings of the Working Group in 2011, Denmark, Spain, and Germany were joined by Bulgaria, Poland, Cyprus, Portugal, Belgium, Slovenia, Hungary and Austria in opposing the Commission’s proposal for the collection of cash-based fiscal data at a monthly rate in the draft Council Directive. Opposition was driven by a number of factors; in the case of Bulgaria, Poland, Portugal, Cyprus and Slovenia, these member states could not collect the information on time due to problems with the administrative capacity at the local level. Local administrations could not provide the data on a monthly basis. If they were required to do so, then national statistical offices faced an immense burden in compiling the data (Interviews 6, 27, 44, 60 and 61). Likewise, Hungary was also against the provision of monthly data due to administration capacities. As the holder of the Presidency, it could not officially take a position and thus left other member states to represent its interests (Interviews 42 and 59). Belgium shared Denmark’s opposition to the use of a cash-based system to collect the data. Belgium already collected the information on an accrual basis while France argued that it had a better accounting system than the one proposed by the Commission (Interviews 12 and 48). Fiscal autonomy was on the minds of the governors of the Austrian Länder, when they lobbied Vienna to oppose any introduction of such a system. While the Federal Ministry of Finance was supportive of the proposal as it was keen to gather better budgetary data on the Länder, the

167 governors wanted to keep as much control as possible over the budgetary system regardless of any agreements at the European level (Interview 19). The positions of Bulgaria et al. were judged to fall between the two extremes on the scale at 50. Lithuania, Luxembourg, Slovakia, Ireland, Latvia, Estonia, Malta, Finland, Sweden, the Netherlands, Greece, the Commission and the ECB were judged to have supported the other extreme which is represented on the scale at 100. Lithuania, Luxembourg, Slovakia, Ireland, Latvia and Estonia had no administrative issues or faced extra costs in providing that level of information and thus could support the Commission’s proposal that data be collected at a monthly rate (Interviews 10, 15, 35, 40, 47, 54 and 61). Luxembourg in particular was more than willing to provide the data, which it viewed as an opportunity to enhance monitoring (Interview 35). A perspective shared by Malta, Finland, Sweden and the Netherlands. These member states felt that the collection of data at a monthly rate could be useful in providing an accurate picture of the finances of the member states (Interviews 14, 41, 43 and 55). However, both Nordic member states were sceptical whether this data could be useful to the Commission (Interviews 14 and 55). Greece had no option but to support the proposal for the collection and distribution of this data to the Commission. The lack of accurate data on Greece’s debt was one of the factors which caused difficulties for the state and subsequently led to the involvement of the Commission, the ECB and the International Monetary Fund in its budgetary affairs (Interview 22). As for the ECB and the Commission, their support for the collection of monthly cash- based fiscal data was to ensure that the same practices were used by all member states across local administrations (Interview 33). With a large number of member states opposing the proposal, the Commission signalled its readiness to seek a compromise on the issue. The Commission proposed that cash-based fiscal data (or the equivalent figure from public accounting if cash-based fiscal data was not available) be collected at a monthly rate for central government and quarterly for local government. This compromise, judged at 50 on the scale, was supported by most member states, with the exception of the Czech Republic, France, Spain and the United Kingdom (Finnish financial counsellor note, 2011b and 2011c). However, that opposition was later reduced to Spain during the Working Group meeting on the 23rd-24th of February, which dealt with the issue briefly (Finnish financial counsellor note, 2011d). After further clarifications had been given by the Commission on the proposal, Spain eventually dropped its opposition (Council of Ministers, 2011b). The ministers attending the 15th of March ECOFIN meeting agreed with the Presidency recommendations to adopt the compromise as the Council’s collective position (Council of Ministers, 2011c).

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AT/PT/ES/DE/DK/ LV/LT/EE/IE/LU/ FR/UK/CZ Status quo BG/PL/BE/CY/SI/ MT/FI/SE/EL/NL HU/Outcome SK/COM/ECB

0: No requirement 50: Cash-based fiscal data 100: Cash-based fiscal to submit cash- at a monthly frequency for data at a monthly based fiscal data. central gov’t and quarterly frequency for both central for each subsector. gov’t and each subsector.

Figure 11: The initial positions of the actors to the stringency in the provision of cash-based fiscal data to the Commission.

Note: AT: Austria; BE: Belgium; BG: Bulgaria; CY: Cyprus; CZ: Czech Republic; DK: Denmark; EE: Estonia; EL: Greece; ES: Spain; FI: Finland; FR: France; DE: Germany; HU: Hungary; IE: Ireland; IT: Italy; LV: Latvia; LT: Lithuania; LU: Luxembourg; MT: Malta; NL: The Netherlands; PL: Poland; PT: Portugal; SI: Slovenia; SK: Slovakia; SE: Sweden; UK: United Kingdom; COM: Commission; ECB: European Central Bank.

Attention again turned to the mandate that the Commission wanted to give independent institutions under Article 3 over the course of the first two Working Group meetings of 2011. The Netherlands pushed strongly for the requirement that independent institutions be given the power to audit national budgets. This was in line with the member state’s argument during the Task Force negotiations that such bodies could provide non-biased analysis (Interview 41). Despite the persistence of the Dutch delegation, there was no support forthcoming from any other member state, except partial backing from the United Kingdom. The member state repeated its earlier stance on the importance of such institutions (Interview 32). Conversely, Spain, Italy and Belgium, made clear their opposition to giving independent institutions any power over the budgetary process, despite their support for fiscal councils (Interviews 12, 41 and 45). After a long and at times heated discussion between the Netherlands, Spain, Italy and Belgium, Finland moved a compromise where independent institutions could evaluate, on a regular basis, budgetary forecasts at the ex-ante and ex-post stages of the budget process. These evaluations could be taken into account into future budgetary forecasts where appropriate. The compromise was met with agreement by all the member states (Finnish financial counsellor note, 2011b and 2011c). With the permanent representatives in the COREPER II formation scheduled to discuss the progress of the Working Group on the second and third days of its meeting in late January, the Hungarian Presidency placed the two draft Regulations dealing with the Eurozone,

169 budgetary surveillance in the Euro area and macroeconomic imbalances in the Euro area along with the draft Regulation on the surveillance and coordination of economic policies and the draft Regulation on the excessive deficit procedure on the agenda (Council of Ministers, 2011e). On the draft Regulation on macroeconomic imbalances in the euro area, the Commission had proposed that the fines of 0.1% of GDP collected from member states that failed to implement a corrective action plan to address excessive imbalances would be distributed to countries under certain conditions as laid out in Article 4. Under the proposal, the fines were to be divided between Eurozone and non-Eurozone member states that were not in excessive deficit or in an excessive imbalance procedure (European Commission, 2010g). Initially, member states were divided between the Commission proposal and allocating the fines to the EU budget. However, the issue become a political one when Germany proposed that the monies go the European Financial Stability Facility (EFSF) instead (Interview 36). As this was a Eurozone issue, the matter was discussed in the informal gathering of member states under the Belgium Presidency, with the results of the negotiations presented to the Working Group presided by the Hungarian Presidency (Council of Ministers, 2011e). The issue of where to allocate the fines collected by the Commission is represented in Figure 12. The extreme positions on the scale are 100 – Fines to be distributed to Eurozone member states as a proportion of their GNI who are not in the excessive deficit procedure or the excessive imbalance procedure and 0 – Fines allocated to the general budget of the European Communities. At one extreme – 100 - are the Eurozone member states Estonia, Finland, Malta, the Netherlands, Slovakia, Slovenia, Cyprus and the ECB, which supported the Commission’s proposal. Those member states and institutions took to the floor at the informal gathering of Eurozone members, held an hour before the Working Group on the 24th – 25th of January. The decision by Estonia, Slovakia, Malta and Slovenia to back the proposal was not just based on a deep-seated belief that good fiscal policies should be rewarded. The member states disagreed with the proposed distribution key for the capital of the European Stability Mechanism (ESM), as it made them the highest contributors per head of population to the fund (Interviews 6, 15, 40, 43 and 47). However, for Cyprus, Finland, the Netherlands and the ECB, their support was solely based on providing an incentive for member states to avoid being placed in an excessive deficit procedure or being subject to an excessive imbalance procedure (Interviews 6, 41, 33 and 61). For the Commission, the proposal provided an opportunity to reward member states that were respecting the debt rules (Interview 33). At the intermediate position of 50 on the scale are a group of member states that were supporting the German proposal for the fines to be allocated to the EFSF. For Germany and for

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Austria, it was entirely logical that member states, which had contributed large sums of monies in an act of solidarity to bailout programmes, should benefit from the fines imposed on Eurozone countries that broke the rules by reducing their liabilities through the EFSF (Interviews 19 and 36). For Belgium, Portugal, Luxembourg, Spain and Greece, their support for Germany’s proposals was based on concerns about the EFSF’s ability to raise money on the markets, preventing larger countries from benefiting from the funds, along with the desire to support the Eurozone (Interviews 12, 22, 27, 35, 50 and 62). France and Italy sought to retain the status quo, 0 on the scale, i.e. the continuation of any monies collected by the Commission as other sources to be allocated to the EU budget. Both member states saw the distribution of fines to the budget as a way to lower their own contributions to the Union’s finances and to support policies across the bloc. With the positions of the Eurozone member states established, the discussion on the issue was presented to non-Eurozone countries in the Working Group (Interviews 45 and 48). Surprisingly, considering the potential benefits that came from allocating the fines to the EU budget, some of the non-Eurozone member states took differing views on the Commission’s proposal. Sharing France and Italy’s position at 0 on the scale were Romania, Bulgaria and Poland. The three member states pushed for the fines to be allocated to the EU budget, as they believed that such a measure incentivised all member states to pursue fiscal policies that were in line with the conditions set down in the Stability and Growth Pact. Increased funding of the EU budget could help to expand or create new programmes that could benefit member states (Interviews 44 and 60). Supporting the German proposal were Lithuania and Latvia. The two Baltic states thought that the fines could be used to support the Euro area, without any contributions from these countries (Interviews 10 and 63). Both countries took an intermediate position between the two extremes at 50 on the scale. While not taking to the floor at the Working Group meeting, both Sweden and Denmark supported the Commission’s proposals that the monies go to those member states not in excessive deficit or subject of the excessive imbalance procedure. Thus, the positions of the member states were judged to be in line with the Commission’s proposal at 100 on the scale. For both countries, member states that respected the rules should be rewarded (Interviews 13, 31 and 55). Denmark’s decision to support the Commission proposal for example was to ensure that the right policies were adopted in the Eurozone before that member state considered joining (Interview 46). Despite wanting to participate in the Eurozone discussions, both the United Kingdom and the Czech Republic stayed silent on the proposal, as did Hungary, which as the holder of the Presidency,

171 had to find an agreement between the member states on an issue that had now become political (Interviews 11, 32, 42, 51 and 59). The negotiations continued until the 9th of February, when the Presidency informed COREPER II that progress had been made after the intervention of the Council Legal Service. The Council Legal Service had found that the fines could be allocated to the EFSF and thus there was wide agreement among the member states in the Working Group that the fines go to this stability mechanism (Council of Ministers, 2011f). Some member states remained opposed to the proposal. However, by the ECOFIN summit in March, that resistance had faded away and ministers were able to approve the agreement reached in the Working Group (Council of Ministers, 2011c and 2011f).

IT/FR/RO/BG/PL LV/DE/AT/PT/LU/ EE/FI/MT/NL/ Status quo ES/EL/BE/LT SK/SI/CY/SE/ Outcome DK/ECB/COM

0: Fines 50: Fines 100: Fines will distributed to be distributed to constitute resources of all Eurozone Eurozone Member states Member states the general budget of the through a as a proportion European stability of their GNI Communities. mechanism. who are not in the EDP or EIP.

Figure 12: The initial positions of the actors to the allocation of the fines collected by the Commission from member states. Note: AT: Austria; BE: Belgium; BG: Bulgaria; CY: Cyprus; DE: Germany; DK: Denmark; EE: Estonia; EL: Greece; ES: Spain; FI: Finland; FR: France; IT: Italy; LV: Latvia; LT: Lithuania; LU: Luxembourg; MT: Malta; NL: The Netherlands; PL: Poland; PT: Portugal; RO: Romania; SI: Slovenia; SK: Slovakia; SE: Sweden; COM: Commission; ECB: European Central Bank.

With regard to the draft Regulation on the budgetary surveillance in the Euro area, member states agreed with the use of reverse qualified majority voting to overturn a Commission’s recommendation to the Council to impose an interest-bearing deposit on a member state that failed to address its deviation from the adjustment path towards the medium- term budgetary objective under Article 3.1. The details of the trigger and procedure for the levying of the interest-bearing deposit was laid out under Article 6.2 of draft the Regulation on

172 surveillance and coordination of economic policies (European Commission, 2010h). However, Belgium, the Netherlands, and Luxembourg wanted to expand the application of the procedure within the draft Regulation on the budgetary surveillance in the Euro area and to the draft Regulation on macroeconomic imbalances. As these proposals, outlined in a non-paper, had yet to be presented to the member states in either the informal gathering or in the Working Group, the discussions only formally began at the next meeting held on the 31st of January and 1st February (Finnish financial counsellor note, 2011e). At the informal gathering of Eurozone member states on the 31st of January 2011, the Netherlands and Luxemburg, with passive support from Belgium, tabled their non-paper. The member states proposed that under the first step under Article 3.1 of the draft Regulation, the recommendation of the Council, based on the advice of the Commission, as to whether sufficient action had been taken to address a serious deviation from the medium-term budgetary objective, was to be taken by RQMV. The use of the voting procedure in the second step under Article 3.1, the imposition of fines, was to be maintained. In the draft Regulation on the prevention and correction of macroeconomic imbalances, RQMV could be used in several steps of the excessive imbalance procedure. Under the first step, the submission or endorsement of corrective action plan under Articles 8.2 and 8.3 could be amended by the Council on the basis of major changes in economic circumstances of a member state under Articles 8.2. In the second step, the Council would then consider the prescribed corrective action that needed to be undertaken or not under Articles 10.1 and 10.4 based on a report by the Commission (Benelux, 2011; Finnish financial counsellor note, 2011e). These proposals, unsurprisingly, were rejected by both France and Spain. The two member states had initially opposed the use of RQMV in any circumstances. Both member states argued that an agreement had already been reached on the use of the voting procedure in the Task Force (Finnish financial counsellor note, 2011e; Interviews 48 and 50). When the issue was presented to the Working Group, Bulgaria indicated its support for the proposal (Interview 44). As did the Presidency, which asked the Council Legal Service to give its opinion on extending reverse qualified majority voting (Finnish financial counsellor note, 2011f). Over the next three Working Group meetings held on the 16th and 23rd – 24th of February, the Council Legal Service had initially judged that it was legally possible to extend and apply the voting procedure in the two Regulations (Finnish financial counsellor note, 2011d and 2011f). However, after undertaking a second review of the proposal at the behest of a number of member states, the Council Legal Service concluded that the voting procedure

173 could not be extended to Article 3.1 of the draft Regulation on budgetary surveillance in the Euro area, though it was possible to do so in the various provisions on the excessive implementation procedure in the draft Regulation on the prevention and correction of macroeconomic imbalances. The Council Legal Service argued that for RQMV to be applied, when the Council was deciding to issue a recommendation to address a serious deviation from the medium-term budgetary objective, there would have to be treaty change. While welcoming the new opinion of the Council Legal Service, Spain and France continued to voice their opposition to the implementation of the procedure in the draft Regulation on the prevention and correction of macroeconomic imbalances. Those member states were supported by the rest of the Council, except for Belgium, the Netherlands, Luxembourg and Bulgaria (Ibid). The majority of the member states wanted to stick to the agreement reached on the issue in the Task Force according to a report from the Presidency to COREPER II on the 1st of March (Council of Ministers, 2011g). During the trialogues, the European Parliament (Parliament) pressed for an extension of RQMV. Most member states were willing to reach a compromise on the issue; however French Finance Minister Christine Lagarde rejected such compromise in the meeting of ministers in the ECOFIN configuration on the 20th of June. Lagarde however knew that sanctions could only be applied in the worst-case scenario and thus eventually agreed to a watered-down version of RQMV, reverse simple majority (Interview 59). On reverse simple majority, ministers formally agreed a two-step procedure under Article 6.2 of draft Regulation on the surveillance and coordination of economic policies, which was referenced in Article 3.1 of draft Regulation 1173 – see the discussion above on the non-paper. On the basis of a recommendation from the Commission, the Council could decide by qualified majority voting to adopt a decision on compliance when a member state was found to be deviating from the adjustment path towards its medium-term budgetary objective. If the member state continued to fail to adhere with the targets to meet its medium-term budgetary objective, the Commission could, after one month, recommend for a second time that the Council adopt a decision of non-compliance. Thus, the decision was deemed adopted if not rejected by “reverse simple majority” (Council of Ministers, 2011h). The Working Group also had problems on reaching a compromise on the treatment of imbalances in Article 3.2 of draft the Regulation on macroeconomic imbalances. With the ministerial meeting approaching on the 9th-10th of February, the Commission’s final proposal for Regulation 1176 on the prevention and correction of macroeconomic imbalances was placed on the agenda for the Working Group meeting on the 26th of January (Council of

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Ministers, 2011i). During the negotiations in the Task Force, a number of member states argued that if current account deficits were a threat to the stability of the Eurozone and to the European economy, then so were current account surpluses. Thus, both current account surpluses and current account deficits should be treated symmetrically. The Task Force however fudged the issue by agreeing a two-step procedure to treat macroeconomic imbalances. In the first step “an annual assessment of the risks of macroeconomic imbalances […] in the context of an alert mechanism based on a scoreboard covering a limited number of indicators and economic analysis” would be undertaken. The Commission would then conduct an in-depth analysis identifying and assessing the severity of macroeconomic imbalances, only if the alert mechanism indicated that there is an imbalance or a potential for one. Under an enforcement framework, the second step, member states were then compelled to implement measures designed to correct these imbalances (European Council, 2010b). The Commission incorporated the procedure into its draft proposal for the Regulation on macroeconomic imbalances; however, the institution had left open the question of how to treat imbalances in Article 3.2. As the issue was left open, member states with high current account surpluses, Germany, and large current deficits, Spain, pushed hard for an asymmetric approach or a symmetric approach respectively right up to the end of the negotiations in the Council (European Commission, 2010i; Interview 33). This split in the Council is illustrated in Figure 14. The extreme positions on the scale are 100 – The Commission shall set indicative thresholds that shall be symmetric for current account surpluses and deficits and 0 – The continuation of the current policy that there would be no requirement to establish a mechanism to set non- symmetric or symmetric indicative thresholds. At 50 on the scale is a coalition of mainly Northern and Eastern member states led by Germany, which were pushing for an asymmetric approach. The German delegation under pressure from the Bundestag, particularly the CDU/CSU and FDP parliamentary groups, argued strongly that high current account surpluses were not the problem. Instead, it was the lack of competitiveness in Portugal, Ireland, Italy, Greece and Spain was the source of high current account deficits (Interview 56). If those member states were serious about tackling the issue, then they should address structural problems in their economies rather than be “out to get” Germany. The member state also pointed out the hypocritical stance of those criticising Germany for a high current account surplus, when at the same time those countries were in receipt of funding from the EFSM and from the EU budget, both of which were backed by taxes collected from exports (Interviews 16 and 36). This was a position that the Netherlands strongly agreed with, and the Dutch delegation called the attacks on member states with current

175 account surpluses as unjustified. Countries with high current account surpluses, like the Netherlands, were supporting those with current account deficits that were in difficulty (Interview 41). The senior bureaucrats judged that the policy preference of these actors corresponded to 50 on the scale. Making the argument that member states, especially in the Eurozone, needed to address competitiveness issues were Finland and Denmark. Both viewed current account deficits as a large economic problem which signalled serious underlying issues with the health of a member state’s economy, which posed a greater threat than high current account surpluses to the stability of the Eurozone and to the European economy as a whole (Interviews 14 and 46). The competitiveness argument was also the basis for the support from the Czech Republic, Sweden, Latvia, Slovenia and Slovakia for an asymmetric approach, as those countries did not believe that member states with export driven economies should be treated in the excessive imbalance procedure (Interviews 6, 40, 51, 55 and 63). Austria also used the issue of competitiveness to underpin its position, pointing out that a symmetric approach was effectively instructing member states to become less ambitious in meeting the challenges in the European economy. Cautious support for an asymmetric approach came from Malta. The member state did not see a problem with current account surpluses. Estonia, like the Czech Republic et al., did not think it was fair that member states that were competitive should be treated negatively (Interviews 43 and 47). Luxembourg did not take a vocal stance, as the member state was the chair of the Euro group and thus officially neutral. Nonetheless, it did support an asymmetric approach. For Luxembourg deficits posed a greater risk than surpluses to the stability of the Eurozone and to the wider European economy. It did, however, agree that, in principle, there had to be action on current account surpluses (Interview 35). Unlike Luxemburg, the Commission and the ECB took a public position on this issue. Both institutions argued that current account deficits rather than current account surpluses posed a greater risk to the stability of the Eurozone economy; and thus, there was no need to set symmetric thresholds for these imbalances (Interview 33). Conversely, at one of the extremes on the scale - 100, was a coalition of mainly Southern member states led by Spain. The member state suffered from a huge current account deficit. Thus, Spanish negotiators sought the establishment of a mechanism that treated current account deficits and current account surpluses symmetrically. Spain questioned why current account surpluses were being treated differently when other imbalances were treated symmetrically. There was no economic rationale to treating these imbalances separately, when current account surpluses had a huge spill-over affect in the Eurozone. Despite the threat posed

176 by current account surpluses, triple-A countries were not keen on a symmetric treatment of imbalances, a position contrary to their overall stance of wanting to reform economic governance (Interviews 50 and 62). Spain received support from its Mediterranean allies, France, Italy, Greece and Cyprus. Portugal also backed the Spanish position. Central to the argument of the five member states was that those with high current account surpluses were not doing enough to stimulate domestic demand in their economies. By treating current account surpluses symmetrically with current account deficits, Germany et al. could be forced to change macroeconomic policy and focus on stimulating domestic demand. This might lead to member states with persistently high current account surpluses increasing investment and in turn boosting imports. Eventually, such measures could reduce the current account deficits and current account surpluses, bringing equilibrium to the various levels of imports and exports of the member states in the Eurozone and in the European economy as a whole (Interviews 3, 22, 27, 45, 48 and 52). Senior policy-makers judged that the policy preference of these actors corresponded to 100 on the scale. The non-Mediterranean member states supported the symmetric approach, however for reasons other than the one presented by Spain and its allies. Ireland and Hungary, not vocal as it held the Presidency, considered current account surpluses and current account deficits equally dangerous and that they should therefore be treated the same, while Bulgaria based its support for a symmetric treatment on its own data, which showed that it had a large trade deficit with Germany (Interviews 42, 44 and 54). Belgium and the United Kingdom contended that current account surpluses were negatively affecting the fiscal policies of other member states, and this needed to be addressed before the issue became too politicised (Interviews 12 and 32). As for Lithuania, it was supportive of a symmetric approach in theory. However, it was sceptical about forcing a member state to rebalance in a way that was needed to address the issue (Interview 10). Poland initially shared the same position as Ireland and Hungary and supported a symmetric approach. However, Poland later reverted to a neutral position and then supported an asymmetric treatment of current account imbalances after the Council adopted this position in its general approach. As part of its Presidency mandate, Poland later argued strongly in favour of an asymmetric treatment of current account surpluses in the trialogues with the Parliament (Interview 60). The other extreme on the scale was the status quo at 0, or the continued policy that there was no requirement to establish a mechanism to set non- symmetric or symmetric indicative thresholds. The status quo was not supported by any member state.

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Having failed to reach an agreement in the Working Group in early March, both leading players on this issue, Germany and Spain, agreed that the question could only be addressed at a political level. Thus, it was left to the ministers in their upcoming ECOFIN meeting to reach a compromise (Finnish financial counsellor note, 2011g). In its note to finance ministers before the ECOFIN meeting on the 15th of March, the Presidency advised ministers that the current text, which reflected the agreement reached in the Task Force, represented a very balanced compromise between the two groups of member states (Council of Ministers, 2011b). Finance ministers agreed with the assessment of the Presidency; however, the Council was now required to examine the issue once again under the Polish Presidency when the trialogues concluded (Council of Ministers, 2011c).

Status quo AT/FI/DK/SE/CZ/LV/LT/ ES/PT/FR/IT/EL/ EE/MT/SI/SK/LU/NL/DE/ CY/IE/HU/PL/BG/ COM/ECB/Outcome BE/UK

0: No requirement to 50: The Commission 100: The Commission shall establish a mechanism may set non-symmetric set indicative thresholds to set non -symmetric or indicative thresholds for that shall be symmetric for symmetric indicative current account current account surpluses thresholds. surpluses and deficits. and deficits.

Figure 13: The initial positions of the actors on the setting of symmetric thresholds.

Note: AT: Austria; BE: Belgium; BG: Bulgaria; CY: Cyprus; CZ: Czech Republic; DK: Denmark; EE: Estonia; EL: Greece; ES: Spain; FI: Finland; FR: France; DE: Germany; HU: Hungary; IE: Ireland; LV: Latvia; LT: Lithuania; LU: Luxembourg; MT: Malta; NL: The Netherlands; PL: Poland; PT: Portugal; SI: Slovenia; SK: Slovakia; SE: Sweden; UK: United Kingdom; COM: Commission; ECB: European Central Bank.

Shortly after the conclusion of the Working Group meetings, ministers reached an agreement on an updated general approach on the 20th of June, at the ECOFIN Council dinner, on the six legislative proposals. The updated general approach allowed negotiations with the Parliament to be concluded by the European Council summit that was scheduled for the 23rd and the 24th of June (Council of Ministers, 2011h). While negotiations had concluded in the Council, the Parliament was debating the legislative package. The next chapter goes into further detail on the inter-institutional negotiations in the trialogues.

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5.8 Results

Table 4 illustrates the constellation of positions on the six most important issues in the negotiations in the Six-Pack. The table indicates that the bargaining success of the member states mainly follows an East-North-South – East-North-South cleavage. This finding is based on examining the positions of the member states across the six issues along the East-North- South dimension. The East-North-South dimension has been found in previous studies to be a relevant factor when explaining cleavage patterns in the Council (Mattila and Lane 2001; Mattila 2004). Breaking the cleavage patterns down by issues, an East-North-South – North- South – East-North-South cleavage is disguisable in issue one, the establishment of a debt benchmark. Economic performance (strong-weak) cleavage pattern is distinguishable among the two East-North-South groupings of member states and in the North-South group. Less evident is the net-recipient/net-contributor cleavage pattern in the two East-North-South groupings of member states; however, such a cleavage is apparent in the North-South group. A North-East-South – East-South cleavage is apparent in issue one, the linking of the debt criteria with the medium-term budgetary objective. Other cleavage patterns are also discernible. There is an economic performance cleavage and a less distinguishable net- recipient/net-contributor cleavage pattern. In the case of the latter cleavage, the addition of the Eastern member states in the group of Northern member states makes it less clear cut. Turning to the third issue, the stringency of the provision of cash-based fiscal data an East-North-South cleavage pattern is distinguishable across the three groupings as is the economic performance cleavage pattern. The East-North-South cleavage pattern across the three issues means that a net-recipient/net-contributor cleavage pattern is not evident.

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Table 4: Constellation of positions in the Council during the negotiations on the Six- Pack.

Constellation of positions

Issue:

The establishment Status quo • Northern and Outcome of a debt • Eastern, Northern Southern • Eastern, Northern benchmark. and Southern member states: and Southern member states: (CY/IE). member state: (FR/IT/ES/PT/ (FI/SE/DK/BE/ HU/EL/UK). NL/DE/AT/SI/ SK/LV/LT/EE/ BG/CZ/MT/LU/ PL). The inclusion of Status quo Outcome the debt criteria in • Eastern, Northern • Eastern and the medium-term and Southern South member budgetary member states: states: objective. (NL/PT/EE/BE/DE/ (MT/UK/HU/FR/ SE/SK/SI/DK/CY/ IT/EL/ES/IE). LT/LV/PL/BG/AT/ LU/FI/CZ). Stringency of the Status quo Outcome • Eastern, Northern provision of cash- • Eastern, Northern • Eastern, and Southern based fiscal data. and Southern Northern and member states: member states: Southern (LV/LT/EE/IE/ (FR/UK/CZ). member states: LU/MT/FI/SE/EL (AT/PT/ES/ /NLSK). DE/DK/BG/ PL/BE/CY/ SI/HU). The allocation of Status quo Outcome • Eastern, Northern fines. • Eastern and • Eastern, and Southern Southern member Northern and member states: states: Southern (EE/FI/MT/NL/ (IT/FR/RO/BG/PL). member states: SK/SI/CY/SE/ (LV/DE/AT/PT DK). /LU/ES/EL/BE/ LT). Introduction of Status quo • Northern and Outcome RQMV. • Southern member Southern • Eastern, Northern state: (ES). member states: and Southern (AT/FR/IE/IT/ member states: PT). (BE/BG/CY/CZ/ DE/DK/EE/EL/FI /HU/LT/LU/LV/ MT/NL/PL/SE/SI /SK/UK). The symmetric Status quo Outcome • Eastern, Northern treatment of current • Eastern, and Southern account deficits and Northern and member states: surpluses. Southern (ES/PT/FR/IT/EL member states: /CY/IE/HU/PL/ (AT/FI/DK/ BG/BE/UK). SE/CZ/LV/LT/ EE/MT/SI/SK/ LU/NL/DE).

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On the issue of allocating fines, East-North-South cleavage pattern is distinguishable in two of the three groupings. An economic performance cleavage pattern is likewise present those two groupings of member states. The constellation of member states in those groups means that a net-recipient/net-contributor cleavage pattern cannot be identified. In the other group on this issue an East-South cleavage is apparent and also an economic performance cleavage. On the proposal to introduce reverse qualified majority voting the constellation patterns are not dissimilar from issue two in the Council negotiations. There is a North-South cleavage and in that group an economic performance cleavage and a net-recipient/net- contributor cleavage. An East-North-South cleavage is apparent, and an economic performance cleavage is also evident. Again, a net-recipient/net-contributor cleavage is not very distinguishable. On the sixth issue, the symmetric treatment of current account deficits and surpluses the two constellations of member states follow an East-North-South cleavage pattern. As with the other issues where an East-North-South cleavage pattern is apparent, an economic performance cleavage is also present. Turning to measuring the bargaining success of the member states individually, Figure 14 graphs the mean level of bargaining success of the member states and the European Council, the Parliament, the ECB and Commission on the six issues that were identified as controversial during the negotiations in the Six-Pack. The bargaining success of the member states is measured on a policy scale ranging from 0-100 (distance to outcome). The closer a member state to the outcome on the policy scale, the higher its bargaining success. To control for luck, the weighted average distance of each member state to the other positions in the Council is tested as a variable in the regression analysis. Germany is the most successful member state in the Six-Pack negotiations. The member state has an average level of bargaining success of 100, up from 75 in the Task Force negotiations. Likewise, the European Council4 has an average level of bargaining success of 100.

4 The European Council’s average level of bargaining success is based on the two issues that were included in the Commission’s Six-Pack proposals – RQMV and the linking of the debt criteria with the medium-term budgetary objective.

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Following Germany is a group of 7 member states led by Slovenia. The member state along with Latvia, Luxembourg, Lithuania, Denmark, Belgium and Austria have an average level of bargaining success of 91.67. Slovenia and Latvia maintain their average level of bargaining success from the Task Force. Luxembourg, Lithuania, Denmark, Belgium and Austria have a higher average level of bargaining success than the level achieved in the Task Force. The average level of bargaining success increases from 66.67, 83.33, 66.67, 60 and 66.67 respectively. Closely following the following the 7 member states is the Czech Republic with an average level of bargaining success of 90, down slightly from the 91.67 achieved in the Task Force. Behind the Czech Republic is another group of 7 member states led by Slovakia. The member state along with Sweden, Poland, the Netherlands, Finland, Estonia and Bulgaria have an average level of bargaining success of 83.33. Poland, Estonia and Bulgaria have a lower average level of bargaining success than the level achieved in the Task Force. The three member states achieved an average level of bargaining success of 91.67 in the Task Force compared to 83.33 in the Council. Slovakia and Sweden maintained their average level of bargaining success achieved in the Task Force negotiations while the average level of bargaining success achieved by the Netherlands and Finland in the Council increases to 83.33 from 66.67. Behind the 7 member states is Cyprus with an average level of bargaining success of 75, down from the 83.33 achieved in the Task Force. Similarly, the ECB managed to achieve an average level of bargaining success of 83.33, which was an increase on the level achieved by the institution in the Task Force (66.67). Likewise, the Parliament, though not participating in the Council negotiations, had an average level of bargaining success of 83.33 compared to the rest of the member states and the institutions. Moving down the scale to 50, Malta and Portugal have an average level of bargaining success of 66.67. The level of bargaining success achieved in the Council is up from the level achieved by Malta (60) and Portugal (50) in the Task Force. Likewise, the bargaining success for the Commission increased to 66.67 from the level it achieved in the Task Force (58.33). Romania5 and Greece follow the two member states with an average level of bargaining success of 50. The level average level of bargaining success for Romania in the Council is slightly below the level achieved in the Task Force (75). Greece increases its average level of bargaining success from 40 in the Task Force to 50 in the Council.

5 The level of Romania’s bargaining success is not entirely accurate, as the position of the member state is clear for only 1 issue. 182

Below Greece and Romania is Spain with an average level of bargaining success of 41.67, an increase on the 40 achieved in the Task Force. Slightly behind Spain, are the United Kingdom, Ireland and Hungary with average level of bargaining success of 40. The United Kingdom’s average level of bargaining success is just below the 41.67 achieved in the Task Force. Ireland and Hungary experienced significant falls in average level of bargaining success that both member states achieved in the Task Force. Hungary’s average level of bargaining success decreased from 66.67 to 40 while Ireland’s average level of bargaining success decreased from 50 to 40 in the Council. The member states with the lowest average level of bargaining success were France and Italy. France has an average level of bargaining success of 33.33, a significant decrease from the level (50) achieved in the Task Force. Similarly, Italy experienced a steep fall from the average level of bargaining success achieved in the Task Force (50) to the level achieved in the Council (30). With the exception of Cyprus, Malta and Portugal, the highest levels of bargaining success are among those member states from Northern and Eastern Europe. The levels of bargaining success in Figure 9 therefore indicates that member states that sought to radically reform the EU’s economic governance structures were mostly successful in doing so. In relative terms, bargaining success of the member states at 50 and below was low, indicating that these countries exercised very little influence in shaping the outcomes of the Task Force negotiations. Having described the cleavage patterns of the member states in Table 6 and the bargaining success of the member states in Figure 14, the next part of the analysis explains the variation in the bargaining success of the member states. Table 7 presents the results of the multivariate analysis of the factors that determined bargaining of the member states in the Task Force. The variables are divided into three categories; (1) endogenous power resources; (2) exogenous resources of power and (3) endogenous and exogenous resources of power. According to Bailer (2004), endogenous power resource variables are the circumstances in which the negotiations are conducted in and the personal attributes of the negotiators (Bailer, 2004, p.100). The endogenous power resources in this category are proximity to the ECB, the Commission, the status quo, the Parliament, the European Council and network capital. Bailer (2004) argues that exogenous power resources consist of variables that are shaped by a member state’s environment and thus challenging to modify during negotiations (Ibid). The variables that fall into this category are voting power, EU budget status, domestic constraints and government deficit/surplus and the Presidency. The third category contains both endogenous and exogenous power resources; salience and the weighted distance variable.

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European Council DE SI LV LU LT DK BE AT CZ EP ECB SK SE PL NL FI EE BG CY PT MT Commission RO EL ES UK IE HU FR IT

0 20 40 60 80 100 Mean Bargaining Success

Figure 14: Mean bargaining success of member states and institutions.

Note: DE: Germany; SI: Slovenia; LV: Latvia; LU: Luxembourg; LT: Lithuania; DK: Denmark; BE: Belgium; AT: Austria; CZ: Czech Republic; SK: Slovakia; SE: Sweden; PL: Poland; NL: The Netherlands; FI: Finland; EE: Estonia; BG: Bulgaria; RO: Romania; CY: Cyprus; PT: Portugal; MT: Malta; EL: Greece; ES: Spain; UK: United Kingdom; IE: Ireland; Hungary; FR: France; IT: Italy; European Council; EP: Parliament; ECB: European Central Bank; Commission: European Commission.

In Model 1 the endogenous variables are run then separately the exogenous factors in Model 2. In Model 3 both the endogenous and exogenous variables are run together to see whether the results remain consistent with those in Model 1 and Model 2. Salience is then added in Model 4 and finally the weighted distance variable in Model 5 as control variables. In general, the main reason for running multivariate models is to control for the effect of other variables. Comparing the results of models that include and exclude a particular variable allows for an investigation of the different types of relationships that exist between a number of explanatory variables and the outcome variable. Estimates for Model 5 indicate that two endogenous power resources, proximity to the ECB and to the European Council had a statistically significant effect on the bargaining success of the member states in the Council negotiations on the Six-Pack. Therefore, the results do meet the expectations of Hypothesis 1, that the European Council had more influence than the

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Commission in shaping the EU’s response to the opening phase of the European sovereign debt crisis and Hypothesis 1c, that an actor that is closer to the ECB will have more bargaining success than an actor that has positioned itself further away from the ECB. Thus, member states with positions that were aligned with that of the European Council (the recommendations of the Task Force) and the ECB experienced an increase in their bargaining success vis-à-vis member states that were not aligned with the European Council or the ECB. The remaining endogenous variables proximity to the Commission, the status quo, the Parliament and network capital were found not to have a statistically significant effect on the bargaining success of the member states. Therefore, the results do not meet the expectations of Hypothesis 1a, that an actor that is closer to the Commission will have less bargaining success than an actor that has positioned itself further away from the Commission, Hypothesis 1b, that member state that was closer to the Parliament’s position had more bargaining success than a member state that positioned itself further away from the European Council, Hypothesis 6, that a member state with a high level of network capital will have more bargaining success than a member state with a low level of network capital, or Hypothesis 11, that an actor that is closest to the status quo will have more bargaining success than an actor that is further away from the status quo. Conversely, none of the exogenous variables, voting power, the EU budget status, domestic constraints, government deficit/surplus and the Presidency, were found to improve the bargaining success of the member states. The results therefore do not meet the expectations of Hypothesis 3, that a member state that holds the Presidency will have more bargaining success than the member state that did not hold the Presidency, Hypothesis 4 that a member state with a good macro-economic performance will have more bargaining success than a member state with a poor macro-economic performance, Hypothesis 5, that a member state that is a ‘net-payer’ of the EU budget will have more bargaining success than a member state that is a ‘net-beneficiary’, Hypothesis 7, that a member state with a strong EAC will be more successful than a member state with a low ratification hurdle, or Hypothesis 8, that a member state with more voting power will have more bargaining success than a member state that does not.

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Table 5: Factors affecting bargaining success.

(1) (2) (3) (4) (5) VARIABLES Model 1 Model 2 Model 3 Model 4 Model 5

Closeness ECB 0.462*** 0.389*** 0.388*** 0.378*** (0.0800) (0.0948) (0.0961) (0.0873) Closeness Commission 3.73e-05 0.00883 0.00854 0.0512 (0.0402) (0.0400) (0.0400) (0.0310) Closeness Parliament 0.210** 0.229** 0.229** 0.117 (0.0769) (0.0750) (0.0754) (0.0815) Closeness Status Quo 0.0935 0.0780 0.0772 0.120 (0.0898) (0.0908) (0.0921) (0.0880) Closeness to European Council 0.339*** 0.328*** 0.329*** 0.326*** (0.0324) (0.0343) (0.0375) (0.0388) Network Capital -2.313 -2.607 -2.691 -2.844 (3.165) (3.187) (3.182) (3.018) Voting Power -2.836** -0.525 -0.535 -0.757 (1.035) (0.711) (0.724) (0.678) EU Budget Status 1.582 0.330 0.299 0.242 (1.563) (1.046) (1.086) (1.013) Domestic Constraints 1.966^ 0.282 0.265 0.179 (1.052) (0.630) (0.656) (0.618) Govt Deficit/Surplus 2.901*** 0.840^ 0.858^ 0.782 (0.702) (0.494) (0.518) (0.475) Presidency -31.98 -9.359 -9.725 -9.539 (21.30) (10.12) (10.35) (10.70) Salience -0.00905 -0.0230 (0.0621) (0.0601) Average Weighted Distance -0.00219*** (0.000534)

Constant 9.500 86.54*** 18.23 19.11 39.46* (12.88) (7.628) (14.20) (16.08) (16.15)

F 7.95*** 266.92*** 97.52*** 51.40*** 46.94*** N 152 152 152 152 152 R-squared 0.747 0.240 0.756 0.756 0.779 Note: Dependent variable is absolute value of 100 minus the distance of the position to the outcome during the Six-Pack negotiations. Linear regression models with robust standard errors. The models show the regression coefficient and robust standard errors in parentheses. ***p < 0.01; **p < 0.05; *p < 0.10.

Likewise, salience was found not to have a statistically significant effect on bargaining success of the member states. Therefore, the results do not meet the expectations of Hypothesis 9, that an actor that attaches a high level of salience to an issue will have more bargaining

186 success than an actor that attaches a low level of salience to an issue. Turning to the average weighted distance which acts as a control variable for power and luck in the multivariate analysis, this factor was found to have a statistically significant negative effect on bargaining success. Therefore, the results do meet the expectations of Hypothesis 12: An actor with more support will have more bargaining success than an actor with less support. Indeed, this finding is of particular interest. The finding may be a result of more powerful member states being in a minority rather than the majority position in the Council. Thus, the less powerful member states that found themselves on the winning side or in the majority in the Council did so through luck rather than through power.

5.9 Conclusions

The result of the multivariate analysis point to two endogenous variables that influenced the bargaining success of the member states in the Council, proximity to the ECB and to the European Council (recommendations of the Task Force). While the ECB did not have as much freedom in the Council as it had in the Task Force negotiations, the Bank nonetheless managed to influence the bargaining success of a member states. The ECB was present for the discussions and according to the data from the minutes, was an active contributor. Further, the ECB tabled an opinion on the legislative package. Like the Commission, the ECB had a body of experts, which only the largest member states could rival. Indeed, for some member states, greater trust was placed in the experts from the ECB than with the Commission officials in DG ECFIN. Therefore, despite the limitations placed on the ECB by the negotiations taking place within the Community Method, the ECB remained an influential actor throughout the Six-Pack negotiations. The influence of the in shaping the EU’s response has been outlined in several studies (Hodson 2012; Schwarzer 2012; Yiangou et al. 2013 and Niemann and Ioannou 2015) that have examined the institution’s role in the Task Force and the Six-Pack. As the Task Force recommendations, in part, formed the basis of the Six-Pack and as the negotiations in the Task Force were conducted outside the Community Method, the ECB had a platform that was not usually available to the institution to shape the Union’s legislative response to the opening phase of the crisis, the findings support the contention that the ECB was equally influential in the Task Force and the Six-Pack. The results therefore challenge the narrative that ECB’s influence is limited to an advisory role as per Article 4 of Protocol (No 4) on the statute of the European System of Central Banks and of the ECB.

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Apart from proximity to the ECB, closeness to European Council also had a positive impact on the bargaining success of the member states. The European Council had more influence than the ECB in the negotiations on the Six-Pack. Member states may have used the endorsement of the Task Force report by the heads of state and governments in the European Council to add weight to their policy positions in the Council. The recommendations in the Task Force report did not provide policy guidance for all of the controversial issues in the Six- Pack. Nonetheless, ministers, permanent representatives and officials in the ECOFIN configuration would have been aware of the general policy preferences of their member state on a number of Task Force related issues that emerged during the Six-Pack negotiations. Thus, the European Council could have influenced the Six-Pack negotiations, directly and indirectly. The Six-Pack provided the first opportunity to operationalise, where possible, the reforms proposed in the Task Force. The Six-Pack was therefore to the forefront of the EU’s efforts to address the weaknesses in the economic governance framework that had become increasingly visible since the start of the crisis. The findings from the multivariate analysis suggest that the member states that were the most successful were those that were aligned with the institutions and with the Task Force, that to varying degrees sought to reform the EU’s economic governance structures. Thus, member states that advocated reforming the Stability and Growth Pact had higher levels of bargaining success than the member states that strived to frustrate those reforms by either proposing to water them down or pushing for the retention of the status quo. The rise of the European Council in the Six-Pack continues the trend that began with the establishment of Task Force outside of the Community Method, namely the influence of the institution in shaping the EU’s response to the opening phase of the sovereign debt crisis. The results therefore reflect the findings of Allerkamp (2010), Alexandrova et al. (2014), Puetter (2011), Schwarzer (2012), Chang (2013), Niemann and Ioannou (2015) and Da Conceição-Heldt (2016) that the power of the European Council has increased to the detriment of the Commission. The changed institutional dynamic as demonstrated by the establishment of Task Force and its continuation in policy-making, at least in the Six-Pack, means that the perceived understanding of EU decision-making has changed since Article 15(1) of the Treaty on European Union came into force. The average weighted distance was the only explanatory variable that would to have a statistically negative effect on the bargaining success of the member states in the multivariate analysis. Though the literature is sparse on the theoretical framework, this is the second time that the average weighted distance was found to have a statistically negative effect on the bargaining success of the member states. Therefore, testing the explanatory variable with a

188 larger dataset may yield different results. In relation to the remaining explanatory variables, proximity to Commission, the Parliament, the status quo, network capital, voting power, EU budget status, economic performance (government deficit and surplus), the Presidency and salience the results for the most part are in line with the findings in the existing literature. On proximity to the Commission, the results support the findings of Allerkamp (2010), Alexandrova et al. (2014), Puetter (2011), Schwarzer (2012), Chang (2013), Niemann and Ioannou (2015) and Da Conceição-Heldt (2016) that the institution has ceded influence to the European Council. The results however run counter to the findings of Bailer (2004) and Arregui and Thomson (2009) that a member state that is close to the position of the Commission will experience a high level of bargaining success. A possible explanation for the difference in the results might be due to the number of cases selected. Bailer (2004) and Arregui and Thomson (2009) utilised the DEU dataset whereas this research availed of a smaller number of observations. Conversely, Bailer (2004) found that proximity to the Parliament yielded no bargaining advantage whereas Arregui and Thomson (2009) did so when legislation was decided under the co-decision procedure. The different sized datasets used in this research and by Bailer (2004) would tend to add more weight to the argument that proximity to the Parliament has no effect on the bargaining success of the member states. The results on the status quo in this research reflect the findings of Bailer (2009) and Arregui and Thomson (2009). In all three pieces of research, proximity to the status quo had not effect on the bargaining success of the member states. In relation to network capital, the findings run counter to results in Arregui and Thomson’s (2009) study on bargaining success. Arregui and Thomson found that network capital has a modest but statistically significant effect on the bargaining success of the member states (Arregui and Thomson, 2009, p.670). A possible explanation for the differences between the results in this research and Arregui and Thomson’s might be the size of the datasets utilised to explain bargaining success in the Council. Arregui and Thomson availed of the DEU II dataset which contained the positions of member states across on 57 issues whereas in this part of the research, only 6 issues were examined. Thus, the validity of both findings on the influence network capital depends on particular conditions. Turning to voting power the results support the findings in Arregui and Thomson’s (2009) and Bailer’s (2004) that voting power had no impact on the bargaining success of the member states in the Council. The literature on influence of the EU budget status of a member state (Mattila 2004; Hosli et al. 2011) did not test the explanatory variable in the context of bargaining success; rather it focused on the how the factor effected voting in the Council. As with the other factors

189 that the previous research has ignored, it is too early to draw conclusions on the validity of this explanatory variable based on one case study. Turning to domestic constraints, the findings do mirror those in other articles that tested the explanatory factor in the Council (Bailer and Schneider 2005; Schneider, Finke and Bailer 2010). The results of the multivariate analysis however do not mirror the findings in the literature that examined the domestic constraints in the European Council (Hosli 2000; Slapin 2010; Dür and Mateo 2010). As this part of the research examined the Task Force, which was set up by the European Council, then the studies on the influence of domestic constraints is more relevant in that context. One possible explanation for the difference in the findings on the influence of domestic constraints between this research and the other studies that examined the explanatory factor within the context of the European Council is the number of actors that those studies take into account. This study based domestic constraints on the power of the European Affairs Committee (EAC) in each member state parliament. The current body of literature considered other factors such as referenda and EACs. In relation to economic performance (government deficit and surplus), the findings do not contradict or support pre-existing theoretical frameworks as it has not received any attention in the studies examining bargaining success in the Council. Thus, it is too early to make a judgement about the validity of the theoretical framework when examining bargaining success in the Council. On the influence of salience, both Bailer (2004) and Arregui and Thomson (2009) did not find any evidence that the explanatory factor influenced the bargaining success of the member states in the Council. The results of the multivariate analysis in this study support that contention in a different context. Arregui and Thomson (2009) did however find that the member state that held the Presidency had a higher level of bargaining success. Again, the differences in the findings may be due to the size of the dataset used in the research. The quantitative evidence on the bargaining success of the member states as illustrated in Figure 14. Of the 16 member states in Figure 14, member states with an average level of bargaining success ranging from 100 to 83.33, half 8 are net-recipients while the other 8 are net-contributors. At the bottom end of Figure 14, there are only two member states, Ireland and the UK, that are net-contributors while the remaining 8 in the bottom 10 are net-recipients. Cyprus, which is the only member state left, has an average level of bargaining success of 75 and is a net-recipient. Thus, in Figure 14, member states that were both net-recipients and net- recipients were in the top and bottom half of Figure 14. Therefore, this balance between the two groupings meant that the EU budget status had no affect either positively or negatively on the bargaining success of the member states.

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Similarly, member states with low to average voting power and weak to average EACs make up the top 10 and bottom 10 of Figure 14 while member states with high levels of voting power and strong EACs make up the middle of Figure 14. Thus, like the EU budget status variable neither voting power or domestic constraints effect bargaining success in the Council. A similar picture is apparent with economic performance (government deficit/surplus), salience and proximity to the Commission, the Parliament and the status quo. Member states that had a smaller deficit for 2010 in the top 10 of Figure 14 had a higher average level of bargaining success than the member states in the bottom 10 which had larger deficits. Member states with budget deficits that vary in size make up the middle section of Figure 14. Thus, economic performance had no impact on the bargaining success of the member states. Likewise, member states are split between the member states that achieved a higher average level of bargaining success in the top 10 of Figure 14 and attached higher levels of salience to an issue than member states at the bottom half with lower levels of bargaining success considered the issues to be less salient. The remaining member states in Figure 14 attached varying levels of salience. As with the other explanatory factors, this is a possible explanation as to why salience had no positive or negative impact on the bargaining success of the member states in the Council. A similar pattern emerges with respect to proximity to the Commission, the Parliament and the status quo. With regard to the Presidency, the results support the contention of a number of senior officials interviewed for this project that the agenda for the negotiations in the Council had been set through the Task Force report. Thus, member states in the Council negotiations were simply trying to implement the Task Force report legislatively. Turning to the factors that had a positive impact on the bargaining success of the member states, the results of multivariate analysis aligns with the quantitative evidence that is presented in the Six-Pack Council negotiations. It is clear from qualitative the evidence that the majority of member states supported positions during the Six-Pack negotiations that aligned with the Task Force recommendations. The same rationale can also explain why proximity to the ECB increased the bargaining success of the member states. The ECB took positions in the Task Force that were later adopted as the outcome of the Six-Pack negotiations and advocated certain positions which also gained the support in the trialogues. The evidence also provides an explanation as to why the average weighted distance had a negative impact on the bargaining success of the member states. The more powerful member states were on the losing side, thus the member states on the winning side were successful in the negotiations because of luck.

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Table 6: European Council and Council of Ministers meetings.

Meetings of the European Council and Council of Ministers - ECOFIN Date of meeting and configuration: Relevant subjects of the meetings: Inaugural Ad-Hoc Working Group (hereafter • Commission presentation of the legislative Working Group) on Economic Governance proposals. 24.11.2010. 2343rd meeting of the Permanent Representatives • RQMV. Committee 30.11.2010 - 01.12.2010. • Distribution of fines. • Symmetric treatment of thresholds. • The Committee exchanged views on the main outstanding issues in the draft texts. Working Group 01-02.12.2010. • Medium-term budgetary objective. • Numerical debt criteria. • Symmetric treatment of thresholds. • The Working Group exchanged views on the main outstanding issues in the draft texts. Working Group 09-10.12.2010. • Medium-term budgetary objective. • Numerical debt criteria. • Symmetric treatment of thresholds. • The Working Group exchanged views on the main outstanding issues in the draft texts. European Council summit 16-17.12.2010. • Discussions on Commission presentation of legislative proposals. Working Group 11-12.01.2011 - Hungarian • Cash-based fiscal data. Presidency. • Symmetric treatment of thresholds. • The Working Group exchanged views on the main outstanding issues in the draft texts. 3062nd Meeting of the Council of the European Union • The Council took note of the presentation of (Economic and Financial Affairs) 18.01.2011. the Presidency's work programme in the field of economic and financial affairs. Working Group 19-20.01.2011. • Cash-based fiscal data. • Symmetric treatment of thresholds. • The Working Group exchanged views on the main outstanding issues in the draft texts. 2348th meeting of the Permanent Representatives • The Committee took note of the proceedings Committee 20-21.01.2011. of the Council meeting, 18 January.

Working Group and Informal gathering of Eurozone • Distribution of fines. member states 24-25.01.2011. • Medium term budgetary objective. • Numerical debt criteria. • RQMV. • The Working Group exchanged views on the main outstanding issues in the draft texts. 2349th meeting of the Permanent Representatives • The Committee exchanged views on the Committee on 26, 28 and 31.01.2011. main outstanding issues in the draft texts. • Symmetric treatment of thresholds. Working Group and Informal gathering of Eurozone • Symmetric treatment of thresholds. member states meetings 31.01.2011 and 01.02.2011. • RQMV. • Distribution of fines. • Meetings exchanged views on the main outstanding issues in the draft texts. European Council summit 04.02.2011. • Discussions on progress in negotiations on Six-Pack.

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Working Group and Informal gathering of Eurozone • Meetings exchanged views on the main member states meetings 07- 08.02.2011. outstanding issues in the six draft texts. 2351st meeting of the Permanent Representatives • The Committee exchanged views on the Committee 09-10.02.2011. main outstanding issues in the six draft texts. 3067th meeting of the Council of the European • Distribution of fines. Union (Economic and Financial Affairs) 15.02.2011. Working Group and informal gathering of • Meetings exchanged views on the main Eurozone member states 16.02.2011. outstanding issues in the six draft texts. 2352nd meeting of the Permanent Representatives • The Committee took note of the proceedings Committee 17, 18 and 21.02.2011. of the Council meeting on 15 of February. Working Group and informal gathering of Eurozone • Medium-term budgetary objective. member states 23-24.02.2011. • Numerical debt criteria. • Cash-based fiscal data. • RQMV. • Meetings exchanged views on the main outstanding issues in the draft text. 2354th meeting of the Permanent Representatives • All six legislative proposals discussed in Committee 02-04.03.2011. preparation for Council meeting on 15 of March. Working Group and informal gathering of Eurozone • Meetings exchanged views on the main member states 07.03.2011. outstanding issues in the six draft texts. 2355th meeting of the Permanent Representatives • The Committee discussed and solved several Committee 09 and 11.03. 2011. outstanding issues on the five regulations. Eurozone summit 11.03.2011. • Discussions on progress on negotiations on Six-Pack. 3076th meeting of the Council of the European • The Council adopted its general approach. Union (Economic and Financial Affairs) 15.03.2011. European Council summit 24-25.03.2011. • Discussions on progress in negotiations on Six-Pack. 2362nd meeting of the Permanent Representatives • The Presidency informed the committee Committee 04 and 06.05. 2011. about procedural issues related to, and the schedule of, the trialogues as well as the outcome of the first two trialogue meetings held with the Parliament. Working Group on Economic Governance 12 of • Preparation of the trialogues. May. 3088th meeting of the Council of the European • Took note of Presidency report. Union (Economic and Financial Affairs) 17.05.2011. 2364th meeting of the Permanent Representatives • The Presidency informed the committee of Committee 18, 19, 20 and 23.05.2011. the state of play regarding the trialogues conducted with the representatives of the Parliament. The committee held an exchange of views. 2365th meeting of the Permanent Representatives • The Presidency informed the committee of Committee 24, 25 and 26.05.2011. the state of play regarding the trialogues conducted with the representatives of the Parliament. Working Group on Economic Governance • Provision of cash-based fiscal data. 30.05.2011. • Trialogues - state of play. 2366th meeting of the Permanent Representatives • The Presidency informed the committee of Committee 31.05.2011, 01 and 06.2011. the state of play regarding the trialogues conducted with the representatives of the Parliament. The committee held an exchange of views.

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2367th meeting of the Permanent Representatives • The Presidency informed the committee of Committee 07-10 and 14.06.2011. the state of play regarding the trialogues conducted with the representatives of the Parliament. The committee held an exchange of views. Working Group 15.06.2011. • Discussion on economic governance package. 2368th meeting of the Permanent Representatives • The Presidency informed the committee of Committee 15-17 and 20. 06.2011. the state of play regarding the trialogues conducted with the representatives of the Parliament, and in particular on the remaining outstanding issues. The committee held an exchange of views in preparation for the Council meeting of 20 June 2011. 3100th meeting of the Council of the European • The Council approved the updated general Union (Economic and Financial Affairs) 20.06.2011. approach on the six pieces of legislation. European Council summit 23-24.06.2011. • Discussions on progress in negotiations on Six-Pack. Eurozone summit (Polish Presidency) 21. 07.2011 • Discussions on progress in negotiations on Six-Pack. 3115th meeting of the Council of the European Union • The Council confirmed political agreement (Economic and Financial Affairs) 04.10.2011. on the proposals and on text on the scoreboard in draft Regulation on the prevention and correction of macroeconomic imbalances. 3122nd meeting of the Council of the European Union • The Council approved the amendments set (Economic and Financial Affairs) 08.11.2011. out in the Parliament's position at first reading on draft Regulations on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies, on the prevention and correction of macroeconomic imbalances, on enforcement measures to correct excessive macroeconomic imbalances in the euro area, and on the effective enforcement of budgetary surveillance in the Euro-area.

• The Council adopted draft Regulation on speeding up and clarifying the implementation of the excessive deficit procedure and the draft Directive on requirements for budgetary frameworks of the member states.

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Putting the Bible into practice - The negotiations on the Six-Pack in the Parliament

5.10 Structure

The goal of this chapter is to retrace the developments in the negotiations of the Six-Pack in the European Parliament (Parliament). As with the preceding section of this case study, the focus is on the operationalisation of the recommendations of the Task Force and other developments in the negotiations in the Parliament. As has been noted previously, not all of the issues that the interviewees identified as having been salient in the negotiations in the Task Force could be implemented through the Six-Pack. The suspension of funds to member states for failing to meet the requirements of Stability and Growth Pact could only be dealt with within the context of the next round of negotiations of the Financial Perspective. Therefore, the issue is not included in this section. A further three issues were included in the Six-Pack; however, they are also not included in this section because they were not sufficiently controversial in Parliament decision- making. On the introduction of interest-bearing deposits, no party group tabled amendments to the Commission proposal. Likewise, on the question of providing a degree of leeway in the excessive deficit procedure for member states that had implemented second pillar pension reforms, the party groups supported the European Commission’s (Commission) proposal that the institution and the Council would consider the costs of these pension reforms when assessing developments in the deficit and debt figures in the excessive deficit procedure. The issue had first surfaced in 2005 during the reforms of the Stability and Growth Pact and the importance of the issue was reduced by MEPs in the Six-Pack to codifying the agreement in the Council of Ministers (Council) (Interview 24). Party groups from across the plenary also supported the Commission’s proposal for the mandatory establishment of independent fiscal institutions in the member states. The establishment of independent fiscal institutions that had the power to disseminate binding reports was an issue in the Task Force that was implemented by the Commission in the Six-Pack. The Commission argued that independent fiscal institutions were important in increasing transparency and accountability in a member state’s budgetary process. A position echoed by MEPs from across the plenary, who backed the Commission proposal. Thus, the major remaining issues that were discussed in the Parliament during the negotiations were political issues; (1) the establishment of a debt benchmark – the reduction of

195 debt by 1/20 per year over 3 years if debt to GDP was above 60%; (2) the symmetric treatment of macroeconomic indicators, specifically current account surpluses and current account deficits; (3) the application of reverse qualified majority voting (RQMV); (4) the inclusion of the debt criteria through the medium term budgetary objective; (5) the distribution of fines collected by the Commission; (6) and the provision of cash-based fiscal data (Interviews 8, 9, 20, 21, 23). The first controversial issue was the inclusion of the debt criteria through the establishment of an automatic debt reduction benchmark in Article 2, paragraph 1a of the Regulation on the excessive deficit procedure. According to the proposal, member states that exceeded the reference value, the debt to GDP ratio of 60%, were required to reduce their debt by 1/20 per year over a period of 3 years. A number of party groups were concerned that the reduction of debt by 1/20 per year over a period of 3 years was too rigid and that the Commission had failed to take into account other relevant factors that affected the debt levels of a member state. The second controversial issue was whether macroeconomic imbalances should be treated symmetrically or asymmetrically in Article 3.2. The Commission had proposed that the macroeconomic imbalances should be treated asymmetrically, due, in part, to the opposition voiced by Germany in the Task Force. Asymmetric treatment of current account surpluses would allow member states to continue to focus on the export side of the economy over reforms to stimulate domestic growth. If there was symmetric treatment, then member states with high current account surpluses faced the prospect of being investigated and even be placed in the excessive imbalance procedure after a decision by the Council. Once placed in the excessive imbalance procedure, the member state was required to adopt an action plan of policy measures. In the case of member states with high current account surpluses, these measures included, for example implementing a domestic stimulus package, to correct the imbalances within a certain timeframe. The third controversial issue was the application of RQMV in the Council when imposing an interest-bearing deposit, as proposed by the Commission on a member state that failed to reduce debt levels below the 60% threshold. A number of party groups wanted the majority needed to overturn the Commission proposal to be lowered. The fourth controversial issue was on the inclusion of the debt ceiling within the Stability and Growth Pact, which if broken by a member state, would trigger the sanctions procedure. A number of party groups wanted the debt ceiling left out of the reforms to the Stability and Growth Pact, arguing that the focus should be on growth not on reducing debt. The fifth controversial issue was the distribution of fines collected by the Commission. The institution had proposed, under Article

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4 of the draft Regulation on macroeconomic imbalances in the euro area that fines of 0.1% of GDP that had been imposed on a member state for failing to address excess imbalances, would be allocated to member states that were not subject of the excessive imbalance procedure or were in the excessive deficit. A number of party groups argued that the fines should go to the new stability mechanism or to the EU budget. The sixth controversial issue was the provision of cash-based fiscal data. The Commission had proposed, under Article 3.2 of the draft Council Directive on budgetary frameworks, that member states be required to provide cash-based fiscal data at a monthly rate for local administrative units and for the federal or central government. A number of party groups argued that member states should be able to provide data at a quarterly rate for local administration units.

5.11 Background to the negotiations

The Commission communicated its proposals for the Six-Pack on the 29th of September 2010 to the Council and the Parliament respectively, as per articles 289(1) and 294 of the Treaty on the Functioning of the European Union. The Commission’s proposals for the Six-Pack were decided under the Ordinary Legislative Procedure, Article 289(1), the Consultation Procedure, Article 289(2), and the Non-Legislative Enactment, Article 290 of the Treaty on the Functioning of the European Union. The Ordinary Legislative Procedure is the main decision- making mechanism used for adopting legislation in the Union. Under the Ordinary Legislative Procedure, the Commission, after an extensive consultation process, adopts a legislative proposal through the College of Commissioners. Once the proposal has been adopted, it is communicated jointly to the Council and to the Parliament as per Article 294(2) of the Treaty on the Functioning of the European Union (Official Journal of the European Union, 2012, pp.172–173). However, only four of six pieces of legislation were decided under the Ordinary Legislative Procedure. The four were; • Draft Regulation on the prevention and correction of macroeconomic imbalances (hereafter known as the draft Regulation on macroeconomic imbalances), • draft Regulation on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (hereafter known as the draft Regulation on the surveillance and coordination of economic policies),

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• draft Regulation on enforcement measures to correct excessive macroeconomic imbalances in the euro area (hereafter known as the draft Regulation on macroeconomic imbalances in the euro area), and • draft Regulation on the effective enforcement of budgetary surveillance in the euro area (hereafter known as the draft Regulation on budgetary surveillance in the euro area).

The Council Directive on requirements for budgetary frameworks of the member states (hereafter known as the draft Council Directive on budgetary frameworks) was to be decided under the Non-Legislative procedure and the draft Regulation on speeding up and clarifying the implementation of the excessive deficit procedure (hereafter known as the draft Regulation on the excessive deficit procedure) was to be decided under the Consultation procedure. The main difference between the Ordinary Legislative Procedure and the Non-Legislative and the Consultation procedures, is that under the former the Parliament can propose amendments to the Commission proposal under co-decision, and thus shape the text, while under the two consent procedures, the Parliament can only veto a text, not to make changes to it. The Parliament attempted to extend the Ordinary Legislative Procedure to the Council Directive on budgetary frameworks and the draft Regulation on the excessive deficit procedure. The Committee on Legal Affairs was of the opinion that the Ordinary Legislative Procedure was the right mechanism to decide the two pieces of legislation. Likewise, the Committee agreed with the procedures to decide the other five dossiers (Lehne, 2011 and Official Journal of the European Union, 2012). An absolute majority, 376 MEPs out of 751 (European Parliament, 2018), was needed to pass the Six-Pack in the Parliament. In the 7th Parliament (2009-2014), the largest party was the European People’s Party (Christian Democrats) with 274 MEPs, the Socialists and Democrats (Socialists) with 196 MEPs, the Alliance of Liberals and Democrats for Europe (Liberals) with 83 MEPs, the Greens/European Free Alliance (Greens) and the European Conservatives and Reformists (Conservatives) with 57 MEPs, the European United Left/Nordic Green Left (Nordic Greens) with 35 MEPs and the Europe of Freedom and Democracy Group (the Democracy Group) with 31 MEPs. There were 33 non-attached members. From the 7 party groups, possible majorities that could form an absolute majority were; a grand coalition of the Christian Democrats and the Socialists, a coalition of party groups

198 with Commissioners – the Christian Democrats and the Socialists and the Liberals, and a centre right coalition of the Christian Democrats, the Liberals and the Conservatives.

Table 7: Timeline of the negotiations in the Parliament.

Timeline of the negotiations in the Parliament Date of meetings and votes Relevant subject: Discussed in ECON: 26.10.2010, 24.01.2011 and the 22.03.2011. • Symmetric treatment of thresholds. Date adopted: 19.04.2011. • Distribution of fines.

Date tabled: 06.05.2011. • Medium-term budgetary objective. Commission proposal approved as amended and draft legislative • Reverse qualified majority resolution: vote to return to ECON: 23.06.2011. voting. • Numerical debt criteria. Vote on amended proposal and legislative resolution 28.09.2011. • Cash-based fiscal data.

All six pieces of legislation were referred to ECON by the President of the Parliament. This was done after the Commission communicated the legislative package on the 29th of September 2010, as per rule 43 of the rules of procedure of the 7th parliamentary term. This was done by the President in the plenary on the 21st of October. Before the Commission communicated the proposals to the Parliament, six Rapporteurs were appointed on the 21st of September to draft separate reports on each piece of legislation. The six MEPs were Elisa Ferreira of the Socialists for the draft Regulation on macroeconomic imbalances, Corien Wortmann-Kool and Diogo Feio of the Christian Democrats for the draft Regulations on the surveillance and coordination of economic policies and on the excessive deficit procedure, Carl Haglund and Sylvie Goulard of the Liberals for the draft Regulations on macroeconomic imbalances in the euro area and on budgetary surveillance in the euro area, and Vicky Ford of the Conservatives for the draft Directive on budgetary frameworks. The work of these rapporteurs was monitored by shadow rapporteurs, who were appointed by the political groups that were represented on the committee. In the case of the smaller groups like the Greens, only two Shadow Rapporteurs were appointed for all six dossiers (European Parliament 2010, 2011b, 2011c, 2011d, 2011e, 2011f and 2011g).

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5.12 Negotiation process and policy positions of the actors

MEPs in ECON met for the first time to table amendments on each piece of legislation, on the 26th of October. One of the four proposals to be decided under the Ordinary Legislative Procedure, which received numerous amendments, was the draft Regulation on macroeconomic imbalances. To identify and address macroeconomic imbalances, an alert mechanism was to be established, which included a scoreboard that could detect imbalances, such as current account surpluses and current account deficits. The most important issue in the draft Regulation was whether those imbalances should be treated symmetrically or asymmetrically in Article 3.2. Asymmetric treatment of current account surpluses would allow member states to continue to focus on the export side of the economy over reforms to stimulate domestic growth. If there was symmetric treatment, then member states with high current account surpluses faced the prospect of being investigated and even be placed in the excessive imbalance procedure after a decision by the Council. Once placed in the excessive imbalance procedure, the member state was required to adopt an action plan of policy measures. In the case of member states with high current account surpluses, these measures included, for example implementing a domestic stimulus package, to correct the imbalances within a certain timeframe (European Parliament, 2011b). Figure 15 provides an illustration of the differing positions of the party groups on the treatment of current account surpluses and current account deficits. The extreme positions on the scale are 100 – The Commission shall set indicative thresholds that shall be symmetric for current account surpluses and deficits and 0 – The continuation of the current policy that there would be no requirement to establish a mechanism to set non-symmetric or symmetric indicative thresholds. At 100 on the scales are the Socialists, the Greens, and the Nordic Greens. For the three party groups that supported a symmetric approach, it was clear that the current Commission proposal was designed to protect Germany, as it was the member state with the highest current account surplus. For many, this member state’s large current account surplus was one of the causes of the crisis. Due to a lack of coordination of fiscal policies in the Economic and Monetary Union, Germany was able through internal devaluations to keep wages down, which was reducing consumption. Support was also driven for a symmetric approach, due to the member state’s heavy dependence on exports which was considered to be dangerous and thus this imbalance and the lack of investment at the domestic level needed to be addressed (Interviews 8, 20, 21, 38, 39 and 57). Rapporteur Ferreira’s strong support for a symmetric approach in ECON and in the trialogues was considered by a number of her

200 colleagues to be down to the difficulties that the MEP’s member state, Portugal, had in boosting its own exports after the crisis (Interview 24). At the intermediate position of 50 on the scale are the Christian Democrats, the Liberals and the Conservatives. The issue was of low priority for the Christian Democrats, who tabled one amendment expressly in favour of a symmetric approach, by Gunnar Hökmark of Sweden, and one clearly in favour of an asymmetric approach proposed by Hökmark and supported by two Liberal MEPs, Wolf Klinz from Germany and Olle Schmidt from Sweden. The remaining amendments from the party group’s MEPs left the Commission proposal unchanged, i.e. asymmetric by default. (Interview 24). Likewise, the amendments tabled by the Liberal MEPs, with the exception of the one proposed by Schmidt and Klinz, were also silent on the issue. This was a result of a compromise reached in the group between Goulard, the Shadow Rapporteur on this draft Regulation, and Carl Haglund, Rapporteur for the draft Regulation on macroeconomic imbalances in the euro area. Both MEPs represented the two competing factions in the group, the socially liberal and economically left wing, Goulard, and the socially liberal and economically right wing, Haglund (Interview 9). The Conservatives, like the Christian Democrats, were also in favour of supporting competitiveness, an asymmetric approach. However, their only amendment did not expressly call for such treatment (European Parliament, 2011h; Interview 23). There was no support among the party groups for the status quo, which was the other extreme at 0 on the scale. Had a party group supported the status quo, they were in effect, rejecting the Commission’s proposal to establish a mechanism to set non- symmetric or symmetric indicative thresholds. The Committee members opted to back the Socialist and Green amendments that called for the Commission to set symmetric thresholds.

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Status quo EPP/ALDE/ECR/ SD/Greens-EFA/ GUE- COM/ECB NGL/ECON/ Outcome

0: No requirement to 50: The Commission 100: The Commission shall establish a mechanism may set non-symmetric set indicative thresholds to set non-symmetric or indicative thresholds for that shall be symmetric for symmetric indicative current account current account surpluses thresholds. surpluses and deficits. and deficits.

Figure 15: The initial positions of the actors on the setting of symmetric thresholds.

Note: ALDE: Alliance of Liberals and Democrats for Europe Party (Liberals); ECR: European Conservatives and Reformists (Conservatives); EPP: European People's Party (Christian Democrats); Greens-EFA: Greens- European Free Alliance (Greens); GUE-NGL: European United Left-Nordic Green Left (Nordic Greens); SD: Socialists and Democrats (Socialists); COM: Commission; ECB: European Central Bank; ECON: Committee on Economic and Monetary Affairs; EP: European Parliament.

Figure 16 describes an issue that was of high priority for the Christian Democrats and the Liberals, the inclusion of the debt criteria through a higher adjustment path towards their medium-term budgetary objective for member states with a debt to GDP ratio of 60% or above. This provision was to be found under Article 5.1 of draft Regulation on the surveillance and coordination of economic policies (European Parliament, 2011c). The extreme positions on the scale are 100 – Unconditional reduction of debt at a fixed rate and 0 – No debt criterion. The inclusion of the debt criteria, a 60% debt ceiling, in the excessive deficit procedure was somewhat less important than the move to link the debt criteria with the medium-term budgetary objective. MEPs from the Christian Democrats proposed a number of amendments to Article 5.1. Of those proposed, three, one by the Rapporteur for the draft Regulation Wortmann-Kool, and one each by Burkhard Balz and Markus Ferber, were closest to the aims of the legislation and the overall position of the party group, which was the inclusion of the debt criteria to prevent overspending (Interview 24). This was also the reasoning behind the amendment tabled by the Liberals. The party group was concerned that if debt went unchecked, then the next generation faced the burden of reducing high debt. Since the legislation was designed to strengthen the preventive arm, it was logical that measures be taken to address problems related to high debt before member states were forced out of the bond markets (Interview 9). The other main party group on the right side of the plenary, Conservatives, did

202 not table any amendments, which indicates that they were happy with the Commission proposal (European Commission, 2010h; European Parliament, 2011i). At an intermediate position of 50 on the scale are the Greens and the Nordic Greens. Both party groups charted a middle course between the right side of the plenary, the Christian Democrats and the Liberals, and the left side of the house, the Socialists, with their amendments by supporting the status quo. The amendments tabled by the Greens acknowledged that there was a requirement to increase scrutiny on high debt levels. However, there also needed to be some flexibility on the path towards the medium-term budgetary objective, hence the inclusion of the requirement that other factors should be taken into account. Without any leeway, member states could find it difficult to meet their targets laid out in the medium-term budgetary objective (Interviews 38 and 57). The Nordic Green amendments also reflected those tabled by the Greens. However, the amendments tabled by the party group throughout the committee stage did not reflect the deep seated antipathy of most of the MEPs of the Nordic Green towards the Six-Pack (European Parliament, 2011i; Interview 39) Thus, both party groups, like the Commission, did not want a specific debt target included in the Regulation, however, unlike the Commission, the Greens and the Nordic Greens were clearer in wanting additional mitigating factors to be included in the Regulation. At the other extreme on the scale at 0 is the Socialist party group. For Socialists MEPs, such as the shadow rapporteurs for the draft Regulation, Udo Bullman, and Anni Podimata, there was no need to operationalise the debt criteria. The amendments by those MEPs represented the overall view of the party group, which did not believe that this was the time to have stricter rules on debt. Thus, the Socialists sought to maintain the status quo. There needed to be less of a focus on debt and more on how to treat imbalances, which was a salient issue for the Socialists. Nonetheless, the party group used the issue as leverage to ensure that allowances were made for investment spending facilitated through borrowing, the ‘golden rule’. Under the ‘golden rule’, member states were to split their budget into a deficit financed capital account and a balanced current account. By having two accounts, member states would be encouraged to undertake capital spending (European Parliament, 2011i; Interviews 8 and 20). MEPs in the Committee then voted to support the amendments tabled by Christian Democrats and the Liberals, that debt criteria should be operationalised in the Regulation.

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SD COM/GUE- EPP/ALDE/ ECON NGL/Greens-EFA /ECB/Outcome Status quo

0: No debt 100: Unconditional 50: No specific debt criterion. target, but flexibility reduction of debt at in reducing debt by a fixed rate. taking into account

additional mitigating factors.

Figure 16: The initial positions of the actors on linking the inclusion of the debt criteria with the medium-term budgetary objective.

Note: ALDE: Alliance of Liberals and Democrats for Europe Party (Liberals); EPP: European People's Party (Christian Democrats); Greens-EFA: Greens-European Free Alliance (Greens); GUE-NGL: European United Left-Nordic Green Left (Nordic Greens); SD: Socialists and Democrats (Socialists); COM: Commission; ECB: European Central Bank; ECON: Committee on Economic and Monetary Affairs; EP: European Parliament.

The final two Regulations to be decided under the Ordinary Legislative Procedure were the draft Regulations on macroeconomic imbalances in the euro area and on the budgetary surveillance in the euro area. The issue in the former was the allocation of fines of 0.1% of GDP that would be imposed on a member state for failing to address excess imbalances, identified by the Commission, through the implementation of a corrective action plan. The Commission had proposed that under Article 4 of the draft Regulation, the proposed fines were to be allocated to member states that were not subject of the excessive imbalance procedure or were in excessive deficit (European Parliament, 2011d and 2011e). Figure 17 illustrates the policy positions of the party groups on this issue. The extreme positions on the scale are 100 – Fines to be distributed to Eurozone member states that are not in the excessive deficit procedure or the excessive imbalance procedure as a proportion of their GNI and 0 – Fines allocated to the general budget of the European Communities. At 0 are the positions of the party groups from the left side of the plenary and the status quo. The Nordic Greens tabled two amendments on this issue, Händel supported the Commission proposal with the caveat that the monies were linked to social and environmental investments, while Jürgen Klute pushed for the allocation of fines to the EU budget. Both were underpinned by the same argument of stimulating growth in the Eurozone. In the case of Klute’s amendment, the monies from the fines could be used to fund cohesion and structural programmes, via the EU budget,

204 in member states that were suffering from the crisis. Conversely, Händel’s amendment supported investment in areas that were of interest to the party group in member states that were following the rules. Ultimately Händel’s amendment prevailed and thus reflected the overall position of the party group (Interview 39). While sharing the sentiments of the other party groups, the Socialists were also concerned that the Commission’s proposals were too punitive and could create a divide between member states (European Parliament, 2011j; Interview 21). Thus, both party groups supported the extension of the status quo by continuing to support the pre-existing policy that fines collected by the Commission be used by the institution to support EU programs through the budget. Moving up the scale to 20, the Greens argued that the fines should be allocated to the European Investment Bank (EIB), which the party group considered to be more targeted than the EU budget. The EIB could channel the monies from the fines exclusively to areas that drove growth, which was not possible if the monies were allocated to the EU budget (Interviews 38 and 57). Further up the scale at the intermediate position of 50 were the Christian Democrats, the only party group on the right side of the plenary to table amendments. Of the three amendments, two were in line with the position of the Christian Democrats, which was that the fines should be allocated to the European Financial Stability Facility (EFSF) until the European Stability Mechanism was established. By allocating the funds to the EFSF, additional monies were available to help stabilise the Eurozone during another crisis. The other amendment from the party group, tabled by Rodi Kratsa-Tsagaropoulou from Greece, called for the fines to be allocated to the EU budget (European Parliament, 2011j; Interview 24). At the other extreme on the scale at 100 was the Commission proposal. The compromise reached in the Committee would reflect the initial policy preference of the Christian Democrats.

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SD/GUE -NGL/ Greens-EFA EPP/ COM/ECB Status quo ECON/ Outcome

0: Fines 20: Until the 50: Fines 100: Fines will constitute establishment distributed to be distributed to resources of of a all Eurozone Eurozone the general mechanism Member states Member states budget of the the interest through a as a proportion European and the fines stability of their GNI Communities. will be mechanism. who are not in allocated to the EDP or EIP. the EIB.

Figure 17: The positions of the actors to the allocation of the fines collected by the Commission from the member states.

Note: EPP: European People's Party (Christian Democrats); Greens-EFA: Greens-European Free Alliance (Greens); GUE-NGL: European United Left-Nordic Green Left (Nordic Greens); SD: Socialists and Democrats (Socialists); COM: Commission; ECB: European Central Bank; ECON: Committee on Economic and Monetary Affairs; EP: European Parliament.

The other dossier that the Liberals were responsible for was the draft Regulation on budgetary surveillance in the euro area. As noted in the chapter on the Task Force, member states had agreed to extend RQMV to strengthen the enforcement in the preventive arm of the Stability and Growth Pact. In line with the conclusions of the Task Force, the Commission proposed, under Article 3.1, that after the Council had imposed an interest-bearing deposit, based on a recommendation from the Commission, of 0.1%, member states could, after 10 days and through RQMV, vote to reject the sanction (European Parliament, 2011e). The policy differences of the party groups are outlined in Figure 18. The extreme positions on the scale are 100 – The Council could not overturn a Commission proposal to impose sanctions and 0 – Qualified Majority Voting (QMV) to be applied when voting on the adoption of enforcement measures. At one extreme – 100 on the scale are the Christian Democrats. The amendment tabled by Arturs Krišjānis Kariņš proposed that the Commission could impose sanctions freely without any interference from the Council. This represented a far greater shift in power away from the Council to the Commission than envisaged under the original proposal for RQMV (European Parliament, 2011k; Interview 24). Moving down the scale to 90 is the amendment tabled by Edward Scicluna of the Socialists. In contrast with the Christian Democrats, RQMV was not considered to be a main

206 priority for the party group. The attention of the Socialists was firmly fixed on the draft Regulation on macroeconomic imbalances, which was the only dossier that the party group had been allocated a rapporteurship. Scicluna’s amendment rejected the proposal for RQMV. Instead Scicluna proposed that the Council amend the Commission’s recommendation to impose a sanction through unanimity (European Parliament, 2011k; Interview 21). Moving down the scale to 30, the Nordic Greens and the Greens rejected RQMV in favour of reversed simple majority. For the Nordic Greens and the Greens, the Commission’s proposal was too automatic and there needed to be a degree of flexibility when imposing sanctions (Interviews 38 and 39). At the other extreme on the scale is 0 – The status quo or the use of QMV in the Council to adopt sanctions. The status quo was not supported by any party group. As with draft Regulation on excessive macroeconomic imbalances in the euro area, the Liberals did not table any amendments to Article 3.1. By not doing so the party group could position themselves as neutral arbiters or the kingmakers later on in the negotiations if the opportunity arose (European Parliament, 2011k; Interview 24). In the Committee, MEPs voted for the Commission proposal.

Status quo Greens – EFA ECON/COM/ SD EPP and GUE/NGL ECB/ Outcome

60: RQMV 0: QMV to be 30: Proposed 90: 100: applied when the use of to be applied Council Council voting on the simple majority when voting could could adoption for voting for for interest- overturn not interest-bearing interest-bearing bearing a COM overturn deposits. deposits. deposits. proposal* a COM by proposal unanimity **. 88. * Interest-bearing deposits. ** Interest-bearing deposits. Figure 18: The initial positions of the actors on the introduction of RQMV.

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The draft Regulation on the excessive deficit procedure was the only part of the Six- Pack to be decided under the Consultation Procedure. Article 2, paragraph 1a of the Regulation dealt with the inclusion of the debt criteria through the establishment of a benchmark to reduce debt by 1/20 per year over a three year period, if the debt to GDP threshold of 60% was crossed (European Parliament, 2011f). Figure 19 illustrates the divide between the party groups on the excessive deficit procedure. The extreme positions on the scale are 100 – Reduction of 1/20 per year over a 3 year period and 0 – No automatic debt reduction by 1/20 per year. At an intermediate position of 50 on the scale are the Socialists, the Nordic Greens, the Greens, and the Liberals. As with Article 5.1 of the draft Regulation on the surveillance and coordination of economic policies, the Socialists, the Nordic Greens, and the Greens sought to weaken attempts to include the debt criteria. For the Socialists and the Greens, the proposal was too automatic. It did not take into account factors that could affect a member state’s ability to reduce its debt by the amount and rate that had been proposed by the Commission or the impact of the reduction of debt by 1/20 per year for 3 years on the citizens of the member state. The lack of flexibility could also deepen the debt of a member state if policy-makers were tied to a target (Interviews 21, 38 and 57). This sentiment was shared by the Nordic Greens. The party group was in principle against the benchmark. However, in its two amendments, it pushed for greater flexibility rather than an outright rejection of the proposal (European Parliament, 2011l; Interview 39). While the Socialists, the Nordic Greens, and the Greens were mostly unified on the issue, the same could not be said of the Liberals (European Parliament, 2011l). Similar to the division on the draft Regulation on macroeconomic imbalances, Haglund took a firmer approach on the debt criteria in a joint amendment with a number of MEPs from the Christian Democrats, while Goulard backed a more flexible approach. Like Rapporteur Fieo, Haglund was meeting the concerns of his electorate, though in this case from Finland. Goulard, on the other hand, was acknowledging that there were different factors that determined the capacity of member states, in Northern and Southern Europe, to reduce their debt. Despite these contrasting positions, the inclusion of other factors was in the end never questioned by the party group as it was not considered a threat to the Stability and Growth Pact (Interview 9). Conversely, the Christian Democrats were closer to the Commission position at 90 on the scale. Of the amendments tabled by the Christian Democrat MEPs, those by Astrid Lulling, Othmar Karas, Burkhard Balz, Danuta Maria Hübner, Iliana Ivanova, Markus Ferber and Sirpa Pietikäinen were closer to the party group’s collective position of strengthening the debt criteria in the Stability and Growth Pact. Despite being from the same party group, Rapporteur Fieo’s

208 amendment was not in line with the Christian Democrat’s collective position, indicating that national concerns, the MEP was from Portugal, were paramount (European Parliament, 2011l; Interview 24). As for the extreme policy positions on the scale, the status quo at 0 and the Commission’s proposal at 100, neither were supported by any of the party groups. However, when MEPs did vote on the Committee, they opted to support the Christian Democrat position, which was closer to the position of the Commission than the position of the other party groups. The Christian Democrat’s proposed that the debt would be reduced by 1/20 per year after an assessment made over a three-year period. The Christian Democrats were therefore proposing a less rigid approach than the Commission while also maintaining the debt benchmark.

Status quo GUE- NGL/SD/ EPP/ECON/ COM/ECB Greens-EFA/ Outcome ALDE

0: No automatic 50: Flexibility 90: Reduction of 100: debt reduction by in reducing 1/20 per year after Reduction of 1/20 per year. debt by 1/20 an assessment 1/20 per per year over made over a three- year over a 3 3 years. year period. year period.

Figure 19: The initial positions of the actors to reducing debt by 1/20 for 3 years.

Note: ALDE: Alliance of Liberals and Democrats for Europe Party (Liberals); EPP: European People's Party

(Christian Democrats); Greens-EFA: Greens-European Free Alliance (Greens); GUE -NGL: European United

Left -Nordic Green Left (Nordic Greens); SD: Socialists and Democrats (Socialists); COM: Commission; ECB:

European Central Bank; ECON: Committee on Economic and Monetary Affairs; EP: European Parliament.

The final piece of legislation in the Six-Pack was the draft Council Directive on Issue Six: Issue Six: How budgetary frameworks, which was to beHow decided salient under the Non-Legislative Procedure. The salient (important) (important) Commissionwas the proposal had proposed, under Articlewas the3.2, that member states were requiredIssue to pSix:rovide that cashed based Issue Six: How How salient proposal that salient (important) cashfiscal-based data be fiscal data at a monthly ratecashed for localbased administrative units and for the(important) federal or provided to the was the proposal was the fiscal data be that cashed based centralCommission government for (European Parliament,provided 2011g). to For the Conservatives, the dossierproposal provided that the fiscal data be cashed an opportunity to show the rest of the plenarythe that the newly createdprovided party to group, the it was founded EP/COM/ECON/ Commission based fiscal EPP/PES/ALDE/ Commission for data be in 2009, could handle a major piece of forlegislation the (Interview 23).the The Greens and the Nordic Greens – EFA and EP/COM/ECO provided to GUE/NGL? EP/COM/ECON/ the Greens Left who had tabled very few amendmentsN/EPP/PES/A in the CommitteeEPP/PES/ALDE/ stage, did not table any LDE/ Greens Commission Greens – EFA and for the for Article 3. The two party groups did– not EFA consider and the issue toGUE/NGL? be of importance (Interview GUE/NGL? EP/COM/E 38 and 39). Thus, it was left to the Christian Democrats, the Socialists, and the CON/EPP/PLiberals to

ES/ALDE/ amend the article (European Parliament, 2011l). Greens – EFA and

GUE/NGL? 209

Figure 20 outlines the policy positions of the three party groups. The extreme positions on the scale are 100 – Cash-based fiscal data at a monthly frequency for both central government and each subsector and 0 – No requirement to submit cash-based fiscal data. No party group was judged to have taken a position of 0 on the scale. Moving up the scale to 20 are the Socialists. The two amendments tabled by the Socialists called for data to be provided at a quarterly rate for both central and local government. The party group was concerned that such data increased scrutiny and monitoring by outside bodies, such as the International Monetary Fund (IMF) or the European Central Bank (ECB). This in turn might lead to criticism by the ECB and the IMF to change policies in line with the views of those institutions (European Parliament, 2011m; Interview 49). Further up the scale at 70 are the Christian Democrats. The sole amendment tabled by the party group called for the collection of data at a monthly rate for central government and at a quarterly rate for local administrative units. The amendment reflected the party group’s concerns that the Commission’s proposal placed too much of a burden on the member states’ administration, especially those with a federal structure. Nonetheless, the amendment did allow for the collection of data at a rate that allowed fiscal frameworks to provide up-to-date information. The Liberals, at 100 on the scale, tabled an amendment that was the polar opposite of the one proposed by the Socialists. The party group supported the Commission’s proposal for a monthly collection of data from both central government and local administration. As both the ECB and the Commission were mandate dependent institutions, both required data to operate and to base recommendations on. Data provided at the rate proposed by the Commission could improve both institutions’ capacity to fulfil their mandate. The Liberal’s amendment also reflected the party group’s deep-seated support for a federal Europe (European Parliament, 2011m; Interview 49). The collective position of the committee was judged to be at 70 on the scales.

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Status quo SD EPP/ COM/ECB ECON/ ALDE Outcome

0: No 20: Cash-based 70: Cash-based 100: Cash-based requirement fiscal data at a fiscal data at a fiscal data at a to submit monthly monthly quarterly cash-based frequency for frequency for frequency for fiscal data. central gov’t central gov’t both central gov’t and each and each and quarterly subsector. each subsector. subsector.

Figure 20: The initial positions of the actors to the stringency in the provision of cash-based fiscal data to the Commission.

Note: ALDE: Alliance of Liberals and Democrats for Europe Party (Liberals); EPP: European People's Party (Christian Democrats); SD: Socialists and Democrats (Socialists); COM: Commission; ECB: European Central Bank; ECON: Committee on Economic and Monetary Affairs; EP: European Parliament.

These amendments, along with others, were then voted by ECON by simple majority as per Rule 195 of the rules of procedure of the 7th parliamentary term. The reports of rapporteurs, containing the agreed amendments to each article in the six pieces of legislation, were then all adopted by ECON on the 19th of April by varying majorities, with the trialogues commencing the very next day. Ferreira’s report on the draft Regulation on macroeconomic imbalances was backed by 42 Committee members against four MEPs from the Conservatives and the Nordic Greens. A similar number supported Haglund’s report (draft Regulations on macroeconomic imbalances in the euro area), with 39 votes cast in favour and 5 against, with members from the Nordic Greens, the Conservatives, and Socialists opposing the text. Goulard’s report (draft Regulation on budgetary surveillance in the euro area) received support from just over half the Committee with MEPs supporting the text by a margin of 33 votes to 14 against. Members from the Socialists, the Nordic Greens, the Conservatives, and the Greens voted to reject the amended proposal. MEPs from these party groups also backed Wortmann- Kool’s report (draft Regulation on the surveillance and coordination of economic policies) by a margin of 27 votes to 18 against with 1 abstention. A similar number of MEPs backed Feio’s report (draft Regulation on the excessive deficit procedure) by a margin of 29 votes to 7 against with 10 abstentions. Ford’s report (draft Directive on budgetary frameworks) was backed by 29 members of the Committee to 14 against. Members opposing the text came from the

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Conservatives, the Nordic Greens and the Socialists. The six dossiers were then placed on the agenda of the plenary (European Parliament 2010, 2011b, 2011c, 2011d, 2011e, 2011f and 2011g). The next chapter will go into further details about those negotiations.

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5.13 Results Table 8: Constellation of positions in the Parliament during the negotiations on the Six- Pack.

Constellation of positions

Issue:

The symmetric Status quo • Right-wing Outcome treatment of and Liberal • Left-wing current account party groups: party groups: deficits and (EPP/ALDE/ (SD/Greens- surpluses. ECR). EFA/GUE- NGL). The inclusion • Left-wing Status quo Outcome of the debt party • Left-wing • Right-wing criteria in the group: party groups: and Liberal medium-term (SD). (GUE-NGL/ party groups: budgetary Greens- (EPP/ALDE). EFA). objective. The allocation Status quo • Left-wing Outcome of fines. • Left-wing party group: • Right-wing party (Greens- party group: groups: EFA). (EPP). (SD/GUE- NGL). Introduction of Status quo • Left-wing Outcome • Right-wing RQMV. • Left-wing party group: party group: party (SD). (EPP). groups: (GUE- NGL/ Greens- EFA). The Status quo • Left-wing Outcome establishment and Liberal Right- of a debt party groups: wing party benchmark. (GUE-NGL group: /SD/Greens (EPP). -EFA/ ALDE). Stringency of Status quo • Left-wing Outcome • Liberal party the provision of party group: • Right- group: cash-based (SD). wing party (ALDE). fiscal data. group: (EPP).

The existing literature on the formation of party groups in the Parliament points to a left – right divide in plenary, which become more distinct after the 1999 elections to the institution (Hix 2002; Kreppel and Hix, 2003 p.76). Therefore, the analysis of the constellation

213 formation in the Parliament is based on this cleavage pattern. On the first issue – the symmetric treatment of current account surpluses and deficits, the party groups were divided exactly down ideological lines in the plenary. The right side of the plenary, the Christian Democrats, the Conservatives and the Liberals supported the Commission’s proposal for current account surpluses and deficits to be treated asymmetrically. Conversely, the left side of the plenary, the Greens, the Nordic Greens, and Socialists sought the symmetric treatment of current account surpluses and deficits. The final decision-making outcome in ECON aligned with the preferences of the left-wing party groups. The ideological divide between the party groups is also reflected on issue two – the linking the inclusion of the debt criteria with the medium-term budgetary objective. Here, the Socialists, the Greens, and the Nordic Greens sought to water down the focus on inclusion of the debt criteria, which were supported by the Christian Democrats and the Liberals. This right-wing leaning grouping of party groups managed to align the decision in ECON with their preferences. The ideological divide was also apparent on issue three, where the more left-wing parties in the plenary, the Socialists and the Nordic Greens, supported the continuation of the status quo – the distribution of the fines to the EU budget. The Greens supported the distribution of the fines to the EIB while the Christian Democrats wanted the monies collected to go to the stability mechanism. In this case, it was the Christian Democrats alone that managed to align the final decision-making outcome in ECON with their preferences. Likewise, only one grouping of party groups was formed on the introduction of reverse qualified majority voting. The Greens and the Nordic Greens both supported the introduction of simple majority, while the Socialists and the Christian Democrats backed the Commission proposal. The policy positions do not reflect the classic left-right dimension that was prevalent in the previous issues. No party group managed to align the final decision-making outcome in ECON with their own preferences, though the Christian Democrats were the closest. The left- right dimension is apparent again on the fifth issue, the reduction of debt by 1/20 per year for three years. A group containing the Greens, the Nordic Greens, the Socialists, and the Liberals, the left wing of the party group having decided the Liberal’s position, supported a less automatic approach to reducing debt. The outcome in ECON would however reflect the initial preferences of the centre right Christian Democrats. The situation is similar on the sixth issue – the collection of cash based fiscal data. No party group formed managed to find support in the plenary for their positions; however, the Christian Democrats managed to align the final decision-making outcome in ECON with their preferences.

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Turning to measuring the bargaining success of the party groups, the European Council, the Council, the ECB and the Commission individually, Figure 21 graphs the mean level of bargaining success on the six issues that were identified as controversial during the negotiations in the Six-Pack. The bargaining success of the party groups is measured on a policy scale ranging from 0-100 (distance to outcome). The closer a party group to the outcome on the policy scale, the higher its bargaining success. To control for luck, the weighted average distance of each party group to the other positions in ECON is tested as a variable in the regression analysis. The Christian Democrats are the most successful party group in the Six- Pack negotiations. The party group has an average level of bargaining success of 85 in the intra-institutional negotiations. Following the Christian Democrats are two party groups, the Liberals and the Greens with an average level of bargaining success of 70. Behind the two- party groups are the Nordic Greens with an average level of bargaining success of 66. The Socialists have the second lowest average level of bargaining success, having achieved a level of 55 in the negotiations. The Conservatives6 had the lowest average level of bargaining success having achieved a level of 50. The levels of bargaining success in Figure 21, indicate that party groups on the right economically (the Christian Democrats and the Liberals) or party groups that shared, for the most part, the views of the Christian Democrats and the Liberals in this policy area (the Greens), were mostly successful in shaping the Parliament’s position on the Six-Pack. Conversely, the party groups on the left economically (the Nordic Greens and the Socialists), were somewhat less successful in the negotiations. With regard to the institutions which were not participating in the negotiations in ECON, the European Council7 and the Council have an average level of bargaining success of 100 each. The average level of bargaining success achieved by the European Council in the ECON is equal to the level that the institution managed to achieve in the Council negotiations on the Six-Pack. The ECB managed to achieve an average level of bargaining success of 85, a slight increase on the level of bargaining success that the institution achieved in the Council (83.33). The Commission’s level of bargaining success was lower than that of the ECB. The Commission achieved an average level of bargaining success of 65.83. This was slightly lower than what the institution had managed to achieve during the negotiations on the Six-Pack in the Council (66.67).

6 The average level of bargaining success for this party group is not entirely accurate, as the position of the party group is clear for only 1 issue. 7 The European Council’s average level of bargaining success is based on the two issues that were included in the Commission’s Six-Pack proposals – RQMV and the linking of the debt criteria with the medium-term budgetary objective. 215

Figure 21: Mean bargaining success of the party groups and institutions.

Note: EPP: European People's Party (Christian Democrats); Greens-EFA: Greens-European Free Alliance (Greens); ALDE: Alliance of Liberals and Democrats for Europe Party (Liberals); GUE-NGL: European United Left-Nordic Green Left (Nordic Greens); SD: Socialists and Democrats (Socialists); ECR: European Conservatives and Reformists (Conservatives); European Council; Council: Council of Ministers; ECB: European Central Bank; Commission: European Commission.

Having described the cleavage patterns and the bargaining success of the party groups in Table 8 and Figure 21 respectively, the next part of the analysis explains the variation in the bargaining success of the party groups. The bivariate analysis was chosen due to the small number of observations, 27 in total, in the Parliament dataset. For each variable, regressions were run with different control variables, and the results do not differ from the results of these bivariate regressions.

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Table 9: The regression coefficients for the effect of each variable on bargaining success.

Variables Coefficient 95% Confidence R Squared (Bivariate Level Regression with robust standard errors) Salience .17 (-0.03, 0.38) 0.07 Number of EP Seats 0.06 (0.04, 0.19) 0.05 Closeness to .09 (-0.29, .48) 0.157 European Council Closeness Status Quo -.40 (-.55, .25) 0.29 Closeness to ECB .37 (-0.02, 0.78) 0.1873 Closeness to Council 0.45 (.06, .84) 0.262 Closeness to -0.04 (-.30, .20) 0.0032 Commission

Rapporteur 33.75 (23.59, 0.18 43.90) Average Weighted -0.002 (-.007,-.001) 0.361 Distance N 27

Note: EP: European Parliament; Council: Council of Ministers; ECB: European Central Bank; Commission: European Commission.

Salience, closeness to the European Council, the Commission and the status quo, and the average weighted distance were found not to be significant. Hypothesis 1, the European Council had more influence than the Commission in shaping the EU’s response to the opening phase of the European sovereign debt crisis, is therefore not valid nor is Hypothesis 1a, an actor that is closer to the Commission will have less bargaining success than an actor that has positioned itself further away from the Commission. Thus, proximity to the European Council and/or the Commission did not increase the level of bargaining success for the party groups in the intra-institutional negotiations in the Parliament’s ECON Committee. Likewise, Hypothesis 9, an actor that attaches a high level of salience to an issue will have more bargaining success than an actor that attaches a low level of salience to an issue, equally does not explain the bargaining success of the party groups in ECON. Hypothesis 11, an actor that is closest to the status quo will have more bargaining success than an actor that is further away from the status quo was also not found to be valid in this context. Conversely, the average weighted distance which acts as a control variable for luck in the multivariate analysis, was found to be negative and significant. This implies that the further a party group is from the

217 other party groups, the less likely they are to be successful. This is what we would expect, in line with Hypothesis 12: An actor with more support will have more bargaining success than an actor with less support. Likewise, the number of seats held by the party group in the seventh Parliament did not influence the level of bargaining success in ECON. The inclusion of the number of Parliament seats acted as a robustness test. Moving to the variables that were found to influence the bargaining success of the party groups in ECON, proximity to the ECB is significant at 0.10. The F-test is statistically significant at the 0.10 level. The R-squared of .1873 means that approximately 19 per cent of the variance of bargaining success is accounted for by the model, in this case, closeness to the ECB. The t-test for the variable equals 1.92. The coefficient is .379, meaning that for a one unit increase in its closeness to the ECB; a party group should expect a .379 increase in bargaining success. Thus, the results support the contention of Hypothesis 1c, that an actor that is closer to the ECB will have more bargaining success than an actor that has positioned itself further away from the ECB. To test for outliers, studentised residuals were utilised. According to the standardised residuals, case 8 “SD” (Socialists and Democrats) is a possible outlier8. Having excluded the outlier case 8 (SD) in the regression conducted on these results, proximity to the ECB remains significant at the 0.10 level.

8 The outlier has a value of -2.2. Any value of greater than 2 or -2 is problematic. The studentised residual for “SD” is -2.49. The lowest value that Cook’s D can assume is zero, and the higher the Cook’s D is, the more influential the point. The conventional cut-off point is 4/n. Case 8 “SD” is the highest with a value of .84 and influential according to Cook’s D. . 218

Figure 22: Bargaining success and proximity to the ECB.

Likewise, holding the position of rapporteur was found to influence the bargaining success of the party groups in ECON. The F-test is statistically significant at the 0.10 level. The R-squared of .1783 means that approximately 18 per cent of the variance of bargaining success is accounted for by the model, in this case holding the position of rapporteur. The t- test for the variable equals 2.33. The coefficient is 37.0833, meaning that for a one unit increase for the party group holding the position of rapporteur, a party group should expect a 37.0833 increase in bargaining success. Thus, the results support the contention of Hypothesis 10, that a party group that holds the position of rapporteur will have more bargaining success than the party group that did not hold the position of rapporteur. According to the stem and leaf plot of studentised residuals one case SD9 is outside this range. Having excluded the outlier case 8 (SD) in the regression conducted on these results, holding the position of rapporteur remains significant at the 0.10 level.

9 The lowest value that Cook’s D can assume is zero, and the higher the Cook’s D is, the more influential the point. The convention cut-off point is 4/n. However, SD is not is significant using Cook’s D. 219

150

Greens-EFA EPP EPP 100 GUE-NGLALDE SD SD EPP Greens-EFA GUE-NGLALDEGreens-EFA GUE-NGLSDALDEGreens-EFA

50 ECREPPSD GUE-NGLSDALDE

Greens-EFA GUE-NGL 0 SD 0 .2 .4 .6 .8 1 Rapporteur

Level of Bargaining Success 95% CI Fitted values

Figure 23: Bargaining success and holding the position of rapporteur.

In bivariate regression, proximity to the Council is significant. First, the F-test is statistically significant, which means that the model is statistically significant. The R-squared of .02646 means that approximately 26% of the variance of bargaining success is accounted for by the model, in this case, closeness to the Council. The t-test for the variable equals 2.38, and is statistically significant, meaning that the regression coefficient for Closeness to the Council is significantly different from zero. The coefficient is .450, meaning that for a one unit increase in Closeness to the Council; we would expect a .450 increase in bargaining success. Thus, the results support the contention of Hypothesis 2, that a party group that is closer to the Council will have more bargaining success than an actor that has positioned itself further away from the Council. To test for outliers, studentised residuals were utilised. According to the standardised residuals, again one case 8 “SD” (Socialists and Democrats) Socialists is a possible outlier10. Having excluded the outlier case 8 (SD) in the regression conducted on these

10 The outlier has a value of -2.1. The studentised residual for it is -2.3. Case 8 “SD” is the highest with a value of .73. 220 results, proximity to the Council remains significant at the 0.10 level. Cases 1 EPP (European People’s Party) Christian Democrats, 3 ALDE (Alliance of Liberals and Democrats for Europe Party) Liberals and 5 ECR (European Conservatives and Reformists) Conservatives are also possibly influential with the same value of .157.

GUE-NGL SD ALDEEPP EPP 100 Green-EFA SD

80 EPP GUE-NGL ALDE GUE-NGL GUE-NGL Green-EFA

60 ALDE SD Green-EFA Green-EFA ECRSD ALDE EPPECR Green-EFA 40 20

0 SD 0 20 40 60 80 100 Closeness to the Council

Level of Bargaining Success 95% CI Fitted values

Figure 24: Bargaining success and proximity to the Council.

5.14 Conclusions

Before discussing the results, attention needs to be paid to the small size of the dataset. In the Parliament dataset, only 27 observations were collected on the six controversial issues in the Six-Pack. Of those 27 observations, the position of the Christian Democrats and the Socialists were collected for all six issues. For the remaining party groups, the position of the Greens and Nordic Greens was missing for one issue and no data could be collected on the position of the Liberals on two issues. A lack of interest from the Conservatives in the

221 negotiations and the difficulty in finding any information on the position of the Europe of Freedom and Democracy party group reduced the amount of data that was available for testing. Thus, with so few observations and in an incomplete dataset there are limits to the extent to which one can draw conclusions based on the results. Several factors were found to shape the bargaining success of the Christian Democrats and the other party groups. The final decision-making outcomes in ECON on the six issues are closer to the party groups that are aligned or not far from the policy positions of the ECB, the status quo, the Council’s collective position and holding the position of rapporteur. Thus, party groups derive bargaining success from endogenous power resources. According to Bailer (2004), endogenous power resources characterise the actual use of power (Bailer, 2004, p.102). Turning to the proximity of the ECB, the institution did not have as much freedom in the Council as it had in the Task Force negotiations, the Bank nonetheless managed to influence the bargaining success of the party groups that shared the institution’s position. Like the Commission, the ECB had a body of experts, which only the largest party groups could rival. Therefore, despite the limitations placed on the ECB by the negotiations taking place within the Community Method, the ECB remained an influential actor throughout the Six-Pack negotiations. The influence of the in shaping the EU’s response has been outlined in several studies (Hodson 2012; Schwarzer 2012; Yiangou et al. 2013 and Niemann and Ioannou 2015) that have examined the institution’s role in the Task Force and the Six-Pack. As the Task Force recommendations, in part, formed the basis of the Six-Pack and as the negotiations in the Task Force were conducted outside the Community Method, the ECB had a platform that was not usually available to the institution to shape the Union’s legislative response to the opening phase of the crisis, the findings support the contention that the ECB was equally influential in the Task Force and the Six-Pack. The results therefore challenge the narrative that ECB’s influence is limited to an advisory role as per Article 4 of Protocol (No 4) on the statute of the European System of Central Banks and of the ECB. The literature on the influence of rapporteur (Benedetto 2005; König et al. 2007; Costello and Thomson 2010; Finke and Han 2013) is primarily focused on the actor’s ability to shape the outcome of negotiations rather than its impact on the bargaining success of party groups. Thus, the findings of this research can only support the general conclusion in those studies that the rapporteur is influential. The findings of this research should be placed within the context of the size of the dataset. Only six issues were examined and therefore further tests are needed before a definite conclusion can be drawn on the position of the rapporteur and its influence on the bargaining success of the party group.

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Similarly, literature (Thomson and Hosli 2006; Costello and Thomson 2013; Napel and Widgrén’s 2006) on proximity to the Council is sparse so the caveat that was placed on the findings on the rapporteur applies here too. A possible explanation for proximity to the Council and increased bargaining success may be that the party groups that took the same positions as the Commission were also taking the same positions of the Council, which was in part implementing the Task Force recommendations. In both cases the Commission’s proposals and the Commission’s position would, in part, reflect the Task Force recommendations. Again, the context of the negotiations should be taken into account before drawing any conclusions. In relation to the remaining explanatory variables, proximity to the European Council (Task Force recommendations) was found not to have an effect on the bargaining success of the party groups. On the surface this would run counter to the findings in the literature (Allerkamp 2010; Alexandrova et al. 2014; Puetter 2011; Schwarzer 2012; Chang 2013; Niemann and Ioannou 2015; Da Conceição-Heldt 2016) on the growing influence of the European Council. However, the Council was for the most part, implementing the Task Force recommendations thus in reality the European Council was an influential actor within ECON in this particular case. Equally, proximity to the Commission was not found to have an effect, thereby supporting the findings of Allerkamp (2010), Alexandrova et al. (2014), Puetter (2011), Schwarzer (2012), Chang (2013), Niemann and Ioannou (2015) and Da Conceição-Heldt (2016). The results of the bivariate regression also found that the influence of salience had no impact on the bargaining success of the party groups. Literature on the impact of salience on the bargaining success of party groups is sparse, however both Bailer (2004) and Arregui and Thomson (2009) examined the explanatory factor in the context of intra-institutional negotiations and likewise found that the variable did not influence bargaining success of the actors. With regard to proximity to the status quo, the findings again do not correlate with any studies on the impact of the explanatory factor and the bargaining success of the party groups. Bailer (2004) when examining intra-institutional bargaining found that an actor that took an extreme position in an effort to ensure that the outcome is no different to the status quo will experience a decrease in their bargaining success (Bailer, 2004, p.116). With two contrasting findings, further testing is needed before a definitive conclusion can be drawn on the impact of a party group’s proximity to the status quo. As with a number of explanatory factors tested in this research, studies on the influence of the average weighted distance on the bargaining success of intra-institutional actors are sparse. Despite the gap in the literature, this the third time, utilizing two different analyses, that the explanatory factor has been tested and where the

223 results have shown that the average weighted distance has had no effect or had a statistically negative effect on the bargaining success of an intra-institutional actor. The quantitative evidence on the bargaining success of the member states as illustrated in Figure 21. Of the 6 party groups, all had level of bargaining success higher than 50 per cent. To the explanatory factors that had a positive impact on the bargaining success of the party groups, it is clear from the quantitative evidence that the party groups that had the highest level of bargaining success were those that were close to the ECB, the Council and held the position of rapporteur. On the remaining explanatory variables, the party groups that are divided between those with the lowest and highest level of bargaining success are also split between those that attached a high and low level of salience, sought to retain the status quo and also took the most radical position possible on the scales, aligned close to the position of the Commission and took the furthest possible position on the scales from the institution, and were the best and least supported in ECON. This balance between the member states ensured that the explanatory factors were not statistically significant in the bivariate regressions.

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Putting the Bible into practice - The inter-institutional negotiations on the Six-Pack

5.15 Structure

This section examines the developments in the inter-institutional negotiations on the issues that were operationalised by the European Commission (Commission) proposal or were placed on the agenda by the European Parliament (Parliament) or the Council of Ministers (Council) in the trialogues. As has been noted in the preceding chapters, it was not legally possible to operationalise the Task Force recommendation to suspended funds to those member states that failed to adhere to the rules of the Stability and Growth Pact in the Six-Pack. There was one issue, the introduction of interest-bearing deposits, which was operationalised in the Commission proposal and was controversial in the Task Force negotiations, though not in the Six-Pack. With no underlying differences between the Commission, the Parliament and the Council on this issue, it is therefore excluded from the reconstruction of the negotiations in the trialogues. Thus, the major remaining issues that were discussed in the trialogue negotiations were;

• Economic dialogue; • linking the inclusion of the debt criteria with the medium-term budgetary objective: • the establishment of a debt benchmark – the reduction of debt by 1/20 per year over 3 years if debt to GDP was above 60 per cent; • the symmetric treatment of macroeconomic indicators, specifically current account surpluses and current account deficits; • the distribution of fines collected by the Commission; • the provision of cash-based fiscal data; • flexibility for member states that implemented second pillar pension reforms in the excessive deficit procedure, • and the role of independent institutions (Interviews 8, 9, 20, 21 and 23).

Three issues that had not been controversial in the Task Force or during intra- institutional negotiations, now raised inter-institutional conflict in the trialogues. Economic dialogue had not been discussed in the Council, as the member states opposed the concept. However, the Parliament considered it to be an important issue. Support for the proposal was

225 so unified that there were no amendments tabled to water down the proposal in the Parliament’s Committee on Economic and Monetary Affairs (ECON). Likewise, support was universal for the establishment of independent institutions with powers to issue binding reports within ECON that no amendments were proposed to water down the proposal. Despite the lack of internal debate, the Parliament did attach considerable importance to the issue in the trialogues. Member states in the Task Force had discussed the powers of independent institutions in the context of fiscal councils. The Council supported the Task Force decision to not allow independent institutions to issue binding recommendations. However, the Council Presidency was forced in the trialogues to engage with the Parliament on this issue. The Parliament also supported a more open interpretation of the rules in the excessive deficit procedure for member states that had instigated second pillar pension reforms than the Council. Thus, on both issues, MEPs supported the Parliament’s position without debate while in the Council the discussion on the two issues was limited to following the recommendations of the Task Force report. The Commission however continued to press for a specific deadline in the excessive deficit procedure. Thus, all three issues warrant significant attention in the analysis of trialogue negotiations, even though they were not controversial in intra-institutional negotiations.

5.16 Background to the trialogues

The trialogues commenced on the 20th of April 2011 after ECON’s rapporteurs received a mandate from its members to start negotiations with the Council and the Commission. At the first meeting, the Parliament’s team, consisting of the Chair of ECON, Sharon Bowles, the Rapporteurs for the six dossiers, Ferreira, Feio, Ford, Haglund, Wortmann- Kool and Goulard, along with the shadow rapporteurs, stressed that the Council should make the first move. Representing the Presidency of the Council of Ministers (Presidency) on behalf of the Council was Minister György Matolcsy and Secretary of State Andras Karman, who were both from the Hungarian Ministry for National Economy. For its part, the Council, with the support of the Commission, stressed the importance of the six proposals and that both institutions were committed to reaching an agreement with the Parliament by June 2011 (European Parliament, 2011n).

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5.17 Negotiation process

Having set out their aims for the trialogues, the attention of the institutions now turned to the issues. Throughout the negotiations the Hungarian Presidency had attempted to please all the actors. However, the Presidency quickly found itself in difficulties when the Commission began to work with the Parliament in an effort to ensure that the legislative decision-making outcome reflected the institutions’ preferences, contrary to those of the Council (Interview 30). Figure 25 illustrates the differing positions of the institutions on one of the most important issues in trialogues for the Parliament, economic dialogue. The extreme positions on the scale are 100 – Binding invitations to institutions and member states and 0 – No provision for economic dialogue. Economic dialogue was tabled without amendment by various MEPs in the discussions in the Committee on Economic and Monetary Affairs (ECON) on the draft Regulations on the excessive deficit procedure, on macroeconomic imbalances in the euro area, on budgetary surveillance in the euro area and on the surveillance and coordination of economic policies. Economic dialogue was championed by Sylvie Goulard, the Rapporteur for the draft on budgetary surveillance in the euro area. Goulard argued that officials from the Council and the Commission should be invited to ECON to explain the decisions on economic governance made by the Eurogroup. Thus, Goulard sought to increase the accountability and transparency of the decision-making process. As this was more an institutional rather than a policy issue, and therefore less contentious within the Parliament, Goulard’s proposal won the backing of all the party groups. The party groups also agreed to the extension of economic dialogue to other areas covered in the Six-Pack (Ibid). Economic dialogue was therefore extended to the draft Regulations on the excessive deficit procedure, on macroeconomic imbalances in the euro area, on the surveillance and coordination of economic policies. The scope however was much broader under these proposed pieces of legislation than in the draft Regulation the on budgetary surveillance in the euro area. In the case of the three draft Regulations, ECON was to “conduct hearings and organise public debates on macroeconomic and budgetary surveillance undertaken by the Council and the Commission”. In the draft Regulation on budgetary surveillance in the euro area, it was proposed that “the Commission [could] make its analyses public and for the economic and finance minister of one or several member states concerned to respond to the findings of the Commission’s analyses” (European Commission, 2010j).

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At the first meeting, the Parliament team pushed for the inclusion of economic dialogue, arguing that there should be a specific article on the hearings of the President of the Euro-group in the legislation. Parliament’s strong push for the inclusion of economic dialogue in the Six- Pack was driven by a desire to gain more influence in economic policy, surveillance and in the budgetary process of a member state. The Parliament also sought to reduce the democratic deficit by bringing greater transparency to the decision-making process in the Euro-group (Interview 24). The Parliament’s position was judged to be one of the extremes – 100 on the scale. At an intermediate position of 50 on the scale is the Commission. The institution was sympathetic to involving member states, though the institution was concerned about the impact that binding invitations to member states could have on decision-making in the EU (Interview 33). At 0 on the scale is the Council. In response to the Parliament, the Presidency in the fourth trialogue on the 17th of May suggested that it was open to the introduction of an economic dialogue. Before the fourth trialogue, the Council had made no provision for economic dialogue. However, the Presidency warned MEPs that there was no support in the Council to give the Parliament powers to issue binding invitations (European Parliament, 2011o). Indeed, some member states considered it a dangerous shift in the inter-institutional balance, while others shared the concerns of the Commission on the impact that the Parliament’s interference could have on decision-making in the EU (Interview 30). Like the Council, the Commission was sympathetic to involving member states, though the institution was concerned about the impact that binding invitations to member states could have on the decision-making process (Interview 33). The Parliament, however, refused to drop the idea of calling on senior officials from the member states to appear in front of MEPs and continued to push this proposal in the last trialogue meetings in May. From the perspective of the Parliament, it was logical that, having lost economic sovereignty in the Economic and Monetary Union, officials from the member states should have a platform to express their concerns on fiscal policy to the member states and to the Commission and the European Central Bank (ECB) (European Parliament, 2011p). At the trialogue meeting in early June, the Parliament continued to press the issue of member state participation in ECON. In an attempt to reach an agreement between the Presidency and the Parliament, the Commission tabled a compromise text which emphasised that invitations to the member states were to be non-binding. The institutions, the ECB, the Council and the Commission, however were required to attend the hearings (European Parliament, 2011q). The compromise was included in the four draft Regulations on budgetary

228 surveillance in the euro area, on the excessive deficit procedure, on macroeconomic imbalances in the euro area, and on the surveillance and coordination of economic policies. Despite a number of member states criticising the decision taken by the Presidency on this issue, the Council did back the compromise (Interview 30).

Council COM EP Status quo Outcome

0: No provision 50: Non- 100: Binding for economic binding invitations to dialogue. invitation to institutions and institutions and member states. member states.

Figure 25: The initial positions of the actors to compelling member state officials to attend hearings in ECON.

Note: COM: Commission; Council; Council of Ministers; EP: European Parliament.

Also, at the first trialogue meeting, discussions were held on the distribution of fines collected under the draft Regulation on the correction of excessive macroeconomic imbalances in the euro area, and the draft Regulation on the enforcement of budgetary surveillance in the euro area. The Parliament’s representatives noted that the Presidency, acting on the Council’s behalf, was unable to take a stance on the position that had been taken in ECON on fines. On the Committee’s support for extending RQMV, the Presidency argued that there were both legal and political problems in the Council to that proposal (European Parliament, 2011n). Figure 26 illustrates the differing positions of the institutions on the allocation of fines. The extreme positions on the scale are 100 – Fines will be distributed to Eurozone member states as a proportion of their GNI who are not in the excessive deficit procedure or in the excessive imbalance procedure and 0 – Fines constitute resources of the general budget of the European Communities. At 100 on the scale is the position of the Commission. The institution proposed that the monies collected from the fines go to those Member states that had not been subject to the excessive deficit procedure or the excessive imbalance procedure. The Commission argued that Member states that were respecting the rules should be rewarded for doing so (Interview 33). At 50 on the scale is the Council’s and Parliament’s position. Despite an initial preference for the Commission’s position, the majority of the Member states backed the Germany proposal that the monies go to the European Financial Stability Facility (EFSF)

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(Interview 34). Germany’s proposal then became the Council’s collective position, despite some delegations arguing that it was absurd that countries had to pay a fine, which could then be used as part of a rescue package for the member state that was penalised. For the Council, the distribution of fines to the EFSF reduced the contributions of those member states that were respecting the rules of the Stability and Growth Pact. It was also entirely logical that the fines go to a mechanism that provided support to member states that were in difficulty (Interviews 26, 29 and 30). This was also the underlying reason for the Parliament’s support for the fines to be allocated to the EFSF (Interview 24). Further down the scale at 0 is the status quo or the extension of the provision that any fines that are collected by the Commission be allocated to the EU budget. The status quo was not supported by any institution. When the discussions in the trialogues ended on this issue, the legislative decision-making outcome reflected the positions of the Council and the Parliament at 50 on the scale.

Status quo Council/EP COM Outcome

0: Fines 50: Fines 100: Fines will distributed to be distributed to constitute resources of all Eurozone Eurozone Member states member states the general budget of the through a as a proportion European stability of their GNI Communities. mechanism. who are not in the EDP or EIP.

Figure 26: The positions of the actors to the allocation of the fines collected by the Commission from member states. Note: COM: Commission; Council; Council of Ministers; EP: European Parliament.

Figure 27 describes the two extreme policy options supported by the Commission and the Parliament on linking the inclusion debt criteria with the medium-term budgetary objective under Article 5.1 in the draft Regulation on the surveillance and coordination of economic policies. The medium-term budgetary objective is a requirement for all member states to adjust their structural budgetary positions at a rate of 0.5% of GDP per year as a benchmark. The medium-term budgetary objective ensures that governments don’t break EU’s fiscal rules while taking into account the need to achieve sustainable debt levels. The extreme positions on the 230 scale are 100 – The inclusion of the debt criteria – 60% and 0 – No specific debt target. At 0, the Commission supported the status quo. The institution argued that there was a separate procedure that dealt with the debt criteria in the Stability and Growth Pact. Thus, the inclusion of the 60% criteria in the article was unwarranted, as a “high level” in the text was sufficient to force member states to reduce their large debts (Interviews 25 and 33). At the other extreme at 100 is the Council and the Parliament. Both wanted stricter rules on reducing debt, and it was felt that the addition of the 60% criteria was a more binding threshold for member state to meet than the Commission’s proposal, which was open to interpretation. The inclusion of the debt criteria limited the Commission’s room for manoeuvre when deciding whether a warning should be issued to a member state that significantly deviated from the adjustment path towards the medium-term budgetary objective. Continued inaction to address such a deviation could result in a joint Commission and ECB mission to the member state that was failing to meet its medium-term budgetary objective (Interviews 24 and 30). At the end of the negotiations in the trialogues, the legislative decision-making outcome reflected the preferences of the Council and the Parliament at 100 on the scale.

COM EP/Council Status quo Outcome

0: No specific debt 100: The inclusion target. of the debt criteria

– 60%).

Figure 27: The initial positions of the actors on linking the inclusion of the debt criteria with the medium-term budgetary objective.

Note: COM: Commission; Council; Council of Ministers; EP: European Parliament.

Figure 28 outlines the differing position of the Council, the Commission and the Parliament on the question of establishing a numerical benchmark for the reduction of debt by 1/20 per year over a 3 year period if the member state had broken the 60% debt ceiling in the draft Regulation on the excessive deficit procedure, Article 2, paragraph 1a, and the treatment of pension reforms in Article 2.7 (European Parliament, 2011i). The extreme positions on the scale are 100 – A numerical benchmark of 1/20 per year over a 3 year period and 0 – No

231 provision for establishing a benchmark. No institution supported maintaining the status quo. Moving up the scale to 70, the Parliament supported the benchmark, though with the caveat that an assessment on the impact of the reduction of debt by 1/20 per year for three years was undertaken. For the institution, which did not have co-decision powers on this issue, this was not a core concern. Its position demonstrated a certain degree of ignorance, as for many MEPs the path of reduction was complicated to understand, and the consequences of the Commission proposal on the member states too difficult to assess (Interview 24). At the other extreme on the scale – 100 were the Council and the Commission. The Commission’s proposal allowed for the measurement of the reduction of a member state’s debt at a regular and consistent level. The Directorate-General of Economic and Financial Affairs argued that the proposal made sense, as previously there had been too much emphasis on the deficit, which had to be corrected with an excessive deficit procedure (Interviews 33 and 34). Despite some hesitancy by France and Italy, on what the Commission proposal meant in practice, and the previous agreement to operationalise the debt criteria in the medium-term budgetary objective, the Council did support the establishment of the benchmark. As with the Commission, the Council support was underpinned by the need to reinforce the Stability and Growth Pact by operationalising the debt criteria. The Council’s position was also influenced by two other factors, the Task Force report and the markets. Agreement had been reached in the Task Force to give more importance to debt in the Stability and Growth Pact. There was also a need to bring certainty to the markets through establishing a mechanism that brought debt onto a sustainable path. The sheer complexity of the Commission proposal made this one of the most technical and difficult discussions in the Council’s Ad-Hoc Working Group, which needed to make sure that any agreement could not endanger Italy’s chances of survival on the debt markets (Interviews 26, 29 and 30). At the conclusion of the negotiations in the trialogues, the agreement reached reflected the preferences of the Council and the Commission.

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Status quo EP COM/Council Outcome

0: No provision 70: A benchmark 100: A for establishing a following an benchmark benchmark. assessment made of 1/20 per over a three-year year over a period. 3 year period.

Figure 28: The initial positions of the actors to reducing by 1/20 for 3 years.

Note: COM: Commission; Council; Council of Ministers; EP: European Parliament.

Figure 29 lays out the policy differences of the institutions on the question of pension reform in Article 2.7. The extreme positions on the scale are 100 – Consideration given by the

Council and the Commission to the costs of second pillar pension reforms when assessing excessiveIssue Six: Howdeficit procedure, the debt and deficit figures and 0 – A temporary deviation from salient Issue Six: How Issue Six: the(important) medium was-term budgetary objective for member states that had undertaken secondHow pillar the proposal that salient (important) was salient pensioncashed based reforms. No institution supported the status quo (0). Further up the scale (importantat 50, and fiscal data be the proposal that cashed based ) was the takingprovided an to the intermediate position between the two extremes, is the Commission.proposal The Commission for fiscal data be Commission did not initially want to take pension reformsprovided into account, to the due to doubtsthat cashed about the based EP/COM/ECON/ Commission for the longevity of these reforms. However, a strong push by thea group of mainly Easternfiscal Europe data EPP/PES/ALDE/ be Greens – EFA EP/COM/ECON/ member states in the Task Force forced the Council to take theEPP/PES/ALDE/ concerns of those countriesprovided into and GUE/NGL? to the account in its proposals. In an attempt to neutralise the TaskGreens Force– EFA recommendations, the and GUE/NGL? Commissi on for the Commission wanted to be clear on the costs and length of these reforms. The CommissionEP/COM/ was also concerned about making distinctions about different types of expenditure. ECON/EP Thus, the P/PES/AL

DE/ Commission proposed a five-year exemption for member states that had undertaken second Greens – pillar pension reforms in the excessive deficit procedure (Interview 33). The proposalEFA mirrored and GUE/NGL that of then Chair of the Sherpa Committee, Thomas Wieser, in his third draft of the Task? Force report, which had been an attempt to win over Poland and the other member states that had

undertaken second pillar pension reforms.

At the other extreme on the scale – 100 were the Council and the Parliam ent. The position of the Presidency reflected the decision at the European Council summit that flexibility should be given to member states that had undertaken second pillar pension reform in the excessive deficit procedure with certain conditions. The European Council argued that pension

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reforms improved the sustainability of public finances in the long term (Interview 30 with senior Council official). In the case of the Parliament, the issue was simply about codifying the agreement reached in the Council in the Six-Pack (Interview 24). At the end of the negotiations on this issue, the compromise reached reflected the Council and Parliament’s position.

Status quo COM Council/EP Outcome

0: Temporary 50: COM and 100: COM and deviation from the Council consider Council consider medium-term costs of second costs of pension budgetary objective pension pillar pillar reform when for member states reform when assessing in EDP that had undertaken assessing in debt and deficit second pillar pension EDP deficit and figures. reforms debt figures only when deficit

over five years.

Figure 29: The initial positions of the actors to giving greater flexibility in the excessive deficit procedure for member states that had undertaken pension reforms.

Note: COM: Commission; Council; Council of Ministers; EP: European Parliament.

Issue Six: How salient (important) Figure 30 illustrates the positions of the institutions on the provisionIssue Six: of cash How- based was the proposal that fiscalcashed data based under fiscal Article 3.2 of the draft Council Directive on budgetarysalient frameworks (important) The

data be provided to was the proposal that extremethe Commission positions for on the scale are 100 – IssueCash Six:-based How fiscal data at a monthlycashed frequency, based fiscal for the salient data be provided to centralEP/COM/ECON/EPP and state government and social security(important) funds, was and quarterly, for localthe governmentCommission for and the other/PES/ALDE/ extra-budgetary Greens funds and 0 – Nothe requirement proposal that to submit cash-based fiscal data. No – EFA and cashed based EP/COM/ECON/EP institutionGUE/NGL? supported the status quo (0). fiscal Taking data be an intermediate at 50 onP/PES/ALDE/ the scale is the provided to the Greens – EFA and

Commission. The institution had proposedCommission the collection for of cash-based fiscalGUE/NGL? data at a monthly the rate for both central and local government.EP/COM/ECON For the institution the proposal was aimed at

/EPP/PES/ALD ensuring that member states had the same E/practices Greens – in the collection of data. It came as a shock to officials in the institution when it becameEFA apparent and that member states had different practices GUE/NGL? in collecting data (Interview 33).

At the other extreme on the scale – 100 are the Parliament and Council. Both institutions agreed that fiscal data should be collected at a monthly rate for central government and

quarterly for local government. The Council agreed in principle that the collection of such data

was a useful tool, which allowed the Commission to identify issues with the debt levels of

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regional or local governments in the member states at an early stage. Spain, on the other hand, had huge problems with the provision of such data due to its highly decentralised state structure, which prohibited the country from handing over the information required at the rate proposed by the Commission. The inability of Spain to provide the data resulted in the Council’s position reflecting the member state’s preference for the provision of cash-based data at a monthly rate for government and at a quarterly rate for local government (Interviews 26 and 30). As for the Parliament, MEPs sought a balanced and reasonable approach, which bridged the Commission’s proposal and the Council’s common position. Thus, MEPs supported the provision of cash based fiscal data at a monthly rate for central government and at a quarterly rate for local government (Interview 49). At the conclusion of the discussions in the trialogues, the outcome reflected the Parliament’s and Council’s position.

Status quo COM EP/Council Outcome

0: No 50: Cash-based 100: Cash-based fiscal data at requirement fiscal data at a a monthly frequency, for to submit monthly central and state gov’t and cash-based frequency for social security funds, and fiscal data. both central quarterly, for local gov’t and gov’t and each other extra-budgetary funds. subsector.

Figure 30: The initial positions of the actors to the stringency in the provision of cash-based fiscal data to the Commission.

Note: COM: Commission; Council; Council of Ministers; EP: European Parliament.

Figure 31 describes the policy differences on the role of independent institutions in fiscal policy under Article 4 of the draft Council Directive on budgetary frameworks. The extreme positions on the scale are 100 – Independent institutions to analyse, assess and validate a member states budget and 0 – No role for independent institutions in policy-making. No institution supported the status quo. Further up the scale at 70 is the Council. The Council objected to the role of independent institutions in fiscal policy making as a number of member states had constitutional issues. Thus, the Council wanted the Commission proposal watered- down by arranging independent institutions to monitor the budget process and provide independent analysis for elements of the budget process (Interviews 29 and 30). Unlike fiscal

235 councils, independent institutions did not have the power to issue binding reports. At 90 on the scales was Commission which wanted greater transparency of the budget process through mandating the inclusion of all institutions involved in the field of budgetary policy to examine the budget process. The Commission argued that there was strong evidence that, where such bodies had been established, there was a positive impact on a government’s fiscal policy. Independent institutions, unlike governments, were able to take a long-term view on fiscal policy. The Commission, however, sought to find a compromise with those member states that opposed the compulsory creation of fiscal councils. The Commission proposed that the independent institutions would provide an analysis of the whole budget process (Interview 33). At 100 on the scale is the Parliament. At the committee stage, the issue received little attention because it was not controversial. However, in the trialogues, the Parliament attached significant importance to it. For the Parliament, independent institutions represented an opportunity to increase transparency and accountability in fiscal policy-making in the member states (Interview 49). The Parliament therefore wanted independent institutions with expertise in fiscal policy and budgetary policy to analyse, assess and validate a member state’s budget. When negotiations in the trialogues came to an end, the legislative decision-making outcome was judged to be at 70 on the scale. The outcome, mirroring the Council’s preference, allowed independent institutions to provide monitoring and analysis for elements of the budget process that was free of any interference from the ministries of finance.

Status quo Council COM EP Outcome

0: No role for 70: 90: 100: Independent independent Arrangements Independent institutions to institutions in for monitoring institutions analyse, assess policy- and independent mandated to and validate a making. analysis for analyse member states elements of the budget budget.

budget process. process.

Figure 31: The initial positions of the actors on the role of independent institutions in the budgetary process.

Note: COM: Commission; Council; Council of Ministers; EP: European Parliament.

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At the 7th of June 2011 trialogue, the Parliament pushed for the expansion of the voting procedure into the preventive arm of the Stability and Growth Pact despite the Presidency’s opposition. The Parliament argued that this brought it on par with the macroeconomic surveillance procedure, as originally proposed in Article 3.1. This issue was only resolved at the end of inter-institutional negotiations. On the question of a symmetrical or non– symmetrical approach, the Presidency and the Council stated that the text could not be altered, as it represented the best possible outcome between the different positions of the member states (European Parliament, 2011q). Figure 32 illustrates the differing positions on the treatment of current account surpluses and current account deficits in Article 3.2. No requirement to establish a mechanism to set non- symmetric or symmetric indicative thresholds. The Commission shall set indicative thresholds that shall be symmetric. At 0 on the scale is the status quo or preventing the Commission from establishing a mechanism to set any indicative thresholds. Further up the scale at 50 is the Council and the Commission. The Commission preferred that imbalances be treated separately. It was quite clear to that institution that current account deficits indicated competitiveness weaknesses in a member state’s economy. Further, permanent deficits posed a more immediate risk to the stability of the Economic and Monetary Union than current account surpluses (Interview 33 and 37). Thus, the institution favoured the setting of non- symmetric indicative thresholds. Likewise, the Council wanted the Commission to have the power to set non- symmetric indicative thresholds. The Council position was heavily weighted in favour of Germany, the member state with the largest current account surplus and strongest proponent of an asymmetrical approach, rather than Spain and Portugal. These two member states were pushing strongly for symmetrical treatment of current account surpluses and deficits (Interview 29 and 30). At the other extreme on the scale of 100 was the Parliament. The Parliament strongly supported the empowerment of the Commission to set indicative thresholds that were symmetric. For MEPs from the Socialists, the Greens, and the Nordic Greens it was a matter of principle that some concessions be given to member states with high current deficits, which had undertaken tough economic reforms. It was also considered an opportunity to treat member states, in the Eurozone especially, more equally. As the issue was so contentious, it was not possible to decide the list of relevant factors or the thresholds for current account deficits and current account surpluses which triggered the excessive imbalance procedure and the macroeconomic imbalances procedure during the legislative procedure (Interview 24). The Council and the Commission were given joint responsibility for deciding the relevant factors,

237 which was based on a list proposed by the Commission and covered under Article 126(3) the Treaty on the Functioning of the European Union (Article 1 Regulation on the excessive deficit procedure) (Official Journal of the European Union, 2012). At the end of the negotiations in the trialogues, the Commission and Council argument won out over the Parliament’s and thus the legislative decision-making outcome reflected the preferences of these institutions.

Status quo COM/ Council EP Outcome

0: No requirement to 50: The 100: The establish a mechanism Commission may Commission shall to set non -symmetric or set non-symmetric set indicative symmetric indicative indicative thresholds that thresholds. thresholds. shall be symmetric.

Figure 32: The initial positions of the actors on the setting of symmetric thresholds.

Note: COM: Commission; Council; Council of Ministers; EP: European Parliament.

The reports for the six amended proposals in Parliament were adopted through roll call votes on the 30th of June. For Ferreira’s report (draft Regulation on macroeconomic imbalances – the symmetric or asymmetrical treatment of current account surpluses and current account deficits), 551 voted in favour, 88 against, and 29 abstained. With the exception of one MEP, all of the members of the Christian Democrats voted in favour, which was also the case with the Greens and the Liberals. The Socialists fully backed Ferreira’s report. The majority of those from the European Conservatives and Reformists (Conservatives) voted against the proposal, as did members of the Nordic Greens. However, the vote was a lot tighter in the Freedom and Democracy group and among Independents. The overall margin was also small for Wortmann-Kool’s, Feio’s and Goulard’s reports. There were 333 votes cast in favour for Wortmann-Kool’s report (draft Regulation on the surveillance and coordination of economic policies – linking the inclusion of the debt criteria with the medium-term budgetary objective) with 303 against and 26 abstentions. A coalition of the Christian Democrats and the Liberals with 4 defections each from the Conservatives and Europe of Freedom and Democracy the groups, along with 5 rebels from the Greens and 6 from the Socialists, prevented the Parliament from rejecting the report. The majority of the Socialists, the Nordic Greens, and the Greens voted against the proposal, as did members from

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Conservatives and Independents. Again, the vote was tight in the Europe of Freedom and Democracy group though a majority did vote against the report (European Parliament, 2011s). Though not as close as the vote on the Wortmann-Kool report, only a small majority of members backed the Goulard and Feio texts. Goulard’s report (draft Regulation on budgetary surveillance in the euro area – economic dialogue and the distribution of fines) was backed by 339 in favour, 304 against with 26 abstentions. Again, a coalition of the Christian Democrats and the Liberals was required to ensure that the report was adopted with the aid of defections from the Conservatives, 4, Freedom and Democracy, 3, Greens, 6, and the Socialists 7. The majority of members from those party groups, with the exception of the Conservatives, along with the Nordic Greens, opposed the report. The majority of the Conservatives abstained on this occasion. Feio’s text (draft Regulation on the excessive deficit procedure – numerical benchmark for the reduction of debt by 1/20 per year over a 3 year period and the treatment of pension reforms), the only report to be decided under the Consultation Procedure, was supported by 339 MEPs in favour, 304 against with 26 abstentions. As with the two previous reports, a coalition of the Christian Democrats and the Liberals was needed for the adoption of the report. Rebels supporting the text from the party groups opposed to it numbered 7 each from the Socialists and Greens and 4 from both the Conservatives and Freedom and Democracy party groups. The bulk of the members from these party groups along with the Independents opposed the text (ibid). Support was higher for both Haglund’s and Ford’s report. Haglund’s text (draft Regulation on macroeconomic imbalances in the euro area – economic dialogue and the distribution of fines) received the support of 368 members with 80 voting against and 209 abstentions. The majority of the Greens joined the Liberals and the Christian Democrats in supporting Haglund’s report along with 7 rebels from the Socialists, and 4 each from the Freedom and Democracy and Conservatives groups. The bulk of the members from the Socialists and Conservatives opted to abstain from the vote, with the main opposition coming from the Nordic Greens and Independents. Ford’s report (draft Council Directive on budgetary frameworks – the provision of cash-based fiscal data at a monthly frequency and the role of independent institutions in fiscal policy) on the only proposal in the package decided as a Non- Legislative Enactment, received the second highest votes in the plenary after Ferreira’s text, with 468 votes cast in favour and 156 against with 43 abstentions. The bulk of the Christian Democrats, the Liberals and the Greens voted in favour of the report, as did the Socialists and the Conservatives. However, a substantial minority in both groups opted to oppose the text. The majority of the Nordic Green and Independents were opposed (ibid).

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As there were several proposals coming before the plenary, a number of draft legislative resolutions, statements as to whether Parliament approves, rejects or proposes amendments to the proposals, were to be voted on next. However, after the plenary voted on the amendments, the Chair of the Economic and Monetary Affairs Committee, Sharon Bowles, proposed that the final vote on the draft legislative proposals should be postponed. Bowles was able to make such a proposal under Rule 57.2 of the Parliament’s rules of procedure. After a brief debate between then Chair of the Socialists Martin Schulz, opposing the proposal, and the Rapporteur Wortmann-Kool for draft Regulation on the surveillance and coordination of economic policies, in favour of the motion, the Parliament by electronic vote agreed to postpone the ballot, by 410 in favour to 245 against with 12 abstentions. The reports were thus referred back to the Economic and Monetary Affairs Committee (European Parliament, 2011t and 2011u). At the trialogue meeting on the 30th of June, some Rapporteurs, Ferreira in particular, wanted the Commission to table proposals to address the question of a symmetrical approach. However, Bowles concluded that it was not possible to find a majority in the Parliament on the text tabled by the Commission on this issue. In response, the Commission stressed the need for an agreement to be reached as an important step in strengthening the ‘Community Method’ in the area of economic policy making in the Union and as comprehensive response to the crisis. The Presidency, for its part, reported back to the member states that no agreement could be reached and that it therefore had to pass the texts on to the incoming Polish Presidency (European Parliament, 2011v). The decision to postpone the final vote on the draft legislative proposals was a result of the Liberals siding with the party groups on the left of the plenary. MEPs from the Liberals were mostly supportive of the Six-Pack; however, they did not want the whole legislative package, the centre piece of the Hungarian Presidency, being agreed upon due to their opposition to Prime Minister Viktor Orbán and his domestic policies (Interviews 17 and 59). The trialogues resumed when the Parliament returned from its summer recess on the 30th of August and concluded on the 20th of September. Ministers reconvened in the Economic and Financial Affairs Council configuration on the 4th of October, where they confirmed their agreement on the compromise on the six legislative proposals, after the Parliament had voted on the 28th of September on the agreement struck with the Presidency. The compromise that paved the way for the Parliament to vote on the legislative resolution included the extension of reverse simple majority and the symmetric treatment of current account surpluses and current account deficits. On reverse simple majority, ministers formally agreed a two-step procedure under Article 6.2 of the draft Regulation on the surveillance and coordination of economic

240 policies, which was referenced in Article 3.1 of draft Regulation on budgetary surveillance in the euro area. On the basis of a recommendation from the Commission, the Council could decide by qualified majority voting to adopt a decision on compliance when a member state was found to be deviating from the adjustment path towards its medium-term budgetary objective. If the member state continued to fail to adhere with targets to meet its medium-term budgetary objective, the Commission could, after one month, recommend for a second time that the Council adopts a decision of non-compliance. The decision was to be deemed adopted if not rejected by simple majority (Council of Ministers, 2011h). On the draft Regulation on macroeconomic imbalances, Ferreira’s report, MEPs voted in favour of the report by a margin of 550 with 87 against and 24 abstentions for the amended proposal, and the legislative resolution was approved by 554 votes to 90 against with 21 abstentions. As had been the case previously, the bulk of the party groups supported the proposal, with the exception of the majority of Independents, the Nordic Greens, the Conservatives and members of the Freedom and Democracy group. This was also the case for the legislative resolution. The margin in favour of Wortmann-Kool’s report increased, with 356 MEPs voting in favour and 265 against with 35 abstentions for the amended proposal. An increased number of Liberal, Conservative, Socialist and Green MEPs joined those members who had backed the report in June. Most of those MEPs that had crossed over also backed the legislative resolution, which was approved by 354 votes to 269 against with 34 abstentions. A majority of members from the Socialists, Greens, Conservatives, Freedom and Democracy party groups, however, still opposed the proposal and the legislative resolution. The Nordic Greens remained implacably opposed (European Parliament, 2011w). Both the Goulard and Feio texts also saw a moderate increase in the number of MEPs supporting the reports since the vote on 23rd of June. Goulard’s report received 352 votes in favour 243 against with 61 abstentions and the legislative resolution was approved by 352 votes to 237 against with 67 abstentions. Feio’s text, received 361 votes in favour 270 against with 35 abstentions and the legislative resolution was approved by 363 votes to 268 against with 37 abstentions. As was the case with the vote on the Wortmann-Kool’s report, more MEPs from the Liberals, Conservatives, Socialists and Greens joined those members who had originally backed the two texts on the ballot in June. The majority of the Conservatives, Socialists and Greens along with the members of the Nordic Greens and Independents continued to oppose both amended texts. The bulk of the Independent MEPs and their party group colleagues voted against the legislative resolution. Also showing a slight increase in support was Haglund’s report which received 395 votes in favour, 64 against with 201 abstentions for the amended

241 proposal, and the legislative resolution was approved by 395 votes in favour to 63 against with 206 abstentions. A number of Socialists, who had initially abstained in the first vote, joined the majority of the Greens, the Christian Democrats and the Liberals in supporting the report. The Socialist rebels also supported the legislative resolution. Opposition was restricted to the Nordic Greens and the Independents. The only vote to be held on Ford’s report was one for the legislative resolution, which was carried by 442 votes in favour to 185 against with 40 abstentions. The majority of the Liberals, the Christian Democrats, the Greens and the Conservatives backed the proposal as did a substantial minority of Socialists. However, the majority of the Socialists, the Nordic Green, members of the Freedom and Democracy group and Independents opposed the legislative resolution (ibid). Turning to the symmetric treatment of current account deficits and current account surpluses in the draft Regulation on macroeconomic imbalances, ministers agreed that there would be no symmetric treatment of current account deficits and current account surpluses. With political agreement having been reached at the Economic and Financial Affairs Council configuration on the compromises, ministers formally adopted the legislative proposals known as the Six-Pack on the 8th of November 2011 (Council of Ministers, 2011j).

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5.18 Results Table 10: Constellation of positions in the trialogues during the negotiations on the Six- Pack.

Constellation of positions

Issue:

Economic Status quo Outcome • EU institution: dialogue. • EU institution: • EU institution: (Parliament). (Council). (Commission). The allocation of Status quo Outcome • EU institution: fines. • EU institutions: (Commission). (Council/ Parliament). The inclusion of Status quo Outcome the debt criteria • EU institution: • EU institutions: in the medium- (Commission). (Council/ term budgetary Parliament). objective. The Status quo • EU institution: Outcome establishment of (Parliament). • EU institutions: a debt (Commission/ benchmark. Council). Flexibility in the Status quo • EU institution: Outcome excessive deficit (Commission). • EU institutions: procedure for (Council/ member states Parliament). that undertook pension reforms. Stringency of the Status quo • EU institution: Outcome provision of (Commission). • EU institutions: cash-based fiscal (Council/ data. Parliament). Role of Status quo Outcome • EU institution: • EU institution: independent • EU institution: (Commission). (Parliament). institutions. (Council). The symmetric Status quo Outcome • EU institution: treatment of • EU institutions: (Parliament). current account (Commission/ deficits and Council). surpluses. Note: Commission: European Commission; Council: Council of Ministers; Parliament: European Parliament.

According to Tsebelis and Garrett (2000), the Parliament and the Commission are more pro-integrationist than the members of the Council. This division between the institutions is also reflected in the positions that they take in negotiations (Tsebelis and Garrett, 2000, p.10). Therefore, the analysis of the constellation formation in the trialogues is based on this cleavage pattern. On the first issue, economic dialogue no pro-integrationist cleavage pattern is evident. On the second issue the allocation of fines, there is pro-integrationist/supranationalist –

243 integrationistsceptic/intergovernmental cleavage pattern expressed in the Council and the Parliament sharing a position. As for the Commission, it is isolated on this issue. A similar constellation is apparent on issue three, the inclusion of the debt criteria in the medium-term budgetary objective and issue four, the establishment of a debt benchmark. On issue four however it is the intergovernmental Council and the supranationalist Commission grouped together with the supranationalist Parliament isolated. On the fifth issue, the flexibility in the excessive deficit procedure for member states that undertook pension reforms the cleavage pattern that was established in other issues is again apparent, with the Commission one its own and the Parliament and Council. This constellation of institutions is again apparent on the stringency of the provision of cash-based fiscal data, the sixth issue. On the seventh issues, the role of independent institutions, the institutions are split across three positions and thus no pro- integrationist/integrationistsceptic cleavage pattern is evident within or between constellations. On the eight issue, the symmetric treatment of current account deficits and surpluses, the Parliament is isolated while the Council and the Commission are grouped together. Thus, a pro-integrationist/integrationistsceptic cleavage pattern is distinguishable between the Council and the Commission. Figure 33 graphs the mean level of bargaining success of the institutions in the trialogues. The bargaining success of the institutions is measured on a policy scale ranging from 0-100 (distance to outcome). The closer an institution is to the outcome on the policy scale, the higher its bargaining success. The Council is the most successful actor in the trialogues. The institution has an average level of bargaining success of 93.75. Following the Council are the Parliament and the Commission, with an average level of bargaining success of 80 for the former institution and 66.25 respectively for the latter. The levels of bargaining success in Figure 33 indicate that the Council was the most successful institution in shaping the outcome in the trialogues and thus the final legislative outcome. Similarly, the Parliament had a high level of bargaining success while the Commission managed to achieve a level just above average. There are two institutions that were not involved in the trialogues and whose bargaining success requires attention. First, the European Council has an average level of bargaining success of 10011. Second, the ECB has an average level of bargaining success of 75 from the eight issues examined in the trialogues. The average level of bargaining success

11 The European Council’s average level of bargaining success is based on three issues that were discussed in the trialogues – the linking of the debt criteria with the medium-term budgetary objective, flexibility in the excessive deficit procedure for member states that undertook pension reforms and the role of independent institutions.

244 achieved by the ECB is lower than the level achieved by the institution in the Council and ECON. Having described the cleavage patterns of the member states in Table 15 and the bargaining success of the member states in Figure 33, the next part of the analysis explains the variation in the bargaining success of the institutions. The bivariate analysis was chosen due to the small number of observations in the institution dataset. For each variable, regressions were run with different control variables, and the results do not differ from the results of these bivariate regressions.

European Council

Council

ECB

Commission

0 20 40 60 80 100 Mean Bargaining Success

Figure 33: Mean bargaining success of the institutions in the trialogues.

Note: European Council; Council: Council of Ministers; EP: European Parliament; ECB: European Central Bank; Commission: European Commission.

Having described the cleavage patterns of the legislative institutions involved in the trialogues in Table 10 and the bargaining success of the European Council, Council Parliament, ECB and Commission in Figure 33, the next part of the analysis explains the variation in the bargaining success of the institutions that participated in the negotiations in the trialogue along with that of European Council and the ECB. The bivariate analysis was chosen due to the small number of observations, 27 in total, in the trialogue dataset. For each variable, regressions were run with different control variables, and the results do not differ from the results of these bivariate regressions.

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Table 11: The regression coefficients for the effect of each variable on bargaining success.

Variable Coefficient 95% Confidence R Squared Bargaining Level Success Salience -.39 (-.93, 0.14) 0.09 Closeness to .39 (0.12, .67) 0.29 European Council Closeness to -.45 (-.81, .09) 0.2383 Status Quo Closeness to .41 (0.01, 0.81) 0.1765 ECB N 27 Note: ECB: European Central Bank.

To the first result in Table 11, salience was not to be significant at 0.10 when outliers are included or excluded. Thus Hypothesis 9, that an actor that attaches a high level of salience to an issue will have more bargaining success than an actor that attaches a low level of salience to an issue is not a valid explanation in this research when seeking to understand the bargaining success of the institutions. With regards to proximity to the European Council (recommendations of the Task Force), the variable remains significant with the inclusion of outlier case 7 (Commission)12. Having excluded the outlier 7 (Commission) in the regression conducted on these results, proximity to the European Council remains significant at the 0.10 level. Thus, the results support the contention in Hypothesis 1, that the European Council had more influence than the Commission in shaping the EU’s response to the opening phase of the European sovereign debt crisis. Without the outlier case 7 (Commission), proximity to the status quo is not significant. However, with the inclusion of the outlier the status quo is significant at 0.10. The F-test is statistically significant at the 0.10 level. The R-squared of 23.83 means that approximately 24 per cent of the variance of bargaining success is accounted for by the model, in this case, proximity to the status quo. The t-test for the variable equals -2.62. The coefficient is - .4551583, meaning that for a one unit increase in its closeness to the status quo, institutions should expect a -.45 decrease in their level of bargaining success. Thus, the results do not

12 The F-test is statistically significant at the 0.10 level. The R-squared of 9.25 means that approximately 9 per cent of the variance of bargaining success is accounted for by the model, in this case, closeness to the European Council. The t-test for the variable equals 3.04. The coefficient is .3940328, meaning that for a one unit increase in its closeness to the European Council; institutions should expect a .394 increase in bargaining success. 246 support Hypothesis 11, that an actor that is closest to the status quo will have more bargaining success than an actor that is further away from the status quo. Similarly, on the proximity to the ECB and its effect on bargaining success, the removal of the outlier case 7 (Commission) means that the factor is not significant. When the outlier is included, F-test is statistically significant at the 0.10 level. The R-squared of 0.1765 means that approximately 18 per cent of the variance of bargaining success is accounted for by the model, in this case, proximity to the status quo. The t-test for the variable equals 2.17. The coefficient is .4154412, meaning that for a one unit increase in its closeness to the status quo; institutions should expect a 41 increase in their level of bargaining success. Thus, the findings do not support the contention of Hypothesis 1c, that an actor that is closer to the ECB will have more bargaining success than an actor that has positioned itself further away from the ECB. In general, the exclusion of the outlier on results on the effect on the proximity of the ECB and the status quo on the bargaining success of the institutions in the trialogues, means that one cannot be confident that a relationship exists between these variables and bargaining success of the Commission, the Council and the Parliament.

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Commission Commission EP EP EP 100 Council Council Commission Council Council EP

Commission Commission

50 EP Council

Commission 0

0 20 40 60 80 100 Closeness to European Council

Level of Bargaining Success 95% CI Fitted values

Figure 34: Bargaining success and proximity to the European Council.

Note: Commission (European Commission); Council (Council of Ministers); EP (European Parliament).

248

Commission Commission EP EP 100 CouncilCommission Council Council

80 EP

EP 60 Commission Commission EP Council 40 20

Commission 0

0 20 40 60 80 100 Closeness to Status Quo

Level of Bargaining Success 95% CI Fitted values

Figure 35: Bargaining success and proximity to the status quo.

Note: Commission (European Commission); Council (Council of Ministers); EP (European Parliament).

Commission EP EP 100 Council Commission Council Council

80 EP EP 60 Commission Commission EP Council 40 20

Commission 0

0 20 40 60 80 100 Closeness to ECB

Level of Bargaining Success 95% CI Fitted values

Figure 36: Bargaining success and proximity to the status quo.

Note: Commission (European Commission); Council (Council of Ministers); EP (European Parliament).

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5.19 Conclusions

Before the results are interpreted, the small size of the dataset must be highlighted. In the trialogue dataset, only 27 observations from the three institutions were collected on the eight controversial issues that featured in the negotiations. While the position of the Commission, the Council and the Parliament were collected for all of the salient issues, there are still issues that need to be discussed even with a complete dataset. One issue that has been already noted in the previous section are outliers. When an outlier is removed and as a consequence there is no relationship between the variables, one cannot be confident that a relationship exists. Another issue that one has to take into account are measuring errors, which tends to be magnified in small datasets. In such cases these errors have the potential to negatively affect the model. With these caveats in mind, the results are examined below. A year after the Commission tabled its proposals for the Six-Pack, the most comprehensive package of reforms to the EU’s economic governance structures since the changes implemented to the Stability and Growth Pack in 2005 had been agree upon. While both the Parliament and the Council entered the trialogue negotiations as co-legislators with equal influence under co-decision, it would be the latter institution that would prevail. Across 6 of the 8 issues, the Council was a pivotal member in the constellation of positions of EU institutions as outlined in Table 15. One factor was found to shape the bargaining success of the Council, the Commission and the Parliament and by extension the decision outcome, proximity to the European Council (Task Force recommendations). This supports the findings in the literature (Allerkamp 2010; Alexandrova et al. 2014; Puetter 2011; Schwarzer 2012; Chang 2013; Niemann and Ioannou 2015; Da Conceição-Heldt 2016) on the growing influence of the European Council. On possible explanation for the European Council’s influence in the trialogues, the Council was for the most part, implementing the Task Force recommendations. Thus, the European Council, through the Council, was provided an opportunity to shape the outcome of the Six-Pack. As noted earlier, the removal of outlier in the results on the effect of bargaining success and proximity to the ECB and the status quo meant that it was impossible to assert with any confidence that a relationship exists between these variables and bargaining success in the trialogues. Thus, it is impossible to say whether the results on the proximity to the status quo support the findings in Costello and Thomson (2013), Napel and Widgrén (2006), König et al. (2007) on the influence of the variable. Similarly, one cannot state unequivocally about the extent of the influence of the ECB in shaping the EU’s response to the European sovereign

250 debt crisis on these results. Literature on the impact of salience on the bargaining success of the institutions is sparse, however both Bailer (2004) and Arregui and Thomson (2009) examined the explanatory factor in the context of intra-institutional negotiations and likewise found that the variable did not influence bargaining success of the actors. In terms of explaining the results of the institutions bargaining success as outlined Figure 34, the Council’s bargaining success is down to power. The Council’s influence under co-decision has been established in several studies on decision making in the EU (Tsebelis and Garrett 2000; Thomson and Hosli 2006; Hagemann and Høyland 2010; Costello and Thomson 2013). Indeed, Hagemann and Høyland (2010) argued that the Council’s influence was derived its power to set the agenda. In the case of the Six-Pack, the agenda was set by the European Council through the Task Force report which proved a basis for the Commission proposals for the legislative package. Another factor that can explain the success of the Council is the collective weight of the preferences of the member states prevailing over those of the MEPs (Thomson and Hosli 2006; Costello and Thomson 2013). This is apparent in the Six-Pack negotiations in the Council. The depth of the crisis and the risk of contagion in the Eurozone during 2009-2011 forced member state policy-makers to take a ‘quantum leap’ in reforming economic governance, which left the majority of the Parliament with little choice but to support (Interview 30). The Parliament’s influence was further weakened by the technical nature of some of the more important elements of the Six-Pack, such as the reduction of debt by 1/20 per year over a three-year period. A number of Parliament negotiators did not have the level of expertise to stand over the institutions first reading position or to counter the Council’s proposals in the trialogues. The Council and the Presidency team were only implementing what had already been agreed to in the Task Force report (Interview 49). The Commission had also provided technical expertise during the negotiations in the Task Force and used the report as a basis for the Six-Pack proposals. The Council’s administration therefore gained valuable expertise through the Task Force negotiations, which aided the Hungarian and Polish Presidencies in the trialogues. The Parliament however had not been consulted in those negotiations, leaving the institution with limited experience in dealing with the issues before the Six-Pack was tabled. Therefore, the Parliament’s superior resources, which Häge and Kaeding (2007) have argued tips the balance in the trialogues in the institutions favour, had no discernible influence on the legislative decision-making outcome in the negotiations. While the Council emerged as the dominate actor in the trialogues, the Parliament and the Commission were on the winning side on several issues. The evidence partially supports

251 the contention by Kreppel (1999) and Kasack (2004), that the Parliament is more successful on issues that are less politically sensitive. In the trialogues, the Parliament was on the winning side on the distribution of fines, flexibility in the excessive deficit procedure for member states that undertook pension reforms, the stringency of the provision of cash-based data and the inclusion of the debt criteria in the medium-term budgetary objective. Thus, the Parliament shaped the legislative decision-making outcome on one politically sensitive issue. The Commission however was far more successful than the Parliament, on influencing the more controversial issues. On compelling member state officials to attend hearings of ECON, the reduction of debt by 1/20 per year over three years and the symmetric treatment for current account deficits and current account surpluses, the Commission was on the winning side with the Council. For the Commission, the Six-Pack proposals represented a far-reaching transfer of powers. Pre the crisis Commission recommendations to sanction member states that broke the deficit rules could be overturned, and infamously were after Germany and France had broken the 3 per cent deficit ceiling in 2003. The Commission also had light touch supervisor powers, which allowed Greece to report inaccurate fiscal data for a decade before the crisis without any sanction (European Commission, 2010l). With the Six-Pack the proposals the Commission’s powers on sanctions and monitoring would be greatly increased. Indeed, the Six-Pack proposals represented a shift in powers away from the Council and to a lesser degree from the member states in fiscal policy making to the Commission. Thus, in the trialogues, Council support for the Six-Pack proposals were on the whole greatly welcomed by the Commissioner Rehn and the Directorate-General for Economic and Financial Affairs. Therefore, it was rationale for the Commission to align itself with the Council where possible in order to ensure that the potential gains in the institutions power were implemented. The Commission’s success was also aided by its proximity to the Task Force outcome. The Commission based its proposals on the Task Force report in an effort to wrest back its agenda setting powers from the European Council. Basing the Six-Pack proposals on the Task Force report also meant that opposition from the Council would be muted. The Task Force report had to be adopted by all of the European Council for the recommendations to have any bearing. Once European leaders approved the recommendations of the report, the Council was, before the Six-Pack negotiations had commenced, already in line with most of legislative package. Therefore, proximity to the Task Force outcome increased the bargaining success of Council and Commission. Proximity to the Task Force outcome also helped to align the goals of both the Commission and the Council in the trialogues. For the Parliament, which had been left out of the Task Force negotiations, the institution only influenced the legislative decision-

252 making outcome on two issues that were dealt with in the report and later in the trialogues. Had the Parliament been involved in the Task Force negotiations or had aligned its first reading position with recommendations in the report, the bargaining success of the institution may have been higher.

Table 12: Timeline of the negotiations in the trialogues.

Trialogue Meetings Date of trialogue meetings: Issues discussed: Trialogue meeting on the 20.04.2011. • Economic dialogue. • Reverse qualified majority voting. Trialogue meetings on the 03-04.05.2011. • Allocation of the fines. • Symmetric treatment of macroeconomic imbalances. Trialogue meetings on the 10-11.05.2011. • Medium-term budgetary Objective. • The numerical benchmark for the debt criteria. Trialogue meeting on the 17.05.2011. • Economic dialogue. • Reverse qualified majority voting. • Symmetric treatment of macroeconomic imbalances. Trialogue meeting on the 23.05.2011. • Allocation of the fines. Trialogue meeting on the 25.05.2011. • Allocation of the fines. • Reverse qualified majority voting. Trialogue meeting on the 30-31.05.2011. • Reverse qualified majority voting. • Symmetric treatment of macroeconomic imbalances. Trialogue meeting the 7, 8-9.06.2011. • Reverse qualified majority voting. • Symmetric treatment of macroeconomic imbalances. • Economic dialogue. • Collection of cash based monthly data. Conclusion of Hungarian Presidency and trialogue on the 30.06.2011.

5.20 Assessment of the influence of the Commission vis-à-vis the European Council

The concluding part of this chapter assesses the influence of the European Council and the European Commission (Commission) in shaping the outcome of the Six-Pack. The European Council’s growing influence came to the fore during the opening phase of the European sovereign debt crisis, when at the March summit held on the 25th and 26th 2010 the Heads of State or Government availed of Article 15(1) of the Treaty on the Functioning of the European Union (TFEU) to request Van Rompuy to “establish, in cooperation with the Commission, a task force with representatives of the member states, the rotating presidency and the European Central Bank”. The objective of the Task Force would be to improve the

253 crisis resolution framework and bring about better budgetary discipline and explore all options to reinforce the legal framework” (European Council, 2010c, p.6). The European leaders at the third ever Euro area summit provided more detail about the role of the Task Force. Eurozone leaders agreed at that 7th of May Eurozone summit to:

“broaden and strengthen economic surveillance and policy coordination in the euro area, including by paying close attention to debt levels and competitiveness developments;- reinforce the rules and procedures for surveillance of euro area Member States, including through a strengthening of the Stability and Growth Pact and more effective sanctions; - create a robust framework for crisis management, respecting the principle of Member States' own budgetary responsibility” (European Council, 2010, p.2).

Following the results of the European Council and Eurozone summits, the Commission’s communication of the 12th of May to the Parliament, the European Council, the Council and the ECB on reinforcing economic policy coordination reflected the broad outline of the results of the summits. The Commission in its communication provided some detail to what had been agreed to at the summits. The communication highlighted the need for more attention to be paid to the use of the EU budget as a tool to ensure better compliance with the rules of the SGP (Commission, 2010, p.5). The Commission also suggested that national fiscal frameworks to better reflect the priorities of EU budgetary surveillance, though no detail was given (Ibid, p.6). Other possible areas of reform included giving the debt criterion, debt-to- GDP ratio of 60 per cent in the Treaty of the Functioning of the European Union, greater prominence in secondary legislation and interest-bearing deposits in cases where inadequate fiscal policies were executed. Details of how much the interest-bearing deposits and how it would be applied were not discussed (Ibid). Finally, the Commission argued that economic surveillance should be expanded, and analysis deepened beyond the budgetary dimension to address other macroeconomic imbalances. The Commission therefore proposed a scoreboard encompassing a number of factors including current accounts which would indicate the need for action to be taken by a member state (Ibid).

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The Commission’s next communication that was submitted to the Task Force on the 30th of June, would add further detail to some of the issues that had been outlined on the 12th of May. The 30th of June communication had been requested by the European Council at the 25th and 26th of March summit was submitted after the ministerial and state secretaries configuration of the Task Force and the Sherpa committee had met to discuss the suspension of EU budget funding and RQMV, the debt criterion, interest-bearing deposits and increased budget surveillance and flexibility for member states in the excessive deficit procedure that had undertaken second pillar pension reforms – see Table 4. The Commission communication had also come after the submission of the proposals to the Task Force by Germany, the Netherlands, Austria, Poland, Bulgaria, Romania, Finland, Slovakia, Slovenia, Sweden, Luxembourg and the ECB – see Table 4. The member states and the institutions proposals discussed increased budget surveillance, the debt criterion, suspension of EU budget funding, flexibility for member states in the excessive deficit procedure that had undertaken second pillar pension reforms, interest-bearing deposits. The aim of the Commission’s 30th of June communication was to develop proposals on addressing macroeconomic imbalances through an alert and sanctions mechanism; strengthening national fiscal frameworks by moving to multi-annual budgetary planning and specifying minimum requirements for domestic fiscal frameworks; focusing on the debt criterion in the SGP and strengthening enforcement measures within the Pact (Commission, 2010, p.2). The Commission also tabled a series of measures in the preventive and corrective arm of the SGP that could be taken when a member state breaches the rules in the Pact (Ibid). The aim of the surveillance mechanism was to address macroeconomic imbalances using a score board with a set of indicators including current account balances. The results from the scoreboard would provide guidance and not be linked to any policy follow up (Ibid, p.3). With regard to national fiscal frameworks, the Commission argued that national cash data should be provided on a monthly basis among a number of elements. To increase fiscal sustainability, the Commission proposed that in the preventive arm of the SGP, the member states with high debt would have to make rapid progress to their medium-term budgetary objective (Ibid, p.7). In the corrective arm of the pact, the institution proposed that the debt criterion of the excessive deficit procedure be implemented effectively through a numerical benchmark that defined the pace of debt reduction (Ibid, p.8). On strengthening enforcement measures, the Commission proposed that an interest-bearing deposit be temporarily imposed on a member state that failed to make sufficient progress with budgetary consolidation in the preventive arm of the SGP. The interest-bearing deposit would be applicable to Eurozone

255 member states only. As regards to the sanctions regime in the corrective arm of the pact, the EU budget funding that were related to cohesion policy, Common Agricultural Policy and spending and fisheries fund would be utilised to ensure that member states respected the key macroeconomic conditions of the SGP i.e. the debt criterion (Ibid, p.9). Four months later the Task Force negotiations came to an end when its recommendations ended. The Task Force recommendations included the proposals of the Commission’s 12th of May and 30th of June communication, both of which were influenced by the guidelines agreed by Eurozone leaders at the 7th of May Eurozone summit, and new issues such as reverse qualified majority voting, flexibility for member states in the excessive deficit procedure that had undertaken second pillar pension reforms and fiscal councils – see Table 13. Therefore, with the exception of these three issues, the Task Force recommendations did not significantly diverge from the Commission’s 12th of May and 30th of June communications. Thus, the Commission’s position on all of the most salient issues dealt with in the Task Force remain consistent from its first communication on the 12th of May to the tabling of the Six-Pack proposals on the 29th of September. The three issues however were later added to the Commission communications which, along with the Task Force recommendations, formed the basis of the Six-Pack legislation and the Regulation on EU funds – see Table 13. The exclusion of the conditionality rules on compliance with the SGP requirements in the relevant regulations on EU expenditures was done so for legal purposes. The recommendations of the Task Force on this issue were included in the Regulation 1303 on EU funds. Turning to the differences between the final outcome of the Six-Pack negotiations and the Commission proposals there are a number of differences. The Commission agreed with the operationalisation of debt criterion, though sought greater flexibility in its application. The Commission failed to achieve such flexibility in Article 5 of the Regulation on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies. The Commission also failed with regard to how the fines would be distributed. The Commission had wanted the fines to be distributed to Eurozone member states as a proportion of their GNI that were subject of the excessive deficit procedure or had been placed in the excessive imbalance procedure. In other words, the Commission sought through its proposals to reward member states that were adhering to the rules of the SGP. The Parliament and Council argued that the fines should be utilised to help part fund the stability mechanism. At the end of the trialogue negotiations, the position of the Parliament and the Council was reflected in Article 4 of Regulation on enforcement measures to correct excessive

256 macroeconomic imbalances in the euro area. The Commission was also unsuccessful in its aim of collecting cash-based fiscal data from both general and state/local government at a monthly rate in the trialogue negotiations on Article 3(2.a) in Council Directive on requirements for budgetary frameworks of the member states. Similar to the negotiations in the trialogues on the distribution of fines, the joint position of the Council and the Parliament, that cash-based fiscal data be provided at a monthly rate for general government and quarterly for state/local government, emerged as the outcome. The Commission was also unable in the trialogues to ensure that the flexibility for member states that implemented second pillar pension reforms in the excessive deficit procedure would be limited to 5 years. Both the Parliament and the Council were successful in ensure that such flexibility would not be constrained in Article 1(5) of Regulation on speeding up and clarifying the implementation of the excessive deficit procedure. The final issue that the Commission was unable to influence the outcome was on the role of independent institutions in Article 6(1.b) of the on requirements for budgetary frameworks of the member states. Here the Commission had wanted independent institutions to be given a mandate to analyse budget process whereas the Parliament wanted these bodies to examine and validate budgets while the Council wanted a freer interpretation of the powers of independent institutions. At the end of the trialogue negotiations, the Council’s position prevailed. The Commission was however more successful in other areas. On the operationalisation of the debt criterion within the debt reduction benchmark - Article 1(2.b) of the Regulation on speeding up and clarifying the implementation of the excessive deficit procedure, the Commission’s proposal remained unaltered after the trialogue negotiations. Likewise, the proposal by the institution on non-symmetric treatment of current account surpluses in Article 3(2) of the Regulation on the prevention and correction of macroeconomic imbalances were maintained in the final legislative text. Finally, the Commission was also successful in getting its proposal for establishing reverse qualified majority voting in Article 3.1 of the Regulation on the effective enforcement of budgetary surveillance in the euro area and its position on allowing the Parliament’s Economic and Monetary Affairs issue non-binding invitations to institutions and member states. In the case of the latter issue or economic dialogue, it was pushed by the Parliament in the trialogues and the Commission position was adopted in the Regulation on speeding up and clarifying the implementation of the excessive deficit procedure, the Regulation on the prevention and correction of macroeconomic imbalances and the Regulation on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies. In summary, the Commission was able to

257 get 44.44% of its proposals on the most salient issues in the negotiations adopted into the legislative package. Overall, the Commission achieved an average level of bargaining success of 77.77 across the most salient issues in the Task Force and Six-Pack negotiations – see Figure 37.

European Council

Commission

0 20 40 60 80 100 Mean Bargaining Success

Figure 37: Bargaining success of the European Council and the Commission.

Note: Commission (European Commission).

Conversely, based on the same data the European Council achieved an average level of bargaining success of 100 across the salient issues in the Task Force and Six-Pack negotiations. The bargaining success of the European Council can be explained through its ability to set the agenda of the Task Force negotiations. The Commission under the Community Method has the power to set the EU’s agenda through tabling proposals. The Task Force, as has been noted early, was established outside of the Community Method by the European Council. The Commission therefore ceded the role of agenda-setter to the European Council during the opening phase of the European sovereign debt crisis. The European Council managed to seize the agenda for shaping the EU’s response to the crisis through Article 15(1) of the TFEU, which allowed the institution to ‘provide the Union with the necessary impetus for its development and shall define the general political directions and priorities thereof. It shall not exercise legislative functions. Thus, Article 15(1) gave the European Council the leading role in shaping

258 the EU’s response to the crisis through the Task Force. The establishment of the Task Force also allowed the European Council to stay within the Treaties while exercising influence within the Community Method. The Task Force recommendations had the full weight of the heads of state and government behind it, thus making it impossible for the Commission to reject the proposed policies in the report. Thus, despite tabling the Six-Pack proposals a month before the Task Force recommendations were agreed on in an effort to re-establish its agenda-setting powers, the Commission was in fact re-emphasising the position of the European Council. The European Council’s presence was also felt in the trialogues, where the Council of Ministers (Council) sought to enact, where possible, the Task Force recommendations legislatively. The European Council may not have been officially represented, however it did have its own agent in the trialogues to align the Six-Pack legislation to as close to the Task Force recommendations as possible – see Table13. In broader context, the establishment of the Task Force and its recommendations marked the end of a process that finally allowed the European Council to assert itself as the driver of integration and the evolution of the Commission’s role of an agenda-setter to one of supervision and monitoring through the new powers that the institution gained in the Six-Pack.

259

Table 13: Task Force recommendations and Commission proposals.

Task Force recommendations Commission proposals and legislation • Specific attention should be • Special attention • Regulation 1175 on paid to the impact of pension should be paid to the strengthening of reforms in the member states that the surveillance of implementation of the SGP, have, and will, budgetary positions such as establishment of a undertake pension and the surveillance mandatory second pillar, on reforms such as a and coordination of debt and the deficit by a multi-pillar system economic policies. member state. that includes a mandatory, fully funded pillar (Article 9).

• A new surveillance • Framework outlined • Regulation 1176 on framework should be in Article 3 to Article the prevention and established to correct 11. correction of macroeconomic imbalances. macroeconomic imbalances.

• National fiscal frameworks • Accounting and • Directive 85/EU on should meet requirements in statistics outlined in requirements for the following areas no later Article 3. budgetary than end 2013: (1) public • Forecasts outlined in frameworks of the accounting systems and Article 4. Member States. statistics; (2) numerical • Numerical fiscal rules rules; (3) forecasting outlined in Article 5, systems; (4) effective 6 and 7. medium-term budgetary • Medium-term frameworks; and (5) budgetary adequate coverage of general frameworks outlined government finances*. in Article 8 and 9. • Adequate coverage of general government finances outlined in Article 10, 11, 12 and 138.

• In the first stage of the new • Interest-bearing • Regulation 1173 on financial enforcement deposits imposed on the effective measures in the SGP, Euro area member enforcement of interest-bearing deposits and states (Article 3). budgetary noninterest-bearing deposits surveillance in the and fines will be introduced euro area. for the Euro area only. • Fiscal councils will be tasked • Independent • Directive 85/EU on with providing independent institutions mandated requirements for analysis, assessments and to analyse budget budgetary forecasts related to domestic process Article 6(1.b) frameworks of the fiscal policy matters. Member States.

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• Conditionality rules on • Funding from the • Regulation 1303 on compliance with the SGP European Regional EU funds. requirements in the relevant Development Fund, regulations on EU the European Social expenditures should be as Fund (ESF), the broad as possible. Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund should be suspended. • Reverse qualified majority • RQMV will be used • Regulation 1173 on voting (RQMV) will be used to impose interest- the effective to impose interest-bearing bearing deposit enforcement of deposits. (Article 3), non- budgetary interest-bearing surveillance in the deposits (Article 4) euro area. and fines (Article 5). • Regulation 1174 on • RQMV will be used enforcement to impose fines**. measures to correct excessive macroeconomic imbalances in the euro area. • Operationalise the debt • Debt criterion to be • Regulation 1175 on criterion in the Treaty debt- taken into account in the strengthening of to-GDP ratio of 60% in the the medium-term the surveillance of Treaty of the Functioning of budgetary objective budgetary positions the European Union. (Article 5). and the surveillance • Debt criterion to be and coordination of taken into account in economic policies. the debt reduction • Regulation 1177 on benchmark (Article speeding up and 1(2.b)). clarifying the implementation of the excessive deficit procedure. *The Task Force agreed to present the outline of the national fiscal frameworks, leaving the Commission to provide further detail in its proposed Directive. The Commission however was present throughout the negotiations in the Task Force, thus the details provided in the proposed Directive reflected the concerns of the member states.

**RQMV was to be only used when imposing fines (Article 3) in the proposed Regulation on enforcement measures to correct excessive macroeconomic imbalances in the euro area.

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Part VI Conclusion

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6.1 Structure

This chapter is split into two parts. The first part of the conclusion examines the research findings within the context of the debate on liberal intergovernmentalism and neo- functionalism and the impact of the results on the literature on the European sovereign debt crisis that crisis that examined the influence of the European Council, the European Commission (Commission), the European Central Bank (ECB) and the European Parliament (Parliament). The first section therefore examines the findings in the context of the first aim of this research project, the influence of the European Council and the Commission in shaping the sovereign debt crisis and part of the second aim of the research project, the role legislative institutions in influencing the decision-making outcome. The second half of this chapter addresses the influence of the member states in the Task Force and Council of Ministers (Council) and the party groups in the Parliament.

6.2 Implication of findings on EU decision-making

Within the context of the discussion on the European Council vis-à-vis the Commission, the existence of the Task Force also supports one of the key pillars of Moravcsik’s (1993) argument that the EU’s development has been somewhat uneven and been driven by intergovernmental agreements (Moravcsik, 1993, p.476). The Task Force was established by the inter-governmental European Council and the recommendations formed part of the Six- Pack. The development of the agenda to reform the EU’s economic governance structure was driven by a two-level configuration headed by the then President of the European Council Herman Van Rompuy with the blessing of the heads of state and government, and not by the Commission. Indeed, the Commission played a mainly advisory role in the Task Force negotiations while the Parliament was excluded altogether from the negotiations. The Task Force recommendations also mirrored another element of Moravcsik’s Liberal Intergovernmental (LI) framework; policy co-ordination based the preferences of the member states rather than the Commission. The institution’s average level of bargaining success as outlined in Figure 9 in Chapter 5 was 58.33 in the Task Force, which was behind 21 member states and the ECB. The influence of the Commission in the Six-Pack negotiations is also weak. Turning to the Six-Pack negotiations within the Council, proximity to the institution was not found to have

264 had an impact on the bargaining success of the member states – see Table 5 or on the party groups in the Parliament’s Committee on Economic and Monetary Affairs (ECON) – see Table 9. In terms of bargaining success, the Commission achieved just a level above average in the Six-Pack negotiations in the Council (66.67). Likewise, the Commission achieved an average level of bargaining success of 65.83 in ECON and 66.25 in the trialogues. To put this into context the level of bargaining success achieved by the Commission was lower than the level achieved by 19 member states, and the ECB and the institutions that did not participate in the negotiations in the Council i.e. the European Council, and the Parliament. In ECON, the Commission was only behind the Christian Democrats, however four of the party groups that had lower levels of bargaining success than the institution did not take positions on all of the issues. Similarly, the Commission’s average level of bargaining success was lower than the other institutions that did not participate in the negotiations in the ECON i.e. the European Council, the Council and the ECB. In the trialogues, the Commission was behind both the institutions that participated in the trialogues, the Council and the Parliament, and the European Council and the ECB. Conversely, the European Council managed to achieve an average level of bargaining success of 10013 compared to the Commission in the Council, the Parliament and the trialogues. The influence of the European Council is further underlined by the impact of aligning with the institution on the bargaining success of the actors. Proximity to the European Council was found to have a positive effect on the bargaining success of the member states in the Council and institutions in the trialogues. Further evidence to support Moravcsik’s contention that the EU’s development is intergovernmental, and the conclusions drawn by Puetter (2011), Dinan (2012), Schwarzer (2012), Chang (2013), Niemann and Ioannou (2015), Verdun (2015) and Da Conceição-Heldt (2016) on the shift towards intergovernmentalism during the European sovereign debt crisis can be found in the bargaining success of the Council. The Council is a conduit for the European Council under co-decision. Indeed, a number of senior policy-makers from the Council’s Economic and Financial Affairs (ECOFIN) configuration and the member states interviewed for this project indicated that the role of the Council was to implement the recommendations of Task Force report through the Six-Pack. The Council achieved a higher average level of bargaining success (100) compared to the level achieved by the Commission (65.83) in ECON. Likewise, in the trialogues, where both institutions can participate, the Council’s level of bargaining success (80) was above that of the Commissions’ (66.25). Thus,

13 The European Council’s level of bargaining success is based on two issues. 265 the policy response to the European sovereign debt crisis, was driven by the intergovernmental European Council rather than the supranational Commission, while the content of the Task Force report and the Six-Pack legislation heavily reflected the preferences of the member states. Indeed, according Schmitter (2005), Haas argued that for regional bureaucrats to intervene on an issue a number of elements had to come together such as economic interdependence between member states and a crisis of sufficient magnitude. The European sovereign debt crisis was certainly a crisis of sufficient magnitude and economic interdependence was a factor increasing the intensity of the crisis through contagion. While it is true that the Commission was able to intervene, it was at the behest of the European Council and in advisory capacity in the Task Force rather than a leading player. The Commission therefore did not provide the dynamic for further integration in the area of economic integration, as the ‘secretariat’ should under neo-functionalism. Thus, the EU’s response to the opening phase of the crisis reflects Moravcsik’s LI framework than Haas’ neo-functionalism when examining the influence of the European Council and the Commission. In terms of decision-making in the EU, the finding support Bauer and Becker’s (2014) conclusion that the Commission’s role shifted from setting the agenda to one of implementing the agenda. The Six-Pack proposals are evidence of such a shift. The proposals were in part based on the recommendations of the European Council’s Task Force. Like the Commission, the European Council’s role has also evolved. Since the Lisbon reforms were introduced in 2009, the European Council has through Article 15(1) of the Treaty on European Union gained the ability to “define the general political directions and priorities”. Article 15(3) set down the number of meetings (two) that the European Council was to have every six months while Article 15(5) created the position of President whose role would be to drive the work of the institution forward and ensure continuity in its agenda. The European Council, as has been outlined earlier, availed of these changes at the first opportunity that arose, which was the European sovereign debt crisis. Indeed, the establishment of the Task Force by the European Council was manifestation of a process that was under way since the inception of the institution. As outlined by Allerkamp (2010) and Alexandrova (2014), the European Council started to erode the Commission’s ability to set the EU’s agenda soon after the institution was established in 1978. Thus, the European Council’s ability to set the agenda during the crisis brought to the fore a process that had been going on for some time, the displacement of the Commission as the EU’s main agenda setter. The establishment of the Task Force also heralded a potentially new avenue that would place the European Council at the centre of setting the EU’s agenda. The European Council

266 could ignore the Parliament while allowing the ECB, where applicable, and the Commission provide policy expertise to member states. Thus, future forums like the Task Forces could set the EU’s policy agenda that reflected the concerns of the member states rather than been shaped by the supranational Commission. These forums would have the weight of the European Council behind them, which would increase the clout of any recommendations that they would produce. While the Task Force was able to recommend far reaching proposals to reform the EU’s economic governance structures, it was undermined by poor leadership by Van Rompuy. Indeed, Van Rompuy brought the Task Force close to collapse due to inexperience. This ignorance of the working procedures of the Council’s ECOFIN configuration coupled with the Commission pre-empting the recommendations of the Task Force with the proposals for the Six-Pack, undermined any future plans to shape the EU’s agenda through a forum similar to that of the Task Force. The establishment of the Task Force therefore proved to be the exception rather than the rule, as the European Council never sought to establish another forum similar to the Task Force. Had the Task Force proved to be a success for the member states, the Community Method could have been permanently undermined. Instead, the Community Method manged to survive as the EU’s main decision-making process. In doing so the supranational Commission and the Parliament could still play a role in shaping the EU legislation and curb the influence of the European Council and member states. The prevalence of Community Method therefore ensures the relevance of the Commission, in an era where the institution’s agenda-setting powers have been significantly weakened. The Commission was of course not the only supranational institution to be involved in shaping the Task Force recommendations and the decision outcome of the Six-Pack, the ECB and the Parliament likewise participated in the negotiations and their influence tends to support Haas’ idea of EU integration. The same spill-over effects that were unable to make the Commission the most influential player in the Task Force and in the Six-Pack, negotiations increased the influence of the ECB in decision-making. The ECB as noted in Chapter III is prohibited has the only the power to give an opinion on Commission proposals that fall under the remit of the institution – Article 282(5) of the Treaty on the Functioning of the European Union (Official Journal of the European Union, 2012). Nonetheless, the ECB managed to shape the outcome of the Task Force report and to a degree the common positions of the Council and the Parliament on the Six-Pack by going beyond its primary objective of maintaining price stability and becoming involved in the negotiations on reforming the EU’s economic governance structures. Indeed, the ECB was quite successful in shaping the recommendations of the Task Force and the outcome of the Six-Pack. At the end of the Task Force negotiations, 267 the ECB had an average level of bargaining success of 66.67– see Figure 9, while in the Council the institution achieved an average level of bargaining success of 83.33 – see Figure 14 and an average level of 85 in ECON – Figure 21. In the trialogues, where the ECB did not participate in the negotiations, the institution managed to achieve a level of bargaining success of 75 – see Figure 33. The ECB therefore had a higher average level of bargaining success than the Commission by the end of the Task Force negotiations and throughout the negotiations on the Six-Pack. In terms of influencing the bargaining success of intra institutional actors, the ECB was found to have had a positive effect on the bargaining success of the member states in the Council – see Table 5 and on the party groups – see Figure 22. The influence of the ECB on the bargaining success of the institutions involved in the trialogues could not be determined. Thus, the bargaining success of the ECB as an institution and the Bank’s impact on the bargaining success of the member states and the party groups is evidence of a (successful) spill- over effect for a supranational institution in the Six-Pack negotiations and less so in the Task Force. The ECB’s move into a new policy area caused by a crisis of sufficient magnitude in a policy area where economic interdependence between member states is high, gave the institution’s senior policy-makers an opportunity to intervene in a new policy area i.e. economic governance, it gave the Bank a platform in which to deepen economic integration. This finding feeds into a trend identified by Schwarzer (2012) that the ECB started to become more involved in the discussion on economic governance as the crisis deepened. It also supports Da Conceição-Heldt (2016) conclusions that the ECB became a driver of economic integration during the crisis. The influence of the ECB introduces a new actor into the supranational/neo-functionalism debate, one that replaces the Commission as ‘the secretariat’ in Haas’ model of neo-functionalism (Schmitter, 2005, p.257). The influence of the ECB in the intra-institutional negotiations in the Council and the Parliament as a factor in increasing the bargaining success of the member states and the party groups is significant. The ECB’s role in decision making is limited to giving opinions. The results indicate that the ECB’s opinion on economic issues carries more weight than the Commissions, further strengthens the contention made in this research that the ECB has become an alternative source expertise on economic issues for member states and party groups. By challenging the Commission monopoly as the only source of expertise, the ECB helped to further weaken the institution’s ability to influence the Six-Pack negotiations. Though not involved in the negotiations in either the Task Force or on the Six-Pack in the Council, the Parliament in the latter case managed to achieve an average level of bargaining success of 83.33 – see Figure 14. In the trialogues, the Parliament managed to achieve an

268 average level of bargaining success of 80. Proximity to the Parliament however did not have an impact on the bargaining success of the member states in the Council. The level of bargaining success that the Parliament achieved supports the conclusions made by Chang (2013), Schwarzer (2012) and Niemann and Ioannou (2015) that the Parliament managed to successfully shape the EU’s response to the crisis. Indeed, Niemann and Ioannou argued that the Parliament’s influence could be described as cultivated spill-over or the drive by supranational institutions to increase their own power through championing integration (Niemann and Ioannou, 2015, p.199). This was demonstrated during the Six-Pack, the Parliament was able to gain a number of concessions from the Council, which prevented the supranational element of the legislative package from being watered down. Thus, the bargaining success of the Parliament, like that of the ECB, indicates that Haas’ neo- functionalism remains relevant. In terms of the influence of the Parliament, under co-decision, the bargaining success of the institution supports Thomson and Hosli (2006) and Costello and Thomson (2013) that the institution does have a degree of influence under the legislative procedure. However, the influence of the Council is greater than that of the Parliament, a finding that is supported by the level of bargaining success achieved by both institutions in the trialogues – see Figure 34. Overall, the results present a far more balanced picture of the importance of both LI and neo-functionalism when examining the roles of intergovernmental and supranational institutions in EU decision-making.

6.3 Influence of intra-institutional actors

Having examined the influence of the institutions within the context of the LI/neo- functional debate and the possible impact that the findings of the research may have on decisions-making in the EU, the second part of this chapter examines the influence of the other legislative actors, the member states and the party groups. First, to the bargaining success of the member states after the negotiations on the Six-Pack in the Council had ended. As the negotiations in the Council were interlinked with those in the Task Force, it is useful to compare and contrast the bargaining success of the member states between the negotiations in the Task Force and in the Council on the Six-Pack to identify any trends. In Figure 9 which measures the bargaining success of the member states and institutions in the Task Force, member states are split roughly along two dimensions, (1) an East/North-South and (2) an economic performance (strong-weak) cleavage. Member states that could be grouped within the East/North constellation and had a relatively strong economic performance achieved levels of

269 bargaining success above average or over 50. There were however three exceptions to the two trends that emerged in the Task Force, Cyprus, Ireland and Malta. The bargaining success of the member states, both large and small that fall into the East-North and relatively strong economic performance arguably could also be a result of luck, though not as Barry describes. The European sovereign debt crisis provided a unique opportunity for member states that were fiscally conservative to push through far reaching reforms of the EU’s economic governance framework at a time when resistance to such proposals was at its weakest. Thus, more fiscally inclined member states that were unhappy with the Commission’s failure to distill fiscal discipline in profligate member states before the crisis, had an opportunity to correct the institution’s mistake through the Task Force and later the Six-Pack. Integration in the Economic and Monetary Union (EMU) and in the Euro area therefore increasingly favoured the policies of fiscally conservative member states over the needs of Southern member states that tended to have looser budgetary policies. The bargaining success of the member states in the Task Force also showed the emergence of an East/North axis in economic policy. Bar the United Kingdom, which as the key-informant indicated was not particularly engaged with the negotiations, all of the member states that fell into the North or East category had an average level of bargaining success above 50. This East-North axis is a relatively new constellation in the Council. Before the 2004 enlargement of the EU, member states in Council’s ECOFIN, member states were generally split between fiscally conservative member states in the North and member states in the South that advocated looser fiscal and monetary policies. The 2004 accession changed this dynamic by bringing into the Council a number of post-communist member states that advocated balanced budgets and low debt. The addition of Estonia, the Czech Republic, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia to the Council therefore increased the number of potential allies that the traditional fiscally conservative member states, such as the Netherlands and Germany, could count on when shaping economic policies. Conversely, the 2004 accession provided France and Italy and the other member states that advocated looser budgetary policies with (potential) allies that had little or no economic fire power; Cyprus and Malta. Indeed, with the exception of those two smaller member states, the average level of bargaining success of economic heavily weights from the South, France, Italy and Spain, was at 50 or below. Another factor that should be taken into account when explaining the low levels of bargaining success of the member states from the South, were the economic conditions during 2010 which are outlined in greater detail in Chapter II. The European sovereign debt crisis was approaching its height, with Greece receiving financial assistance from the Commission, the

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ECB and the International Monetary Fund (the Troika), a few weeks before negotiations were to begin in the Task Force. The Troika during the Six-Pack negotiations would provide financial assistance to Ireland and Portugal. This crisis also heightened fears of contagion within the Eurozone and raised questions about whether the Euro area would weather the economic storm with all of the member states that used the single currency. It was therefore extremely difficult for member states, with growing budget deficits and ever-increasing bond spreads, to successful defend the economic governance status quo or to garner support for their policy proposals outside of the constellation of member states in the South. The European sovereign debt crisis therefore provided the opportunity to strengthen the EU’s economic governance framework in line with the policies of more fiscally conservative member states like Germany or the Netherlands. A similar pattern is discernable in the Six-Pack negotiations in the Council, which is outlined in Figure 14, though the cleavages are less clear cut than in the Task Force negotiations. Three member states, Hungary, Romania, and the United Kingdom that would naturally fit the into the North/East constellation have an average level of bargaining success below 50. The United Kingdom’s bargaining success as noted earlier is a result of a lack of interest by the member states in reforming the EU’s economic governance framework. Data on the policy preferences of Romania could only be collected on two issues, thus skewing the average level of bargaining success of the member state. The bargaining success of Hungary was affected by the member state holding the rotating Presidency of the Council, which meant that it could only be active on issues that were extremely salient. In terms of the member states that are from the South, Cyprus and Malta are joined by Portugal with an average level of bargaining success of 75, 60 and 50 respectively. Luck as described by Barry (1980), which was outlined earlier, provides a possible explanation for the bargaining success of the three member states. Cyprus, Malta and Portugal are not economic heavily weights and in the case of Portugal it was heading for a bailout during the Six-Pack negotiations, which further reduced the influence of the member state in the Council. The three member states joined Austria, Bulgaria, the Czech Republic, Denmark, Estonia, Finland, Germany Latvia, Lithuania, the Netherlands, Poland, Slovakia, Slovenia and Sweden, which all recorded an average level of bargaining success ranging from 100 to 83.33. At 50 or below in Figure 14 are the member states from the South with the exception of the 3 member states that were mentioned earlier. Thus, the North/East – South dimension that emerged during the negotiations in the Task Force is also present and fairly stable in the Council negotiations on the Six-Pack. The continued existence of the North/East – South dimension is a result of a number of factors that were

271 outlined at the start of this section on the Task Force, such as poor economic conditions continuing into 2011 and the North/East axis carrying over from the Task Force into the Council. In terms of decision-making in the ECOFIN, economic policy will be predominantly shaped by the North/East axis. The bargaining success of the party groups as outlined in Figure 21 roughly follows the left/right dimension, when the European Conservatives and Reformists – Conservatives are excluded. The bargaining success of the Conservatives is arguably skewed as it is based on one issue. The European People's Party – the Christian Democrats had the highest level of bargaining success followed jointly by the Alliance of Liberals and Democrats for Europe – the Liberals and the Greens-European Free Alliance – Greens. A possible explanation for the bargaining success of the Christian Democrats and the Liberals are the roles that their rapporteurs played during the Six-Pack negotiations. The party groups had two rapporteurs each for four of the Six-Pack dossiers and according to Figure 23 holding the position of rapporteur during the negotiations increased the bargaining success of those party groups. In terms of bargaining success, the Greens could be considered an outlier in the left/right dimension that is present in the Figure 21, however such a view would be incorrect as the Greens according to the senior policy-maker in that group were conscious that action had to be taken to reform the EU’s economic governance framework. Thus, the Greens on a number of occasions shared the same policy goals as the Christian Democrats and the Liberals. The remaining party groups, the European United Left-Nordic Green Left – Nordic Greens and the Socialists and Democrats – Socialists both managed to achieve a level of bargaining success that was just above average in ECON. Luck would certainly be one possible explanation for the bargaining success of the Nordic Greens. The party group was badly split in ECON between members seeking to engage and those MEPs that sought to reject the Commission’s proposals outright. Thus, luck can explain how a small party group that was fractured and exercised little influence in the negotiations in ECON managed to achieve a level of bargaining success that was higher than the Socialists. Conversely, the bargaining success of the Socialists could be a result of having no luck in so far that the party group found itself politically isolated and was on the losing side in ECON, despite having power. The Socialists were the second biggest party group after the Christian Democrats, were fully engaged with the negotiations in ECON through taking positions on all six issues and had also had a rapporteurship, yet the party group had the lowest level of average bargaining success with the exception of the Conservatives. The low level of bargaining success of the Socialists, are possibly the result of the economic conditions in the Eurozone and the EMU, which were

272 covered earlier in this section. The seriousness of the crisis made it difficult for Socialists to garner support for policies that reduced the focus on reducing debt in favour of investment. Thus, no grand coalition could be formed with Christian Democrats while the party group’s traditional allies did not want to engage with negotiations (the Nordic Greens) or generally favoured the Commission’s approach (Greens). In terms of future implications on EU decision- making, the traditional left/right division in the plenary on economic issues will be restored. The European sovereign debt crisis was unique in its depth and threat that it posed to the stability of the Eurozone and to the EMU. Thus, the left/right dimension became less clear cut as a majority of MEPs sought to present a credible position under market and time pressures. Once the crisis began had been resolved, the factors that drove MEPs to cross ideology lines and support measures that would restore stability to the Eurozone and to the EMU disappeared, thus restoring the partisan lines in the plenary until the next EU wide economic crisis. This research project posed two central research questions; (1) the influence of the European Council vis-à-vis the Commission, and (2) the extent to which other legislative actors influenced the decision-making outcome. With regard to the first question, the evidence presented in this chapter supports the contention that the European Council did indeed undermine the Community Method through establishing the Task Force. In response to the Task Force report, the Commission was forced to table the Six-Pack proposals earlier than envisaged. The content of the Six-Pack was also heavily influenced by the Task Force recommendations, thus weakening the Commission’s ability to set the agenda from the onset of the negotiations. Likewise, the recommendations of the Task Force also undermined the Commission’s agenda-setting powers in the negotiations on Regulation 1303 on EU funds. Turning to the second question, the results indicate that within the Council member states from Northern and Eastern Europe had the greatest level of bargaining success and thus aligned the institution’s collective position with their policy preferences. Within the Parliament, the party groups that were on the right in the plenary, in terms of reforming economic governance had the highest level of bargaining success, shaped the collective position of the Parliament. During the trialogues, it was the Council and the Parliament rather than the Commission that shaped the legislative outcome of the Six-Pack. Thus, the Task Force report and the outcome of the Six-Pack negotiations demonstrate that LI and centre-right policies on reforming the EU’s economic governance structure dominated this crucial period in the history of the EMU.

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