Explaining the European Fiscal Compact Through

CEU eTD Collection E XPLAINING THE In partial fulfillment for the degree of Master of Arts in PublicPolicy ofArts ofMaster degree forthe In partialfulfillment THROUGH THE Supervisor: Professor Marie-Pierre Granger I NSTITUTIONAL Elena-Constantina Karagiorgi Elena-Constantina Central European University Central Department ofPublicDepartment Policy E Budapest, Hungary UROPEAN Submitted to T HEORY OF 2012 By C HANGE F ISCAL G RADUAL C OMPACT CEU eTD Collection enables predictions regarding trends the enables predictions of integration. andmonetary European economic isit its furtherCompact provides a anexplanation of creation and case oflayering. Hence, gradual institutional change canbe appliedin contextthis and demonstrates that Fiscal the of theory the that shows research This change. institutional of type the identify hence and with revisedregards soPactto the Stability and Growth as changes,to unfold introduced the itanalyzes Fiscal the Subsequently, Compact within context. aretraceable this assumptions main theory’s the whether test to order in governance economic European of framework general the portraying by continues It assumptions. main theory’s the on elaborates institutionalism from which theory the of institutional gradual andchange derives then Fiscal the of creation the in and in general governance economic European of context in the applied CompactThis research in aimsparticular. at examining ABSTRACT: whether the theory of gradual It institutional firstly change can be delineates the theoretical framework of new i CEU eTD Collection BIBLIOGRAPHY38 ...... CONCLUSION 36 ...... InstitutionalChange ...... 28 CHAPTER III: Explaining the Fiscal Compact through the Lens of the Theory of Gradual Change 16 ...... CHAPTER II:European Economic Governance and Theory the Gradual of Institutional ...... Change 4 Institutional Gradual of Theory the and Approach Institutionalism New I: CHAPTER INTRODUCTION...... 1 TABLE OFCONTENTS Change 32 ...... 3.2. An Assessmentof Fiscalthe Compact through Theory the Gradual of Institutional 3.1. The Fiscal Compactand the Stability and Growth Pact ...... 28 EconomicGovernance ...... 23 2.3. Tracing the Theory Gradual of Institutional Change in Fieldthe of European 2.2. From the EMU to the Stability and Growth Pact and the “Six-Pack”...... 19 2.1. Historical Overview ofthe Creation EMU of ...... 16 1.3. The Theory of Gradual Institutional Change ...... 10 1.2. Defining Institutions andInstitutional Change ...... 8 three‘NewTheInstitutionalisms’1.1...... 4 ii CEU eTD Collection Stability Stability and Growth Pact andits reforms of 2005 and2011 (Six-Pack). Thebriefly sketched constituted of the Economic and Monetary Union, created with the Maastricht Treaty, and the is governance economic European of framework main The value. added its and creation regards to biggerframeworkthe of economicEuropean as governance so to understand its institutionalthe frameworkchange is issue and-like becauseit a importance within anyother treaty heavily-discussed decided within of the the European EU. The FiscalUnion - Compact,itisunderstand whataddedvalue is. can help however, us as within economic so framework of governance,Compact to European bigger the draw conclusionsshouldeconomic be seen regardingpolicies. istreaty tothegovern already actually with European existing something that adding provisions theTherefore,whether thisandlong debateinthepressas since therehasbeena 2011 to then December it is very interesting to explain the creation of the Fiscal 1 is euro currency the whose country, twelfth force on 1 January, 2013,or on firstthe day of the month followingits ratification by the into the will If enter treaty ratified, member Constitution. with state’s each in accordance President’sParliament’s through orthrough vote, referendum signature Ireland) caseof (the either states, member of twelve ratification the requires Union (TSCG), andMonetary formally known as the The Fiscal Compact, Fiscal –signedthe CzechRepublic Kingdom Compact. and the Treaty on Stability,On 2 March,2012,all member the states of European the Union – apartfrom Coordination Unitedthe and Governance inINTRODUCTION the Economic TSCG, Article TSCG, 12(2) As a result of European economic governance, the Fiscal Compact is Compact of theFiscal paramount economic governance, As aresultEuropean of 1 1 . The treaty’s negotiations have started in have started . The negotiations treaty’s CEU eTD Collection these gradual changes have an accumulative effect that finally leads to further institutional tofurther leads finally that effect have an accumulative gradual changes these within institutionan happen gradually and slowly and are often hard toidentify. However, institutional change. makes that model explanatory this explaining appealing andpertinentparticularly to something is also This well. as Institutionalism New of thought of schools by other explored institutionalism of Gradual Institutional isChange built on ideas developed in fieldthe of historical (Mahoney the theory below, lens. Aspresented theoretical this through oftheFiscalCompact creation and Thelen,Institutional presented by Change, Mahoney andand Thelen (2010), aims atexplaining the 2010: itof Gradual Theory uses the specifically, More governance. economic European 32). Nevertheless,explainby in offered in todevelopments New Institutionalism current fieldorder the the of schools of further presentedthought, below. is Thiswork drawing upon theoreticalthe lines the same theory several are there Within approach this isNewInstitutionalism. of theory the their evolution can beand evolution the of policy ideas. predominant The theoretical approach to institutions and longer,dependent path process institutionalof evolution. a as resultof butrather the notas ananswer crisis, tothe ofthe Fiscal Compact creation the itexplaining moves awayfrom this andaims at focus However, governance. economic in field of institutional European the evolution economiccrisis of effect the towards in point a anewtime or situation that juncture”, triggers achange. doesnot This work disregard the triggering “critical a as moment this identify to important is it Nevertheless, crisis. the towards countries European of answer asan aswell crisis, economic of the result the is merely Fiscal Compact the that suggests governance economic of European the framework The main assumption of the Theory of Gradual Institutional change is that changes There has beenalot of academic aimingexplaining institutional the change work at 2 CEU eTD Collection institutional change the Fiscal constitutes. Fiscal the change Compact institutional type of what if with and,so, explaining Compact of Fiscal the creation the and governance economic withinof theframework canbetraced European Gradual Change Institutional The research will conclude with an answer to whether the main assumptions of the Theory drawn futureregarding institutional in of changes fieldthe of economicEuropean governance. Theory of Gradual Institutional Change is applicable in this case and what conclusions can be at the changes that areand previous the especially with Pact Six-Pack. Stability the regards to Looking and Growth introduced by the Fiscalidentify its willfocus in Thethird to ones. onthe FiscalCompact, addedvalue, chapter order Compact will help bynew,diverging they whether havebeen replaced or governance, economic of European to identify whetherpolicy lines and whether lines these have been sustained andreinforced though evolutionthe the economic main the identify to be will aim The reforms. its and Pact Growth and Stability the of initiation to from andMonetary startingUnion, the Economic the governance, economic Theory Gradual of Institutional Change will be applied context inthebroader of European linesguiding for thesubsequentanalysis will be further elaborated. In secondthe chapter the the offer will that assumptions main theory’s the Moreover, Change. Institutional Gradual of as so focusto justify Institutionalism Theory introduced onHistorical useof the and the the be will institutionalism new of thought of schools main The analyzed. be will Compact governance. us explain institutional evolution within biggerframework the of European economic canhelp Change and whethertheTheory case of Fiscal Institutional Gradual the of Compact in the identified be can assumptions these whether test is to work this of aim The change. The first chapter explains the theoretical framework through which the Fiscal 3 CEU eTD Collection also different analytical analytical differentalso approaches. institutionalism. Itisimportant tonote eventhat within schoolsthese of thought there are institutionalism,singlesup whereasGayPeters(2000) to seven out of types new Vivien (2010) proposesSchmidt a fourth ‘new institutionalism’, the discursive institutionalism. historical and institutionalism choice rational institutionalism, sociological Thereleast within areat1996: 936). schools new three different of thought institutionalism: institutionalism, however,does constitutenot a unified body of thought (Hall and Taylor relationshipthe betweeninstitutions and the behavior of within actors the aninstitution. New explaining under the process which institutions arecreated and change. Moreover,it explains Therefore,new for right the 2006: 4). framework theoretical institutionalism offers institutional characteristics and political agency, performance, and change” (March and Olsen between the relations of asetideasandhypotheses institutions, concerning theoretical (2006), the term ‘institutionalism’ suggests “a general studythe approach to of political institutions impact andpolitical on their andMarch socialprocesses. Accordingand to Olsen The new institutionalism is approach particularly useful dealingwhen with issuesthe of The1.1. threeInstitutionalisms’ ‘New andmain areanalyzed. theory’selaborated the assumptions Change. Forthis purposethe concept ofinstitutions andinstitutional isfurther change Institutional Gradual of Theory the of use the and Institutionalism Historical on focus the As statedabove, this delineates chapter in typesthe newinstitutionalism, of order to validate CHAPTER I: New Institutionalism Approach and the Theory of Gradual Institutional Change Institutional 4 CEU eTD Collection from from cooperation affectedamong actors by institutionan (Hall and Taylor 1996: 945). institutionalism the ofinstitutionalprocess creation can be in conceptualized of terms gains choice inrational Therefore, institution. an within actors the for value their and functions exact these to by referring creation its explain They performs. institution the that functions creation institutions.of By using deduction rational institutionalistschoice specify the behave. Rationalis of are by likelywhich how most actors the affected theirother calculation, perception to choice approach is thatactors’ behavioris driven not by historical but events by their strategic institutionalismdebates. Hall 945) and Taylor (1996: aptly that out point thedistinctivefeature of this Justalso like everydeveloped other (Parsons however,itassumption, 2007:67). “man-madeemphasizes institutional constraints” school of a rationality the thought, shares distinctiveinstitutionalism choice Rational 4). 2010: (Schmidt rationalpreferences choice approachinstitutionalismmaximize theiras so to strategically, their behavior andcalculate fixedwith preferences as also to entails institutionalismthe internal choice Rational North. places asDouglas such areeconomists, institutionalists choice its focus on the (Hallactors’ and behavior. Taylor 1996: It suggests 942), as thatwell actorsas the arestudy rational of cultural broader (Hallenvironment” economics.and Taylor 1996:946). The most institutionalfamous rational andAccording DiMaggio1991). ‘logic tothe of institutionsspecificappropriateness’, adopt forms and (Powell agents social of action the areaffecting institutions the appropriateness or legitimacy rules becauseexplain institutional to andas change behavior. actors’ They suggest that so this through dynamic of appropriateness’ of these ‘logic the follow institutionalists formsSociological and rules norms attention of Itplacesthe its social theory. on and culture organization agents. “are widely valued within a Sociological institutionalism has been developed within the field of sociology and Rational institutionalism arose from the study of American congressional behavior congressional American of study the from arose institutionalism Rational 5 CEU eTD Collection being 1990).(North efficient 1984), unlike rational choice institutionalism seesinstitutionsthat as serving apurpose and andOlsen (March institutions by the generated inefficiencies the stresses also institutionalism identitiesparticular and develop policies whichareotherwiseshift. costly to Historical stresses wayinthe policy which act linespast encourage actors alongto lines those and adopt It choices. policy subsequent on lines, policy existing already the as well as norms, and institutionalof structure existing emphasizes This of impact the the path-dependence concept historical developmentand Taylor operation and(Hall 1996;Thelen1999;Pierson 2000). areand institution’s the from within derive institution that embedded an consequences actions. It focuses on the organizational of structure polity the political or economy” and (Hall 938). Taylor 1996: how institutionsare institutions understood as “formal informal or routines,procedures, norms andconventions embedded in institutionalism historical In action. and institutions between structurerelationship thespecify the to approaches both two upon other itof draws the as aseclectic, institutionalism actors’ behaviorbuildingits main (Ibid).assumptions Hall Taylorand (1996:940)consider historical in thought of school other any than consistent more is and thought, of school a as institutionalism, the outcomeschoice andsociological institutionalism 2007:85).(Parsons Parsons argues historicalthat of those Historical institutionalism is often described as being in middlethe position between rational politics and structural-functionalism within political science (Hall and Taylor 1996:937). its emergence even earlier, during 1960sand the 1970s, as a response togroup theories of historical sociology and political economy (Parsons 2007:86). Hall and Taylor (1996) trace Historical institutionalism in developed latethe 1970s and early 1980s from studies in Historical institutionalism places emphasis on path-dependenciesthe and unintended 6 CEU eTD Collection institutional change. define the 32). However,before explaining the theory of institutional itgradual is change necessary to meaning oforiginally built ideas on developed in historical institutionalism (Mahoney and Thelen 2010: the word institutioninstitutionalisms upon and all draws becauseitof creation the FiscalCompact, new the explaining three can inbe usedthis within proposed research,by theMahoney and Thelen (2010) and presented below, is more appealingfor scope of any of the approaches” this For (Hall 1998: 958). reason Theory the Gradual of Institutional Change, three,as well even though as two either other the of to alternative it a“fully realized represents thatthis approach mean not the was meaningdoes however, an amalgam”, of “something create to effort inan institutionalism sociological of more inclusiveapproach suitedanalysis. for andbetter thesubsequent institutionalism, tospecify relationshipthe betweeninstitutions and action, also makes this choice asrational well as beliefs, or ideas and institutions between relationship the as such institutionalism, sociological of elements combines and is eclectic institutionalism historical factthat the Furthermore, in case. this juncture” a“critical constitutes crisis see whether economic the itis meaningful as to Compact, of creation Fiscal the 1996: 942),makes historical institutionalism an theoreticalappropriate for analyzingtool the Taylor and (Hall path anew creates and occurs i.e. change institutional important junctures”, when moments “critical consideration into take institutionalists historical most that fact the Moreover, Compact. of Fiscal the creation is,the -that governance economic European inparticularly institutionalism approach appealing in developments recent the explaining expectedthe inefficiencies generated by make institutions, the use of historical the This exact concept of This concept of exact path-dependency, well theunintended as consequences and The fact that historical institutionalism draws upon both rational choice and choice rational both upon draws institutionalism historical that fact The 7 CEU eTD Collection defines institutions as“any form constraintof that humanbeingsshape devise to human whole (Parsons 2006: 67). Among rational institutionalists,choice Douglass (1990:North 4) a as definition their to regards with not and emphasize, they point the to regards with mostly vary they However, above. presented institutionalism new of thought of schools different the traditions orconventions (Parsons 2007:66). to institutional actors” from and“concrete “phenomena”, all combines contains these part of institutionalthe landscape andhe further suggests that notionthe institutionof as standards or treaties, laws, identifies same he Under the logic, structure. organizational of pattern behavior of agroup among people” thatsometimesacquires aformal duties and generateoutcomes”. Graig defines Parsons institutions(2007) as“any enduring institutions “contain and elements combine of both modesthese of action” and “inculcate Hesuggests strategic other.” the action,that or hand, one on andthe rational purposive action,on social andnorms norm-oriented institutions between “somewhere locates Budapest autonomous role inpolitical life”. ClausOffe inhis N.9atthe lecture public Colleguim rules, haveapartly that andstandardoperating procedures of “collections structures, between arenasrational individual actors or forcompeting social forces”, butthey are According to March and Olsen (2006: 4) institutions are not just “contracts differ asto: theseapproaches that of equilibrium institutionalismsthree institutionsdefines in ways. Marchdifferent and Olsen (2006) argue abovementioned the of one Each is. institution an what to as approaches different are There 1.2. Defining andInstitutional Change Institutions Definitions of institutions vary,notjust in sciencessocial in general, butalso across and structures into rules and behavior establish, human sustain,translate transform, that or eliminate processes the institutions.(March (c) and impacts; and Olsen 2006: political into 4). which within modern political setting actors most typically organized the act; as (b) the processes that translate institutions, structuresof and nature rules the (a) understand they …[how] 8 CEU eTD Collection following policies andaction subsequent alongparticular a historical path, because of the is “path commonly that constraints”, of as consequences known dependence”, the unintended which Parsonsaccording to (2006:68)“incorporate feedback between action and within institution,an can be explained through institutionalistthe explanatory segments, in andchange 2000:7). valuescharacterize structures institution the the that (Peters is the type second the and institutionalization, of process the or institution an of development institutional identifiedchange by Gay (2000).Peters One is internalthe evolution and institution. This definition institutionalof followschange thelines of twothe types of as well of andpolicy ideas of within behavior, development patterns the practices an as institutions, which is creationthe of new institutional formal and informal procedures, rules, acombination of offers abovementionedthe definitions. as it relationship behavior andthe further of 2006:67), actors the enableactors’ (Parsons as formal or informal above Iuse definitions, definition the offered byParsons (2006)thatinstitutionsrules, aredefined compliance procedures, units polity the of 1986:19).In inincorporateand economy” (Hall work, this an effort the to conventionsstandard operating practices that structure relationshipthe betweenindividuals in various or practices that and compliance institutionsprocedures, aredefinedformal as“the rules, institutionalism, structure human behavior within institutionalthe setting (Hall and Taylor 1996:947). In historical andprocedures but norms, also the symbols, and cognitivescripts moral thatguidetemplates institutions areseen within broader a context, so as to include notjust formal rules, institutionalism, sociological In individuals.” for disincentives and incentives of set a thatprovide andrules …customs interactions as“regularities inrepetitive or interaction”, This institutional change or evolution, as well as the development of policy ideas In this researchinstitutional encompasseschange evolutionthe and developmentof 9 CEU eTD Collection and Thelen 2010: 2).This isbecausenotjust institutions do emerge andbreakbut down, they lacking the“useful fortools explaining the more gradual evolution of institutions” (Mahoney how institutions are explaining for and eclectic theories vastliterature with science social place incontemporary created, replaced with new ones or ended, this institutional in way. outcomes a certain political substantive analysis these changes can be equally for formingconsequential behavior actors’ is andfor developing be Nevertheless, traced. hard to are sometimes and very andpiecemeal slow are changes in over time are changing created, once institutions, properties ofinstitutionsinstitutions offer thepossibilitychange to (Ibid: 14) and that 2010: 32). This model or theory of institutionalgradual change proposes that basicthe sociological and rational choice institutionalism with equal benefit (Mahoney and Thelen historical institutionalism a to create model of institutional change, which can be exploredby (2010) areproposing anew model institutional of change. Theirideasfrom emanate In ‘ The1.3. Theoryof Gradual Institutional Change below. analyzed further exactly assumptions concept the on of dependency consequences, path and unintended explaining institutional change within familyofnewthe institutionalism, asitbases its main theory reason institutional forthe offersthebestof methodological change gradual approach this For dependence”. path and constraints man-made “emphasize claims institutionalism choice ofinstitutions atprevious points. Therefore, according Parsons to (2006: 68) Explaining Institutional Change, Ambiguity, Agency andPower Mahoney and Thelen although(2010) argue that institutional hasanalysis a prominent 10 subtle and gradual ’ Mahoney and Thelen ways These (Ibid: 1). CEU eTD Collection Thelen, 2010:14). develop aframework thatwill identify andexplain the oftypes institutional change. (Mahoney and type one why explain of changeto takes place instead of fails another.Therefore, they on build the distributional approach approach to distributional the that argue They create. might tensions those draw they and attention to the fact thatthis institutions”, approach into does not, however,specify build the are differentmodes ofchange change that and pressures for “tensions that suggests approach (Mahoney and Thelen, 2010:4). According to Mahoney and Thelen (2010) the distributional institutions explaining institutional change and they considerhow the choice institutionalism, sociological institutionalism historicaland institutionalism – face problems in 2 establishment of a link between the political context whichframework, can help identify and explain thetypes modesor of institutional change. – as well as the characteristics In incremental 4). they words other changeand a 2010: Thelen, (Mahoney develop of the a model formscan allow create of the and theorize ustoobserve (2010) that Thelen and Mahoney concerns, exact these including By ways. in new rules existing implement may occur when problems of rule interpretation and enforcement emerge and enable actors to change institutional that is arguments their of One agents. change and change for strategies institutional andcontext” the “properties institutions”the of Mahoney andlinks Thelen (2010), particular “modes ofincremental change tofeatures of the the exact the propose theory institutional change.of gradual not sufficiently deal gradual with the institutional transformations, andfor this reason they transformations.” They argue contemporary the that literature institutionalon analysis does “fundamental to lead might shifts” incremental and transformations “gradual Thelen and Mahoney ways. subtle more in time over develop also In theiranalysis, first they show how the leading approaches toinstitutional analysis –rational- causes gradually unfolding changes gradually unfolding The main expectation of the theory of gradual institutional change is the change institutional gradual of theory the of expectation main The these because immense significance gradual areof changes that suggests Their theory , supplemented with attention to issues of compliance, provides a motive force for change for force motive a provides compliance, of issues to attention with supplemented of future outcomes.of This newmodel institutionalof presentedchange, by have an accumulative effect and may consequentially be consequentially may and effect accumulative an have 11 power-distributional approach , which permit typesspecific of 2 suggest these that (2010) to CEU eTD Collection follows their replacement with new ones new with replacement their follows incan their It place. happen in a radical when way, break a sudden institutions down of below. analyzed further institutional transformation (Mahoney 2010: and15). Thelen, Each one of fourthe types is 3 displacementwill in occur a gradual way and(Mahoney Thelen 2010: 16). then new rules, theadoption competing of stop these able arenot to the old rules by introduced whoactors had least the gains in previousthe set of rules. If supporters the of more be Thesenewlikely ones. previous are rules to the than supplementing rather and these arecompeting, rules for areintroduced examplegradual whennewrules way, layering, drift andStreeck Thelen anddescribe(2005) four institutional types of change: modes of institutional Mahoneychange, and Thelen (2010) build upon previous workby sketch frameworkthe for identifying modesthe institutionalof change. When referring to andcontext institution and type the of dominantchange agent.These threehelp points us of political the between characteristics the link is andthe third the one institutional change, of second causalisconnection link the the between type ofchangeanddominant agent the type The institutions. the of and context political the of characteristics the and change institutional of type the between connection is the One change. institutional of type the to connections causal key three identify therefore, (2010), Thelen and Mahoney context. institutional and dominant changeagent, of the institution characteristics the and context can political The change. influence institutional of type the and – institution the type of institutional change, as they form the type of the This radical shift is also evident in the three main institutional theories. Displacement and conversion is whenexisting arebeing rules andnewones introduced removed are who will most likely emerge and act within that particular political particular that within act and emerge likely most will who . Each mode is defined by a diligent exploration of the type of 3 . However, displacement can also take placein a canalsotake displacement . However, 12 displacement, CEU eTD Collection weak veto points, and whetherand Thelen(2010) focus mainon two whether aspects: political the context offers strong or the institution offers thatplay characteristics role most important the in institutional Mahoney explaining change, actors a low or high level of discretion of the institution towards more favorable ones (Ibid). These actors, or “institutional challengers”, aim at changing the goals,functions and purposes produced by who aimactors exploitingat the existing within ambiguities aninstitution. is way andthe rules they are redeployed existing the gab between arguethat this Thelen and Mahoney 16). 2010: Thelen and (Mahoney ways innew interpreted are they however 17). inaction a change with regards to impactthe of the institution (Mahoney and Thelen 2010: choose not to respondshiftsto in Forexample environment. the itwhencan occur actors the of institutionthe to a shift in the external conditions and, therefore, cause with their accumulate and over long-run the lead toa big change (Mahoney and Thelen 2010: 17). can changes, small being although modifications, and amendments These amendments. of introduction the prevent to able not are they however rules, existing the maintain to new treatiesadding existingthe to Inthis ones. casethe supporters of the framework. Such new rules may take the form of amendments, revisions and the adoption of institutional currentthe setting and incorporate newthey rulesinto pre-existent the instead so. do Therefore, of capacity changing withinactually original to they the rules, work ones . It occurs when actors who want to challenge the existing institutional setting lack the challenge wantsetting institutional who whenexisting the to It occurs actors In order to conceptualize the dimensions of the political context and the institutional the and context political the of dimensions the conceptualize to order In Conversion Layering Drift is when the rules are not changed, however the impact of these rules due change rules theimpactof these however changed,is rules arenot the when is whennewrules on parallel arebeingintroduced or existingtop tothe is when the existing rules are neither being removed nor neglected, nor removed being neither are rules existing the is when 13 status guo areable CEU eTD Collection the institutionthe and the follow rules institution.of the Identifying the type of agents’ behavior whether andupon theagents behavior, agents’ seekthe to specifically topreserveaccording – insurrectionaries, symbionts,subversives andopportunists of change and themodes of institutional Theyidentifychange. four types of “change agents” institution,move Mahoneyand Thelen (2010) astep further and between differentiate actors high level of discretion in the interpretation and enforcement of rules. or adding new ones, is more removing without of enactment rules the i.e. and changethe interpretation in Conversion, the likely to happen when thereguo are weak veto possibilitiesrules are more andlikely a to be introduced interpretingin and enforcing rules, the then displacementis more likely Thatoccur. to is,the new place of old ones, as the defenderspossibilities of the byweakveto ischaracterized When political context andthe theirones impact. change and at the new will old they place,can neglectthe however rules, not introduce likely take asactors to samemore is drift then high, is also rules the of timeenforcement and interpretation in the discretion of the institutioninterpretation and enforcement allows of rules.strong Whereas, ifa vetovetolow possibilities possibilitieslevel are high, and theof level discretion and the targeted above.institutional change presented wheninstitutiondiscretion interpretingwhen and enforcing rules the arerelated differentto the modes of offers of level the and a possibilities lowveto low and strong among combinations level different The of discretionMahoney an soas explainand Thelen produce to analytic framework, institutional change. in the interpretation enforcement of rules. the or thesetwoaspects regarding By combining will have less power in retaining the existing rules because of weak veto possibilities. Besides the relation between the characteristics of the political context and the context political of the between thecharacteristics relation the Besides happen Layeringislikely is more political by the characterized context to when 14 . This typology . This typology is constructed status CEU eTD Collection represents and whether this theory can be applicable in this case. becan theory andapplicable this whether represents will help usidentify in the third what chapter typeinstitutional of the change Fiscal Compact political contextand the institution and the type of occurringthe institutional This changes. the of characteristics main the consideration into taking bepresented, will framework governance economic European the section, following the In future. in the evolve might wayseconomic the andmake as governance inwhich European Compact predictions to is goal the can theory toexaminethis usexplainhelp Fiscal of whether the creation the By FiscalCompact. doing latest so the in and particular governance, economic in European in canbe caseof changes applied the framework whether theoretical is this to test this thesis cases Theaim inapplied ofinstitutional andactual change (Ibid:32). concrete of episodes change, institutional of analysis substantive the for a tool offering at aims change institutional a modelconstruct for explaining institutionalmodel change. This theory or of gradual institutional associated withcharacteristics institutional change, Mahoney and Thelen (2010) endeavor. another of focus the be can and malleable very is something agents change of type deal because of not this identifyingHowever, will research the with change agents type the withassociated a particularmode institutional changeof (Mahoney and Thelen2010:23). are agents’ ‘change of types as different change, institutional explaining for is useful By conceptualizing the main characteristics of the political context and main the context of the political characteristics main the By conceptualizing 15 CEU eTD Collection (SGP) Pact Growth and Stability the of creation the or (EMU) Union Monetary and Economic the of creation the explain to not is aim The (2010). Thelen and by Mahoney proposed change institutional of modes the to according represents Compact Fiscal the change institutional of will assist in explaining later on the creation of the Fiscal Compact, and to identify This Governance. Economic of framework in beEuropean will traced the main assumptions what type focuses on mainthe lines followedpolicy this within Subsequently, context. theory’s the This chapter starts from the historical evolution of European economic governance and European Economic Community (EEC) leaders to agree on aplan forEMUwasthe the agree on leaders to (EEC) EconomicCommunity European integration” (McNamara2005:143). Dyson159) argues (2010: that mainthe for the reason “overnightsuccess”, butrather a process has that “deep in roots historythe of European with the it was only increate EMU.However, 1992 the achieved madeto acommitmentgovernment signing Community in the 1969summitofin The Hague (seeUngerer 1997:97-117)when headsthe of the Maastricht European the of endeavor asan official started (EMU) Union Monetary and The Economic Treaty.2.1. HistoricalOverview of the Creationof EMU According to McNamara,assumptions of theory the of gradual institutional change. main testing the whetherthey thus reinforcedare replaced, or being and gradually sustained this was whether are main these policies focusthe suchaslow on andtrace inflation, lines, policy not an Featherstone 1999, Heipertz and Verdun 2004) 4 For answers to these questions one can refer to the work of many profound scholars (see Dyson and Dyson (see scholars profound many of work the to refer can one questions these to answers For CHAPTER II:European Economic Governance and the Theory of 4 , neither to criticize the economic and monetary polies followed so far. The goal is far.The goal to so followed polies monetary and criticize economic the to , neither Gradual Institutional Change Institutional Gradual 16 CEU eTD Collection that point, the member states were more willing to accept Germany’s position in favor of Germany’s infavor weremorepoint, position to accept the member willing that states “snake”, therefore promoting therefore “snake”, the values of thefor the average of anotional ‘ecu’, accounted currency, which This system adopted the also currencies mechanism soas exchange-rate (ERM), in to minimize fluctuations bilateral exchange rates. of the member and the (EMS) System Monetary states. European the established policies macroeconomic This system performed betterprioritizing growth and employment, whereas Germany was in favor lowof inflation policy. than the -Francewasinfavor policy There wasalack of regardingpriorities economic of consensus member well amongconcerning the the EMU(Verdun 2010: 328). as thedifferences states as Woods), (fall monetary situation of Bretton for thatwas reason unstableinternational the the EMU was then stalled until and of 403).Thecreation Bulmer 2011: (Bache,George economies currency of the weaker 1979 when the European Monetary support value ready werenot the economies of to moreto collapse strong once becausethe System was set up. The 1971, following ending the of dollarthe convertibility. wasreestablished It in 1972, butonly system aiming fluctuations. atnarrowing exchange-rate However, this system in collapsed exchange-rate an tunnel”, in the “snake the of establishment in the resulted This fluctuate. coordination of economic policies as well as a limit within which exchange rates could minister. 5 Woods, wouldBretton havejeopardizedthat. because mainof Aswitchfloating fall fixed from theirthe rates, exchange concern. to of andmarket diminishing the cost transaction of financing common agricultural the policy was decline of the Bretton Woods system. Ensuring smooth trade relations within the common The name was taken from Pierre Warner, chairman of the working group and Luxembourg’s prime Luxembourg’s and group working the of chairman Warner, Pierre from taken was name The Finally,in EEC1979, the countries in a new attempt tocoordinate their The plan, or Werner or the The plan, exchange-rate stability 5 the proposed itand 1970 in presented was report, 17 and low low inflation (Dyson 2010:161). At CEU eTD Collection it was generally agreed that a further economic convergence is needed for asustainable a further isneeded it convergence economic was generally agreed that to discuss the next stages of the EMU. The IGC work finished in Maastricht. Within the IGC currency 2010: 329). (Verdun European Central Bank, fixing the of ratesand exchange the introduction the of singlethe stability prices.of Finally, the thirdfrom stage, January established1999 onwards, the soas ensure the memberto states of the monetary policies and economic of the convergence December achieving to at from aimed Thesecondbanks. stage, January 1998, 1994 central among cooperation acloser and policies economic of a closer co-ordination member states, focusedDecember July of 1993,on establishing movement the1990 to free capital among from firststage, integration. The monetary processtowards agradual, three-stage proposed It co-ordination. policy economic to parallel rates in exchange fluctuations the narrowing of idea previous the on built was report The union. amonetary of establishment the for changes in decideup, wasset to institutional necessary Intergovernmental Conference the upon order inwas accepted 1989Europeanthe Councilmeetingin Madrid thatan after and was a committee’s task to prepare report onstrengtheningmonetary report The co-operation. The Commission. the of President Delors, of Jacques chairmanship underthe committee developed in 1988 atthe HannoverCouncil, European itwas when decided toestablish a in 1985 andthe agreement on provisions of the Single the Act, and European further ERM. the outside general towardspromotingconsensus low inflation, United the however, Kingdom remained this wasbecause of increasethe ininflation due to risethe in oil in Despite 1973. prices the Bache, and economic suchaslowinflation.Bulmer priorities, to According George (2011) During first the stage, an Intergovernmental Conference (IGC)wasinitiated in order Council with theLuxemburgEuropean theEMUstarted steps towards The concrete 18 CEU eTD Collection 7 6 clausefor Denmarkaswell out EMU and Treaty Denmarkrejected the in the Danish referendum in1992, resultingof anopt- outfrom UK opted the its ratification. facedwith Treaty difficulties Maastricht the note that is It andindicators” (Bache, 2011:405). to direction of George important Bulmer all relevant 2010: 329):the lefttreaty for wereroom maneuver, moving “ifstates towards rightthe in were‘escapeclauses’ there strict, wording criteriathe of were (Verdum the treaty performance of exchange rates,GDP, in order fora a countymaximum to be ableper cent of grossthe domestic product(GDP)and thepublictoup debt to 60per cent of the joinlevel the EMU. Although of inflationstipulated in Treaty Maastrichtthe levelwere setting the a country’sof budget deficitup to3 and specifically, criteria More these Bulmer 405). 2011: George, (Bache, monetary union a maximum level of interest rates, and a good Eurogroup ofthe was creation the steps those Among coordination. policy economic reinforce In order for EMU the to besustained, theEuropean a numberCouncil took of steps soas to From 2.2. the EMUto Growth the Stability and Pact and the “Six-Pack” subsequent agreements. EMU and how policies on whether and those sustained wereevolved or through inthe future Pack”, further analyzed below. The aim is to focus on the main policies stipulated through the “Six-Pact andthe Growth Stability and suchasthe integration, monetary and economic road of monetary economicEuropean leading and development, for tofurther agreements For an answerto why the EMU needs informal governance, see Puetter2006: chapter2. Treaty. the to protocol a in attached is clause opt-out The The creation of the EMU with the Maastricht Treaty was only the beginning of long a of beginning Treaty was only the Maastricht the EMUwith of The creation the 7 in December 1997; an informal body consisted of the finance ministers of the of ministers finance the of consisted body informal an 1997; in December 6 . 19 CEU eTD Collection 8 had they both Therefore, to go undertheexcessive Nevertheless, (EDP). deficitprocedure France andnecessary failed tocomplycorrections. Germany deficits.and reducetheir budget in preventive arm,to reduce order only deficits.made However, their the budget Portugal SPG. In2002France, Germany and Portugal were given an early partof warning, the as France and Germany problems with meetingexperienced rule the and of objectives the EMU, andit was designed primarily a as mechanismpreventive (Verdun 2010: 331). wouldfree joining the was putinmemberas after SGP nostate placeso ride that to secure sanctions, such as fines.question Besides ensuring and in memberstate the towards recommendations with initiates The procedure Treaty. the thein maintenance the case of when thedeficit breaches starts of that a memberby 3% the state of GDP ceilingstipulated the convergenceof no compliance criteria,deficit. The dissuasive arm consists of excessivethe (EDP), deficit aprocedureprocedure the the warning early of possibility Council has arm” Commission The (European preventive2012). arm policy advice andthe offers the possibilityJune 1997and Council two Regulations of 7 July 1997. Ithas “a preventive and adissuasive of imposingstates. The SGP took thebudget discipline and avoidance of deficits,excessive wouldbe sustained by member the form of a Resolution of the Amsterdam Europeanminister. finance German Waigel, Theo of proposal Council the following of 17 maintaining the EMU criteria was the establishment of the Security and Growth Pact in 1997, step, however,important towards 2004).Themost 2006; economic (Puetter governance body This asignificant role inshapingplays intergovernmental European euro-area. The Council, following a proposal by the Commission, addresses early warning. early addresses Commission, the by proposal a following Council, The This preventive mechanism, however, proved insufficientwhen member statessuch as such criteria, convergence Maastricht the ensure that was to SGP the The goal of 8 towards the member state that is about to have an excessive an have to about is that state member the towards 20 CEU eTD Collection 9 mainly with regards to sanctions (European Commission 2012). The aim of the Six-Pack is to memberapplies with states, the euro-area law. It toall for member rules specific states, EU of EU secondary beingforce2011, therefore in part into entered December directivethat one under the new circumstances. This reform, known as Six-Pack, is a set of five regulations and 2011, the SGPwas further reformed in 2011 to ensure maintenance the its of provisions aiming atthe fiscal sustainability budgetary of (Verdun objectives 2010: 332). was strengthened by adding toitmore differentiated medium-term orientated provisions state may have a temporary deficit higher than that stipulated in SGP, and the preventiveso as to includemore flexible provisions regarding circumstancesthe underwhich member a arm SGP(Dysonthe 2010).Morespecifically, two Council regulations the of 1997 wereamended in “softening” were SGPwasreformed reforms 2005. These As a the situation, of resultthis however the Council had the right not to follow the recommendations of the Commission Council’slegal. decision was TheECJ inruled 2004 thethat Council’s decision was illegal, whether the Court (ECJ) of Justice European asked the the Commission Moreover, possible. have notbeen forthis asmaller would in situation state a similar whereas avoid sanctions, such asAustria, Netherlands and the felt Spain France that to andGermany their power used were its initialstates biggerthat supporters. membera weakening follow EDP.Thisled the caused ironically to bythetwo of SGP, the (ECOFIN), in November 2003, they managed tocircumvent Commission’s the proposal to Ministers Financial and Economic of Council the of meeting in the Subsequently, sanctions. they managed toget support from memberother states andavoid to possible financial For the exact ECJ ruling, see Case C-27/04 Commission v. Council. Following theglobal financial crisis of 2008 andthe European sovereign crisisdebt of amongmember ascountries the This ECOFIN’s caused disagreement decision states, 21 9 . CEU eTD Collection Establishing the European Stability Mechanism. Functioning of the European Union, which will give legal basis to a separate treaty, the Treaty 10 process is Stability mechanism, in European (ESM) Another Mechanism the temporary temporary. lack in legal basis are only the EU andtherefore the however, mechanisms, treaties, Financial Stabilityother mechanisms, such as the European Financial Stability Facility (EFSF) and the European Mechanism Bulgaria, Moreover, and Romania. member Lithuania, Poland Denmark,Latvia, area states, (EFSM)Council in March 2011 andaims at fostering economic policy betweencoordination euro- the were put debt. Amongin initiatives those isPlus which Euro the by Pact, was adopted European the place as bailoutmainly by triggered sovereign the crisis,indebt an assistmembereffort to in states huge governance, economic mechanisms. European of field in the initiatives more been have there 2011, and These forthcoming).(Puetter, failedFrance and support toreach of the against ECOFIN recommendations the Germany Commission’s the when in 2003, one the as such situations prevent to seeks voting reverse of principle This it. against vote states member of majority qualified a unless Commission, majority voting (RQMV), underwhich Councilthe a adopts proposal made by the it Furthermore, reversequalifiedintroduces the Imbalance Procedure. Macroeconomic new the with surveillance macroeconomic introducing by also and surveillance fiscal with debt public reducing by field, fiscal inthe primarily SGP, the strengthen are part of EU legislation? The answer is that even though the Fiscal Compact is an theFiscalCompact is even though that The answer EU legislation? are partof why deal if emerges: question Fiscal isto with the focus measuresthe Compact, that on those formal adoption of –in andprocedures rules a economicEuropean Here, governance. –seen evolution as the law, theinstitutional arepartof these EU signify and therefore The ESM is aimed at being incorporated in EU law with an amendment to the Treaty on the 10 In addition to the Stability and Growth Pact, as well as its subsequent reforms of 2005 . However, this work deals primarily with the EMU and the SGP and its reforms, as 22 CEU eTD Collection interpretation and implementation of the rules), as suggested by the theory. inthe highlevelof discretion or (low institutions the of characteristics the and possibilities) weakveto or (strong context political of the characteristics on the befocus will placed the governance, economic European the of framework general the within assumptions these these gradually unfolding may changes be the causes of outcomes. to other In order trace that as it suggests 2004; 1999), Thelen concept of (Mahoney Pierson 2000; dependence path the to attention places theory the Moreover, 2). 210: Thelen and (Mahoney transformations” these “incremental shifts” have an accumulative effect and they often add up to “fundamental However, These very sometimes incremental 1). hardtotrace. changes small and and are institutionsthat change with subtle andgradual ways over time (Mahoney and Thelen2010: As mentioned in one, chapter gradual the institutional change theory’s main isassumption European Economic Governance Tracing2.3. the Theory ofGradual Change in Institutional the Field of can be appliedwithin framework. this EMU Six-Pack,to the aim the whetheris to trace thetheory of institutionalgradual change It canhelpintegration. monetary about the usdrawconclusions towards European trends it stands asaseparate intergovernmental treaty, isalsoimportant for analysis. subsequentthe change to explain its creation. Moreover, the fact thatiswhether there continuity and whether wecanapplyit theory the of institutional gradual is not incorporated into EU law, but to place this treaty in framework of economic bigger andidentify the governance European is aim the - it ratify that states member those for only binding thus - treaty intergovernmental After portraying the main aspects of the European economic governance, from the from governance, economic European the of aspects main the portraying After 23 CEU eTD Collection of interpretation interpretation of of rules ishighthe low respectively. or (Mahoney only and Thelen 2010), offersthat vetopoints, strong according the model institutional to gradual of change due decisionmaking to the by theEuropean Council.process EMU weretaken Therefore, consensus among member states is necessary. For example, the concrete steps for creating the changes, offers strong veto points. For decisions regardingdecisions onprovisions strengthening EMU. the the EMU and Treaties’ EMUreforms, and this commitment leaders to the European goal their However, ‘snake’. stayedcommitted of establishing the is evidentdesire by theirof the by cooperation,achieve monetary besidesbeing fixed exchange-rate stability a continued adoption member of thestates leaders many asaway European andto ensure The stability peace in attempts Europe. to EMU and (McNamara their all with integration was a single for monetary memberthat currency by considered states EU following 1998: Moreover, market. McNamaraamong argues of economies the (1998) common the European 2), were not European political leaders, asmonetary wouldintegration and encourage trade investment always successful, haslongof beena priceconcern stability and monetary cooperation Hestresses that (1998). like the rules along previous the ones, without removalthe of old,the while inflation policy. conditions, However,exogenous such as the rise in oil of prices 1973 moved policies fostering economic growth and employment, whereas Germany was in favor of a low of in favor was France focus. cooperation’s the about adisagreement was there beginning of the old ones. changedenactment but the new of rules, introduction The political context of the EU, within which decisions are taken towards institutional McNamara according back integration history to EMU traces tothe of European Although there was a general consensus regarding monetary atthe integration, monetary regarding there was ageneral consensus Although layering or 24 drift can occur, depending on whether the level Layering is the introduction of new of introduction isthe drift does not imply CEU eTD Collection convergence criteria. Moreover, it (EDP),accordingadded excessive Moreover, the criteria. deficitprocedure to convergence added apreventivestability. SGP – clause The early the –tothe Maastricht warning been adopted have in rules new these order specifically, More Council. to European maintainin the regulations and resolutions the policy goals of EMU, such1997. Again there possibilities, arestrong veto asconsensus is adoption needed for the of as low inflation and price Growth Pact, consisting of one resolution and two council regulations, which were adopted in recognizedEurogroup by Lisbonthe Treaty – alongside the existing rules. again this wasOnce years. half a a and layering, two for president a have now can it and Treaty, the 14 to No protocol as we have the the with ‘formalized’ was introductionEurogroup the Treaty Lisbon the after beginning, the at informal of a new rule – here theinformal creation body consists of the financial ministers of ofthe euro-area countries. Although European Council Decemberof 1997 for better coordination of economic policies. This was high, as they constituted primary source of EU law. could opt out. Moreover, the level of discretion regarding the enforcementDenmark and UK the as of thesuch new rulescountries Treaty, Maastricht the of adoption the for needed was for of consensus creation the EMU.Although the wereintroduced rules, newrules Treaty is a case of to ensureprice Maastricht stability. as so policies monetary and economic of the achieveconvergence criteria wasto Maastricht rates. This policy was sustainedaimed toachieve low inflation and price stability by minimizing fluctuations in exchange throughout the wholestability Georgeand(Bache, Bulmer 2011).As a result, the creation of EMSandthe ERM design of the EMU. The member states towards Germany’s fostering position lowof inflation policy goaland price of the A more evident example of layering, however, is the creation of the Stability and Stability is the creation of the however, layering, of example A more evident Following the creation of the EMU, the Eurogroup was created after a decision by the 25 layering, as in addition to the old the to addition in as CEU eTD Collection rules, neither does it enact the existing rules in different ways. It it in in newenact only theexistingthe rules rules, does adds different rules, neither implementation. their and provisions the of interpretation in the discretion more is there now however same, the remains still context political The ways. different in slightly but rules previous the of enactment the well as the clause regarding exceptional cases). This reform can be seen as a drift,permit as we have more flexibility when it comes avoidsituation. to tofuture, Inorder similarsituationstheSGPwas inthe reformed inaway to sanctions (for example the one year membertime frame, as states,Council, Council’s the followed decision by ECJrulingthe causedthediscontent of several as well were not implemented). Even though France andGermany managed togain insupport asthe the Commission. this(in rules casethe differently rulesareimplemented these rules arethesame,however The the because as a drift and Germany France regarding decision Council’s seethe we can only 2005 reformwas illegal, asitwas against the provisions thatthe same Councildecided upon. Therefore, was the aftermathagainst Commission’s the proposal ECJ ruling,(see also caseC-27/04),the Council decision of Although theCouncil Germany decide theexcessivehasprocedure. the right deficitunder to this the Councilof the SGP, when France and Germany failed correctto their deficits after the early warnings, decideddrift, because of the Institution’s discretion in the implementation of the measures. In the case not to follow the economic of within governance. framework European general the Commission’s place piecemeal have thattake and anaddedvalue criteria tothese changes convergence they proposal Maastricht are inlinethe provisions with These correct deficit. theirexcessive to measures formember which sanctions beimposed could wouldthat to necessary states the nottake putting France and The Six-Pack, however, is an example of layering, as it does not question the previous Although the SGP is an example of layering, its reform of 2005 could be seen as a 26 CEU eTD Collection theory theory of gradual institutional in change context. this the itself,of applicability the as aswell FiscalCompact asto the usdrawconclusions enable to identify and institutional to represents, typewhat Fiscal changetherefore of the Compact regards to the SGP, so as to examine what its added value is towards the SGP. This will assist will beanalyzed with Fiscal Compact the governance, economic of European framework and new in areaddedparallel of rules existingthe to support ones. be aslayering, 2005SGPreform, as takingthe with characterized of place, exception can the interpretation and application of rules allowed by institution.the Theinstitutional changes in the discretion of level the to according drift, or layering for only allow points, veto namely strong by political of the the SGP. context, The characteristics stipulated the integration tosuch economic an rates fixed exchange regarding from went cooperation member states wherethe case this In end. the at effect accumulative countries an have and way a piecemeal in happening can is evident that institutional the theory of gradual asgradual changebe can traced, changes are face sanctions if their deficitsrules areadoptedin support of previousthe ones. new the and high, is rather provisions the of are implementation the regarding discretion of level higherthe Finally, measures. these of than adoption the for needed was consensus as points, veto strong the limit toreach recommendations Again Council’s morethe easily. in support this case we have enableas theCommission’s so to voting (RQMV), majority qualified well reverse as the as Procedure, Imbalance of Macroeconomic is the introduction Six-Packprovisions the the Among it. SGP, soastostrengthen tothe parallel directive, and one fiveform regulations of After having theory traced the institutionalgradual of inchange general the it governance, economic European of framework general the of delineation the From 27 CEU eTD Collection 12 whole Treaty. where the main provisions are stated. However, in this work the use Fiscal Compact refers to Economicthe and Monetary Union (TSCG). The Fiscal Compact only refers to the Title III of the TSCG 11 of of 27 European countries Compact Fiscal the introduction, inthe stated As The3.1. FiscalCompact and the Stability andGrowth Pact integrationas towhere is European the directed. creation. This willsubsequentlyexplanation help usdraw conclusions and makepredictions its of explanation an offer thus and identified, be therefore can change institutional of type occurring the so, If FC. the of creation the of case in the be applied can change institutional stated by Fiscalthe Compact SGP.and whether these provisionsThis(SGP) after the 2011 reform of the latter. The purposeare is to examine divergingthe new provisions of the will or in line withprove Pact regards andGrowth Stability the(FC) with to the theFiscal Compact analyzes This chapter previous ones whether the assumptions of the theory of gradual to fiscal discipline” (Puetter, forthcoming). In order to assess the Fiscal Compact in light the Compact Fiscal toassessthe In order forthcoming). (Puetter, fiscal discipline” to Germany seeing the Fiscal Compact as a means strengtheningof member states’ commitment with lines similar along proceeded have crisis the of light in the implemented governance euro area to reforms “the institutional andFrance, Germany between a compromise adopt euro.Likethe the original institutional of design EMU,whichthe was considered tobe andafter memberthey member other forstates for states the all euro-area binding effect it force into will andhave states, memberenter by If governance. twelve ratified euro-area The two non-signatory countries are the United Kingdom and the Czech Republic. the in Governance and Coordination Stability, on Treaty is treaty of this name official The CHAPTER III: Explaining the Fiscal Compact through the Lens ofthe Theory of Gradual Institutional Change of Institutional Theory Gradual 12 . It is an intergovernmental treaty that introduces reforms to the 28 11 was signed 2 March, on 2012, by 25 out CEU eTD Collection against it” Commission 2012).Therefore, likelihoodofmemberagainst (European the to avoid states financial is sanctions adopted,“unlessconsidered a qualified majority of membervote states of France and Germany). largethe possibilitythe such states (as itoppose to proposal has happened inin 2003 case the With the introduction for with offering therefore sanctions, approve a qualifiedmajority Commission’s the proposal of RQMV, the Commission’ssanctions following the Commission’s proposal. 2011reform, the Before Council the had to proposal forvoting (RQMV)for financial Undersanctions. the EDP,the Council can imposefinancial 60% of the GDP and not just for agovernment deficit of 3%, which has been the case so far. aboveratio for (EDP) adebt Procedure Deficit Excessive the as totrigger so criterion” debt SGP (European Commission further2012). It reinforcesby “operationalizing the SGP the the under arm preventive the of context in the means MTO the from deviation’ ‘significant by theirapplication.ensuring strict so Itdoes by indefining quantitative whatterms provisions aims The Six-Pack these atreinforcing (MTO). objectives specific medium-term well as eachmember state’s budgetary balance should be in with country-the accordance must notexceed 3%of GDPandthe must the public debt notexceed 60%of GDP,as the deficit in SGP tostrengthen theSGP.Accordingthe general adopted the order to government have euro.Thewas Six-Pack the member that adopted the states for specific provisions and intoforceSix-Pack, entered Decemberon It 2011. applies toall member with EU states previous ones. the from diverging or to parallel are they whether and provisions new the are what examine institutional change - in this of theory the gradual of institutional itischange,case necessary compareto itwith previousthe the last reform of the Stability and Growth Pact - so as to Another key reform introduced by the Six-Pack is the reverse qualified majority The last reform of the SGP consists of five regulations and one directive, known as 29 CEU eTD Collection Article 7).This implies by thethat RQMV, whichwasintroduced Six-Pack,the will apply to unlessdeficitprocedure”, aqualified majority countiesof is iteuro-area against (TSCG, of in “isan framework is of deficitcriterion excessive currency inbreach the euro, the the member euro-area Commission’s states to supportthe whenmember proposals whose a state, FCthe arenotaddingsomething previous new,but only provisions, restate article 7commits and Protocol the (No 12)annexed totheEuropean Union Treaties. Although articles 4 to 6 of Pact, was already undertheStability reiterate what the TFEU and Growth procedure, stated “endangerdeviation notshould fiscal in the medium sustainability the (Ibid). term” temporary that specifies them and however FCreiterates the intheSix-Pack, setbeen out the have already from circumstances” “exceptional These MTO but only in circumstances. exceptional deviation temporary permits it time, same the At 3). Article (TSCG, MTO the from mechanism be correction incase the specifies that should triggered of automatically deviation MTO “shall be …inline evaluated revisedPact” with the (Ibid).It Stability and Growth tothe with regards the progress that stipulates it 3).Moreover, Article Pact” (TSCG, Growth in (MTO)“as medium-term defined country-specific objectives revisedStability the and andPact(Six-Pack).It binds Growth memberstates torespectand ensureconvergence tothe toidentifystudies (McArdle 2012). macroeconomic imbalances potential would initiate that based macroeconomican indicators issystem on warning established early MIP to According surveillance. macroeconomic fosters which (MIP), Procedure Imbalance Macroeconomic the introduces Six-Pack fiscal the rules, of enforcement stricter the besides sanctions is less, thus signifying a stricter enforcement of the fiscal rules. Furthermore, In addition, the articles 4 and 5 of the FC, with regards to the excessive deficit The Fiscal Compact follows the policy directions stipulated by the revised Stability 30 CEU eTD Collection now being used. 13 in take alsoplaceyear. way atleaststresses the whichIt of thePresident twice to meetings a ante to reinforce surveillance andcoordination of economic policies among themselves with Inaddition,best benchmarkingof invites and euro-area. practices MS the 11suggests article measuresthe providedby of TFEU and enhancedthe for cooperation theproper functioning by convergence member (MS) the encouraging towork states jointly,make effective useof to thememberin state question. financial sanctions law. theECJcanimpose In case national this into mechanism correction rule andthe has thebalancebudget later ECJif the totranspose failed the contracting party to another can take onecontracting party thisAccording agreement, to parties. contracting basis from it European Court derivesthe of specifically,in Justice legal governance. More euro-area the the article 273 of TFEU rule. this with compliance the monitoring in level national at institutions and independent of role provides the states article same the Moreover, 3). Article (TSCG, constitutional” preferably character, for a specialinshould “takeeffect national the law”, “through provisionsbinding forceof andpermanent agreementmechanism correction and rule balanced this isthat FC the of innovation An 3). Article between the provided by Six-Pack.the all stages of excessivethe deficitprocedure, and not just during sanctioning the stageas FC refers only to title III, articles 3 to 8. Therefore, for legal clarity the full name of the treaty is discussion of the economic policy reforms that the member states planundertake. memberto the states that reforms policy economic of the discussion Regarding the governance in euro-area,the article 12provides for Euro Summit Articles 9 to 11 of the TSCG by enhanceinnovation introduced article 8is the role FCunderthe Another the of to Furthermore, the FC adds a new rule to the SGP, the balanced budget rule (TSCG, 13 restate the need for economic policy coordination and coordination policy economic for theneed restate 31 ex- CEU eTD Collection delineated theinstitutional withinchanges generalthe framework of EMU, focusthe is support of existingthe with ones, exceptionthe of 2005reform the Afterof SGP. the having Council, those changes constituted either European the within possibilities veto strong of because how, shown was It governance. institutional takingchanges place withinof the generalcontextEuropean economic as causesof outcomes” (Mahoneyand Thelen other 2010: 3). significance in their own right; and gradually changes mayunfolding be hugely consequential great canbeof “gradual these changes Moreover,are hard that to trace. sosmall sometimes institutional arechanges happeningin gradually incrementaland an way. Thesechanges are is main before, the As stated institutional change that of of gradual the assumption theory Institutional Change 3.2. An Assessment of the FiscalCompactthroughthe Theory ofGradual Union. European the of framework legal the into treaty the of text the incorporate to in order from into entry the force of TSCG the the treaty should beassessed should and steps betaken supported by the contracting parties. Last but not least, article 16 suggests that after five years its because functions and arebeingrecognized of indirect formalization Eurogroup, the TSCG article 12). These clauses, together with the other provisions of article 12, constitute an involved inthe SummitsEuro when institutional issues are forthcoming, (Puetter elaborated be shall MS area non-euro that that states further It appointed. be shall Summit Euro the euro-area governance, such as the SGP, constituted such as the SGP, governance, euro-area the in developments the of Most rules. the of implementation and interpretation the towards In the second chapter the EMU history was elaborated soas the trace type of to history was elaborated EMU the chapter second In the layering 32 or layering drift , according tothe level of discretion because they added new rules in CEU eTD Collection law. 14 TFEU“theprocedure the infringement was evident already from the Maastricht Treaty. Hefurther notes that in the article 126(10) of have governance institutionsto in amoresupranational role of controlling field the euro-area institutions. supranational the to governance euro-area of field inthe sovereignty more convey However, as Dehousseregulations and directives, like the SGP and as its (such reforms)(2012)legislation EU signifies secondary of part not and – the level reluctancenational and of theintergovernmental MS to points out, this reluctance of the previous provisions. MS to allow restating them and by adding newones alongside the ones previous further that strengthen the is a case is the Fiscal of it that Compact evident ECJinthe case a MSfails implementto balancedthe rule budget in law.national Therefore, budget and rule the MTOs law, innational and the possibility financialof posedby sanctions mechanism in from of of deviations case the MTO, incorporation balanced the correction the supporting substance the of revisedSGP(Six-Pack):thethe automatic triggering of the few added are there newrules However, of compliance. and assessment the objectives convergence tothebudgetary such asthe escapeclause the of extreme circumstances, in FC, the arebeingreplicate theSix-Pack of several provisions itwas shown that Compact, of gradual changes in the EMU. placed on the type of change the FC represents and how it can be situated within the spectrum that is not part of secondary EU law. However, the creators FC show creators their aim the of the law. is that of However, partof EU secondary not is in FC of The samefact adoption the the by the still framework.” trend evident procedure The Commission’s power to bring a case before the ECJ against a MS that fails to comply with EU The fact that the FC is an intergovernmental treaty – therefore part part fact of primary law at theFCThe treaty that is– therefore anintergovernmental From the examination of the main provisions stated by the Six-Pack and the Fiscal 14 isbefore ECJ the excluded inthe excessive deficit 33 layering , as it reinforces the existing rules by CEU eTD Collection further by triggered moments,critical such thefallas Woodsof in Bretton the 1971 or the of support policy ideas such inflation as low andhave stability price 1998), (McNamara been underpinned byaneoliberal a closerconsensus economic towards coordination and the although changes, These governance. economic European of field in the changes many been light beginningthe EMUuntil economic have the of From the there of the crisis. nowadays in future. the as a way to commit member states to these strict rules, preventing them from amending them somethingin very constitutions, nature (Chalmers This difficult 2012). factcanbe explained amend their soasto domestically achieve majorities to parties all contracting require prevented. This is because any amendmentany unilateral future amendmentof provisionsthose of FCthe will beof is automatically these clauses at a “pan-Union member states, of the constitutions level”into the transposed 3 arebeing of article provisions the will then stated. isclearly EU” the of framework legal the into Treaty this of substance the incorporating intension for the TSCG to gradually becomeproposals part of EU law… the submitted in supporting to article “commit MSs as Commission the of 16, powers where control the by strengthen FC the“the Commission”aim of (TSCG, of the creators the Nevertheless, process. the over control MSs’ isstill there Therefore ArticleECJ. 7). the Finallyto MS non-complying the takes parties contracting the of they ifone only but law, national show an open as it sanctionscan pose toaMS for its failure to provisions of transpose the inarticle 3 By legalbasisfrom deriving article 273of TFEU,they the give ECJacontrolthe to power, governance. euro-area in the Commission the and ECJ the both of involvement the enhancing The future of the European economic governance is for sure uncertain, especially in is especially sureuncertain, for governance economic European of the The future Another important point with regards to article 3 is that once the TSCG is ratified and 34 CEU eTD Collection the future.the in control supranational more introducing of possibility the with integration, monetary and economic more towards trend clear but tentative a show conditions, certain under sanctions impose power the to 8thatoffersECJ of andarticle control Commission the the strengthens 7 that article discretion, fiscal MS’s reducing aims at 3 that article with together clause, incorporate to order thesubstance legal of TSCGintothe of framework the EU.This the 16 offers ahind by after stipulating that fiveyears all necessary shouldthe steps in be taken Already article the economic cooperation. closer andstricter leading to effect accumulative an have changes small these that identify can one change, institutional gradual of theory the through and EMU the of context bigger the within if seen however, changes, small seemas whichcannow addsomenew FCdoes the provisions, Nevertheless, hardtrace. to sometimes and small are changes that assumptions main theory’s the of one prove comments the reiteration(Vitorino2012, Feldstein mention 2012) thethat FC haslimited added valueis andit rather of the in foundation. press theirthe articles Several andsupports existing tothe rules which adds previous provisions stated effect. has anaccumulative every change by theevolution, whereeach ischange builton foundationsthe of previousthe policies andwhere SGP and institutional acontext of gradual into its changes itplaces However, economiccrisis. the last reform.institutional not does change disregard thetriggering effects of exogenous variables, suchas These The fears euro”. the theory marketof sustainability down gradual of the regarding “calm and, therefore, of states” the fiscal “reduce the discretion is to attempt an Compact Fiscal of adoption the the that argues example for (2012) Dehousse crisis. economic current According tothe institutionaltheory of gradual a FC change the constitutes 35 layering, CEU eTD Collection occurring mode of institutional change, and whether the political context of the European the of context political the whether and change, institutional of mode occurring institutionalresearch could aim incorporatingat change the agents –suggested by the theory of gradual change applicability level actual and the of toitswith discretion regards implementation. Further – so and functionality its observe as actually can one enforcement and to ratification its after only and correlate this topic shouldbe subjecttofurther research.This isbecause Fiscal is the new, Compact the main actors’ strategies effect. accumulative havingan andpiecemeal, slow are changes that with assumption main theory’s the proves trace to hard even and small are Pact regards to by introduced the Stability regards Growth to the FC with and fact thechanges The ones. that the layering, caseof the FCconstitutes the that itwas shown specifically, More FCthe in particular. in thecaseof in and general, governance economic of European context inthe are applicable in be field expected the economicEuropean of governance. can whatlightfurther developments shed and theFCsignifies on and therefore theory, what whatkind institutional of accordingFCchange the represents the to types suggested bythe European economic governance, creation upto the of FC.the meidentify This enabled to in to trace delineated order mainthe of thebigger within assumptions theory’s context economic main were the For thisof purpose creation. governance aspects European its of provideso as explanation to (FC), an FiscalCompact of inthe creation the specifically more economicand governance, in of European couldcontext betraced the change This thesis aimed atexamining whether assumptions the of theory the gradual institutional of CONCLUSION Due to time constraints, as well as limitations regarding the availability of literature, availability as the of well regarding Due to as limitations time constraints, change institutional gradual of theory the of assumptions main the that proven was It as new parallel andin arebeingintroduced of rules to already support the existing 36 CEU eTD Collection displacement in favor of less veto points, and whetherthisis leading changes to such as occurring atthesame intime EU,such the as the introduction of new decision-making rules orentangled institutional economic arebeingsupported changes by governance gradual would be to examine howgradual institutional changes happening in fieldthe of European Another suggestion another. agentover type one of change favors governance economic . 37 conversion or CEU eTD Collection Dehousse, R.2012,“The ‘Fiscallegal Compact’: uncertainty and political ambiguity.” De Grauwe,P. 2005. 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