Germany and Italy: Stumbling Giant and Prodigal Son?
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Germany and Italy: Stumbling Giant and Prodigal Son? Social Pacts and the Political Economy of Fiscal Consolidation (1991-1998) Benedicta Marzinotto International Relations Department London School of Economics and Political Science PhD Thesis in International Relations l UMI Number: U213473 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. Dissertation Publishing UMI U213473 Published by ProQuest LLC 2014. Copyright in the Dissertation held by the Author. Microform Edition © ProQuest LLC. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code. ProQuest LLC 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106-1346 B'TBSfUiT* iWtJ crwryrtr /Jtwes Abstract In the run-up to European Monetary Union (EMU), Italy put in place an extraordinary fiscal adjustment, whereas Germany encountered serious difficulties that go beyond the re-unification shock. "WaF-of-attrition" models are employed to explain this puzzle. It is argued that Italy's high debt burden and soft currency regime from 1992 to 1996 turned out as an opportunity. The prospect of EMU membership opened up room for market- induced credibility gains. By allowing a sensible reduction of interest payments, the high-debt GDP ratio de facto reduced the scope for welfare retrenchment, thus minimising conflicts between socio-economic groups over the distribution of the fiscal adjustment burden. At the same time, social concertation offered a locus of conflict resolution. Social partners’ fiscal preferences stemmed from an evaluation of the distributional impact of deficit reduction and of trade-offs in other policy areas, e.g. exchange rate policy. Thanks to Italy's soft-currency regime, domestic business agreed to unions' demands for a tax-imposed fiscal consolidation as the devalued Lira allowed them to maintain a competitive edge. The opposite is true for Germany, where the low debt burden and hard currency regime functioned, paradoxically, as straightjackets. With a low debt level, deficit reduction had to come from real government activities, either on the revenue or on the expenditure-side. Also, the appreciated Deutschmark did not offer an alternative "pressure valve" to Germany's export-oriented business. The failure of the 1996 social pact is understood against this background. This thesis sheds light on the political economy of EMU-induced fiscal adjustment as well as on the determinants of social concertation in the EU. In this respect, it contributes simultaneously to two strands of literature: the now flourishing research agenda on fiscal policy in EMU -of which it rejects the strong institutionalist flavour, and the equally recent revival of corporatist studies since the 1990s. 2 Table of Contents Abbreviations i Graphs and Tables ii Chapter I - Empirical Puzzle, Definitions and Case Studies 14-39 1. Challenges to EU Fiscal Coordination 1.1 Existing interpretations of fiscal adjustment 1.2 Consensus signals a solution to the “war of attrition” 2. Fiscal Consolidation: Old and New Definitions 2.1 The economics of fiscal consolidation 2.2 The dimensions of fiscal consolidation 3. Stumbling Giant and Prodigal Son? 3.1 Most-dissimilar-systems research design 3.2 Italian and German budget consolidation: raw economics Chapter II - Theories of Fiscal Adjustment 40-71 1. A Synopsis of Theoretical Interpretations 2. The Limits of Top-Down Explanations 2.1 The role of external constraints 2.2 The position of state administrations 2.3 Political and fiscal institutionalism 3. The Leverage of Bottom-Up Explanations 3.1 The fate of ideology under permanent austerity 3.2 The new politics of the welfare state and beyond 3.3 The contribution of neo-corporatism 4. Bringing Socio-Economic Preferences Back In 4.1 Vested interests and economic policy 4.2 Vested interests in fiscal adjustment 3 Chapter III - Timing, Size, Composition and Persistence of 72-100 Italy’s Fiscal Consolidation (1991-98): Preferences versus Institutions 1. Italy’s Fiscal Consolidation: Stylised Facts 1.1. The timing and size of fiscal consolidation 1.2. The composition of fiscal consolidation 1.3 The persistence of fiscal consolidation 2. The Role of Fiscal and Political Institutions 2.1 The Italian budgetary process 2.2 The economic role of fiscal institutions 2.3 The economic role of political institutions 3. Partisan and Median Voter Preferences 3.1 Demand-side partisan politics 3.2 The Italian median voter Chapter IV - Social Pacts and the Fiscal Role of Italian Social 101-141 Partners 1. Macroeconomics and the Italian Variety of Corporatism 1.1 A profile of Italian interest groups 1.2 The historical relevance of macro-concertation 2 .____Fiscal Policy Responses to the Financial Crisis 2.1 The U-turn under the Amato Government (1992-1993) 2.2 Technocrats, social partners and markets (1993-1994) 3. The Creation of Consensus in the Final Run-Up to EMU 3.1 The neo-liberal agenda of Berlusconi (1994) 3.2. The Dini and Prodi Governments (1995-98) 4. Social Pacts: Their Content and Financial Impact 4.1 The content of Italian social pacts 4.2 The financial impact of social pacts Chapter V - Size, Composition and Persistence of Germany’s 142-169 Fiscal Adjustment (1991-98) Preferences versus Institutions 1. Germany’s Fiscal Adjustment: Stylised Facts 1.1 The timing and size of fiscal adjustment 1.2 The composition of fiscal adjustment 1.3 The persistence of fiscal adjustment 4 2. The Role of Fiscal and Political Institutions 2.1 The German budgetary process 2.2 The economic role of fiscal institutions 2.3 The economic role of political institutions 3. Partisan and Median Voter Preferences 3.1 Demand-side partisan politics 3.2 The German median voter Chapter VI - The Fiscal Role of German Social Partners: The 170-208 Failure of the Social Pact 1. Macroeconomics and the German Variety of Corporatism 1.1 A profile of German interest groups 1.2 The historical relevance of macro-concertation 2. Fiscal Policy-Making in the Aftermath of Unification 2.1 First budget response to unification (1991-92) 2.2 Pro-active budgetary interventions (1992-93) 3. Reconciling Fiscal Austeritv and Electoral Politics 3.1 U-tum in German fiscal policy 3.2 Fiscal solutions to unemployment(1995-98) 4. Social Pacts: Their Content and Financial Impact 4.1 The content of German corporatist agreements 4.2. The financial impact of German corporatist agreements Chapter VII - The Societal Base of Fiscal Adjustment: a 209-255 Comparative Perspective 1. Strategic Configurations and Macroeconomic Contexts 1.1 The distribution and intensity of fiscal preferences 1.2 Explaining preference formation: macroeconomic environments 2. Further Supporting Evidence: Sequencing 2.1 Italy: the short-term advantage of floating 2.2 Germany: the straight jacket of monetary hegemony 3. Extending the Argument: Shadow Cases 3.1 Fiscal adjustment and interest politics in Belgium 3.2 Fiscal adjustment and interest politics in Portugal 5 Chapter VIII - The Political Economy of Italian and German 256-280 Fiscal Consolidation 1. Changing Models of Capitalism in the Euro-zone? 1.1. The Italian variety before and after Maastricht 1.2. The fate ofModell Deutschland in the Euro-zone 1.3. Italy and Germany in comparative perspective 2. The Political Economy of Fiscal Consolidation 2.1 The economics of fiscal adjustment 2.2 The new political economy of corporatist patterns 2.3 The limits and future research agenda References 281-296 Appendix la 297-299 Appendix lb 300-302 Appendix2a 303 Appendix 2b 304 Appendix 3a 305-6 Appendix 3b 307 6 Abbreviations Abbreviations Name A Austria AES Economic and Social Agreement AN Alleanza Nazionale B Belgium BDA Bundesvereinigung der Deutschen Arbeitgeberverbande BDI Bundesverband der Deutschen Industrie CA Cyclically Adjusted CB Collective Bargaining CdL Conquiste del Lavoro CDU Christlich Demokratische Union CEO Chief Executive Officer CGIL Confederazione Generale Italiana del Lavoro CGTP Confederafao Geral dos Trabalhadores Portugueses CIP Confedera^o da Industria Portuguesa CISL Confederazione Italiana Sindacati Lavoratori CME Coordinated Market Economy CME Coordinated Market Economy CNEL Consiglio Nazionale deU'Economia e del Lavoro CPCS Concelho Permanente de Concertacao Social CSU Christlich Soziale Union D Deutschland DAG Deutsche Angestellten Gewerkschaft DC Democrazia Cristiana DDR Deutsche Demokratische Republik DGB Deutscher Gewerkschaftsbund DHIT Deutsche Industrie und Handelstag DM Deutschmark DPEF Documento di Programmazione Economica e Finanziaria E Spain ECB European Central Bank EMS European Monetary System EMU European Monetary Union ERM Exchange Rate Mechanism EU European Union F France FAZ Frankfurter Allgemeine Zeitung FCP Fiscal Consolidation Programmes FI Forza Italia FIN Finland FPD Freitliche Partei Deutschlands FT Financial Times GDP Gross Domestic Product 7 GNP Gross National Product I Italy ILO International Labour Organisation IRL Ireland IRPEF Imposta sul reddito delle persone fisiche KA Konzertierte Aktion LMEs Liberal Market Economies LN Lega Nord NL Netherlands NRS Nuova Rassegna Sindacale OECD Organisation for Economic Cooperation and Development P Portugal PCI Partito Comunista Italiano PDS Partito Democratico della Sinistra PPI Partito Popolare Italiano PR Proportional