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«By David J. Howarth University of Edinburgh d.howarth ABSTRACT French policy-makers have been caught in a dilemma with regard to the ...»

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Making and Breaking the Rules:

French policy on EU ‘gouvernement économique’

and the Stability and Growth Pact

By David J. Howarth

University of Edinburgh

d.howarth@ed.ac.uk

Abstract

French policy-makers have been caught in a dilemma with regard to the

construction of the Economic governance (EG) dimension of EMU between two strong but

contradictory preferences: on the one hand the supranational consequences of a dirigiste

approach to macro-economic policy and, on the other hand, a Gaullist reflex to retain sovereignty as much as possible and to insist upon intergovernmentalism in EU-level macroeconomic policy-making. Since the late 1980s, French governments have promoted the construction of EG in ways which can be seen in terms of these contradictory preferences, while challenging the official Treaty-based ‘price stability’ goals of EG. The Raffarin Government supported the March 2005 reform of the Stability and Growth Pact (Stability Pact, SP) because it rendered the Pact more flexible allowing greater margin of manoeuvre in the development and implementation of the Broad Economic Policy Guidelines (BEPG) and the application of the Excessive Deficit Procedure (EDP). EG has thus involved less ‘topdown’ Europeanization and ‘transformation’ of French policy than ‘bottom-up’ Europeanization, ‘accommodation’ and ‘absorption’.

KEY WORDS EMU, Economic Governance, Stability and Growth Pact, Europeanization

Paper presented on Panel Session 10A Challenges to the Stability and Growth Pact:

Institutional and domestic political aspects.

Chair: Gerald Schneider (University of Konstanz) Discussant: Henrik Enderlein (Duke University) EUSA Tenth Biennial International Conference, Montreal, Canada, 17 to 19 May 2007 Introduction Leading French politicians and academics have, since the start of discussions on the shape of the EMU design in 1988, been the principal proponents of the establishment of some form of ‘gouvernement économique’ (economic governance (EG)) at the EU level. Economic governance has ostensibly and rhetorically been presented as a counter-balance to the monetary policy-making power of the European Central Bank (ECB). It has also been presented as a means of encouraging coordinated reflation among EU Member States to ensure economic growth. At the same time EU economic governance has been used as a justification for domestic structural reform: a useful external constraint for French governments hamstrung by financial constraints and domestic political opposition to structural (notably pensions) reform. All French governments have defended the broader objectives of the Maastricht Treaty and Stability Pact (SP) rules (to prevent the unsustainable increase in the public debt load). However, French governments have also refused to accept the binding nature of the precise fiscal policy rules that are meant to reinforce the price stability goals of EU economic governance. These rules are not allowed to constrain French policy making when they are inconvenient.

This paper is thus a case study of the difficult acceptance of ‘Europeanization’ in France both in terms of the policies pursued by French governments but also in terms of their adopted discourse. French policy and discourse on economic governance provides an excellent example of how successive French governments have retained an idea of European Integration ‘à la carte’: they maintain a discourse in favour further integration, provide little substance as to what that means and are not actually committed to respect the rules they have previously accepted. This paper analyses the diversity of ways in which French policy makers have presented the concept of European ‘gouvernement économique’. This concept has been manipulated – beyond the core EMU goals of price stability (the stated aim of macroeconomic policy coordination in the Maastricht Treaty and the Stability Pact) and,

subject to this stability, economic growth – to cover:

1) economic policy coordination with other member state governments and with the ECB to achieve an 'appropriate' policy mix;

2) a more energetic EU-level interventionism designed to stimulate economic growth and create jobs;

3) the reinforcement of EMU’s credibility and legitimacy;

4) an explicit challenge to the ECB's goals and goal-setting and operational independence.

The inconsistent and often incoherent presentation of the concept of EG by leading members of the French political class reflects the inherent contradiction between two well-established French policy making preferences. On the one hand, the consequences of a dirigiste approach in the context of EMU encourages French governments to match the single monetary policy with some form of supranational economic governance that can bring about a tight coordination of national macroeconomic policies but also serve as a potentially useful device to empower French governments in the domestic political and economic context. On the other hand, the Gaullist reflex to retain national policy making margin of manoeuvre (‘sovereignty’) as far as possible is manifested in the preference that EU-level policy making is conducted in an intergovernmental manner. The difficulty elaborating a clear French policy on EG has thus reflected the incoherence in French policy on European integration more broadly and the failure of French governments to move beyond the divisive questions of principle (‘should we transfer sovereignty?’) to the more consensual challenge of managing such change: not ‘whether’ but ‘how’ to transfer sovereignty (Arnaud 2000; Drake 2001).





The ‘price stability’ function embodied by the Maastricht Treaty’s convergence criteria and the Stability and Growth Pact (Stability Pact, SP) has consistently been marginalized in French government (both conservative RPR-UDF / UMP and left-wing Plural-Left) discourse and policy on EU economic governance precisely because of the ostensibly binding nature of this function. The emphasis placed on the other forms of economic governance – notably as ‘policy mix’ and ‘intervention’ but also as political representation of the Euro-zone and even as political control over monetary policy – reflect more the domestic political and economic tradition – crucial to government-legitimisation in France – of volontarisme (or dirigisme), that is active – at least ostensibly active – state intervention in the economy. 1 While the price stability dimension of European economic governance has conformed to the preferences of French governments seeking to push through significant structural reforms to lower the French public spending deficit and contain the rising debt burden, the rigid design of the SP rules has contradicted French preferences in favour of intergovernmentalism and margin of manoeuvre in macroeconomic policy making.

The Pact was accepted by the Juppé Government (1995-1997) only after lengthy and bitter debate (Heipertz and Verdun 2004; Milesi 1998) to meet intransigent German demands and ensure the start of Stage Three of EMU. Thus the repeated failure of French governments to follow the existing rules of EU-level economic governance and the Broad Economic Policy Guidelines (BEPG) established for France should not be seen as a reconceptualisation of French preferences with regard to economic governance. The French government’s Pact reform proposals and its support for the elements of the March 2005 reforms demonstrate the preference for more flexible SP rules, the application of which should be subject to national political and economic considerations. The elaborate nature of the potential flexibility in the application of the reformed SP’s rules thus embodies the French paradox of wanting EG yet insisting upon intergovernmental policy making and margin of manoeuvre.

1 Volontarisme can be equated with dirigisme which Schmidt has defined as ‘a set of interventionist policies and directive policy-making processes’ (Schmidt 1997, 229) with the state actively steering the economic (industrial and so on) development of the economy (see also Hall 1986; Schonfield 1969).

EMU, Economic Governance and Europeanization In terms of the relevance of the diverse literature on Europeanization with regard to France and European integration, two conclusions can be drawn from the argument made here about EU-level economic governance and national margin of manoeuvre. The first concerns the description of EMU as ‘transformative’. The second concerns an application of the concept of Europeanization as a two way process that is ‘bottom up’ and ‘top down’ (Börzel 2002). In her study of the impact of EU adjustment pressures on policy sectors in the member states, Schmidt (2002) applies Radaelli’s (2000) analytical framework of Europeanization in terms of the scope of domestic change to several domestic policy sectors. This framework includes the concepts of transformation, accommodation, absorption, retrenchment (‘negative’ change) and inertia (resistance) (see also Heritier et a l. 2001; Cowles, Caporaso and Risse 2001).

Schmidt argues that EMU is the only EU policy area which has ‘transformed’ French policy and policy making. In all other areas (for example, financial services, electricity, air transport, railways and road haulage) there has been either been absorption or inertia.

With regard to EMU, the ‘transformation’ that Schmidt outlines disguises developments which have worked to increase government margin of manoeuvre rather than decrease it. Rather than restricting the macroeconomic framework in which French governments must operate, EMU has actually decreased constraints on French governments.

There is greater margin of manoeuvre in fiscal (and other macroeconomic policies) despite (or even because) of the Stability Pact. As EMU removes the possibility of speculation against national currencies, greater deficits are less problematic in the short-term for governments in managing their macro-economic policy as they are effectively sheltered by the single currency. The most restrictive element of the EU fiscal rules (notably the 3 per cent deficit limit) was until the 1990s not seen as particularly constraining for French policy makers given how seldom French governments had exceeded this figure in the past (only once since 1958).

When respecting these fiscal rules became politically difficult from 1993, French governments tried to change them. After the start of EMU’s Stage III, it became possible to flout and then change them (the March 2005 reforms) to ensure continued margin of manoeuvre. ECB interest rates, which decreased with the start of EMU, have far better conformed to French economic preferences than under the European Monetary System (EMS) – despite repeated criticism of ECB monetary policy making by French governments. The SP – created ostensibly to restrain the spending of profligate governments – in fact increased adjustment time for governments. The appearance of budgetary restraint – at least in the early years of EMU – built credibility for EMU and national macroeconomic policy (Jones 2000).

Thus ‘transformation’ in the realm of monetary policy has, at best, allowed for ‘accommodation’ and ‘absorption’ in fiscal and macro-economic policies and at worse ‘retrenchment’ – higher budget deficits and debt load – and ‘inertia’ – failure to engage in structural reform.

Börzel (2002) is helpful to this analysis because of a pertinent distinction between ‘top-down’ and ‘bottom-up’ Europeanization. Furthermore, an application of the concepts of ‘pace-setting, foot-dragging or fence-sitting’ further demonstrates the interaction of French fiscal and macro-economic policy preferences and policy on EU-level economic governance. 2 German CDU-CSU governments engaged in ‘pace-setting’ on the fiscal policy rules and macro-economic policy framework of EMU, while French governments engaged either in ‘fence-sitting’ – as on the design of the convergence criteria in the early 1990s – or ‘foot-dragging’ – as on the independence of the ECB and the creation of the Stability Pact.

2Börzel (2002: 194) defines these three strategies as follows. Pace-setting is ‘actively pushing policies at the European level, which reflect a Member State’s policy preference and minimize implementation costs’. Foot-dragging is ‘blocking or delaying costly policies in order to prevent them altogether or achieve at least some compensation for implementation costs’. Fence-sitting is ‘neither systematically pushing policies nor trying to block them at the European level but building tactical coalitions with both pace-setters and foot-draggers’.

However, since 1993, French governments have almost consistently engaged in ‘pace-setting’ with regard to the reform of EU-level economic governance. French governments sought certain EU-level developments (‘pace-setting’) because they were seen to complement French state action and domestic economic objectives (to achieve a ‘goodness of fit’) which lowered the implementation costs at the national level (Börzel 2002: 194). Member states seek to ‘upload’ national policy arrangements to maximise the benefits and minimise the costs of European policies of ‘downloading’. For Héritier et al. (1996) member states ‘compete at the

European level for policies that conform to their own interest and approach’ (Börzel 2002:

194). Thus, French governments have sought EU-imposed goals – Europeanization as ‘tying one’s hands’ through a deliberately developed external constraint – but all French governments have also opposed tightly binding rules that eliminate national margin of manoeuvre in national fiscal and macro-economic policy making. A coincidence of French and German preferences between 2003 and 2005 created a window in which French ‘pacesetting’ resulted in desired policy change on the Stability Pact.



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