The Scientisation of Fiscal Policy and its Limits: the Contestation overOutput Gaps in Italy

UNIVERSITY OF AMSTERDAM

Research Master Social Sciences

The Scientisation of Fiscal Policy and its Limits: the Contestation over Output Gaps in Italy

Author:

Camilla Locatelli (12241083)

Supervisor: prof. dr. Daniel K. M¨ugge Second Reader: prof. dr. Jonathan Zeitlin

The Scientisation of Fiscal Policy and its Limits: the Contestation over Output Gaps in Italy

Camilla Locatellia

a_{University of Amsterdam}

ABSTRACT

The sovereign debt crisis triggered a process of deep reforms in European Economic governance that pushed for technocratic handling of budget decisions, powered by the introduction of a plethora of standardised procedures, target measures and indicators in fiscal monitoring. This shift, aimed at producing more stable and less conflictual handling of budget decisions, has profoundly transformed fiscal policy reshaping its inner working towards scientisation, i.e. the increasing use of the language and the status of science to justify decisions as objective and drive accountability apart (Marcussen, 2009).

A central measure in this new technical apparatus - the output gap - has been at the centre of a heated contestation between Italian and European institutions over the past five years. The unfolding of this dispute, related to the methodology used to estimate potential output, elucidates new political dynamics that this transformation has brought about. Rather than producing a less conflictual policy environment and de-politicise fiscal decisions, scientisation has reshaped existing cleavages in knowledge controversies that transform actors and venues of fiscal decisions, bringing to the fore the role expertise. Using process tracing, this article analyses this transfromation through a case study on the Italian contestation. The findings of this study enlarge the scholarly understanding both of the Euro Area crisis economic policy response and the specific dynamics of the scientisation of policy fields.

KEYWORDS

Fiscal Policy; European Union; Output Gap; Italy; Scientisation

1. Introduction

At the beginning of the 2019 summer, the destiny of Italy within the Euro appeared to be at best uncertain. Failing to hit the European debt reduction targets, the Italian government had to authorise a conditional budget freeze as the risk of incurring into an Excessive Deficit Procedure (EDP) appeared more real than ever. Italy had just a few months before risked running into sanctions, due to its inability to meet the Stability and Growth Pact (SGP) parameters.

In contrast to earlier periods of conflict about Italy’s fiscal position, this time many voices argued that the reasons for this lack of compliance had little to do with Italian fiscal profligacy, but rather with a miscalculation on the side of the European Commission (Costantini, 2018). Papers, articles and online contributions started to discuss issues related to the calculation of the output gap, a central indicator in the new architecture of fiscal surveillance put in place after the sovereign debt crisis (Brooks and Basile, 2019a,b,c; Sumner, 2020; Tooze, 2019).

The output gap model significantly entered the European fiscal framework thanks to the transition towards the use of structural budgets for fiscal monitoring. This shift constituted part of a reform process aimed at moving fiscal policy decisions towards technocratic management by relying on economic models and standards procedures (Matthijs and McNamara, 2015). As the sovereign debt crisis had brought about constant conflict over fiscal targets, such move attempted to routinise budgetary decisions, aiming for, on the one hand, more transparent and predictable handling of fiscal policy, on the other, a partial de-politicisation of fiscal policy that would bring more stable and less conflictual functioning of this policy realm.

The debate on this transformation has, for the most part, focused on elucidating how a similar shift relates to the make-up of divergent interest among Eurozone countries (Schimmelfennig, 2018) or how it can be understood as a by-product of the current setting of European institutions (Verdun, 2015). A handful of contributions has highlighted the ideological component present in such reforms and how they have generated a new form of “governing by the rules and ruling by the numbers” (Schmidt, 2015).

However, the consequences of moving fiscal policy decision to technocratic management and how this process in turn unfolds in the political economy of the Eurozone have yet not completely understood nor empirically investigated. A plethora of parallel contributions has indeed argued that moving political decisions outside the realm of politics through the use of technical devices generates controversial consequences: on the one hand, it contributes to a process of scientisation of the fiscal policy realm (see Marcussen, 2009), where technical discussions in budgetary decisions crowd out considerations on the redistributive consequences of fiscal policy (Tesche, 2019). On the other, models and indicators themselves, upon which this type of governance relies, are political artefacts that embody ideological choices and only partially capture the reality they are asked to describe and govern (M¨ugge, 2016). Their use in governance can lead to the emergence of new knowledge controversies that tie into existent political cleavages (Barry, 2012) and expand within knowledge communities that transcend national borders (Marcussen, 2009).

Investigating how this type of dynamics might unfold in the context of post-crisis European fiscal rules is an important, yet missing, step in understanding the current

dynamic of the Euro Area economic governance. Using process tracing, this article reconstructs the vicissitudes regarding the contestation over the use of output gaps that involved Italy and the European Commission between 2014 and 2019. The analysis of this episode sheds light on other sides of this process that have been yet unforeseen but that relate to moving fiscal policy decisions towards technocratic management. Therefore, this study tackles the following research question:

What new political dynamics does the technicisation of fiscal rules bring about and how do they manifest in the contestation over output gaps?

The article is structured as follows: a first section briefly reconstructs the reforms that have been implemented after the crisis and reviews the major theoretical contribution on how to understand their origins and consequences, highlighting the gaps still present in the literature. This section also describes the output gap and offers an overview of its functioning. A second section describes the methodological approach and the reasons for case selection. The third section presents the results from a case study on the contestation over the use of output gaps in Italy. A final section concludes connecting the findings to the presented theoretical framework.

2. Origins and Consequences of Post-Crisis European Economic Governance

The Euro-crisis profoundly altered the stability of the Euro Area and exposed many issues that the first decade of the monetary union had hidden under the surface. Many have traced back the origins of such issues to the incomplete setting of a monetary union without a fiscal one that over the course of ten years had shown macro-economic imbalances, inefficient governance and lack of expected convergence (Scharpf, 2014; Schelkle, 2012; Streeck, 2015). Others have connected such issues to underlying economic structures and policies in the Euro Area without much blame to the common currency itself (Sandbu, 2017).

Regardless of the different interpretations, it is evident that the unfolding of the crisis faced the Eurozone with significant challenges that asked for effective policy responses. Consequently, such an event triggered a profound transformation of economic governance in the Euro area that evolved in a form of technocratic management that heavily relies on rigid rules, deadlines, reports and the use of economic indicators for monitoring (Schmidt, 2015).

The following section offers an overview of the main reforms introduced, clarifying how they constitute in practice an attempt to routinise and de-politicise economic governance in the EA.

2.1. Post-crisis European Fiscal Framework

The post-crisis regulatory framework introduced a system of socio-economic governance that fosters coordination of domestic policies without entailing a concrete transfer of sovereignty on budgetary matters to the EU level (Verdun and Zeitlin, 2018). In turn, the EU response to the sovereign debt crisis focused on providing loans guarantees to protect countries from the pressure of financial markets and on creating new rules and provisions aimed at strengthening the Stability and Growth Pact parameters and the Maastricht ceilings (Schmidt, 2015). Most of the reforms were implemented in the turmoil of the crisis and, thus, in conditions of extreme uncertainty (Moschella, 2017). These reforms heavily impacted national budgetary decisions by increasing the penetration of European surveillance over domestic fiscal decisions(Verdun, 2015).

The first of those legislation changes, put in place in 2010, created the architecture of the European Semester, which standardises and aligns the budgetary approval procedure in all Euro area countries (Verdun and Zeitlin, 2018). The approval of the so-called and Six-pack (2011), a group of 6 new regulation and one directive, followed this first step and introduced more pervasive control on domestic budgetary issues by European authorities through the use of new surveillance tools1 (Hallerberg, 2014; Schmidt, 2015). It strengthened the role of sanctions for deviations from reforms objectives, and it introduced the principle of default application in case of violation of established ceilings (except in the case of an adverse reverse qualified majority vote by the European Council) (Hallerberg, 2014).

Consequently, in 2013 the Two-Pack, a package of two reforms, established the principle that countries budgetary plans would be evaluated by the Commission with the issuing of recommendations by the 30th of November of each year (Schmidt, 2015; Verdun, 2015). Although countries remain formally independent for macro-economic forecasts, the reforms also pushed for the creation of independent fiscal councils at the national level as tools to monitor the activity of finance ministries and offer independent information on the state of the national public finances (Tesche, 2019).

Finally, in 2013 European leaders approved the so-called Fiscal Compact, an intergovernmental treaty that set forth the principle of balanced budgets in all Euro-area contracting countries and asked those to introduce a debt-brake preferably in their constitution (Hallerberg, 2014).

The outcome of those reforms was the creation of very complex and pervasive monitoring that impacted the autonomy of national governments concerning budgetary decisions (Schimmelfennig, 2014). Moreover, they put in place very standardised and rigid procedures for the discussion of fiscal matters based on the 1_{Such as the Macroeconomic Imbalance Procedure, meant to identify, prevent and address the emergence of}

potentially harmful macroeconomic imbalances that could adversely affect the economic stability in a particular member state, the euro area or the EU as a whole (European Commission, 2020)

use of common deadlines, reports and the reliance on technical instruments.

Different interpretations have traced back the origins of such a shift in the political economy of Europe (Carstensen and Schmidt, 2018a; Schimmelfennig, 2018; Verdun, 2015). Few have yet attempted to empirically investigate how this transition towards standardisation and technocratic management has materialised in practice. However, a plethora of contributions highlighted threats and opportunities that come with pressures for standardisation, technicisation and the use of indicators in governance (Aragao and Linsi, 2020; Barry, 2012; Callon, 1998; M¨ugge, 2016).

The following section aims to connect those two strands of literature in order to draw a conceptual framework useful to analyse the consequences that this transformation has brought to the political dynamics surrounding fiscal policy decisions in the Eurozone. I first review the contributions on the origins of those changes, which tackle the political climate, the institutional framework and the ideological components of that transformation phase in the European context. Later, I connect this narrative to the second body of literature, from which I glean elements concerning the political consequences of the use of indicator in governance. Those will be used as conceptual tools for the empirical analysis of the contestation over the use of one of those technical devices, the output gap.

2.2. The EA Crisis Response: Understanding Transformations in Economic Governance

The sovereign debt crisis produced fundamental transformations in the balances between European countries and the setting of supranational powers: it brought to the surface the high level of interdependence that European economies had reached, but also put the spotlight on the need to create further mechanisms for fiscal integration (De Grauwe, 2013; Scharpf, 2016).

Among the various responses that such critical event could have triggered, it is widely felt that European leaders did the minimum necessary to save the Euro: more and different interventions (such as Eurobonds, for instance) could have been done to proceed for further, and much-needed integration (Matthijs and McNamara, 2015; Schmidt, 2015). However, despite a broad consensus over the evaluation of the changes, the origins and possible implications of the reforms in fiscal governance are still a matter of debate.

The EA crisis response has often been understood – mainly from the side of intergovernmentalism- as the outcome of intergovernmental bargaining on partially converging and very diverging interest of members states (or clusters of states) (Schimmelfennig, 2015). These national interests derive directly from the fiscal position of countries and are negotiated in hard bargaining settings where equilibrium is reached amongst interest maximising actors (cf. Moravcsik, 1998;

Schimmelfennig, 2014, 2015). The post-crisis reforms are interpreted as the outcome of a common interest in maintaining the Euro and a divergent interest between Northern solvent countries, which preferred national adjustment mechanisms, and Southern insolvent ones, which preferred the institution of mutualisation mechanisms (Carstensen and Schmidt, 2018a; Schimmelfennig, 2015). In the turmoil of the crisis, as new treaties implementation requires unanimous consensus of the Council, Northern countries agreed to some form of mutualisation mechanisms for the sake of saving the Euro2 but had the chance to dictate the conditions of the reforms (Schimmelfennig, 2015).

The Fiscal Compact is often considered a good example of how EU economic governance can be understood as the outcome of a clash of interests between country members. Despite matching a common desire for stability in the EA, its design reflects the preference of Germany (the country with the strongest bargaining power) in having a supranational control over fiscal policies. For instance, the constitutionalisation of the debt-brake actively followed Germany’s approach to public finances, as well as its interest in pushing the crisis consequences (austerity measures and structural reforms) on other countries (Schimmelfennig, 2015).

Such clashes of interest remain at the heart of the monetary union and explain the constant dynamics of tension that generates around fiscal rules: Southern countries asking for more flexibility in the rules as the lack of internal growth drains their public finances and the Northern countries maintaining balanced budget thanks to an over-expanded export sector that drives growth (see Scharpf, 2016). Thus, the path that reforms have taken in the Euro crisis is understood as a direct consequence of the attempt to generate routinised and standard procedures that would tame those constant conflicts of opposing interests.

Other accounts have emphasised the effect of the institutional characteristics of EU supranational institutions in shaping the direction that the reforms have followed. The solutions put in place to address the crisis strongly depended on the previous feature of the governance in the Euro Area (Verdun, 2015): it was well known at the time of the crisis that the EU institutional setting was insufficient, as it lacked a common budget, despite centralised control of monetary policy, and of proper mechanisms to address asymmetric shocks (De Grauwe, 2013). However, as the matter of economic governance entailed many veto points, the institutional response to the crisis had to include an innovative mix of layering over existing regulations and copying from previous experiences3 (Verdun, 2015). The outcome of this reform period mirrors a learning process from previous institutional change attempts: as reforms that implied further fiscal integration were deemed impossible by the presence of divergent interests, circumventing the problem allowed for the needed integration to happen in any case (Verdun, 2015).

2_{A potential failure of the common currency appeared to be a negative outcome for all sides.}

3_{Those represent two of the ideal-types of institutional change that are present in Streeck and Thelen (2005)}

Through this lens, as an example again, the Fiscal Compact reflects the adaptation to the existent institutional setting. As the role of veto players had, in the past, made reforms in fiscal governance particularly long and challenging, the Fiscal Compact was introduced as an intergovernmental treaty, only applicable to the states that ratify it with a minimum requirement of twelve ratifying countries to make it effective. In this way, no single veto player could block its creation. Overall, this line of reasoning sees the design of the post-crisis framework as a direct descendant of the structures and rigidities of previous EA institutional setting (Verdun, 2015).

Moreover, this account highlights how the crisis has shuffled the power balance across European institutions: within the new regulatory framework, the Commission-the technical body of Commission-the European power institutions- gained a central role in Commission-the implementation of a mix between soft and hard rules, which leaves increasing room for discretion in its operate (Bauer and Becker, 2014; Verdun and Zeitlin, 2018). This new centrality has profoundly changed the structure of economic governance in the Euro-Area: despite rules result from political agreements in the Council, the institutional role of evaluation and enforcement is given to the commission, de-facto moving much political power to a technocratic body (Bauer and Becker, 2014). Recently, the debate has seen the rising of another line of interpretation of the reforms path, one that looks primarily at the role that ideas played in that specific phase of institutional change (Carstensen and Schmidt, 2016; Schmidt, 2008). This line of argument focuses mainly on the degree of uncertainty in which, in a moment of crisis, decisions are taken and the importance that ideological frames play in shaping the path that institutional change may take (Matthijs and Blyth, 2015; McNamara, 2006)

During the EA crisis, the widespread cognitive understanding of its origins in the fiscal profligacy of the South made European leaders interpret the events as a failure of the SGP (Matthijs and McNamara, 2015; Schmidt, 2015). As the real causes of the crisis - such as asymmetric developments of the private sector- remained in the background, the primary interpretative key of the situation used by European leaders was the dichotomy between Northern solvent countries and Southern insolvent ones (Matthijs and McNamara, 2015). Such widespread interpretation led to the revival of a set of normative and cognitive understandings on how to run monetary and fiscal policy that relied on a mix of German ordoliberal ideas and neoliberalism (Matthijs and McNamara, 2015; Schmidt, 2015).

The so-called Bruxelles-Frankfurt consensus acted as the driving force for the legislation changes (Matthijs, 2016). This ideological framework combines an ordoliberal standpoint that focuses on rules-based governance, which guarantees stable money and sound public finances, and the neoliberal understanding of structural reforms of welfare state and labour markets as necessary for growth

according to the philosophy of expansionary fiscal contraction

widespread consensus, the reforms went in the direction of stricter and more specific rules that transformed fiscal policy in an increasingly technocratic realm, where budgetary decisions are insulated from political debate and are driven by the use of technical models and indicators, amongst which the output gap (Matthijs and McNamara, 2015; Schmidt, 2015). This form of “governing by rules and ruling by the numbers” (Schmidt, 2015) aligns with the ordoliberal standpoint that sees the abstraction of fiscal decisions from the realm of politics as an effective strategy to reach more stable administration of public finances (Matthijs, 2016). However, it is till unclear how this form of governance materialises in turn in the dialogue between national and EU institutions: what it mean in practice to move fiscal policy decisions out of traditional political dynamics is still missing from the interpretation of the post-crisis changes

On another side of the debate, many voices have recently raised attention on the consequences that similar transformations in governance might produce: how indicators and technical models are used in governance appears to be less straightforward than commonly assumed. The introduction of scientific devices such as indicators and standardised measures contributes to a process of scientisation of policy decisions (Marcussen, 2009), namely the use of the authority science and its instruments as tools for gaining legitimacy.

In the case of fiscal policy, scientisation brings to the fore technical discussions and crowds out considerations on the redistributive consequences of budgetary decisions (Tesche, 2019). This exercise of making distributional choices by default relies on the use of macro-economic indicators such as public deficits or output gaps that are calculated on extremely political formulae, riddled with distributional implications (M¨ugge, 2016; Tesche, 2019). The use of economic models does not isolate fiscal policy from making arbitrary choices: economic statistics are intrinsically political artefacts, as they embody ideological choices on how society is and should be organised (M¨ugge, 2016). As such, they often have performative consequences, re-shaping the reality in which they are applied (Callon, 2006). They are a partial snapshot of a complex reality, and their partiality often includes ideological and historical biases in their construction (M¨ugge, 2016). In turn, economic indicators as bureaucracies work like machines to reduce ambiguity, but they can only reduce and not eliminate the degree of uncertainty that is inherent in statistical standards and numbers (Aragao and Linsi, 2020) .

Moreover, pressures for quantification and standardisation favour the rising of a plethora of knowledge controversies that relate specifically to the very functioning of technical rules (Barry, 2012). When the policy field becomes increasingly technical, the economic models underlying the rules become the battleground for ideational power quests (M¨ugge, 2016). Those knowledge disputes do not act isolated from the “political situation” in which they operate: they intertwine with existing cleavages of

interest, generating a complex mix of political and technical motives in the functioning of modern governance (Barry, 2012).

Furthermore, the scientisation of a policy realm might transform the instances that are discussed in policy settings as well as the very actors that participate variously in political decisions. Scientisation alters the cleavage structures of a policy field to the ones of the scientific realm, creating quarrels about theory, methods and data (Fourcade, 2006) and building knowledge communities that partially suppress the existent governor communities and expand outside national boundaries (Marcussen, 2009).

However, attempts to investigate the consequences of the technicisation and standardisation of the fiscal rules in this fashion have yet been neglected by the accounts of the crisis. Nevertheless, after the crisis and the reforms, European politics has become more controversial, domestically salient and politicised than ever before (Schimmelfennig, 2014). It is, thus, debatable whether this attempt of routinising fundamental decisions in economic governance has provided a more stable functioning of this policy realm or has taken the arbitrariness out of the picture. Understanding the process of technicisation of fiscal rules through these lenses allows this research to investigate an understudied dimension of the post-crisis EA response. It gives the chances to study the rules introduced as ideational objects and to empirically investigate their functioning in re-shaping political dynamics surrounding budgetary matters: first, by looking at the process of ideational contestation behind their construction (power over ideas), which includes studying how economic models and indicators travel from the scientific arena to the policy one; second, elucidating how indicators are used in institutional settings for exerting power (power through ideas) and how figures can have performative consequences on the objects that are measured (power in ideas) (M¨ugge, 2016).

An example of the controversies produced by this process is at the centre of this article’s study: the one that relates to the use of output gaps for the sake of fiscal monitoring. The new centrality of the output gap is a feature of the post-crisis economic governance framework: its role has recently sparked a heated debate that involved academics, European and national leaders (Brooks and Basile, 2019a,b,c; Costantini, 2018; Tooze, 2019). This article investigates the new type of politics that governance by indicators has created: one that still needs to be analysed, where new types of conflict emerge and develop. If this form of economic governance by the numbers has not entirely erased political turmoil and heated discussions, it is yet necessary to empirically investigate the type of politics that this process has generated, how, in the case of fiscal policy, it develops and how it might address distributional implications in novel ways. Thus, this article investigates this puzzle by tackling the following research question:

What new political dynamics does the technicisation of fiscal rules bring about and how do they manifest in the contestation over output gaps?

Studying how a central indicator in this governance system has been contested offers the empirical opportunity to see the development of scientisation dynamics at play and understanding the political implication that this form of technocratic governance generates in the EA context. To do so, this article uses process tracing and reconstructs the developing of the contestation in Italy by looking specifically at the actors involved, the venues where the discussion developed, the degree of politicisation of the issues of fiscal governance, the degree of internationalisation of the dispute and the stakes at matter in key episodes of conflict. In order to place the contestation in the debate over the use of output gaps, the following section outlines the features of this indicators and its use, as well as its main pitfalls.

2.3. The Output Gap and its Pitfalls

In this section, I present the major fault lines that the output gap model presents to highlight the dimensions of instability and latent contestability that this indicator in itself carries. Underlying those is a fundamental step to understand the political dynamics that develop with its use: it generates questions on when and why this contestability potential is triggered and the reasons behind those dynamics. Those questions are at the centre of the empirical analysis presented in the following sections. So, what follows is a technical reconstruction of the debate over the use of output gaps in fiscal governance.

The output gap is a tool used to assess the fiscal space of a country, and it is pivotal to the estimation of Cyclically Adjusted Budgets (CAB). The CAB captures a country’s public budget at some defined level of output or policy target, which is considered not affected by fluctuations of the business cycle (Costantini, 2015). In a nutshell, it estimates the public budget net of good or bad economic cycles. This assessment offers a snapshot of the underlying condition of an economy, separating its structural position from the cyclical one. It is used, therefore, to calculate the structural budget, i.e. an estimate of the structural economic conditions of a country. In distinguishing cyclical and structural conditions, the output gap estimates the relative position of a country to its potential (the above-mentioned defined level of output). The output gap, indeed, is basically defined as the difference between the actual output (current output that reflects the business cycle) that a country has in a specific year and its potential output, namely the output that its economy would have if it would be running at maximum potential (thus a measure that should represent on the structural performance of the economy). Potential output is defined as “the level of output that can be produced with a “normal level” of efficiency of

factor inputs”4(Havik et al., 2014, pp.11), namely by exploiting all factors at non-inflationary levels.

In the context of countercyclical fiscal policy, a positive output gap would signal that the economy is overheating, because it is running over its potential, and therefore generates inflationary pressures. Similar pressures would steer policy in the direction of fiscal consolidation, aimed at enhancing the potential of the country economy (and thus closing the gap). Conversely, a negative output gap would signal that an economy is under-utilising its resources: thus, such trend, instead, would push policy towards fiscal expansion, as it would signal slack in the economy and so space for a demand-driven stimulus. In turn, this indicator communicates when growth is going on an undesirable path regarding inflation dynamics.

Estimating potential output is a complex and extremely debated procedure. The disputes over the correct methodology are vast and still open. I observed three main fault lines in the debate that I summarise in the following paragraphs. I will later refer to these issues as: (1) the estimation method problem, (2) the statistical filtering problem and the (3) pro-cyclicality & pessimism issue.

First (1), there exists an extensive discussion on the theoretical approach to the estimation of potential output, which focuses on distinguishing approaches based on purely statistical estimations or a production function (Costantini, 2015). The first approach relies on a pure deduction of the current growth dynamics from the past ones. The second consists of an exercise in economic theory that is based assumptions about the evolution over time of the growth components of an economy (assuming that growth of potential output is only a supply-side phenomenon). The choice among those two models has significant consequences on the components of the calculations and the theoretical assumptions behind the estimation procedure. The purely statistical approaches rely on applying a statistical filter (in the case of the EC a Hodrick-Prescott filter) to the time series data on the evolution of real GDP. The filter allows separating cyclical fluctuations from structural ones by smoothing the impact of cycles over the trend GDP growth (Hodrick and Prescott, 1997). In turn, this means estimating potential output as trend output (Fontanari et al., 2019; Palumbo, 2015).

Those purely statistical approaches5 tend to have two significant drawbacks: on the one hand, because the trend is stochastic6, the decomposition of the series between trend, cyclical and accidental tends to be arbitrary, and the result changes by using different filters; on the other, positive and negative output gaps estimated in a purely

4_{Quotation marks in original text}

5_{Statistical approaches tend to be defined as “theory-free”, but they do actually rely on strong theoretical}

assumptions, such as the one that assumes that actual output tends to fluctuate around potential output. (Fontanari et al., 2019)

6_{Stochastic means that the trend has a random probability distribution that can be analysed statistically but}

statistical way tend to be uncorrelated with inflation trends (Fontanari et al., 2019)7. Those shortcomings have led international organisations such as the OECD and the IMF to progressively abandon this set of approaches (Morrow et al., 2015)

The production function (PF) approaches, also often called “economic methods”, estimate potential output through a series of assumptions about the potential supply of an economy (Morrow et al., 2015). This class of estimation approaches is considered to link potential output estimates to economic theory better. However, it shows the critical drawback of requiring many presuppositions on the economy’s productivity, estimated by a combination of factor inputs multiplied by total factor productivity (TFP). Those assumptions relate particularly to the concept of Natural Rate of Unemployment (NAIRU8.) and the difference in methods used to estimate it (Fontanari et al., 2019; Heimberger and Kapeller, 2017; Palumbo, 2015). The Non-Accelerating Inflation Rate of unemployment is that theoretical level of unemployment at which inflation is believed to remain stable: its very existence in empirical terms is very debated, but it often remains a target in policy-making (Yglesias, 2014)9. NAIRU estimates enter the production function by offering the basis for estimating labour inputs, accounted as the total working hours offered by the active labour force (Heimberger and Kapeller, 2017).

Second (2), the critical analysis of the different estimation techniques for the factors involved in the PF approach, especially the NAIRU estimates, has stimulated the debate on another side. Critical remarks often relate to the volatility of forecasts in real-time: in such approaches, the NAIRU is often computed as the “trend component” of the actual unemployment rate, removed from cyclical factors. Most approaches rely again on the use of statistical filters (in the EC case, Kalman filter) to estimate this trend, which updates forecasts as soon as new information is available, giving a pivotal role to most recent data. This feature of statistical filtering, eventually, shows the tendency to produce pro-cyclical estimates that make the fluctuations of the natural unemployment rate follow closely that of the real unemployment rate. Therefore, this procedure tends to “naturalise” current unemployment at any given moment.

Moreover, this process basically ends up estimating potential output again as a form of trend output just in a more complex and indirect way10 (Fontanari et al., 2019). This critical relevance of new information inherent in the use of statistical filters also creates continuous changes in past estimates and reassessment of the trends. Such constant corrections invalidate the reliability of policy prescriptions based on past estimates (Fontanari et al., 2019; Heimberger and Kapeller, 2017)

Third (3), in the European context, the Global Financial Crisis has a general drop in 7_{This implies that the actual phenomenon that this indicator aims to measure, i.e. the path that growth is}

taking concerning inflation dynamics, might be misrepresented by this type of estimation.

8_{Non-Accelerating Inflation Rate of Unemployment}

9_{For the reasons of space, I cannot go into detail on the debate over NAIRU and the natural rate hypothesis.} 10_{Also relying on the unproven assumption that potential evolution follows the actual one closely.}

potential output estimates for the entire Eurozone (but mainly for Southern European countries), resulting from changes in the NAIRU estimates. This adjustment has generated a strong pro-cyclicality in potential output forecasts. As actual output worsened and unemployment rose, the technical features of the statistical filtering created similar trends for potential output and the natural rate of unemployment, effectively closing the output gap for many countries. In turn, this means that despite rising unemployment after the crisis, those countries did not benefit from an opening up of the output gap, which would have granted space for public spending.

As the output gap plays a central role in the Eurozone fiscal framework, these have had significant consequences for specific countries- Southern European in particular-, steering policy in the direction of structural reforms rather than fiscal stimulus (Heimberger and Kapeller, 2017). As a consequence of those technical issues, many have voiced critical remarks on the opportunity of using output gaps as central indicators for fiscal monitoring: basing policy advice on such a shaky estimate seems to produce more harm than good (Brooks and Basile, 2019a,b,c; Heimberger et al., 2019; Heimberger and Kapeller, 2017; Sumner, 2020; Tooze, 2019).

Those problems inherent in the estimation of output gaps have contributed to its transformation into a controversial element of the post-crisis European framework: how those technical problems have intertwined with a political critique will be the topic of the following paragraphs.

2.4. Conceptual tools

The previous described two main processes that are at the core interest of this research. The first part sheds light on the changes that EU economic governance has undergone as a consequence of the sovereign debt crisis and how those have transformed fiscal policy. Fiscal policy has evolved towards technocratic management with the introduction of a complex set of technical rules, parameters and procedures that rely on complex economic indicators, such as the output gap. This contributed to process of scientisation (Marcussen, 2009) of fiscal policy. Gleaning from another body of literature, that part offers an overview of the potential consequences that such a transition might have on the political dynamics surrounding fiscal policy decisions. Scientisation might generate new knowledge controversies that tie into existent political cleavages and expand within transnational experts communities. On the other, I presented the technical features of the output gap, highlighting how in itself carries multiple fault lines and controversy potential. Its use has been at the centre of debate within the discipline for a long time (Orphanides and van Norden, 2002). As mentioned, the instability of this indicator is an important aspect to consider when analysing the political dynamics surrounding its use in a context of increasing technocratic handling of fiscal policy.

Those two aspects should be kept in mind in approaching the rest of this paper, which empirically investigates how they unfolded in the controversy over the use of output gaps happened in Italy that is at the centre of the empirical analysis.

3. Research Approach

This article reports the findings from the case study on the contestation over the use of output gaps in EA fiscal governance happened in Italy between 2014 and 2019. The following section explains the reasons behind the choice of the case and the methodology used for the study.

Italy is today still facing hard times trying to escape the recession trap entered ten years ago with the onset of the crisis (Storm, 2019). Despite some common elements with the trajectory of other Southern European economies, there is still debate on what are the conditions that caught Italy in this enduring low growth environment (Notermans and Piattoni, 2019). Many argue that the root of Italy’s deflation trap lies in the entering conditions of the common currency (Scharpf, 2016; Streeck, 2015). Others see that the main problem in structural conditions of the Italian political economy, locked into an inefficient institutional equilibrium, adverse to political reform and unable to perform public investment or attract private one (Capussela, 2018).

The membership in the Euro project has strongly affected the Italian political landscape. The common currency requirements have deeply influenced public spending decisions since the early 1990s: they triggered a wave of critical structural reforms that partially deregulated the labour market and re-arranged the pension system (Sacchi, 2018; Storm, 2019). In spite of this transition, during the following decade up until the crisis, Italian growth remained lower than other Euro-area countries, even the peripheral ones (Storm, 2019). As the crisis unfolded, Italy became one of the biggest threats to the Eurozone stability.Despite two full decades of public austerity, Italy had and still has one of the highest levels of public indebtedness of the entire Euro-area (and the entire world). Being one of the biggest economies of the Euro-area, often considered “too big to fail”, and one of the founding members of the European Community, the destiny of Italian public finances always seems to strongly intertwine with the one of the common currency at large (Badell et al., 2019).

Due to the lasting and severe economic condition, the situation of Italy under the post-crisis fiscal framework was at the very best ambiguous (Moschella, 2017). After public austerity failed at providing fuel for new growth but managed to depress internal demand successfully, more austerity and structural reforms were to come (Storm, 2019). However, due to the need to show a strong commitment to the European project, Italy stood by the rules (Badell et al., 2019; Moschella, 2017;

Sacchi, 2015). Moreover, it is essential to keep in mind that many Italian economists at the time were the primary advocates for the logic “expansionary fiscal consolidation” that lied at the core of the new framework (Dellepiane-Avellaneda, 2015; Storm, 2019).

After the crisis, the Italian under-performance generated multiple lines of tension between the Italian government and European institutions, where Italy consistently demanded more flexibility and emphasised the need to restore growth-boosting mechanisms (Carstensen and Schmidt, 2018b). Those frictions often managed to capture international attention due to the crucial role that Italy plays in the Eurozone dynamics. More than other countries, Italy also seems to have the capacity to exert influence on European institutions, having managed in multiple instances to be granted further flexibility for spending (Badell et al., 2019). Moreover, Italy has an important legacy of technocratic ruling, dating back to the ’90s, particularly connected to the membership in the common currency. The logic of vincolo esterno, i.e. the presence of an external pressure that would isolate fiscal decisions from seeking short term electoral gains, has for long ruled the decisions in monetary and fiscal policy that brought Italy in the common market (Jones, 2017). Understanding how the Italian political landscape moved from a widespread consensus on the benefit of technocratic handling of the European matters to a heated and lasting contestation allows our study to isolate the process that the scientisation of fiscal policy specifically might bring with itself.

For all those reasons, the contestation that happened in Italy can be considered a crucial case (Eckstein, 1975; Gerring, 2007) to understand the consequences of the scientisation of fiscal policy introduced by the post-crisis reforms. Studying this case offers a new angle to the analysis of the post-crisis scenario in Italy, one that goes beyond the description of structural dynamics but looks at the effect that a specific idea of handling fiscal policy through strict and technical rules have generated. On the one hand, Italy’s above-explained centrality in the Eurozone development path makes the findings particularly relevant to understand the destiny of economic governance in Europe as a whole.

On the other, the output gap itself represents a crucial element in the renewed European fiscal framework, since it provides foundation to the whole new architecture of fiscal monitoring (Heimberger et al., 2019). Studying in-depth how this technical device is constructed and what could be its implications represent a fundamental step to understand the consequences that governance through this might have on the path of fiscal policy decisions.

For those reasons the case study aims to be both theory-centric and case-specific (Beach and Pedersen, 2013): it tries to connect the specific case to the narrative over the origins and consequences of the post-crisis reform across the Eurozone, but at the same time it looks at the case in its historical importance.

elements of the contestation: using that, I explore and explain the type of politics that surrounded the contestation over the use of output gaps. In particular, my reconstruction focused on elucidating: (1) the set of actors that participate in fiscal policy decisions, i.e. whether it involves only experts or also technocrats and politicians, local experts communities vs transnational ones and how the composition has changed over time; (2) the venues where the core moments of the contestation happen, i.e. whether they are mainly institutional (discussions among policymakers) or also public (experts, academics and general public discussions), international vs national. (3) Moreover, I look at how expertise is used in the development of the controversy and how it interacts with political interests and motives. Finally, (4) I isolate the specific moments of tensions and distinguish them based on the general attitudes of the Italian government towards European institutions and stakes at play and the degree of politicisation that the issues connected to fiscal policy reached at that specific juncture.

To do so, I examined different data sources, both from the institutional side and the public one. Concerning the institutional side, those included: policy documents issued by the Italian finance ministry such as draft budgetary plans, letters to the Commission and staff working documents (in particular, working papers and online contributions)11; European policy documents, including country-specific recommendations, staff working documents (including reports and publications from the Commission, and the OGWG) and official letters from the Commission to the Italian finance ministry12. To understand the public dimension of the contestation, I analysed online contributions on the output gap such as blog posts from academic/policy think thanks (such as VoxEU, Bruegel and Social Europe) and newspaper articles from Italian and European media (for instance, Il sole 24 ore, the Financial Times, lavoce.info and more).

Seven interviews with experts conducted via Skype between October 2019 and March 2020 supported the analysis of the documents. The respondents included members and former members of the Italian finance ministry, the European Commission, the European fiscal board and the Italian fiscal Council. For reasons of anonymity, those interviews cannot be quoted directly: it should be kept in mind that they served mainly as background information for the reconstruction of the contestation and the analysis of the documents.

11_{Retrieved from the finance ministry website: http://www.mef.gov.it/} 12_{Retrieved from the EC website: https://ec.europa.eu/}

4. Minding the Gap: origins and development of output gap contestations in Italy

In the following section, I reconstruct the findings of this case study. First, I trace back how the output gap has entered the European fiscal framework, including a detailed explanation of the methodological approach chosen by the European Commission and its specific fault lines. This explanation provides an overview of the aspects of latent contestability in the European Commission specific approach for the calculation of output gaps. Following section 2.3 earlier, this passage helps to locate the contestation in the European fiscal framework and to understand how the European Commission has dealt with those debated aspects in choosing its specific methodological approach. Consequently, I examine more directly the developments of the contestation, providing a detailed description of the unfolding of events and connecting this to the theoretical framework presented in section 2.

4.1. The history and role of the output gap in the European framework The cyclically adjusted budget (CAB) significantly entered the EU fiscal framework with the first reform of the Stability and Growth Pact in 2005. This revision of the Pact, a consequence of the violations of the nominal ceilings for debt and deficit by many countries (in particular, France and Germany), went in the direction of better accounting the impact of cyclical conditions on revenues and expenditure and the way they influence budgetary decisions (Costantini, 2017). Thus, it implied moving the assessment to fiscal efforts rather than outcomes and introducing measures that would better allow separating cyclical conditions from the structural setting of an economy. Against this background, the CAB was given new centrality in the EU framework. As a matter of fact, despite being previously already available and in use, the CAB presence was limited to an informal role, i.e. the one of a working instrument (Larch and Turrini, 2010)

However, its relevance was eventually strengthened during the post-Eurozone crisis reform process. With the adoption of the Fiscal Compact in 2013, the CAB became central for the calculation of the Structural Ba (SB), i.e. an estimate of the actual deficit of a country that is neither dependent from structural conditions nor one-off exceptional measures (negotiated politically) (Heimberger and Kapeller, 2017). After that reform, the SB turned into the cornerstone for the evaluation of the underlying fiscal position of countries’ public finances. The structural balance is used in the evaluation of fiscal policies regarding deviations from the Medium Terms Objectives (MTOs). Under the preventive arm of the Stability and Growth Pact, MTOs are put in place to ensure sound fiscal health: due to an evaluation of a country’s economic situation and sustainability conditions, they set targets for structural budgets

adjustments (at a rate of 0.5% of GDP as a benchmark) (European Commission, 2019). All countries are required to make more adjustment when the economic situation is favourable, and less in hard times. However, countries with high debt burdens (like Italy) are asked to make faster progress towards their objective (i.e. more adjustment).

Against this background, the output gap model is used as the monitor mechanism in the estimation of the structural balance. As the stance of fiscal policy is counter-cyclical, positive output gaps signal the existence of space for fiscal expansion; negative one signal the need for consolidation.

Despite an initial enhancement with the advantages that such estimate would offer, the shortcomings of the CAB came to the surface quite early in its adoption, in particular regarding the estimation of the underlying fiscal position and the structural adjustment (Larch and Turrini, 2010). The conceptual beauty of this indicator- namely its simplicity and intelligibility by political leaders13 - conceals a plethora of practical issues (Larch and Turrini, 2010). As mentioned above, crucial elements in the methodological structuring of output gaps have a material impact on its actual functioning as a tool for policy monitoring.

In the European context, the methodology for the output gap estimation is decided within the Output Gap Working Group (OGWG), a permanent working group of ECFIN, where delegates -technocrats- from each country finance ministry discuss technical aspects of the model and reach the so-called “commonly agreed methodology”. This methodological agreement represents a set of rules and parameters that should be able to accommodate all countries needs and specific economic structures in the making of this indicator (Heimberger et al., 2019). The group exists since the early 2000s and focused on improving the calculation of this indicator, even before it became central for fiscal monitoring. The actual methodology chosen by the Commission has its origin in the approach used by the OSCE, one of the international organisations at the forefront in developing the output gap methodology.

After giving up a statistical approach in 2002, the Commission methodology today relies on a Cobb Douglas productions function (Costantini, 2017). This approach has received much criticism in the past few years due to a set of issues connected to the estimation of the structural unemployment and Total Factor Productivity (TFT), i.e. a measure of technological progress. The criticism relates to both the estimation method problem (1) and the statistical filtering one (2) of section 2.3, as it tackles both the methodology for the estimation of the single components and the overall specification of the production function.

Concerning structural unemployment, the Commission uses the trend component of 13_{At least in its simple and direct mechanism that automatically determines the fiscal stance in connection with}

the difference between actual output and potential. Its technical make-up is far from being easily intelligible instead, as this article shows

the NAWRU 14, calculated with a Kalman statistical filter, as a proxy. As discussed previously the use of Kalman filtering tends to often produce very procyclical measures, due to the recursive nature of such tool, and its tendency to give disproportionate relevance to the newest data (Heimberger and Kapeller, 2017). On top of this technical issue, the Commission relates the trend component of the NAWRU (Non-accelerating Wage Rate of Unemployment) to the concept of the natural rate of unemployment- at which wage inflation does not accelerate-, taking a somewhat debatable approach to economic theory. As, according to theory, the natural rate should only reflect labour market rigidities, the actual approach of the Commission, using the Kalman filtered NAWRU as a proxy, estimates it as a mix of structural and cyclical factors (Heimberger et al., 2019). Moreover, using the NAWRU as a policy target is in and of itself a disputable exercise that has received many critics in the past few years: the extreme uncertainty that comes with the estimates (very sensible to the forecasts horizon and other technical aspects) as well as the empirical evidence that shows a rather insensitivity of wage inflation to the actual unemployment rate has cast serious doubts on the opportunity of using such measure for structural unemployment (Fioramanti et al., 2020; Stirati, 2016)

Concerning Total factor productivity, the EC production function uses the famous Solow residual as a proxy for technological progress, which is known to be a catch-all variable for all factors that contribute to changes in GDP not related to labour and capita (Heimberger and Kapeller, 2017). This variable is again unobservable, and its capacity to capture the actual dynamics of technological change is debated (Reati, 2001).

Despite the introduction of many improvements, such as the Plausibility tool in 2016, which were supposed to reduce the dimensions of uncertainty connected to the measure, the European Commission itself acknowledges that methodology still carries uncertainty over reference models, processes and parameter values (Hristov et al., 2017).

Those aspects of uncertainty have been at the centre of methodological discussion over the years within the OGWG and have until recently remained confined within technical circles. However, when the structural balance (and thus the output gap) became so central in the Commission framework for fiscal monitoring, then the discussions over the technical details of this model spilt over the boundaries of this technical group and moved to the political and public arena. In the case of Italy, in particular, it became a matter of continuous discussion for over five years, involving in different ways new actors and venues. In the following section, I will reconstruct on the contestation with a focus on highlighting how it reflects the dynamics of scientisation.

14_{Non-Accelerating Wage Rate of Unemployment. The Commission uses the NAWRU as the unemployment}

rate at which wage inflation remains stable, relating it directly to the concept of the NAIRU, which normally refers to the unemployment rate at which price inflation would remain stable. The two terms are used quite interchangeably by the EC (Heimberger et al., 2017)

4.2. First Phase: Expertise and Knowledge Communities

In November 2014, the Italian finance minister Piercarlo Padoan appeared in an interview with the Financial Times, accusing Brussels of “shaky accounting”. He claimed that the Commission apparatus for evaluating fiscal policies was ill-suited for the stakes of decisions that depended on it (Politi, 2014). Using his expertise as a former chief economist at the OECD, he laid out a technical critique of the potential output estimates used by the European Commission, showing how those were miscalculating Italy’s performance. Such a public statement was issued in a highly tense moment of the budgetary approval procedure. Right before, the Draft Budgetary plan presented by Italy on the 15th of October (following the European Semester calendar) mentioned critiques to the potential output measures and offered a divergent estimation of Italian fiscal space than the European Commission ones. This allegation was the first step of a contestation that lasted for over five years, leading to a heating up of the Rome-Brussels relations.

The dispute related to the estimation of the structural adjustment needed for Italy under the new framework: Padoan argued that the Commission methodology miscalculated the actual position of Italian’s public finances and that, therefore, there was actually more room for flexibility in approaching the MTO than the Commission envisaged. The issue related to a series of methodological problems and different calculations for the parameters that compose the production function that the Commission approach uses to estimate output gaps. Despite adopting the same methodology (i.e. the commonly agreed methodology), Italy presented a different estimation of the space for public spending: the Commission estimates showed a 3.5 % of GDP output gap for Italy, which would have required (following the medium terms objectives) a reduction of the structural budget deficit of 0.7 %. Italy estimated a slightly different value, by using another set of parameters and measure compared to the ones of the Commission (mainly a different timespan on the statistical filters). However, in the Financial Times interview, Padoan compared the EC estimate with the one of the OSCE, which showed an output gap of 5.3 %. If the OSCE estimation had been used, Italy would not have had to provide any adjustment for that current year: the situation would have qualified as negative enough to reduce pressure for adjustment (Politi, 2014). At the core, the Italian ministry argued that the EC methodology underestimated Italian potential GDP growth and that the required adjustment relied on unstable calculations.

This public claim by the Italian finance ministry did not remain isolated. Soon after, a group of well-regarded Italian economists wrote an article explaining the theoretical and empirical flaws of the Commission methodology on an Italian newspaper (lavoce.info) (Cottarelli et al., 2014b). That venue became the arena for a

confrontation directly with the Commission: in the next few days, the issue was discussed back and forth between EC economists and the group of Italian ones (Cottarelli et al., 2014a). Not long after, the Commission openly addressed the methodological problems with a publication, actively defending its approach as the outcome of negotiations of different interests in the framework of a “commonly agreed methodology” (Havik et al., 2014).

After these first shots were fired, the controversy remained silently in the background of the political debate: every year onwards under the ministry of Padoan, when Italy presented the Draft Budgetary Plan to the Commission, there would be discrepancies in the measures and a mention of the methodological issue. Some interviewees confirmed that this appears to be an attempt to make a political point by means of a technical critique. Usually, during the budgetary procedure, there would be informal contacts between the ministry and the Commission in the run-up of the budgetary season aimed at obtaining the least different measures on public finances indicators, amongst which the structural balance (in order to appease the possible conflict and increase the credibility of Italian public finances). When Piercarlo Padoan came to office, a clear attempt to make those measures as divergent as possible was made aiming to spark a discussion on the divergent estimates. To be clear, that did not mean tweaking the numbers but rather showing how changing small aspects of the parameters (such as the timespan over which the cycle is calculated) would result into a completely different assessment of the adjustment required.

However, despite the issues at stake were quite high, this open-ended debate among economists did not take the centre of institutional conversations about the budget and, for the moment, did not further expand into a broader public discussion within or outside Italy.

In March 2016, the dispute reached another high point, as Italy led a group of country members (Lithuania, Slovakia, Luxembourg, Portugal, Spain, Slovenia) asking for a revision in the projection horizon of the output gap forecast exercise. This request resulted in a letters exchange with the Commission: the aim was reaching a small methodological change, i.e. extending the horizon of two years to four, despite maintaining the same general approach. Fixing this would have realigned most countries estimate to the Commission ones, generating a more transparent and accurate framework for evaluating structural efforts. Moreover, the letter suggested the need to complement the use of the output gap with other indicators, considering the unreliability of its estimation in real-time (Country Members, 2016). The Commission accepted the criticism and later changed the forecast horizon with an extension.

This change by the EC brought a moment of closure to the issue, without, however, completely satisfy Italy’s- and other countries- demands. The change of the horizon would partially improve the situation of Italy, but would not solve the problem of relying on only one shaky indicator for the estimation of the fiscal space. Later in

October 2016, the Commission introduced the so-called “plausibility tool” as a part of a constrained discretion approach to the Production Function methodology (Hristov et al., 2017). Acknowledging the uncertainties that come together with the estimation of output gaps in real-time and the inaccuracies of the EC methodology, the Commission introduced this instrument for ex-post checking the reliability of the output gap’s estimate with a range of values. If the estimated output gap falls outside that range it is considered “potentially counter-intuitive”, and its estimation might need to be revised (Hristov et al., 2017).

Despite these changes, the following budgets approval cycles always saw the issue being raised again in the discussions between the Italian finance ministry and the European Commission (Ministero dell’Economia e delle Finanze, 2016, 2017; Padoan, 2016). It became particularly important in 2017, when Italy risked the application of an EDP (Excessive Deficit Procedure), as its expenditure plans seemed to deviate too much from reaching the medium-term objectives fixed for the country. Italy mentioned the methodological problem again when asking for more flexibility (Padoan, 2017). This time, however, as the issue had recently reached a partial closure, the Commission was not particularly willing to listen to this further technical criticism. Up until this point, despite the EC recognised the legitimacy of the points raised by the Italian government, the whole issue did not ever expand into a larger institutional discussion. Within the European bureaucracy, the dispute remained pretty invisible and did not trigger any major re-discussion of the whole architecture of fiscal rules. Nevertheless, Italy did not receive a sanction as eventually it was considered broadly compliant with the rules.

In 2018, Italy held elections that resulted in the creation of an anti-establishment government, formed by a coalition of the right-wing Lega Nord and the anti-system Movimento Cinque Stelle. This change in government also marked a turning point in the process that I describe.

The shift sealed the end of the first phase of this contestation, in which the role and expertise of the finance minister ruled the development of the dispute. As a matter of fact, in the first instances, the contestation remained mostly confined within the institutional dialogue between Rome and Brussels and attracted mainly the attention of local expert communities. These first stages entailed a thorough technical contestation that required its perpetrators to be informed and competent on the methodological elements of the output gap calculation. Despite seeming trivial, it is essential to keep in mind that the extreme complexity of the technical make-up of the model isolates a rather small group of people competent enough to understand and criticise its technical aspects. Even within the Commission or the Italian finance ministry, as confirmed during the interviews, only the few directly involved in its construction would be able to understand and fully debate all aspects of the methodology.

This phase shows that, under Padoan’s finance ministry, there came the realisation that the new framework was built on an unstable ground, despite its aim to ensure transparency and non-arbitrary management of fiscal policy. This unstable ground could be shaken, whenever that could be useful for political gains. As in 2014, a discourse of flexibility in the rules just re-entered the agenda of European leaders, thanks to the efforts of the Italian and French government, an opportunity window to steer the fiscal stance partially away from austerity seemed to open up (Carstensen and Schmidt, 2018b).

In this context, the expertise and the international credibility of the finance minister himself could be used as a weapon to gain legitimacy in criticising the EC approach, and obtain further flexibility: Padoan, thanks to its expertise, was recognised as a good spoke person for such critical remarks and thus listened and taken seriously. Such legitimacy did not come only from his ability to perform a sharp critique, but also from his belonging to the same experts’ community –one of mainstream economists working in international institutions- of the Commissioners working on the methodology in Brussels.

As a consequence of that, the Commission became the site of an ideational discussion over the technical aspects of a model that in reality disguised a conversation over different understandings of the necessary path that fiscal policy should have followed to counter the crisis. This different understanding had to do mainly with the objectives and focus of fiscal policy (within the same broad paradigm) rather than with the benefits of technocratic handling of this policy realm. The output gap critiques in this phase did not aim to get rid of this system of technical rules and models, but rather to show that the very same rules could be interpreted in a very different way by comparatively skilled local technocrats belonging to the same experts’ community. As mentioned before, Italian economists- including the ones that agreed on the critique offered by Padoan- were also supportive of the EC logic that pervade the rules, and they maintained consensus on the general apparatus. The dispute they engaged in clearly resembled a scientific debate, where the aim was highlighting the technical inconsistencies of the rules functioning and claim power through the use of expertise on the way the estimates should have been used. As the field of fiscal policy had been “scienticised”, the only legitimate critique could be one of a technical kind, and the only legitimate perpetrators would be actors recognised as valid members of the European fiscal policy community.

The dispute about the output gap did not, however, disappear after this first instances.

4.3. Second Phase: Public Politicisation and International Attention The second phase of this contestation took place in a different context, in which Italy was under the rule of populist, anti-establishment and Euroskeptic government. The attitude of the government towards European institutions and fiscal rules is a crucial element to keep in mind to understand the way the contestation developed in this phase.

Already at the beginning of its mandate in 2018, the government attempted to strongly overturn the Italian fiscal stance, reversing some of the structural changes that the Italian welfare state had undergone in the previous years. Since the first months, the relations between Italy and European institutions became particularly heated, as the leader of the Lega Nord, one of the two vice-prime ministers of this government, openly put forward his willingness to engage in a political fight over the rules for fiscal spending.

At the time of the first budgetary cycle, the discussion over fiscal objectives translated into a political fight. In October 2018, one week before the presentation of the Draft Budgetary plan the recently created Italian fiscal Council15 did not validate the macro-economic planning of the government, warning about the absence of complete coverage for the planned expenses and, thus, the risk of overcoming the deficit ceiling set by the European rules. A few weeks after, for the first time, the Italian draft budgetary plan was rejected by the Commission due to its risk of non-compliance with the MTO’s envisaged for Italy. The budget included a deficit forecast of 2.4%, much higher than the one required to comply with the target set for Italy under the preventive arm of the SGP. A reference to the divergent estimates of the output gaps was included in the budgetary plan, as a partial justification for breaching the set limits (Ministero dell’Economia e delle Finanze, 2018). The refusal of the planned expenditure triggered a back and forth letters’ exchange between the finance ministry and the European Commission: the Italian government justified the increase in spending as a necessary step for bolstering growth and considered the deviation from the set targets only temporary and necessary to give some breadth to the Italian economy (Tria, 2018).

Those letters did not, however, further engage in a critique of the Commission estimates as a way to justify the deviation from the parameters. The response from the Commission denied further flexibility for Italy, as it highlighted, on the hand, the fact that Italy committed to those targets a few months earlier (when the previous government was still in charge), on the other, that Italy benefitted many times from further flexibility in the rules. Eventually, the finance ministry had to come up with a corrected budgetary plan, which tried to seek a compromise in the deficit forecast, despite maintaining the two main policy targets of the new government in place: the 15_{The Parliamentary Budget Office (Ufficio Parlamentare di Bilancio- UPB ) was created in compliance with}

the Two-Pack rules in 2014. This moment is the very first time in which it actively participated in the debate over budget decisions.

so-called citizens’ income, a comprehensive system of unconditional income support and a “flat tax” as a significant reform of the tax system. Eventually, the EC approved Italy’s plan, without however being able to pull the plug to this strand of contestation.

Soon after the issue of the output gap revived and appeared back. As Italy was about to face the risk of an EDP, the contestation moved to another arena: the leader of the Lega Nord and also vice-prime minister in office, Matteo Salvini warned multiple times in the press that European fiscal rules needed to be changed, as the current status of things was limiting Italy’s performance (Rossi and Jones, 2019). As the Commission warned Italy of its deviation from the debt-rule and the risk of incurring in an EDP (Excessive Deficit Procedure), Italy’s response pointed in the direction of the different economic situations depicted by Brussels’s measures and theirs (Moscovici and Dombrovskis, 2019; Tria, 2019). Compared to the previous heated points of the dispute, this specific moment captured the attention not only of the Italian media and Italian economists, but also the scholarly community outside Italy, which, surprisingly, seemed to stand by the point that an anti-establishment Euroskeptic government was making (Giles and Johnson, 2019).

After that moment onwards, indeed, the developments of the contestations clearly exceeded the boundaries of Italy’s fiscal policy decisions. The vicissitudes of Italy became the central point of a plethora of articles, working papers and twitter campaigns meant at spreading awareness and critical remarks on non-measurable indicators used in evaluating fiscal plans by the European Commission (Brooks and Basile, 2019a,b,c; Costantini, 2018; Tooze, 2019). This exposure drew even more international attention to the vicissitudes of the Italian fiscal policy decisions, which reached the highest point of tension in this overall debate soon after. At that juncture, there seemed to be a general agreement in the scholarly community of economists on the fact that relying on estimates of the output gap in real-time for fiscal monitoring was a difficult exercise, as it requires including a high degree of uncertainty in fundamental policy prescriptions. The critical remarks aligned the position economist from every side of the spectrum, from heterodox to the left side of the mainstream.

Eventually, the warning of the Commission was formalised into a document, sent at the beginning of June, forecasting that Italy would not have met its objectives in terms of reduction of the debt both for 2019 and 2020. The Commission did not see to show particular sympathy for the methodological critique, pointing out many times how Italy agreed to those targets in the first place and that the methodological discrepancies had already been discussed and “solved” in previous years (Dombrovskis and Moscovici, 2018). Eventually, the government had to approve a conditional budget freeze of the value of two billion, facing the risk of a sanction amounting at 0.7% of Italy’s GDP (around three billion of euros).