Charlotte Anne Oostman S1495518 Master Thesis European Union Studies Thesis Supervisor: Dr. Dennie Oude Nijhuis 09-05-2019
The challenge of how to reconcile European fiscal discipline and social
democracy; a case study of the Sozialdemokratische Partei Deutschlands
(SPD) and their stance on the Stability and Growth Pact (SGP)
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Lay-out
Introduction 2 1. Theoretical Framework 7 2. The Medium Term Objectives (MTOs) 15 2.1 Position SPD on the MTO in 2002 152.2 Position SPD on the MTO in 2005 17
2.3 Position SPD on the MTO in 2011 18
3. The deadline provided for the implementation Period 22 3.1 Position SPD on the Implementation period in 2002 22
3.2 Position SPD on the Implementation period in 2005 23
3.3 Position SPD on the Implementation period in 2011 25
4. The Weight of the corrective arm 28 4.1 Position SPD on the weight of the corrective arm in 2002 28
4.2 Position SPD on the weight of the corrective arm in 2005 29
4.3 Position SPD on the weight of the corrective arm in 2011 31
5. Conclusion 33 Bibliography 38
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Introduction
Since the decision to move forward with the introduction of an Economic and Monetary Union (EMU) in 1991, the member states of the European Union (EU) have introduced several measures to impose limitations on fiscal spending. In 1997 the fear of fiscal misbehavior led to the creation of the Stability and Growth Pact (SGP). At the time politicians thought that the SGP would be enough to discipline EMU member states and counter the problem of moral hazard. However, when the financial crisis hit the EU in 2008, this assumption proved to be incorrect. In response, the EU reformed the SGP to strengthen fiscal discipline in 2011. This emphasis on budgetary discipline connected well with liberal economic thinking and the views of conservative right-wingpolitical parties.1 The attitudes of left-wing parties towards this reform are by contrast much less
straightforward. On the one hand, these parties tend to be much more skeptic of restraints
imposed on state spending, in particular in the context of counter-cyclical economies policies.2 On the other hand, left parties in the "stronger" Northern European countries, in particular, must have been aware of the need to reduce moral hazard, which requires policies that can impose fiscal discipline. While scholars have conducted sufficient research on the economic effect of EU-imposed austerity, which is generally quite critical, there has been very little research on party attitudes towards these measures.3 The emphasis on budgetary discipline connected well with the thinking of right-wing parties, which therefore does not have to be investigated, but this is not the case for the political left. Throughout its existence, there has been much criticism of the restrictive character of the Pact, which limits the states' ability to pursue counter-cyclical Keynesian policies.4 Scholars conducted much research on the impact of the SGP on domestic economies and the entire EMU.5 However, much less attention has been given to how national actors perceive the SGP, including left parties. We know that all major parties realized the need to reduce moral hazard, which raises the question of how left-wing parties dealt with this. The SGP is a highly restrictive policy that focuses on budget cuts and austerity whenever a country breaches the set thresholds during periods of crisis.6 It consequently places strong restraints on states' ability to pursue counter-cyclical
1 Andini, C., & Cabral, R. (2012). Further austerity and wage cuts will worsen the euro crisis (No. 37). IZA Policy Paper.
2 Hibbs, D. A. (1977). Political parties and macroeconomic policy. American political science review, 71(4), 1467-1487.
3 McKee, M., Karanikolos, M., Belcher, P., & Stuckler, D. (2012). Austerity: a failed experiment on the people of Europe. Clinical medicine, 12(4), 346-350.
4 Hein, E., Truger, A., & van Treeck, T. (2012). The European financial and economic crisis: Alternative solutions from a (Post-) Keynesian perspective. In the Euro Crisis (pp. 35-78). Palgrave MacMillan, London.
5 Dabrowski, M. (2010). The global financial crisis and its impact on emerging market economies in Europe and the CIS: Evidence from mid-2010.
6 Heipertz, M., & Verdun, A. (2010). Ruling Europe: The politics of the stability and growth pact. Cambridge University Press.
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policies and limits medium to long term public spending in general. On the other hand, left-wing oriented parties also have a general desire to increase coordination among the member states in order to facilitate the endurance of the EMU. Besides the tradeoff mentioned above, there are many other considerations, which will be discussed in the following section. Left-wing parties have traditionally been highly skeptical of restrictive policies, which makes the case of the SGP an interesting dilemma. Since the 1900s leftist parties have become part of the political establishment and have played a crucial role in the European project.7 However, with the
rise of far-right populist parties, environmental parties and the far-left, electoral competition increased for the traditional labor parties. Voter volatility has threatened the traditional parties as the electorate became less loyal. In an attempt to tie the electorate, parties have to focus on high salience issues and consider what position would suit public opinion best instead of the
traditional stance derived from party ideology.8 Traditional labor parties have suffered most from
this increased voter volatility. There is no consensus among scholars on why this is the case, but a commonly voiced argument is the economic insecurity perspective, which focuses on the disappearance of the original labor class in western economies. Therefore, labor parties need to
find new support across the political spectrum.9 This can lead to endorsements of policies that
traditionally do not coincide with left-wing ideology. Another argument is the cultural backlash thesis, which focuses on the response of the traditional labor class that is now facing growing
challenges.10 These challenges can be part of the explanation of the rationale behind the
positioning of labor parties concerning fiscal policy and will be a vital part of the research. I expect that the dilemma of left-wing parties towards the SGP has nowhere been as challenging as in Germany. The country has the largest economy in the EMU and as the main potential creditor has a significant interest in policies that reduce moral hazard. For the Sozialdemokratische Partei Deutschlands (SPD), a left-wing party, there are ideological objections against restraints on public spending as set out in the SGP. However, electoral competition with the Christlich Demokratische Union (CDU) also emphasized the importance of fiscal responsibility towards the German
population.11 The SPD struggled between the traditional Keynesian orientation and their German
‘responsibilities' to protect the EMU. These contradictory motivations are of key importance to
7 Hibbs, D. A. (1977). Political parties and macroeconomic policy. American political science review, 71(4), 1467-1487.
8 RePass, D. E. (1972). Issue salience and party choice. American Political Science Review, 65(2), 389-400. 9 Inglehart, R., & Norris, P. (2016). Trump, Brexit, and the rise of populism: Economic have-nots and cultural backlash.
10. Clark, G. (1999). The Roots of Cultural Backlash in Contemporary Processes of Globalization. Indiana Journal
of global legal studies, 257-268.
11 Galli, E., & Rossi, S. P. (2002). Political budget cycles: the case of the Western German Länder. Public choice,
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this research paper. For other reasons as well, the SPD can be expected to have struggled with the response to the SGP. Some of these reasons apply to all left parties in EMU member states; others are expected to have been more specific to the SPD. Each of these factors is systematically investigated in this thesis. The main research question of this research paper consequently is: To what extent has the SPD consistently supported a strict interpretation, implementation, and enforcement of the SGP in the years ranging from 2000 to 2011? It is not possible to compare all aspects of the alterations made to the SGP without this paper turning into the size of a book. Therefore, I will examine three central elements of the Pact that have been subject to ongoing changes. Firstly, the content of the Medium Term Objective (MTO), which is the preventive arm of the SGP. The second element is the implementation period. This focuses on how much time the EC gives member states to implement measures to reduce excessive deficits. The final component of the comparison will entail an analysis of the weight of the corrective arm of the SGP. The importance of these three features for the functioning and impact of the SPD will be explained in the following chapter. This thesis primarily aims to determine the attitudes and preferences of the actors involved in the process of shaping the SGP. Attitudes and preferences are generally assessed in two distinct ways: (1) the analysis of behavior conducted by actors involved. For instance, the stance taken by the SPD during votes on the SGP or the support for proposals on the SGP; (2) with a discourse analysis of the statements made by the actors involved. What does the actor say and what does this mean for the subject at hand.12 These two assessment methods apply directly to the sources chosen in this research? The following section will provide oversight of the sources attributed in this thesis.
First, I will investigate the opinions of SPD members as expressed during parliamentary discussions over the implications of European fiscal policy and its effects on Germany. Both in the lead-up to the 2005 and 2011 reform of the SGP, there were frequent discussions in parliament on the matter, and SPD members clearly stated their stance regarding the three aspects that this thesis aims to analyze. Second, party manifestos of the SPD have pointed out their position on EMU-related topics, which show how it framed the issue of fiscal policy. Third, the SPD has published numerous articles on the effects of financial misconduct of fellow EMU members and the need for budgetary consolidation, which also shows its stance on fiscal policy. While these
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three types of sources provide essential information on the motivations of leading SPD members, they fail to inform us of the context in which they made particular statements. This is problematic because the socio-political context plays a vital role in how political parties present themselves. Furthermore, whether a party is part of a coalition and therefore required to form joint stances or part of the opposition and free in how they present their attitudes fundamentally shapes party positioning. With personal statements and parliamentary debates, it is challenging to keep the context and not see comments on its own without the full story behind the claims made, therefore, a background is essential when analyzing material that is susceptible for interpretation. Fourth, this research will also incorporate, quality newsletters like the Bild, articles on fiscal policy and speeches made by prominent members of the SPD on the issue of monetary policy. Finally, the Sacherverständigenrat in Germany, which is the leading institute on macroeconomic policy, has published pieces on the SGP and implications of alterations for the EU and Germany as well. Especially, statements and speeches are direct extensions of opinions and show preferences of key SPD players. Scientific research, when conducted properly, does acknowledge the attitudes and preferences of researchers, but simultaneously tries to make conclusions that take as many factors as possible into account. It provides a systematic oversight of positions taken by actors involved and is a valuable addition to the analysis of preferences and attitudes. The research will analyze possible changes over time focusing on the periods of 2000 to 2011. When it was initially created in 1997 member states of the EMU were supportive of the SGP. But in 2005, when the economy was not performing to the same extent as previously, some of them sought to change the rules set out in the SGP. In 2011, right after the financial crisis, member states were once again faced with challenges to fiscal spending and altered the rules of the Pact once more. While the SGP was altered both in 2005 and 2011 an additional year, 2002, is added in the analysis that does not constitute an alteration to the Pact. In 2002 the SPD was leading the government and economic circumstances were changing, giving a useful insight into how the economic situation of Germany potentially influenced the perception of the SPD towards the SGP. Besides, the federal elections for the Bundestag also took place. Therefore, the attention for fiscal policy was heightened, and the SPD had to defend their stance versus other political parties. Support for the SGP was not a simply yes or no question. Even though all major parties agreed that there was a need to accept specific rules on fiscal policy they profoundly disagreed on what form these rules had to take. They for instance disagreed on how strict these rules had to be, to what extent fiscal spending had to be limited, and how much state interference this warranted. To what extent the party struggled with these different aspects and the harmonization of their ideological views with the SGP is the theme of this research.
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All these factors can potentially account for the behavior displayed by the SPD concerning the SGP. When I take all these factors into account, I will be able to answer the more significant question of what motivates political party behavior. In the vast share of theoretical contributions, there is less attention to the empirical research on existing theories, and this is primarily what this thesis investigates. These findings can, therefore, challenge existing literature or improve validity. Furthermore, this thesis will provide answers on questions on the importance of salience and the extent to which left parties can display international solidarity.
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1. Theoretical Framework
The previous chapter explained the dilemma that the SPD has with restrictive fiscal policy. To achieve a comprehensive understanding of the position, the party took concerning the Pact the general concept of the SGP has to be taken apart into separate parts. These will unravel how the SPD positioned itself and how this correlates with their ideological roots. Therefore, as mentioned in the introduction three proxies will be utilized to establish whether the SPD has positioned itself towards the right or the left of the economic spectrum. When positioned to the left this correlates with a less strict definition of the Pact. Whereas posted to the right corresponds with a more stringent implementation of the SGP and placing more constraints on fiscal policy. The following section explains these aspects and shows how they can be related to the stance of the SPD on the Left/Right dimension. Because this paper tries to analyze a dilemma focused on ideological stance to economic theory three aspects of the SGP will be introduced as proxies for the Left/Right division: the content of the MTO, the implementation period and the balance between the corrective and preventive arm. These will be explained further in this thesis. The traditional debate surrounding the Left/Right divide of political parties centers around the allocation of values and resources. However, the Left/Right divide in European integration theory focuses mainly on the question where authority should be located.13 This particular research will adopt the traditional Left/Right division becauseof the emphasis on national perceptions of European matters. Generally, left-wing oriented economic theory is less strict and more in favor of counter-cyclical state intervention in the economy. As a result of their preference for more limited levels of state intervention, more conservative right-wing economists tend to argue that economic policy should be relatively restrictive during economic downturns.14 The chosen proxies are derivatives of the left-right division in economic theory. The following section will explain what the proxies specifically entail, how they are essential for the SGP and how changes to these proxies show the level of constraint placed on member states. The first proxy is the Medium Term Objective (MTO). The MTO is the preventive arm of the SGP and a specific aspect of the SGP that lays out a budgetary target for each member state. They are set to ensure the sound fiscal health of each MS. The ultimate goal is to have a budget close to balance or in surplus (CTBOIS). Traditionally the MTOs are updated every three years. The MTO is the most crucial aspect of the SGP because it lays out how a country should conduct fiscal policy.
13 Hooghe, L., Marks, G., & Wilson, C. J. (2002). Does left/right structure party positions on European integration?. Comparative political studies, 35(8), 965-989.
14 Hibbs, D. A. (1977). Political parties and macroeconomic policy. American political science review, 71(4), 1467-1487.
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If reforms to the SGP lead to more rules on how a country should reach its MTO and adds additional budgetary requirements, the MTO becomes stricter, and states are more constrained in conducting fiscal policy. When changes imply more discretionary space in how to achieve an MTO and less budgetary requirements need fulfillment there are fewer constraints on governments and thus a less strict layout of the MTO. The second proxy is the implementation period. The implementation period concerns the time member states are given to implement the goals as set out in the MTO. Furthermore, this also includes the time member states receive to reduce excessive deficits before the initiation of the Excessive Deficit Procedure as part of the corrective arm of the SGP. The implementation period is crucial for member states to create policies that lead to achieving MTOs. It is the framework that decides how governments organize a timeline to reach the final goal of a budget CTBOIS. If changes make the implementation period shorter, a member state is more constrained because it has less time to achieve the goals. This means that they need to implement more rigorous measures to achieve these goals. If the implementation period is prolonged and more exonerating circumstances are incorporated a member state is less constrained. There is more time to meet a budget CTBOIS; thus, the steps can be taken more incremental, and therefore less rigorous. The third and final proxy is the weight of the Corrective arm. The Corrective arm of the SGP is initialized with the Excessive Deficit Procedure once the EC ascertains an excessive deficit with one of the member states. After the Commission has presented proposals for the concerning MS to return to a budget CTBOIS a specific period is set. If a country does not undertake sufficient action, the EC will impose a fine. The Corrective Arm of the Pact is crucial to ensure cooperation from other member states. It is supposed to function as a deterrent. When there are no consequences for not following the MTO there is no incentive for member states to support these; therefore, there's the corrective arm. When changes result in less exonerating circumstances, and a quicker shift towards sanctions member states are more constrained in conducting fiscal policy. Because they want to avoid a sanction under all circumstances they implement severe budget cuts, and there is little room left for counter-cyclical fiscal spending. When on the other hand the focus shift towards prevention and more exonerating circumstances are included to ensure that member states can avoid sanctions under the corrective arm there is less constraint on policy conducted by member states.
For the first aspect, the MTO, the focus lies on the scope of guidelines. During the consecutive alterations of the Pact, the reach of the MTO was broadened, with as central aim reaching a
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structural budget balance as soon as possible.15 To what extent do these guidelines leave
discretionary space for member states, or how strict are the budget requirements in the MTO? When there are additional rules that personalize the implementation of measures, a country has more power. Instead of a one-size-fits-all method, a highly specified approach provides more discretionary space for member states. Discretionary powers decrease the level of ‘strictness' because there is no tick the box approach, but countries can fill the gaps themselves. When on the other hand the MTO is a uniform guideline that imposes set limitations on fiscal spending and fixed percentages to reduce excessive debts, there is no room for an individual member state to alter these requirements. So, if the SPD has taken the stance to increase the scope and strictness of the MTO than this can be seen as evidence for a more neoliberal approach that is in contrast with their ideological ‘identity'. If on the other hand, the party supported leniency and more discretionary space in the implementation of the MTO, this is a more traditional left-wing Keynesian approach.
The implementation period proxy is more straightforward than the MTO. When the implementation period is final, and there are no loopholes to postpone the deadline the SGP is stricter, thus more right-wing oriented. However, when the implementation period changed and additional conditions have been added to circumvent deadlines, the Pact is more lenient, therefore more left-wing oriented. The emphasis of this comparison lies in the justification for delaying implementation. When a country can deviate from the timeline to achieve an MTO due to large scale public investments, more liberal economic thinking justifies this. Whereas removing the exception to allow public investments can be seen as more right-wing oriented. The decision to place the implementation period under review does not stem from a simple yes or no, but on the underlying rationale behind changing deadlines for implementation. If the SPD supported a prolongation of the implementation period, this could be seen as evidence that the party has taken a Keynesian stance. The amount of leniency shows the amount of discretionary space provided to a member state in shaping fiscal policy. Whereas the SPD would have taken a strict stance on the implementation period, thus not allowing for exceptions and extensions, this would be more consistent with neoliberal economic thinking. More concrete this becomes exceptionally clear with the 2005 reforms. Initially, a member state was required to implement changes under the excessive deficit procedure within a single year. However, after the 2005 reforms, this deadline was prolonged up to two years. When the SPD supports this, they are in favor of a less strict timeline for implementation and therefore more Left-wing. When the SPD disregards other
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relevant factors and requires immediate compliance, they support a strict implementation period and thus show a neoliberal stance. The final aspect of the SGP is the balance between the preventive and corrective arm. These two components make up the SGP. In short, in the original layout of the Pact, there was supposed to be a credible threat that the EC initiated the Excessive Deficit Procedure (EDP), which falls under the corrective arm. The 2005 reforms diminished the danger of turning to the corrective arm by allowing for more exonerating circumstances for member states to avoid receiving sanctions. But what does this mean for the Left/Right division in this thesis? A focus on the preventive arm entails more discretionary space for state intervention without negative repercussions. In reality, this means that the corrective arm of the SGP is not up for discussion when a member state breaches the threshold. On the other hand, when there is a threat of correction, there is less to no room for expansionary public investments and the member state concerned must make concrete plans to limit public spending. The final falls under restrictive policies and is traditionally part of a more conservative neo-liberal stance, that is rooted in right-wing economic theory. If the SPD were to favor an emphasis on the corrective aspect of the SGP by eliminating large scale public investments as an exception to deviate from the budget, this could be seen as evidence that the party varies from their traditional left-wing stance. Whereas if the SPD would favor the use of the preventive arm without stressing the presence of the corrective part of the Pact and the overhanging threat of sanctions, this would lead to a less strict interpretation of the SGP. This coincides better with their traditional Left-wing ideological views. The difference between how the SPD responded to a ‘tightening' of the rules versus more leniency determines whether their actions are Left or Right wing. The Stability and Growth Pact has been under two significant revisions since it was first created in 1997. In 2005 and 2011, under entirely different economic situations, member states have come together to alter the layout of the Pact thoroughly. To determine whether the SPD has been consistent in its stance towards the SGP an additional mark year (2002) is introduced in which the Pact hasn't undergone alterations. This specific year has been selected due to the position of the SPD as head of the government and the economic instability in Germany at the time. It also can add useful insights on the influence of government position and economic circumstances on party ideology as mentioned above. The 2005 reforms were necessary for Germany to avoid being fined under the corrective arm of the SGP. Due to the economic downturn, the country was in serious trouble.16 When the Pact was once more under revision in 2011, Germany was by contrast
16 Dustmann, C., Fitzenberger, B., Schönberg, U., & Spitz-Oener, A. (2014). From the sick man of Europe to economic superstar: Germany's resurgent economy. Journal of Economic Perspectives, 28(1), 167-88.
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economically sound and the government did not have a strong incentive to change the rules of the game. These two distinct economic situations emphasize the complexity of the issue for the SPD and add a layer of analysis. The previous sections have elaborated on the three aspects of the SGP and the timeframe that this thesis aims to investigate. As noted earlier the SPD’s stance on the SGP was/is ambivalent because it was shaped by a large number of factors that pushed it in a different direction. The following section will focus on the various elements that could have formed the stance of the SPD. Some problems concern all labor parties and dilemmas that are individually pressing for the SPD. General concerns focus on: Has the party based decision-making on representing the party ideology, or have there been other considerations at play? Solidarity is a large part of the liberal tradition in politics, thus has this been a motive for the behavior of the party? In Germany, the SPD is expressly subject to questions like is the SPD a European left oriented labor party or does the solidarity towards the labor population lie solely with German laborers? Identity is the key when analyzing where the sympathy or even loyalty of the SPD lies. Furthermore, Germany as the main creditor benefits from strict fiscal policy and the German electorate favors this position as well.17
How can the SPD align left-wing ideology with the German position and the preference for convergence and strict fiscal policy by the German population? All these questions serve as indicators for the broader question about consistency. Has the SPD been able to portray a consistent stance towards European fiscal policy, and how has the party moved across the ideological spectrum? Next, I will provide an overview of the different theoretical frameworks that could possibly account for the behavior of the SPD and show whether there is a discrepancy between the intended left-wing behavior and the actual stance.
First, Keynesian ideology could motivate the SPD. Esping-Anderson (2017) argues that social democratic parties are not rejecting the traditional Keynesian thinking but for social democracy and the welfare state to persevere in times where the collective is inferior to the individual cutbacks are necessary. This could explain why the SPD supported budget cuts and austerity despite their traditional rejection of these measures. In the ongoing struggle for the survival of social democracy, parties have to form coalitions with other parties that have opposing views on public spending. Furthermore, the new international economic order has changed the nature of domestic questions on distribution. All these considerations ultimately come down to the most challenging issue of converging the traditional working class’ interests with those of voters that
17 Hayo, B., & Neumeier, F. (2017). Public attitudes toward fiscal consolidation: Evidence from a representative German population survey. Kyklos, 70(1), 42-69.
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do not occupy traditional manufacturing jobs.18 In other words, according to this perspective, we
would expect the SPD to publicly voice their discontent regarding limitations on fiscal spending while acknowledging its necessity. Both influenced by coalitions and adaptations to the new electorate.
The second consideration under investigation is the threat of moral hazard. Throughout the formation of the EMU, the German government expressed an explicit concern for moral hazard. The weaker member states profited from the strong position of the Deutschmark, and the Germans feared that in a single monetary union risky fiscal policy would be conducted because of
the reassurance that an influential member was part of the Union.19 Due to these concerns, the
SGP was created. In 2011 these considerations also played a vital role. Despite the explicit prohibition of a bailout the Germans agreed to contribute to saving member states at the brink of collapse in exchange for further tightening fiscal rules. Thus, the German preoccupation with moral hazard plays a vital role in how political parties anticipate and react to monetary policy and in particular the SGP. Therefore, the SPD has to consider the German tradition when they take a stance on reforming the Pact. This would mean that if this concern was predominant, the party supported strict fiscal measures in order to protect the German economy against excessive risk-taking by other European member states. Their concern for moral hazard would exceed their traditional position on fiscal policy. Thirdly, the question arises whether the party is responding to a changing electorate by moving across the ideological spectrum.20 Scholars generally agree that the traditional labor class as we have known throughout the 20th century is disappearing. Globalization, technologization and a shift towards the services sector has diminished the share of conventional manufacturing jobs in Western economies.21 As a result, preferences of traditional labor voters are changing, which results in more voter volatility. People that traditionally voted SPD, and were thought to continue doing so, become less loyal, and the SPD needs to find an answer that will keep these people tied to the party. The rise of populist parties that have taken over issues traditionally claimed by the left has been challenging for left-wing parties. Some scholars argue that in response to the growth of populism Left-wing parties shift towards the right in an ultimate attempt to hold on to voters.22
18 Esping-Andersen, G. (2017). Politics against markets: The social democratic road to power (Vol. 4877). Princeton University Press. pp. 289-296
19Blyth, M. (2013). Austerity the history of a dangerous idea. Oxford: Oxford University Press. p. 106
20 Inglehart, R., & Norris, P. (2016). Trump, Brexit, and the rise of populism: Economic have-nots and cultural backlash.
21 Sassen, S. (1990). The mobility of labor and capital: A study in international investment and labor flow. Cambridge University Press.
22 Bale, T., Green-Pedersen, C., Krouwel, A., Luther, K. R., & Sitter, N. (2010). If you can't beat them, join them? Explaining social democratic responses to the challenge from the radical populist right in Western Europe.
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Where right-wing parties gain momentum as a result of an emphasis on the nation, social democratic parties lose support for their stance of solidarity and philosophy of burden-sharing. As a result of this shift and the attempt to hold on to the electorate, it would become less attractive to support a less restrictive stance on fiscal spending. This entails both domestically and on the European level. Therefore, it would be expected that the SPD supported strict fiscal rules and as a result the SGP. A fourth consideration is the economic environment in which the SPD operated. During the 2005 and the 2011 reforms, the SPD was in an entirely different position. While they were in office in 2005, this was not the case in 2011. Whether a party is in office or the opposition has a significant influence on the amount of policy freedom they can experience.23 Especially in the German system where it is necessary to form coalitions policy stances can significantly differ between parties that are in office or opposition. Based on this consideration, we would expect the SPD to have taken a more flexible approach in 2005 and a stricter approach in 2011. The fifth consideration is the party configuration. The SPD isn't a unified actor. The shape of the party leadership, the internal power struggle, previous elections, and public discourse can all have a significant influence on the course of the SPD. The direction of the shift depends on the organizational structure of a political party. Whenever the party is activist-dominated the political preferences are essential to determine legislative action. However, when a party is leadership-dominated the individual preferences of the political leader will have significant influence in the direction new policy takes.24 The final explanation focuses on the idea of what drives a political party other than ideology. An alternative view of political parties, in which their sole purpose is voter maximization, can also account for a shift in the behavior of the SPD.25 Although this creates a fine line between credibility and opportunism. However, for social democratic parties, this theory does not apply without an important side note. Traditionally there have been strong formal linkages between labor unions and social democratic parties. This makes responsiveness to public opinion shifts less likely to occur. Where on the one hand this increases credibility for social democratic parties and the SPD, in particular, this phenomenon can also explain why it has been far more complicated for labor
23 Holzhacker, R. (2002). National parliamentary scrutiny over EU issues: Comparing the goals and methods of governing and opposition parties. European Union Politics, 3(4), 459-479.
24 Schumacher, G. (2015). When does the left do the right thing? A study of party position change on welfare policies. Party Politics, 21(1), 68-79.
25 Bale, T., Green-Pedersen, C., Krouwel, A., Luther, K. R., & Sitter, N. (2010). If you can't beat them, join them? Explaining social democratic responses to the challenge from the radical populist right in Western Europe.
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parties to adapt to the new political landscape than other parties in the political spectrum.26 Formal linkages, and especially in Germany with highly organized labor unions, result in more bureaucracy and therefore less responsiveness and speed. In the following chapters, an empirical analysis of the stances taken by the SPD will be provided to test the theories and considerations as described in the previous section.
26 Piazza, J. (2001). De-linking labor: labor unions and social democratic parties under globalization. Party
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2. The Medium Term Objectives (MTOs)
In this chapter, I will review the position taken by the SPD towards the Medium-Term Objectives as set out in the SGP in 200 and its consecutive reforms in 2005 and 2011. To identify underlying motives that explain the rationale behind the behavior portrayed by the SPD additional variables will have to be analyzed. These consist of the socio-economic situation, attitudes of political actors and the position within the EU. This chapter will furthermore explain the technical adjustments made to the MTO during the reforms in order to understand the stance and reasoning of the SPD. For the periods of 2002 and 2005 the analysis focuses on how the government, which the SPD was a part of, dealt with European fiscal policy. For the period of 2011 the focus lies on how the SPD acted as part of the coalition. Therefore, the sources are mainly parliamentary debates and statements on government policies.
2.1 Position SPD on the MTO in 2002
In 2002 Germany was struggling to achieve the goals set out in the MTO. While the EU, in general, was experiencing high levels of economic growth, Germany was experiencing an economic downturn. The costs of the reunification, a lack of modernization and high unemployment rates
were amongst the most challenging problems of the country.27 While faced with the economic
downturn the government, led by Chancellor Schroder of the SPD, had to campaign for the federal elections. The SPD was predicted to lose a significant number of seats in the Bundestag as a consequence of these economic problems. Thus, economic problems and a decrease in voter support were directly related. The connection between the financial situation and voting behavior is relatively strong. The incumbency-hypothesis argues that when a country has economic challenges, this will hurt the political ‘ins' and benefit those in opposition, as was expected to
happen with the SPD.28 During the 2002 elections high unemployment rates, poverty, and
economic stagnation were the main topics for all political parties. Despite a loss of votes, the SPD remained the largest party in Germany.29 The Schroder government evaded a massive defeat due to the Iraq crisis and the national flood disaster in the Eastern part of Germany.30 At the end of the campaign, the focus lay on these crises and drew attention away from economic questions that predominantly controlled the political landscape.
27 Redding, S. J., & Sturm, D. M. (2008). The ans of remoteness: Evidence from German division and reunification. American Economic Review, 98(5), 1766-97. 28 Maier, J., & Rattinger, H. (2004). Economic conditions and voting behaviour in German federal elections, 1994– 2002. German politics, 13(2), 201-217. p. 202 29 Kitschelt, H. (2003). Political-economic context and partisan strategies in the German federal elections, 1990–2002. West European Politics, 26(4), 125-152. 30 Maier, J., & Rattinger, H. (2004). Economic conditions and voting behaviour in German federal elections, 1994– 2002. German politics, 13(2), 201-217. p. 202
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The government coalition, led by the SPD, initially engaged in counter-cyclical policies in an attempt to reduce government debt. When this proved to be ineffective, the Schröder government tried to reduce the deficit by abolishing the Keynesian model and impose austerity measures. This shift can be seen in a broader trend of left-wing parties moving towards the Right.31 The ‘Neue Mitte’ program of Schröder led to increased friction within the SPD.32 The traditional left-wing politicians viewed the program as a betrayal of social-democratic values while the centrist camp welcomed the new reforms. The trend of traditional social-democratic left-wing parties moving towards the right directly connects to the rise of populist parties in the early 2000s. During this period right-wing populist parties like the Deutsche Volksunion (DVU) and the Nationaldemokratische Partei Deutschlands (NPD) gained political ground. Support for these parties grew significantly in Eastern-Germany where they attained high levels of organization and
were able to join city councils and municipalities.33 These populist parties addressed issues like
immigration and connected them to the lack of labor possibilities. They included a topic that traditional social-democratic parties did not address and as a consequence, they were able to speak to the electorate that was traditionally ‘owned' by the left. To absorb the loss, the Schroder government sought support across the political spectrum by moving towards the center with the ‘Neue Mitte' program.34 In the original Pact member states remained responsible for their national budgetary policies if they were to stay on the set boundaries. A deficit could not breach the 3% limit, and government debt could not exceed 60%. However, in the Medium-Term Objective, the goal of each member state was to have a deficit close to the balance or in surplus (CTBOIS). The Pact was made to be a one size fits all agreement, and each member state was required to adhere to the rules.35 It was believed at the time that the SGP was extensive enough and that economic convergence, which would happen automatically, would harmonize EU economies even further. As one of the leading economies in the EU and founder of the SGP, the German inability to reach the set thresholds caused friction amongst member states. In an attempt to reassure the German and European public of its ongoing support for the SGP, the party addressed the topic in the party program for the 2002 elections. The SPD stated that it was in the best interest of the country to uphold the
31 Bale, T., Green-Pedersen, C., Krouwel, A., Luther, K. R., & Sitter, N. (2010). If you can't beat them, join them? Explaining social democratic responses to the challenge from the populist radical right in Western Europe. Political studies, 58(3), 410-426. 32 Zohlnhöfer, R. (2004). Destination anywhere? the German red–green government's inconclusive search for a third way in economic policy. German Politics, 13(1), 106-131. 33 Art, D. (2007). Reacting to the Radical Right: Lessons from Germany and Austria. Party Politics, 13(3), 331–349. pp. 345-346 34 Decker, F., & Hartleb, F. (2007). Populism on difficult terrain: The right-and left-wing challenger parties in the Federal Republic of Germany. German Politics, 16(4), 434-454. 35 Buti, M., Franco, D., & Ongena, H. (1998). Fiscal discipline and flexibility in EMU: the implementation of the Stability and Growth Pact. Oxford Review of Economic Policy, 14(3), 81-97.
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budgetary limitations as set out in the SGP. Therefore, the SPD was forced to cut public spending. The document explicitly states that due to a combination of economic slowdown and the SGP, not
all desired projects were fundable and the focus shifted towards budgetary consolidation.36
Furthermore, the SPD expected that other member states would adhere to the MTO rules as strictly as possible as well.
During the campaign, the SPD attempted to tie both centrist and left-wing voters by simultaneously proposing to liberalize the labor market and presenting themselves as protectors
of the welfare state.37 The personal influence of the chancellor has been significant throughout his
period in office. The literature shows that before the elections of 1998 German politics were impersonal and people voted for the political party and not party leaders. With Gerhard Schroder,
this changed.38 From a theoretical perspective the impact of Schroder on the SPD can be seen as a
leadership-dominated party.39 Research conducted on these party configurations shows that
there is a general trend towards the median-voter position. In Germany during the early right-wing liberal parties like the Freie Demokratische Partei (FDP) experienced a substantial increase in support. Therefore, the median voter shifted towards the right as well as the position of the SPD. In anticipation of the continuous advance of populist parties the SPD also moved towards the center. However, this fear proved to be premature since the DVU and NPD both didn't acquire the required number of votes for the electoral threshold. Despite the explicit statement to uphold the MTO rules to be close to a balance or in surplus as set out in the SGP, the German economy got under even more pressure. The German economic council of experts stated in the 2004/2005 annual report that the budget deficit would exceed the 3% ceiling as laid out in the SGP. Even with the future projections, the state was unable to reach the target by 2006. The German government, therefore, opened negotiations on reforming the SGP.
2.2 Position SPD on the MTO in 2005
The political context became more volatile as a consequence of the ‘Agenda 2010' program, initiated by the Schroder government to get Germany out of the crisis. With a focus on increasing labor mobility and the freezing of state pensions the party’s Keynesian camp publicly turned
36 SPD. (2002). Erneuerung - Gerechtigkeit - Nachhaltigkeit; Für ein wirtschaftlich starkes, soziales und ökologisches Deutschland. Für eine lebendige Demokratie. retrieved from: https://www.spd.de/fileadmin/Dokumente/ Beschluesse/Bundesparteitag/koalitionsvertrag_bundesparteitag_berlin_2002.pdf. pp. 9-10. 37 Kitschelt, H. (2003). Political-economic context and partisan strategies in the German federal elections, 1990–2002. West European Politics, 26(4), 125-152. p. 141 38 King, A. (2002). Leaders' Personalities and the Outcomes of Democratic Elections. Oxford: Oxford University Press. p. 130 39 Schumacher, G. (2015). When does the left do the right thing? A study of party position change on welfare policies. Party Politics, 21(1), 68-79.
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against Schroder. In essence, German finances could not meet the budgetary requirements of the Pact. Therefore, the SPD changed the narrative concerning the SGP. The party stated that the SGP was limiting the possibilities for Germany to invest in the domestic economy. Furthermore, the Pact was too rigid, with a lack of distinction between the member states.40 During the Bundesrat elections end of 2004, the SPD had lost nearly in all regions, which led to a minority in the Bundesrat. As a result, early elections were held in September 2005.41 The CDU/CSU coalition, led by Angela Merkel, gained the majority of votes and the Merkel one administration started, with the SPD as a part of the great coalition. The newly formed Merkel I government followed the line of reasoning of the SPD and concluded that the consolidation of state finances could not jeopardize the economic development of Germany. Even though the ECB, one of the most influential institutions within the EU, openly doubted the motives of the two countries they were able to change the layout of the Pact.42 Therefore, the technical adjustments made in 2005 emphasized national ownership and the level of discretionary space increased. Furthermore, the economic rationale behind budgetary policies was increased and made less pro-cyclical. By strengthening national ownership and making the SGP more responsive to Council recommendations of member states that are growing below
trend, the Pact was to increase in efficiency.43 With tailored rules the Pact could be applied fair
and consistent across the EMU. The leaders of the EU declared that the new SGP was simple, transparent and enforceable. In 1997 the SGP was created from a purely economic stance, and the new SGP had to find a balance between economics and politics. This suggests that discretionary space increased. The critique from the ECB that the SGP became too flexible was countered by the MSs with the assurance that flexibility was not less responsibility. Improved ownership was one of the main adjustments to the SGP.44
2.3 Position SPD on the MTO in 2011
In 2011 when the SGP came under revision, the SPD was in an unprecedented position. Whereas they were in government during the creation and the previous amendment of the SPD, in 2011 they were in the opposition. Because the context differed we can investigate whether the SPD
40 SPD. (2005). Vertrauen in Deutschland. Das Wahlmanifest der SPD. retrieved from: https://www.spd.de/fileadmin/ Dokumente/Beschluesse/Bundesparteitag/wahlmanifest_bundesparteitag_berlin_2005.pdf 41 Sloam, J. (2006). A Tale of Two Parties? The Failure of the Catch-All Parties in the 2005 German Elections. Politics, 26(2), 140–147. pp. 140-141 42 Schure, P., & Verdun, A. (2008). Legislative bargaining in the European Union: the divide between large and small member states. European Union Politics, 9(4), 459-486. 43 Ngai, V. (2012). Stability and growth pact and fiscal discipline in the Eurozone. University of Pennsylvania, 12-10. pp. 2-88. p. 6 44 Chang, M. (2006). Reforming the Stability and Growth Pact: Size and influence in EMU policymaking. European Integration, 28(1), 107-120.
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portrayed an alternative stance now that it did not have to take part in the government. Additionally, the country experienced high levels of economic growth as opposed to 2002 and 2005.
The 2011 technical SGP reforms concerning the MTO were mainly focused on decreasing the discretionary space for member states. This time these reforms took place against the following political-economic background. The 2008 financial crisis showed the flaws of EU fiscal surveillance. The emphasis on debt and deficits did not provide a comprehensive image of the economic soundness of member states within the EU. Housing bubbles, expansionary public
spending, and an uncontrolled financial market led to the most significant crisis in the Eurozone.45
The no bail-out clause had to be violated to save the Eurozone, and the ECB had to overstep its
mandate to reassure stability in the EMU.46 For the member states of the EU, this marked the
beginning of renegotiations on strengthening fiscal governance and improving shared monetary management. For the SPD this meant, that in order to rehabilitate the Eurozone, it was supportive of stricter budgetary rules. The 2011 reforms of the SGP have been described as the SGP Plus and have a stricter set up than the 2005 changes. Where Germany and France were in favor of leniency, this shifted entirely in 2011. Especially the CDU-led government, which did not suffer as extensively from the crisis as other member states, saw it necessary to impose strict austerity measures and reinforce the stringent character of the SGP to reassure fiscal discipline. Before we can analyze the SPD’s views, we have to present the content of the new layout of the SGP. Unlike in 2005, the MTOs aim to achieve a structural budget balance and the sustainability of public finances as soon as possible. Every member state can implement individual measures, similar to the open method of coordination, but in a specified timeframe. The goal of the MTOs is to be close to a balance or surplus and has to be revised every three years. If a member state has surpassed the threshold of a 60% debt, the rules applying to the lower boundary are more stringent. Instead of the allowed 1% of structural deficit the boundary shift towards a mere 0,5%. If a member state is unable to achieve their respective goal within the MTO, their structural deficit has to decrease with 0,5% a year.47 These reforms were discussed on the 2011 party conference of the SPD. The alterations made the Pact stricter and more neoliberal of nature. For the SPD this
45 Lane, P. R. (2012). The European sovereign debt crisis. Journal of Economic Perspectives, 26(3), 49-68. p. 50 46 Hadjimichalis, C. (2011). Uneven geographical development and socio-spatial justice and solidarity: European regions after the 2009 financial crisis. European Urban and Regional Studies, 18(3), 254–274. p. 256 47 Holler, J., & Reiss, L. (2011). What to expect from the latest reform of the Stability and Growth Pact. Monetary Policy & the Economy Q, 4, 85-98. p. 88
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would traditionally not be the proposed solution to budgetary consolidation. However, the party emphasized the need for strict fiscal rules. It was stressed that it was the task of the SPD to show the importance of the EU:
"The Union is at a crossroads, where can be chosen to move forward and increase European integration or slip back into a state of isolationism and populism. As the largest member state and the economic powerhouse of the EU, it is the responsibility of Germany to promote the common interest. Increased integration can lead to a situation wherein member states have to provide for other member states in need, but it is up to the SPD to inform the public of the even greater negative consequences of losing the EMU".48 Sigmar Gabriel, party leader of the SPD at the time, emphasized the great prosperity the EU has brought the country in the social, cultural, political and economic domain. Because the member states cooperate on all these domains there is more democratic legitimacy, which in turn will make the EU more stable. Because of the need to increase economic cooperation, the SPD supported the changes made to the SGP in 2011. However, even though the SPD stressed the need for stricter fiscal rules, the party proposed an additional plan. With a focus on the free market and neoliberal economic policy, the EU has sunk into a deep recession. The EU is unable to provide a social safety net to protect European citizens during this crisis. For the SPD the creation of a Social Stability Pact would protect the social rights of all European citizens and make the EU a more inclusive political system. Throughout the EU citizens would be able to receive universal social security. Furthermore, they would be protected against exploitation and social dumping.49 The addition of a Social Stability Pact can be seen as a justification for the support for the SGP reforms. This Social Stability Pact fitted in the social-democratic tradition of the SPD and could be perceived as an attempt to ty both sides of the political spectrum to the SPD. Remarkably, the SPD did not contradict the stance of the government on the SGP in parliament, but it did put forward the Social Stability Pact. Where the SPD has traditionally been in favor of European integration their constituents show decreasing support. Therefore, the party had to reconnect with its voters. When analyzing this search for voters from a more theoretical perspective there is a consensus that electoral behavior has been of lower influence when a party is in government, however when a party is in the
48 SPD. (2011). Beschlusse des ordentlichen bundesparteitags der SPD. Berlin, 4-6 Dezember 2011. pp. 1-303 retrieved from: https://www.spd.de/ fileadmin/Dokumente/Beschluesse/Bundesparteitag/ beschlussbuch_bpt_2011.pdf p. 110 49 SPD. (2011). Beschlusse des ordentlichen bundesparteitags der SPD. Berlin, 4-6 Dezember 2011. pp. 1-303 retrieved from: https://www.spd.de/ fileadmin/Dokumente/Beschluesse/Bundesparteitag/ beschlussbuch_bpt_2011.pdf pp. 109-117
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opposition electoral behavior becomes highly essential to determine the course of the party concerned.50 This is precisely what happened with the SPD in 2009. Their position towards the EU became more critical. While acknowledging the need for budgetary consolidation, the lack of social policy became the focal point. The SPD changed position by framing European support as a necessary tool to increase wealth for the German laborer. This change of tactic also became clear in 2010, during plenary session 17/67. In the German Bundestag, the government discussed the proposed alterations to the SGP with parliament. In this debate, the SPD, as an opposition party, stated their full support for enhancing the scope of the Pact, to achieve European broad budget consolidation. The narrative of the debate focused on the need to protect the German economy from economic mismanagement conducted by other member states. These had to be placed under tight controls to prevent a future crisis of the same scale as 2008. Furthermore, the SPD urged the government to increase penalties on member states that were willfully misleading the EC with false budget reports.51 They portrayed a message of Germany first, but to achieve this, they had to ensure that on the European level problems were to be addressed that transcended national borders. The EU became a tool and not the final goal to achieve a social society.
50 Hooghe, L., Marks, G., & Wilson, C. J. (2002). Does left/right structure party positions on European integration?. Comparative political studies, 35(8), 965-989. p. 969 51 Deutscher Bundestag. (2010). Stenografischer bericht. Plenarprotokoll 17/67. Sitzung. retrieved from: http://dipbt.bundestag.de/doc/btp/17/17067.pdf p. 7082
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3. The deadline provided for the implementation Period
In this chapter, I will review the alterations made to the implementation period deadlines as set out in the SGP. These deadlines specifically focus on the time member states receive from the European Commission to implement the necessary changes to avoid being fined under the corrective arm of the Pact. Whether a violation leads to a fine will be discussed in the next chapter. When the EC writes an opinion on the draft budgetary plans that all member states are obliged to submit yearly, they evaluate whether a country upholds the rules as set out in the SGP. If a country is unable to do so, an excessive deficit procedure is initiated in which a MS can address the recommendations made by the EC.
3.1 Position SPD on the Implementation period in 2002
In the original Pact, an excessive deficit was detected by the EC after countries filed their Annual Draft Budgetary Plans (DBPs). Member states were able to undertake corrective action which they deemed the most effective after receiving an official warning from the Commission. If a member state did not undertake action within four months the EC would impose a fine. If the MS concerned did address the issue, they were given a year to ensure that the deficit and debt were within the set boundaries of the SGP. However, when this deficit was not corrected within a single year, the Council and the Commission would move towards imposing a fine. Each member state was committed to implement each aspect of the SGP without any delay, and in the case of an extension always had to present a written justification. The original SGP had clear implementation deadlines, which originated under German pressure. The fear for moral hazard and free riding led to a rigid Pact that imposed severe limitations on the government's ability to facilitate counter-cyclical policies.52 The socio-economic context put the country in a complicated position. Whereas Germany was one of the driving forces behind the layout of the SGP, the economic situation in 2002 complicated their position. The country received an official notification from the EC after they submitted their DBP, which entailed concerns on the rising public debt. In order to avoid a sanction under the EDP, the country was forced to present a comprehensive strategy to reduce the government debt within the set implementation period. In the party manifesto of the SPD, they explicitly stated that each member state was obliged to adhere to each measure as set out in the SGP. In particular, there were to be no exclusions or exceptions from set deadlines and targets.53 However, this
52Heipertz, M., & Verdun, A. (2004). The dog that would never bite? What we can learn from the origins of the Stability and Growth Pact. Journal of European Public Policy, 11(5), 765-780. 53SPD. (2002). Erneuerung - Gerechtigkeit - Nachhaltigkeit; Für ein wirtschaftlich starkes, soziales und ökologisches Deutschland. Für eine lebendige Demokratie. retrieved from: https://www.spd.de/fileadmin/Dokumente/ Beschluesse/Bundesparteitag/koalitionsvertrag_bundesparteitag_berlin_2002.pdf p. 11
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statement has to be reviewed in the context of upcoming elections. The German public has always been highly supportive of the SGP because of the fear of misconduct by other member states. Publicly admitting that the government would be unable to uphold the rules they had established would be an unacceptable loss of face before the elections. Thus, the statement was a move to reassure voters that under no circumstances Germany was going to provide a loophole for other member states. Despite these strong claims Hans Eichel, minister of finance, noted that it was
political-suicide if the government were to engage in more budget cuts before the elections.54 In
this instance, a member of the government and trusted advisor to the chancellor directly contradicted the statements as set out in the election program. Despite the SPD’s insistence on upholding strong implementation deadlines they urged the Commission to provide an extension for Germany. Thus, without concrete plans, the government had to present a formal plan of action in order to avoid a fine from the EC. Ultimately the German government was able to present an ambiguous plan of action that sufficiently satisfied the Commission, which led to an extension of the final deadline. 55 Social democratic parties, in general, have attained a more strategic character since the late 1990s in an attempt to slow down the decline in constituents. In the case of, the SPD it was also a direct response to opinion polls wherein the CDU/CSU significantly rose at the expense of the SPD.56 Regarding the strictness of implementation from the SGP, it is safe to argue that the SPD did not act in line with its ideological roots. Despite statements to uphold rigid nature of the Pact Germany proved to be unable to maintain its promises and altered the layout of the SGP.
3.2 Position SPD on the Implementation period in 2005
Early 2005 Schroder set out his opinion on the SGP in an article in the Financial Times, which proved to be the turning point. He stated that the Pact was too straightforward and it did not consider country-specific circumstances. In order to improve effectiveness and efficiency, the EC should draft country-specific plans that incorporated individual economic situations. Furthermore, they had to drop universal deadlines for implementation according to Schroder. Each country has its institutional channels and structures that function within different periods, which had to be incorporated in the new SGP. Furthermore, the trigger for the EC and the Council to initiate the EDP was the deficit reference value of 3%. However, according to Schroder the
54Howorth, D. (2002). Germany avoids EU reprimand over finances. The Telegraph. retrieved from: https://www.telegraph.co.uk/news/worldnews/europe/germany/1384740/Germany-avoids-EU-reprimand-over-finances.html 55Sachverstandigenrat. (2001). Jahresgutachten 2001/02 des Sachverständigenrates zur Begutachtung der gesamtwirtschaftlichen Entwicklung. Druksache 14/7569. retrieved from: http://dip21.bundestag.de /dip21/ btd/14/075/1407569.pdf p. 120 56Kitschelt, H. (2003). Political-economic context and partisan strategies in the German federal elections, 1990–2002. West European Politics, 26(4), p. 300
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simplicity of this arbitrary value made intervention by EU institutions too easy and affected
national sovereignty.57 Once again, Schroder argued that discretionary space for member states had to increase. These statements were in sheer contrast with the 2002 election proposals. In order to remain credible for the German public, the government framed the SGP alterations as an effort to increase effectiveness and efficiency. In 1997 Peter Katzenstein in his book Tamed Power: Germany in Europe described the German tradition of promoting EU solutions to national policy problems.58 This approach gave them the name ‘tamed power’ and has been consistent with the 2005 approach of the government towards the domestic economic problems. The economic position of the country deteriorated in 2005 where wage differentials widened as a result of prior
labor market deregulation and the absence of a minimum wage.59 The ‘Neue Mitte' policy of
Schroder did not have the desired effect and easing the SGP was portrayed as the European solution to this domestic problem.
The content of the implementation period of the SGP changed as a result. After the renegotiations in 2005, the deadline for correcting an excessive deficit had been prolonged from one to two years, with the possibility of an extension leading up to five years. This was one of the major victories for Germany and France because it abolished the rigid character and increased discretionary space and flexibility. The 2005 reforms focused on finding a balance between economic judgment and policy discretion. The EC was forced by the European Council to incorporate more exonerating circumstances and therefore improve national ownership of member states. With increased policy discretion the member states aimed to strengthen the public opinion towards
the SGP. Especially in Germany this argument was used by Schroder to justify easing the Pact.60
Besides, the SPD elaborated on the motivation behind alterations to the Pact in a party statement. Under no circumstances, the SGP should limit economic growth in Germany. Therefore, the Pact had to be more growth-friendly through automatic stabilizers that would adjust for country-specific circumstances to prevent a member state from immediately surpassing the set thresholds.61
