Mark Hallerberg. Domestic Budgets in a United Europe: Fiscal Governance from the End of Bretton Woods to EMU. Ithaca: Cornell University Press, 2004. x + 245 pp. $39.95 (cloth), ISBN 978-0-8014-4271-1.
Reviewed by Alfred C. Mierzejewski (Department of History, University of North Texas)
Published on H-German (January, 2007)
Balancing a National Budget and What that Means
The issue of whether to balance government budgets and how to do so has perennially been a source of controversy in Europe. The debate over the issue has taken on a particularly strident tone in light of the European Union (EU) requirement that governments run annual deficits equivalent to no more than 3 percent and carry cumulative debt loads of no more than 60 percent of annual gross domestic product. They have become critical requirements for entry into and for maintenance of membership in good standing in the EU under the Maastricht accord accepted by the major European powers in 1992. The particulars were embodied in the European Stability and Growth Pact agreed at the Madrid Summit in 1995. The 3/60 requirement was inserted into the rules at the insistence of the German government based on that country's bitter experience with inflation in the twentieth century. It rests on the notion that government budget deficits can depreciate a currency's value to the extent that savings are destroyed and normal market transactions become impossible, circumstances that then lead to the disintegration not just of the economy, but of society itself. The result is that sound fiscal policy and a stable currency have become articles of faith among the Germans. As recompense for abandoning their solid currency, the Deutsche Mark, as part of the European unification process, the Germans insisted that other members of the EU adopt their standards of fiscal rectitude.
Mark Hallerberg addresses the question of how members of the EU wrestled with the budget problem in the period 1973 to 2000. He chose a time frame defined by the abandonment of the fixed exchange rate mechanism and the introduction of the euro as a unit of account among banks. He relies on newspapers such as the New York Times and the Financial Times, interviews with EU and European government officials, statistics from the European Commission and a range of secondary sources for his information. This selection is common in the political science literature, though historians will find it inadequate. Even by political science standards, there are some notable omissions, such as Margaret Thatcher's memoirs and the publications of the various national statistical offices such as the Statistisches Bundesamt, which frequently provide a somewhat different picture than that presented by European institutions.[1]
Hallerberg adopts an institutional approach to his version of political economy (p. 2). He attributes decisive importance to government organizations responsible for the formation and implementation of fiscal policy. Centralization of this process, in Hallerberg's view, is particularly important. He takes this reasoning further, contending that examination of political structures "can also explain why sound fiscal institutions fail to take root" (p. 13). He contends that coalition governments "are particularly guilty of fiscal irresponsibility" and that systems of proportional representation promote deficit spending (p. 9). He identifies in such systems "veto players" who possesses sufficient political or constitutional power to scuttle budget arrangements, opening the spigot to unrestrained spending on behalf of their constituents (p. 9). For responsible fiscal polices to be adopted, Hallerberg asserts that a competitive party system is essential (pp. 11, 13, 16). Debate in electoral campaigns shapes fiscal policy. In addition, this environment makes it possible to punish parties that refuse to balance budgets by expelling them from coalitions or causing them to lose elections (pp. 12, 15). This reasoning implies that a majority of the electorate actually desires balanced government budgets.
Hallerberg proposes three models or ideal types of government to order his analysis. The first is what he calls the "delegation" model. In this regime, responsibility for fiscal policy is assigned to a strong finance minister, supported by the head of the government. One party majority governments are most conducive to this arrangement (p. 12). This model is based on the assumption that the minister will attempt to minimize the tax burden on her constituents by controlling spending. The second is the "commitment" model. In this scenario, countries with proportional representation and coalition governments consisting of many parties develop procedures under which the coalition partners negotiate fiscal policy before cabinets take office. These agreements set rules for spending and taxation. Adherence is enforced by expelling parties when their ministers violate the coalition pact, presupposing competitive elections. Finally, Hallerberg identifies the "fiefdom" model in which ministers set their own budgets. This type of government spends substantially more than it collects in revenues. Ministers enjoy immunity from punishment because elections are not competitive (p. 12).
Hallerberg examines and rejects five alternative explanations for budget discipline. He denies the general validity of the accounting tricks thesis, according to which EU members met the Maastricht criteria only by manipulating their accounts (p. 4). Crucially, he also finds the contention that ideology determines spending priorities (the "partisanship" thesis) untenable. He argues that the idea that leftist governments run deficits in order to stimulate employment while conservative governments balance budgets and tolerate higher levels of unemployment is not supported by the record (pp. 5, 42, 105). He also concludes that the European Monetary System did not enforce budget restraint through its fixed exchange rate mechanism (p. 6). Similarly, he denies that in most cases competitive markets, either for credit or currencies, disciplined governments to balance their accounts (p. 7). Finally, running against the conventional wisdom, he also contends that the EU rules did not lead states to the path of fiscal rectitude (p. 7, 16). Hallerberg substantiates his theoretical model by examining the fiscal history of EU member states from the end of the Bretton Woods regime to the introduction of the euro. Since readers of H-German are primarily interested in Germany, I will concentrate my remarks on the author's discussion of that country accompanied by a few comments about his analyses of other countries' experiences as appropriate.
Britain is the prototype of a state adhering to the delegation model. The country historically has had a strong Chancellor of the Exchequer who is responsible for spending and can enforce government fiscal policy (p. 82). Hallerberg describes the various permutations of this arrangement under the Labour governments of the 1970s, the Thatcher regime, the erosion of Thatcher's system under her successor John Major and the reestablishment of fiscal rectitude under the subsequent Labour cabinets of Tony Blair. Here the perspective adopted by Hallerberg creates something of an optical illusion. As an examination of the British government's accounts since the end of World War II and the attitudes of the leadership of the Conservative Party makes clear, Conservatives had fully embraced the welfare state by the early 1960s at the latest. Consequently, Edward Heath's brief Conservative cabinet in the early 1970s did little to restrain spending. Even Margaret Thatcher, with her reputation as a ruthless budget cutter, only slowed the growth of government spending. Her administration had enormous difficulty balancing its accounts. The Blair cabinets have benefited from economic growth and have raised taxes, all the while increasing social spending and paying for a war.
France also falls into Hallerberg's category of states that have adopted the delegation model. Hallerberg uses this example to support his contention that the Left is fiscally responsible, citing how the Mitterrand regime in the 1980s recognized its mistake of nationalizing industries and raising expenditures and shifted dramatically to a more competitive economic system flanked by tax reductions and privatizations. Hallerberg's discussion can be enhanced by reading Jean-Pierre Dormois' The French Economy in the Twentieth Century.[2] The picture that emerges from this short book is of an economy in which the government is the largest employer, spends most of the gross domestic product and suffers from chronic high unemployment. Whether the budget of the central government is balanced in this environment almost seems to be a formality.
Hallerberg devotes considerable attention to the Federal Republic of Germany, providing a overview of Germany's fiscal history since the early 1970s. He claims that Helmut Schmidt (SPD) and his finance minister Hans Apel (SPD) were serious about balancing the budget (p. 92). He does not mention that this stance greatly weakened Schmidt's standing in his own party. He then asserts that the CDU/CSU/FDP coalition led by Helmut Kohl (CDU) returned West Germany to fiscal rectitude during the early 1980s, departing from that path only with reunification in 1989. As even the small step of reading of Kohl's memoirs should make clear, this picture is misleading. Kohl, like Thatcher, only limited the growth of spending. Moreover, in his own retrospective judgment, he committed serious errors in reshaping the social welfare system, particularly the government's old age retirement system, which increased budget deficits.[3] Hallerberg goes on to contend that the German electoral system is divided into blocs of parties that always work together in competitive electoral campaigns. However, the behavior of the Free Democrats (FDP) since the late 1950s and of the Greens, more recently, belies this claim. Moreover, if one bears in mind the antics of Franz Josef Strauß and the headaches that they caused Helmut Kohl, to say nothing of the more recent behavior of Edmund Stoiber, it should be clear that the CSU, as much because of its commitment to Christian social teaching as its Bavarian particularism, makes the center-right bloc far less cohesive than Hallerberg suggests. In addition, as he points out, because of the influence of the Bundesrat (Federal Council) on budget legislation and the German constitution's provision for a complex system of burden and revenue sharing, the finance minister's influence on fiscal policy is limited. Consequently, Hallerberg correctly predicts budget problems for Germany (p. 43). He points out quite trenchantly that the costs of reunification were not part of the regular budget (p. 97, 101). Since they constituted as much as 12 percent of gross domestic product, this was a serious omission. In contrast, Hallerberg contends that Oscar Lafontaine's (then SPD, today WASG, soon Linkspartei) success in transferring responsibility for many policies from the Economics Ministry to his Finance Ministry in 1998 was beneficial. He justifies this interpretation by pointing out that this change brought German fiscal and economic policy organization into line with that of the French (p. 101). In light of the performance of the two economies, leaving aside the philosophical problems concerning combining economic and fiscal policy, this claim must be considered dubious. In contrast, Hallerberg correctly observes that all parties across the spectrum seek to manage both the budget and the economy which explains why there is so little difference in their spending priorities (p. 101). In an exception to his general finding, he accepts that the Germans met the Maastricht criteria, at least in part, by resorting to budgetary tricks (p. 114). He concludes, however, that Maastricht exerted only a limited effect on German fiscal behavior (p. 220).
Hallerberg assigns the Netherlands, Belgium and Finland to the ranks of the commitment states. Also falling into this category, but of a special nature because they regularly have minority governments, are Denmark and Sweden. Hallerberg provides good short descriptions of the difficult negotiations that have lead to budget agreements in these countries. Their fiscal and economic performances are not markedly different from those of the delegation states.
The fiefdom model presents a more complex picture. Therefore, Hallerberg discusses it in terms of states that changed their fiscal systems and those with fundamentally unstable regimes. He discusses how Italy changed its system of fiscal management to a delegation model, largely under pressure to conform to the Maastricht criteria. He also recounts how Ireland substantially modified its system to adopt a form of the commitment model. Here, market pressure was decisive because the Irish had exhausted their credit (pp. 203-4). He makes no mention of the country's stellar economic performance over the last fifteen years. This economic boom was triggered by deregulation and tax cuts, which increased tax revenues and reduced social service expenditures, thereby helping to balance the budget. Finally, he describes the unstable regimes in Austria, Portugal and Spain. Greece is discussed in the chapter concerning the delegation model. The author recounts how the Greeks changed their system to meet the Maastricht criteria. Complicating this picture is the revelation, possibly appearing too late to be taken into account by Hallerberg, that the Greeks cooked their books.
Overall, Hallerberg's basic contention seems to be correct, but superficial. At first glance, the record seems to support him. Yet, Hallerberg's analysis begs the question as to why fiscal behavior seems to be virtually the same across the political spectrum (p. 42). Here, structural analysis falls short and an examination of party programs and ideology provides at least the beginnings of an answer. In Germany, both the SPD and the CDU/CSU support the corporatist market economy and an extensive welfare state, mistrust competitive markets and run deficits. To justify this behavior, one draws upon socialist and reformist thought, the other on Christian social teaching. The results, indeed, are remarkably similar: budget deficits, low growth and high unemployment. Hallerberg's discussion also begs the question as to how budgets are to be balanced. It makes a difference whether a budget is balanced by cutting spending or by raising taxes. The latter approach, while it may yield a smaller deficit in the short term, reduces the productive capacity of the economy in the long run by increasing deadweight losses. Viewed from another perspective, it also makes a difference at which level the budget is balanced. A low-tax, low-state expenditure, low-cost, low-wage regime is inherently more competitive on the international scene and more receptive to innovation. The high-tax, high-government expenditure, high-cost, high-wage regimes of states such as France and Germany have proven to be exceptionally vulnerable to global competitive pressures, leading to high unemployment rates, low participation rates (in both countries most people are not gainfully employed),[4] slow growth and eroding standards of living. Here again, ideological choices about life style and distribution of wealth are crucial. In short, Hallerberg does not relate fiscal structures to economic performance, which is what really matters. Balanced budgets are not ends in themselves, but means to an end. That end is a certain quality of life for a country's inhabitants.
In conclusion, Mark Hallerberg presents an interesting but surreal analysis. His discussion floats above the realities of politics in Europe. He is surely correct that institutions play an important role in shaping a state's fiscal policies. However, it remains highly questionable, for me at least, whether process is more important than purpose. Budgets are means, discussion of which is not enlightening, if not necessarily related to ends and results.
Notes
[1]. Margaret Thatcher, The Downing Street Years (New York: HarperCollins, 1993). The excellent statistical series of the Statistisches Bundesamt as well as its annual statistical volumes are available on line at www.destatis.de .
[2]. Jean-Pierre Dormois, The French Economy in the Twentieth Century (Cambridge: Cambridge University Press, 2004). I would like to thank Will Gray for bringing this excellent book to my attention.
[3]. Helmut Kohl, Erinnerungen 1982-1990 (Munich: Droemer, 2005), 56-57, 809-10.
[4]. Dormois, p. 21, Table 2.4; 26, 88-89; Gabor Steingart, Deutschland. Der Abstieg eines Superstars (Munich: Piper, 2004), 72; Statistisches Bundesamt, Statistisches Jahrbuch 2004 für die Bundesrepublik Deutschland und für das Ausland (Wiesbaden: Statistisches Bundesamt, 2004), 71, Table 3.1; www.destatis.de/basis/d/erwerb/erwerbtab1/php , accessed on November 25, 2006.
If there is additional discussion of this review, you may access it through the network, at: https://networks.h-net.org/h-german.
Citation:
Alfred C. Mierzejewski. Review of Hallerberg, Mark, Domestic Budgets in a United Europe: Fiscal Governance from the End of Bretton Woods to EMU.
H-German, H-Net Reviews.
January, 2007.
URL: http://www.h-net.org/reviews/showrev.php?id=12779
Copyright © 2007 by H-Net, all rights reserved. H-Net permits the redistribution and reprinting of this work for nonprofit, educational purposes, with full and accurate attribution to the author, web location, date of publication, originating list, and H-Net: Humanities & Social Sciences Online. For any other proposed use, contact the Reviews editorial staff at hbooks@mail.h-net.org.