Reinforcing fiscal discipline in response to the Eurozone crisis: why did the EU insist on strict austerity?
The prolonged eurozone crisis revealed the flaws of institutional design in the European Union. Indebted member states were forced to cut government spending and conduct public sector reforms that led to high levels of unemployment. The EU countries as a whole faced the threat of government debt spill-over. Creditors had lost their trust in Greek government bonds, meaning that the government was unable to bail out the banks. In turn, the banks of Greece were mainly indebted to creditors in Northern Europe and the banks of Northern Europe were “too big to fail” because it would have destabilized the financial system. Politicians and officials started to search for solutions to overcome the crisis. One of the solutions was the Fiscal Compact established by the Treaty on Stability, Coordination and Governance (TSCG) in the Economic and Monetary Union. The aim of the treaty was to reinforce existing fiscal discipline rules in a more credible manner. The thesis looks at the negotiation process leading to the agreement on the Fiscal Compact. The aim of the thesis is to test competing EU integration theories that explain the outcome of reinforcing fiscal discipline rules. To reach its objectives, the thesis elaborates on theories of liberal intergovernmentalism, supranational governance, and historical institutionalism and derives hypotheses that are tested using a process-tracing method to analyse political speeches, press releases, macroeconomic data, and existing regulatory framework. The research findings indicate convergences and contrasts between the positions of key member states and the EU institutions on the policies of fiscal discipline. The study also found that the key member states public concerns caused integration, and existing regulatory framework had an important role in formulating actors positions.