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[DRAFT PAPER: PLEASE DO NOT CITE]
Conceptualising Excessive Deficit in the Eurozone: Expertise, Regulatory Standards
and Risk Communication
Po-Hsiang Ou
DPhil student in Socio-Legal Studies
University of Oxford
ECPR Graduate Student Conference 2014
3-5 July 2014, University of Innsbruck
Abstract:
Expertise plays a critical role in the construction of risk regulatory standards. One key
element to understanding these regulations is risk communication. However, while
most scholars focus on risk communication between regulators and the lay public,
communications internally among experts remain relatively under-studied. This
paper therefore seeks to investigate the internal perspective of risk communication,
by empirically looking at the formulation of EMU fiscal rules.
The fiscal rules laid down in the Maastricht Treaty require Member States to keep
their deficits under 3% and debts under 60% of their respective GDP. These ceilings
have thus defined excessive deficits and conceptualised the ‘risk’ of the EMU.
Through archives and interviews, my findings suggest that experts have framed risk
positively and narrowly in the discussion, and the creation of technical consensus
was heavily politicised. It seems that inter-expert risk communication is not purely
scientific and technical as many risk communication studies presupposed.
Keywords:
Risk communication; risk regulation; Excessive Deficit Procedure; Eurozone crisis;
science and policymaking
2
In order for EMU to function smoothly, Member States must avoid excessive
budgetary deficits. Under the provisions of the Stability and Growth Pact, they
agree to respect two criteria: a deficit-to-GDP ratio of 3% and a debt-to-GDP
ratio of 60%.
–DG Economic and Financial Affairs1
The excessive deficit criteria of the Economic and Monetary Union (EMU) are good
examples for analysing economic expertise in risk regulatory regimes. In this paper I
seek to demonstrate how an ‘economic view’ of risk operates during the making of
risk regulatory standards among experts. This paper is about the role of expertise in
regulation. More specifically, it is about how economic experts conceptualise and
communication risks in relation to the process of standard-setting.
Risk communication among experts is an under-developed topic in the field of risk
regulation. In fact, ‘inter-expert risk communication’ with an economic view of risk
depicts a very interesting picture that goes contrary to conventional wisdom of
science policymaking. Economic experts worked closely with policymakers as a ‘club’.
Economic expertise tends to frame and discuss risks with an ‘optimistic culture’. The
result of such inter-expert risk communication process is ‘arbitrary’. In the case of the
EMU fiscal rules, risk was politicised through economic expertise.
Section 1 will explain why the economic view of risk matters and why inter-expert
risk communication in relation to standard-setting is an important focus. Section 2
will introduce my case study, i.e. the making of the fiscal rules. Sections 3 will discuss
the three major findings of this paper: the club structure of risk communication
network, the optimistic culture of economic experts, and the arbitrary results of risk
regulatory standards. Section 4 will conclude with some thoughts for future research.
1. The economic view of risk:
Economic expertise, in particular the ‘economic view’ toward risks, is of critical
importance to the study of risk regulation. However, while research has identified the
complex and ambiguous nature of ‘risk regulatory concepts’,2 the influences of
various conceptualisations of risk in regulatory practice remain under-studied. The
literature of risk regulation tends to focus on the so-called ‘science/democracy
dichotomy’, yet such debate should be based on a deeper understanding of the role
1 Excessive deficit procedure, <http://ec.europa.eu/economy_finance/economic_governance
/sgp/deficit/index_en.htm> accessed 10 March 2013. 2 Elizabeth Fisher, ‘Risk Regulatory Concepts and the Law’, in OECD (ed) Risk and Regulatory Policy:
Improving the Governance of Risk (OECD 2010) 45.
3
of expertise in public administration.3 Economic expertise and the economic view of
risk thus require further unpacking. In this introductory section, I will first discuss
why the economic view of risk matters; then I will explain why I focus empirically on
risk communication and the making of risk regulatory standards.
1.1 Why economic expertise?
Expertise plays a very crucial role in regulatory practice, especially in areas related to
science, technology and risk. There is a vast body of literature on ‘risk regulation’4 or
‘risk governance’5, addressing crucial issues about uncertainty and future events in
science and policymaking. ‘Risk’ seems to be a common language here, but exactly
what risk are we talking about?
While most studies focus on analysing the tension between science and democracy,
some argue that this science/democracy dichotomy is missing the point.6 I argue, on
a rather different note, that in order to decide whether this science/democracy
dichotomy is really the fundamental question of risk regulation or not, the functions
of expertise in a risk regulatory regime need further unpacking. It is essential to
examine the epistemological basis of the expertise and to analyse its influences on
practices of risk regulation. Experts, in this sense, are those who contributed to the
adoption of certain epistemologies of risk.7
To this end, economic expertise is particularly important. There are three reasons for
this. Firstly, in a theoretical sense, the Foucauldian perspective of ‘governmentality’
explains how knowledge can be deployed as the ‘art of government’, with economic
expertise as a prime example.8 The ‘discovery’ of the economy, as a new way of
thinking about power, has shaped the emergence of an ‘economic government’ as
part of the modern constructs of governing behaviours.9 Secondly, in terms of
regulatory practice, economic tools such as cost-benefit analysis (CBA) are widely
3 Elizabeth Fisher, Risk Regulation and Administrative Constitutionalism (Hart Publishing 2007).
4 Defined as ‘governmental interference with market or social processes to control potential adverse
consequences’. Robert Baldwin, Martin Cave and Martin Lodge, Understanding Regulation: Theory, Strategy, and Practice (2nd edn, Oxford University Press 2012) 3. 5 Aiming at translating the ‘substance and core principles of governance to the context of risk and
risk-related decision-making’. Ortwin Renn, Risk Governance: Coping with Uncertainty in a Complex World (CRC Press 2012). 6 Fisher (n 3).
7 My definition of ‘experts’ here is therefore a broader one: it includes not only ‘technical experts’,
such as scientists, economists and other academics, but also those ‘specialised policymakers’, who have a certain degree of specific expertise and communicate actively with technical experts. 8 Mitchell Dean, Governmentality: Power and Rule in Modern Society (SAGE Publications 1999) 16–18.
9 Ibid 19; Graham Burchell, Colin Gordon and Peter Miller, The Foucault Effect: Studies in
Governmentality (1 edition, University Of Chicago Press 1991) 14–27.
4
used in different areas of regulatory policies.10 The economic discourse is actually
pervasive in public policy debates. Finally, a utilitarian logic is embedded in economic
analyses, and its implication in risk evaluation may be conflicting with other ethical
values such as egalitarianism and liberalism. 11 Economic expertise seems to
approach risks differently when compared with other ‘hard’ sciences or engineering
as purely providing scientific evaluations. Most studies in the field of risk regulation,
however, focuses on issues related to ‘technological risks’12, such as pollution, food
contamination, health, nuclear power or other issues associated with new forms of
technology. It was only until recently, due to series of economic crises in Europe and
worldwide, that ‘risk of economic activities’ started to receive more academic
attentions.13 Understanding how the economic expertise perceives risks is becoming
an essential topic for regulation.
Many historical studies suggest that the language of ‘risk’ was developed for the
purpose of economic activities.14 In the fields of finance and business management,
risk is considered as a tool to facilitate individual decisions of economic activities. In
this sense, ‘risk management’ often refers to the decision-making strategy of a firm
or a person to evaluate risks, reduce costs and maximise profits.15 Risk is thus
embedded in the decision-making process, as ‘side effects’ of business activities to
be managed. In fact, in Knight’s often cited work, risk was considered as something
by definition manageable.16 Knight made a clear distinction between ‘uncertainty’,
those incalculable factors, and ‘risk’, which is calculable by methods of probability
and statistic.17 Moreover, the OECD also defines risk as ‘the measurable probability
that the actual outcome will deviate from the expected outcome’. 18 Risk is
‘measurable’, and its impact is a potential deviation of outcomes, which promotes
10
Richard A Posner, Catastrophe: Risk and Response (Oxford University Press 2004). 11
William D Schulze and Allen V Kneese, ‘Risk in Benefit-Cost Analysis’ (1981) 1 Risk Analysis 81. 12
For example: Bettina Lange, Implementing EU Pollution Control: Law and Integration (CUP 2008); Fisher, Risk Regulation and Administrative Constitutionalism (n 3); Alberto Alemanno, Trade in Food: Regulatory and Judicial Approaches to Food Risks in the EC and the WTO (Cameron May 2007); Scott Lash, Bronislaw Szerszynski and Brian Wynne (eds), Risk, Environment and Modernity: Towards a New Ecology (SAGE 1996). The body of literature in risk regulation is massive and this is clearly not an exhaustive list. However, it should be noted that the field of ‘risk regulation’ also covers other issues that are not strictly linked to the use of ‘new’ technologies, such as natural disasters, lifestyle risks and road safety. 13
Bettina Lange and Dania Thomas, From Economy to Society? Perspectives on Transnational Risk Regulation (Emerald Group Publishing Limited 2013). 14
Peter L Bernstein, Against the Gods: The Remarkable Story of Risk (New Ed, John Wiley & Sons 1998); Vincent T Covello and Jeryl Mumpower, ‘Risk Analysis and Risk Management: An Historical Perspective’ (1985) 5 Risk Analysis 103. 15
Aswath Damodaran, Strategic Risk Taking: A Framework for Risk Management (Wharton School Pub 2008) ch 1. 16
Frank H Knight, Risk, Uncertainty, and Profit (Houghton Mifflin Company 1921). 17
Ibid. 18
OECD, Public-Private Partnerships: In Pursuit of Risk Sharing and Value for Money (OECD 2008) 48.
5
companies’ efficiency.19 Therefore, through probability and economic analysis, risk
can be calculated and rationally managed, in order to reduce side effects and
increase profits. In the language of business and finance, risk has a positive
connotation.
This economic conceptualisation of risk, seeing risks as side-effects, calculable and
potentially profitable, was originally operating predominantly in the private sector,
but has entered into the modern practice of regulation. It is therefore of key interest
to explore the economic view of risk among experts in the context of risk regulation.
This, as I will argue in the following paragraphs, can be analysed through examining
the actual activities of risk communication between different groups of experts in
relation to the process of standard-setting.
1.2 Risk communication and risk regulatory standards
In the risk regulation literature, risk communication is often defined as ‘an interactive
process of exchange of information and opinion among individuals, groups and
institutions’ that contains messages related directly or indirectly to risks.20 Risk
communication is thus a process that connects different actors, including scientists,
regulators and the public, for the purpose of analysing and regulating risks.
In various models formulated by different studies about risk regulation, the role of
risk communication is often a central one. 21 In fact, risk communication has
gradually developed into an academic field of study in its own right, influenced firstly
by experimental psychology and later on by sociology and cultural studies.22 Some
scholars stress that risk communication should not be perceived as merely
transmission of information, and proposed that studies should aim at changing
behavioural responses through ‘active’ risk communication or persuasion.23 Many
studies hence confine the study of risk communication to the relationships between
the government and the public or those between regulators and regulated; they also
concentrate on formulating guidelines or policy suggestions for communicating
science and risk policies between the authorities and the lay public.24 A significant
19
Ibid 48–49. 20
National Research Council, Improving Risk Communication (National Academies Press 1989) 21. 21
For example: Renn (n 5); Alemanno (n 12); Gregory Bounds, 'Challenges to Designing Regulatory Policy Framework to Manage Risks', in OECD (ed), Risk and Regulatory Policy: Improving the Governance of Risk (OECD 2010) 15. 22
Ragnar E Lofstedt, ‘Risk Communication and Management in the 21st Century’ (2004) 7 International Public Management Journal 335. 23
Carlo C Jaeger and others, Risk, Uncertainty and Rational Action (Routledge 2001) 127–129. 24
For example: Renn (n 5) 242; Paul Slovic, ‘Perceived Risk, Trust, and Democracy’ (1993) 13 Risk Analysis 675; W Leiss, ‘Three Phases in the Evolution of Risk Communication Practice’ [1996] The
6
strand of the risk communication literature is thus dominated by studies related to
what I called expert-lay risk communication in a narrower sense, providing various
strategies about how regulators can best ‘educate/persuade’ people, understand ‘lay
perceptions’ and build ‘trust’ among the general public.
However, some scholars have noticed that this current trend of risk communication
research has largely neglected the inter-expert dimension and underestimated the
interactions ‘internally’ between scientists and regulators.25 Being the core of risk
regulation practice, risk communication should be studied in a broader sense, as ‘a
constructive dialogue between all those involved in a particular debate about risk’.26
This is also in line with the abovementioned classic definition of risk communication.
Therefore, looking at risk communication can shed light on not only the discussion
and evaluation of risks in policymaking, but also the formation of different ‘expert
views’ toward risks. For the purpose of this paper, ‘risk communication’ should be
understood specifically as the process of conceptualising risk through interactions
between different actors, especially experts, in a risk regulatory regime. Inter-expert
risk communication is therefore my unit of analysis to illustrate the key aspects of the
economic view of risk in risk regulatory practice.
This empirical focus can be further narrowed down to the making of risk regulatory
standards as case studies. In a risk regulatory regime, the standard-setting process is
where the evaluation of risk and the determination of the acceptability of risk take
place. Hence standard-setting provides an institutional context for risk evaluation,
which is the key to fully understand risk regulation.27 Since the primary function of
expertise is to evaluate risks, my analysis here will focus on inter-expert risk
communication in relation to the process of standard-setting, which leads to the case
study that I will introduce in the next section.
2. EMU fiscal rules: a case study
The outbreak of the sovereign debt crisis in Greece in late 2009, later on escalated
into the Eurozone crisis, has triggered highly scrutinised reviews of budgetary
Annals of the American Academy of Political and Social Science 85; B Fischhoff, ‘Risk Perception and Communication Unplugged: Twenty Years of Process’ (1995) 15 Risk Analysis 137; Ragnar EE Lofstedt, Risk Management in Post-Trust Societies (Earthscan 2012). 25
Renn (n 5) 202. 26
Ragnar E Lofstedt, ‘How Can We Make Food Risk Communication Better: Where Are We and Where Are We Going?’ (2006) 9 Journal of Risk Research 869, 871. 27
Fisher (n 3); Bronwen Morgan and Karen Yeung, An Introduction to Law and Regulation: Text and Materials (Cambridge University Press 2007).
7
disciplines in the EU. The notorious excessive deficit criteria, labelled here as the
fiscal rules of the EMU, are standards triggering the Excessive Deficit Procedure laid
down in the 1992 Maastricht Treaty and reaffirmed by the Stability and Growth Pact
(SGP) and the European Council in 1997.28 According to the Treaty text and its
protocol, ‘Member States shall avoid excessive government deficits’ by following two
criteria to maintain the ratio of government deficit to GDP under 3% and the ratio of
government debt to GDP under 60%.29 These two criteria (3% deficit, 60% debt) of
the fiscal rules have become the benchmark for Eurozone countries to assess their
budget deficits, and the cardinal standards for the EU to manage the risk of
macroeconomic instability in the Eurozone.
Reasons for the fiscal rules to be an appropriate case to illustrate the economic view
of risk are the following. Firstly, risks of economic instability were deemed as some
‘side effects’ associated with the creation of the EMU — they were by-products of
the EMU, not some pre-existing hazards to be regulated. In this sense, managing
‘risks’ was an integrated part of the EMU project and the fiscal rules were tools of
risk management, reflecting an economic view toward risks. Second, economics was
undoubtedly the major source of expertise in the EMU debate. The analysis of the
EMU project and the design of the fiscal rules relied mainly on the method of CBA.30
The whole process of risk communication was heavily influenced by economists and
experts in public finance. Finally, although the EMU debate was based on economic
expertise, the scientific argument for the fiscal rules was rather simple.31 This was
already criticised by many academics in the 1990s, before the current Eurozone
crisis.32 In fact, most studies will agree that the EMU was after all a political
28
European Council, ‘Resolutions of the European Council on the Stability and Growth Pact’, Amsterdam, 16-17 June 1997. 29
Art 126 Treaty on the Functioning of the European Union (TFEU, ex Art 104 TEC) and the Protocol (No 12) on the Excessive Deficit Procedure. 30
Commission, ‘One market, one money: An evaluation of the potential benefits and costs of forming an economic and monetary union’, European Economy No 44, Brussels, October 1990; Committee for the Study of Economic and Monetary Union (ed), Collections of papers submitted to the Committee for the Study of Economic and Monetary Union (European Communities 1989). 31
60% public debt was the average figure of the European Community in 1990. In order to at least maintain such debt ratio, under the condition of 2% inflation rate and the assumption of 3% annual growth in GDP, the tolerable deficit is then 3% of GDP. Jan Viebig, Der Vertrag von Maastricht: Die Positionen Deutschlands Und Frankreichs Zur Europäischen Wirtschafts- Und Währungsunion (Schäffer-Poeschel 1999) 355–364; Daniel Gros and Niels Thygesen, European Monetary Integration: From the European Monetary System to Economic and Monetary Union (2nd edn, Longman 1998) 340. 32
Jose Vinals, ‘Building a Monetary Union in Europe: Is It Worthwhile, Where Do We Stand, and Where Are We Going?’ (Centre for Economic Policy Research 1994) CEPR Occasional Paper No. 15; Barry J Eichengreen, Should the Maastricht Treaty Be Saved? (Princeton Univ Intl Economics 1992); David Begg and others, The Making of Monetary Union: Monitoring European Integration (CEPR 1991).
8
project.33 The ‘non-economic’ nature of monetary integration suggests that the
fiscal rules have played a crucial role in shaping the complex debate between the
economic expertise and politics.
Inextricably linked with the negotiation of the EMU, my analyses will concentrate on
risk communication activities related to the fiscal rules that took place mainly from
the 1989 Delors Report34 and the 1992 Maastricht Treaty. Major actors contributed
to the debate were the Monetary Committee (MC, replaced by the Economic and
Finance Committee after 1999), the DG II (Economic and Financial Affairs) of the
Commission, the Ecofin Council, the Intergovernmental Conference (IGC) on the
monetary union, the Committee of Governors of Central Banks (CoG, the precursor
of the European Central Bank) and several academics as external experts. A rich
literature on the history and political economy of the EMU35 has defined a relatively
clear boundary for this case study and provided contexts and background for
empirical analyses. My data include around 100 historical documents36, 14 semi-
structured interviews37 and other publically available reports.38 These materials
were collated and coded in NVivo to discover patterns and themes related to risk
communication, which I will discuss in the next section.
3. The politicisation of inter-expert risk communication
The general theme of my findings is that expertise, through mobilising an economic
view of risk, is heavily politicised. This politicisation of economic expertise is a
‘process’ 39 facilitated by inter-expert risk communication. It consists of three
33
Two books written by former central bankers who participated in the EMU project are particular insightful: Andre Szasz, The Road to European Monetary Union (Palgrave Macmillan 1999); Tommaso Padoa-Schioppa, The Road to Monetary Union in Europe: The Emperor, the Kings, and the Genies (2nd Revised edition, OUP Oxford 2000); for a much more radical critique from a former Eurocrat: Bernard Connolly, The Rotten Heart of Europe (Faber & Faber 2013). 34
Committee for the Study of Economic and Monetary Union, ‘Report on economic and monetary union in the European Community’ (Delors Report, European Communities 1989). 35
On top of the sources listed in footnote 33, see also Harold James, Making the European Monetary Union (Belknap Press 2012); David Marsh, The Euro: The Battle for the New Global Currency (Yale University Press 2011); Kenneth Dyson and Kevin Featherstone, The Road to Maastricht: Negotiating Economic and Monetary Union (Oxford University Press 1999). 36
The archival data came mainly from two sources: the Historical Archives of the Commission and the European Central Bank Historical Archives. It is however difficult to count the exact number of documents acquired because there are many repeated copies of draft reports and minutes, as well as reports with multiple annexes. 37
For the purpose of anonymity interviews are cited in this paper as ‘fake initials’. 38
Such as the Delors Report, the Commission communications and reports made by the ECB. 39
Pieter De Wilde, ‘No Polity for Old Politics? A Framework for Analyzing the Politicization of European Integration’ (2011) 33 Journal of European Integration 559.
9
dimensions: experts formulated a risk communication network that resembled a club;
they adopted an optimistic culture to risk communication; and the results of risk
communication, i.e. the fiscal rues, were in fact arbitrary.
3.1 Club
‘Club’ is a key word that constantly emerges in my interviews and the literature. The
discussion of the fiscal rules took place mainly in the MC, which was a specialised
scientific body to provide expert opinions and to facilitate the process of economic
and monetary integration.40 There were two subgroups in the MC: the full members
and the Alternates of members. Each Member States can nominate two full
members, one from the national central banks and the other from the ministries of
economics and/or finance, and two Alternates. The Commission can also send two
members to the meetings. Members of the MC then elected a Chairman to represent
the Committee, and a Chairman of the Alternates was also elected to represent the
Alternates.
One predominant feature of this institutional setting is that there was a significant
overlaps between memberships of the MC with other EU bodies, such as the IGC, the
ECOFIN Council and the CoG. According to one official who participated in the
discussion, members of the MC and those in the IGC meeting were actually the
‘same group of people’.41 In fact, many other interviewees have indicated that the
MC, the Alternates of the MC, the IGC, the secondary working group of the IGC, the
ECOFIN Council, the CoG, and perhaps most importantly, the DG II of the Commission,
were all closely related to each other.42 This observation can be further confirmed by
comparing the names recorded in various documents found in the two archives.
Clearly, these people have created a tight-knit network at the EU level, and as several
interviewees put explicitly, a closed club of European experts.43
This ‘clubby’ atmosphere was developed due to the common academic training and
worldview that these experts shared,44 and it has a power to transcend national
40
Age FP Bakker, The Liberalization of Capital Movements in Europe: The Monetary Committee and Financial Integration, 1958-1994 (1st edn, Springer 1995) ch 4. This is also supported by many interviews: interviews with MM (Brussels, 16 April 2013), MS (Frankfurt, 8 April 2013) and PP (Frankfurt, 8 April 2013). 41
Interview with JB (Brussels, 16 Apr 2013). 42
Interviews with MS (Frankfurt, 8 April 2013), MM (Brussels, 16 April 2013), BS (Louvain-la-Neuve, 27 June 2013), HF (Copenhagen, 27 August 2013) and GR (Brussels, 4 April 2014). 43
Interviews with JB (Brussels 16 Apr 2013), BS (Louvain-la-Neuve, 27 Jun 2013) and HF (Copenhagen, 27 Aug 2013). 44
As one senior official commented, experts at this European level share not merely a common background in economics, but a highly similar ‘German-style’ economic thinking. Interview with GR (Brussels, 4 April 2014).
10
boundaries, because ‘it’s the same kind of culture you grew up in whatever country
you come from.’45 Some other researchers also described the MC as an ‘Old Boys’
Club’46, and emphasised the MC’s ability to deal with technical issues with political
sensitivity through a highly secretive but intensive setting.47 Experts participated in
the decision-making process of the fiscal rules formulated a well-organised, confined
and centralised ‘network’ — their memberships overlapped, and there was less
distinction between technical and political bodies.
This club, in terms of social network analysis, can be described as ‘high centrality’
and ‘network closure’.48 It thus created a strong binding mechanism to facilitate
communication and coordination.49 In terms of its impact on risk communication
practices, a closed network can foster harmonious risk communication. ‘They tend to
become friends’, as one expert who worked at a national ministry observed, ‘you
don’t want to offend your colleagues. It was not so contentious.’50 This does not
mean that experts never disagree with each other, but it does imply that forging a
common position has become less difficult. Moreover, a cohesive network provided
an environment for intensive risk communication. The core discussion of the fiscal
rules was conducted in a relatively short time period (especially when compared with
the case of the 2-degree target), mainly from October 1989 to September 1991, and
budgetary discipline was clearly a frequent topic.51 In addition, a club can create a
tendency of iterative risk communication. There was a multi-layered discussion
between the IGC, the MC, the Alternates of the MC and the Commission, which
constantly required confirmation and specification of technical details through
expertise at different levels.52 This kind of iterative risk communication practice was
in fact part of the natural outcome of a harmonious and intensive discussion, in order
to facilitate solid consensuses. In short, the rapid and highly intense discussion was
guaranteed by the confidential, collegial environment and the sense of trust
facilitated, through high centrality and network closure of the ‘euro club’.
45
Interview with HF (Copenhagen, 27 Aug 2013). 46
Amy Verdun, ‘Governing by Committee: The Case of Monetary Policy’ (EU Center of California Working Paper 1999). 47
Ibid; Bakker (n 40). 48
Stephen P Borgatti and others, ‘Network Analysis in the Social Sciences’ (2009) 323 Science 892; Ronald S Burt, ‘The Network Structure of Social Capital’ (2000) 22 Research in Organizational Behavior 345. 49
Borgatti and others (n 48). 50
Interview with BS (Louvain-la-Neuve 27 Jun 2013). 51
During this period of less than two years, the MC has organised 28 meetings, and 12 meeting were noted with high relevance to the discussion of the fiscal rules. This number however does not include meetings with lower relevance, or those meetings of the Alternates and the IGC working groups. 52
For example, out of 33 documents identified as highly relevant to the discussion of the fiscal rules, 18 of them explicitly required certain technical issues to be confirmed or specified in other bodies.
11
One additional feature of this club network worth mentioning here is its stabilising
mechanism. As discussed previously, members of the MC and those of the IGC
participants were the same group of people. This special structure was constructed
specifically for the purpose of political negotiation, as one expert explained:
The Maastricht criteria were not developed in the Monetary Committee (MC) proper. The MC existed and, for the purpose of the Treaty, converted itself into what was called the Intergovernmental Conference (IGC). […] They had this dual-role, so it was quite funny sometimes they were talking as the MC and then just change itself as the IGC. […] Because the MC was an advisory committee, whereas the IGC was a negotiating forum. They actually negotiated the Treaty there. I know this is a bit religious but that was a bottom-line: they could not negotiate the Treaty as the MC; they had to change themselves into [the IGC].53
The ‘dual-role’ of members of MC/IGC was thus justified by an artificial institutional
setting. According to this institutional design of the Maastricht negotiation, the MC
was supposed to be solely an advisory body, and the functions of decision-making
and technical expertise should have been clearly separated.
The same official continued that the distribution of labour between the MC and the
IGC was quite clear in formality, and the members were actually able to ‘talk about
things as economists and then politically’ as well as to adopt different positions in
different meetings. However, when asked about whether experts in the MC can really
prevent the presentation of national interests, she stressed that the formats of
discussion were different, but it was ‘just a way to legitimise the works here’. She
said:
In fact, the MC has changed in that period. What it didn’t really manage that well was, it became less of a technical group, and more of a negotiation [one]; and even when the Treaty was over, and all the IGC was over, they were not quite the same MC [as before].54
These comments seem to suggest that there is an interactive relationship between
the network structure and the process of risk communication. On the one hand,
different institutional environments can influence how messages of risk are phrased
(experts discussed things technically in the MC but negotiated politically in the IGC);
on the other hand, the whole practice of risk communication can also eventually
shape the nature of institutional environment (the actual process of Maastricht
negotiation pushed the MC toward the political end of the spectrum).
The above observation is supported not only by some other officials who have
participated in the discussion55, but also several archival documents about ‘the role
53
Interview with JB (Brussels, 16 Apr 2013). 54
Ibid. 55
Interviews with MM (Brussels, 16 Apr 2013) and JK (Brussels, 27 Jun 2013).
12
of the MC’ before the final rounds of negotiation of the Maastricht Treaty.56 Hence it
seems that although experts did seek to perform differently when they changed hats,
the new institutional arrangement (the IGC/MC divide) was eventually rendered
inconsequential to the network structure. In other words, the attempt to separate
economic expertise from political negotiation only generated some marginal effects
on formality. The nature of the MC became more political, reflecting the reality of
risk communication activities, and the experts remained connected closely in the
same club. There appears to be a stabilising mechanism that ensures the structure of
expert network reflects the actual practice of risk communication.
The economic view of risk considers risk as ‘something to be managed’ through the
decision-making process. Risk management (including evaluation and allocation of
risks) is integrated with policymaking. With an economic thinking of risk, experts
tend not to distinguish economic expertise from policy decisions, and this was
reinforced over time, turning into a closed club of expert network. A club network
has led to harmonious, intensive and iterative practices of risk communication.
Together they contributed to another feature of the economic view of risk in risk
communication, i.e. the optimistic culture of the EMU negotiation.
3.2 Optimism
The institutional structure of a club network not only influences risk communication
behaviours, but also generates a certain ‘culture’. Defined as ‘a particular world of
beliefs and practices associated with a specific group’,57 the culture of economic
expertise in terms of risk communication can be analysed by examining how experts
communicate and conceptualised risks. The discussion of the EMU fiscal rules was
particularly ‘optimistic’, and this can be understood in two perspectives: economic
experts communicated risk with a ‘make-it-work’ mentality, and they conceptualised
risk through a ‘positive framing’.
Make-it-work mentality
Experts who participated in the euro project tend to have strong beliefs in European
integration in general and the EMU in particular. Some connected this belief in a
personal, emotional way, like one economist who joined the team when the CoG was
still based in Basel recalled:
56
For example: Commission, ‘Short Minutes of Monetary Committee 13 March 1991’ (II/01624 of 15 March 1991), section 4; Monetary Committee, ‘Priorities for the Monetary Committee in the Post-Maastricht Era’ (MC/II/19/92-EN of 17 January 1992). 57
Susan S Silbey, ‘Legal Culture and Cultures of Legality’ in John R Hall, Laura Grindstaff and Ming-Cheng Lo (eds), Handbook of Cultural Sociology (Routledge 2010) 470.
13
Following the Delors Report, I went, with other people, to Basel. We moved to Basel with the feeling that we were starting a long journey toward the creation of a single currency. That was an absolutely exciting feeling. […] It was an extraordinary experience, because a new team of economist was set up, all detached from their own countries to work on a truly European project.58
The creation of the EMU was undoubtedly a great milestone of European integration.
Almost every expert I interviewed showed their personal excitement about being
part of a critical historical moment, and for many senior experts at that time, this
belief was further enhanced by the political ideal that European integration was
essentially a peace-keeping project:
These were people who remembered more about what we got in the war. I think that was a lot fresher, even for people who were heads of states at the political level, who were thinking more about what we have got in the past. There was a general feeling that we really need to do this (for peace-keeping), which has somehow been forgotten today. They were certainly much more committed.59
Therefore these experts, with their personal passion, fresh memories of the war and
a sense of mission for the common good of Europe, also demonstrated some strong
personalities in risk communication. Many interviewees, as junior officials in the back
row, described the members of the MC and the IGC as ‘strong characters’ or ‘very
powerful intellectuals’, and the meetings as ‘second education’.60 Several names,
among others Han Tietmeyer, Helmut Kohl, Jean-Claude Trichet, Nigel Wicks and
Mario Draghi, were constantly mentioned by many interviewees as ‘big people’, but
perhaps the key pusher of the EMU project was still the Commission:
The vision for an EMU was a vision held by our President, Jacques Delors. He was the strongest President that we have had, since then there was nobody like him. He drove the [EMU] as much as at the Commission level as at the Member States level. He was a very good negotiator, and he made sure that we had whatever we needed to carry the project through.61
From the President of the Commission to the Alternates of the MC, experts were
highly determined to make the EMU project work. This ‘make-it-work’ mentality has
turned risk communication into a result-driven process and sped up the discussion,
as shown clearly in the reports and minutes of the MC before the eve of the
Maastricht Summit:
As indicated at the last meeting, the Chairman considers that the meeting of 30 September has a special nature, in that the Committee has to reach agreement on the key points of the excessive-deficit procedure. A large area of common ground already exists.62
58
Interview with PP (Frankfurt, 8 April 2013). 59
Interview with MM (Brussels, 16 April 2013), Brussels. 60
Interviews with JB (Brussels, 16 April 2013) and MM (Brussels, 16 April 2013). 61
Interview with MM (Brussels, 16 April 2013). 62
Monetary Committee, Secretariat, ‘Outstanding issues on the excessive-deficit procedure’, Brussels,
14
It explicitly stressed the importance of having a consensus before the deadline for
the Maastricht Treaty. This 2-page note listed all ‘outstanding issues’ in a simplistic
way, and proposed possible conclusions based on existing ‘common ground’. Clearly,
efficiency was the primary concern here, and the official minutes of the MC also
emphasised the critical role of the MC in the whole discussion about the risk and
control of excessive deficits, in order to offer the guidance to the IGC.63 In fact, the
discussion was indeed guided with a very strong intension to ‘make things work’:
The Chairman began by re-emphasizing his view that it would be difficult to achieve EMU if an excessive deficits procedure were not defined in watertight terms. There could be no further delay in reaching agreement.64
Examples like this can be widely found, explicitly or implicitly, in historical records
acquired from the two archives. Experts therefore shared a strong desire of achieving
positive results out of risk communication, and this may be based on their personal
experience, professional judgement or political belief. This make-it-work mentality
has significantly accelerated the process of risk communication. Moreover, it echoes
with the closed network discussed above — the club-like institutional structure that
cultivated the make-it-work mentality for intensive, iterative and harmonious
discussion of risks.
Positive framing
The other cultural perspective of the economic view of risk is related to its positive
connotation. The economic origin of risk coincides with the development of maritime
trade, the discovery of probability theory, and the rise of modern capitalism.65 In the
world of finance, risk is often linked with ‘premium’. Insurance, as ‘a technology of
risk’, sees risk as a form of ‘capital’.66 The action of risk-taking is incentivised with
profits, and it is argued that these rational choices of risks are driving our economies
forward.67
A neutral or even slightly positive stance towards risk can be found in the literature
of economics and finance.68 Experts trained under this educational background
therefore tend to view risk as a form of uncertainty with potential positive outcomes.
This is also true for economists who were involved in the discussion of the EMU fiscal
20 September 1991 (emphasis added). 63
Monetary Committee, Secretariat, ‘Draft minutes of the 383th meeting’, Brussels, 3 September 1991 (MC/II/392/91-EN). 64
Commission, ‘Short minutes of Monetary Committee, 30 September 1991’, Brussels, 4 October 1991 (II/05112), 3. 65
Bernstein (n 14); Covello and Mumpower (n 14). 66
Burchell, Gordon and Miller (n 9) 197. 67
Bernstein (n 14). 68
Damodaran (n 15); Knight (n 16).
15
rules. ‘For me, risk means it can go one way, [and] it can go the other way.’ A senior
expert who worked in the CoG expressed her view, and also added that all these talks
about financial risk in a negative sense are ‘rather recent’. When further asked about
the current discussion of financial risk, she commented: ‘I think it’s a bit like clean air.
Nobody can be against sound public finance.’69 For her, managing risk means
achieving good results.
Constructing the control of risk as ensuring positive outcomes, rather than avoiding
negative consequences, is a positive framing of risk. This might seem like just the flip
side of the same coin. However, different points of departure of risk communication
may have an impact on how risk is further discussed, because positive framing
denotes a sense of ‘optimism’. This is not at all surprising if we take the above
mentioned ‘make-it-work’ mentality into account. In order to realise monetary
integration, the hidden assumption in risk communication of the EMU was that
economic and monetary stability can be achieved, the only problem was how. The
big question behind the discussion of the fiscal rules was not how to avoid danger or
problems caused by the EMU (negative framing), but how to maintain sound
budgetary policies in the EMU (positive framing).
Therefore, different concepts of risks related to the creation of the EMU were
captured through the notion of sound economic and monetary policies. The SGP
defines ‘the objective of sound government finances as a means of strengthening the
conditions for price stability and for strong sustainable growth conducive to
employment creation’.70 Sound public finance, stability and sustainability have thus
become the key concepts that guided the discussion of the EMU and the fiscal rules.
Using these terms has signified a positive framing of risk.
For example, in the 1989 Delors Report, it was suggested that in the economic field
of the monetary integration, the Community should ‘impose constraints on national
budgets to the extent to which this was necessary to prevent imbalances that might
threaten monetary stability’.71 The Commission, in its famous ‘One market, one
money’ report backing the EMU project, also reaffirmed the need for discipline and
iterated several times the importance of budgetary sustainability and price stability.72
Not to mention in the MC, the two criteria of the fiscal rules were named as the
‘unsustainability criterion’ (on debt ratio) and the ‘economic instability criterion’ (on
deficit ratio):
69
Interview with MS (Frankfurt, 8 April 2013). 70
Council Regulation (EC) No 1467/97, Preamble para (2). 71
Delors Report, para 59. 72
Commission (n 30).
16
The [Monetary] Committee considered a spectrum ranging from imminent default through unsustainable snowballing of debt, and various ways in which monetary stability might be endangered, to inappropriate policy mixes and overheating. They concluded that two types of danger are relevant in this context: a) deficits producing unsustainable stocks of public debt […]; b) deficits of a size that could endanger monetary stability […].73
The above quote from the MC report is a perfect example to demonstrate what
‘positive framing’ of risk actually means. It does not mean that experts did not use
any negative term during the discussion. Quite the contrary, as shown in the text
above, communications between experts about the EMU and the need of fiscal rules
were indeed about problems and caveats. However, these negative issues are
debated in a wider context of ensuring sustainability, stability and sound money
policy. A positive framing of risk set the agenda of the EMU debate in an optimistic
direction, which echoes the make-it-work mentality of the experts. Hence, potential
danger of excessive deficits and methods to prevent them were always understood in
relation to ensuring sustainability and stability in the EMU. Numerous examples can
be extracted from the reports and minutes of the MC, the Commission and the CoG,
using terms such as ‘instability’, ‘unsustainability’, ‘asymmetry’ and ‘imbalance’ to
evaluate fiscal rules. The discussion of excessive deficits was embedded within the
maximisation of the opportunities of the EMU, as one senior expert who witnessed
the debate acutely pointed out:
[We] tended to think in positive terms, but we were talking about imbalance, we were talking about danger, […] we probably use the term risk, but as we always say, any risk entails an opportunity. We took a calculated risk, and we believed that the common currency would create a dynamic, that would lead Europe [forward]. That was really the view. So risk yes, but opportunity.74
3.3 Arbitrariness
The optimistic culture among experts, understood as the make-it-work mentality and
the positive-framing of risk, together with the closed club network have led to some
curious consequences. The EMU fiscal rules were based on economic expertise, yet
the economic rationale behind the rules is often criticised.75 The outcomes of risk
communication are ‘arbitrary’ because they were not strictly scientific and created
some regulatory blind spots. However, this arbitrariness was not ‘random’ — it was
actually based on ‘strategic’ choices of economic experts in the process of risk
communication.
73
MC, ‘Criteria for Excessive Deficits (1)’, Brussels, 25 February 1991, 3-4. 74
Interview with BS (Louvain-la-Neuve, 27 June 2013). 75
Willem Buiter and others, ‘Excessive Deficits: Sense and Nonsense in the Treaty of Maastricht’ [1993] Economic Policy 58.
17
The ‘arbitrariness’ of the fiscal rules need to be understood firstly as results of
narrowly focused discussion, as an economist of the CoG commented: ‘the risk at the
time, as it was perceived, was focusing on public finance, per se’76. Through risk
communication, wider concepts of macroeconomic risks in the EMU were confined
to sound public finances, or more specifically, avoiding excessive deficits. Many
interviewees reflected critically that focusing on budgetary deficits was eventually
‘too narrow’ and causing many regulatory ‘blind spots’, such as neglecting the
problems of competitiveness in peripheral countries and the contagion effect from
the private sector.77 Several studies have suggested that the overly narrowed fiscal
rules and these blind spots had led to the Eurozone crisis.78
This practice of narrowing down ‘risks’ to issues of public finance is in fact rooted in
earlier attempts of European monetary integration. The emphasis of coordinating
economic and budgetary policies is historically rooted in the debate between the
monetarist and the economist schools of European monetary integration.79 The
monetarists, supported mainly by France, saw a monetary union as a key driving
force for European integration, whereas the economists, influenced by Germany,
emphasised the importance in converging economic performances before
establishing a monetary union.80 This monetarist-economist debate defined the
basic language of EMU discussion to focus on the area of public finance. Against the
background of European integration and the make-it-work mentality, concepts of
coordinating fiscal policies and converging different economic performances were
hence developed as compromises of this historical debate.
Coordination and convergence were the two key concepts mobilised to narrow down
the scope of risk discussion. ‘Greater convergence of economic performance is
needed’, the Delors Report has stated clearly, that a monetary union will ‘necessitate
a more effective coordination of policy between separate national authorities’.81
Moreover, an annex of the Delors Report had explicitly set fiscal coordination as the
central method of achieving a sustainable monetary union.82 In fact, after analysing
the archival data and comparing the code sets between stability/sustainability and
76
Interview with MS (Frankfurt, 8 Apr 2013). 77
Interviews with MW (Oxford, 16 January 2013), MM (Brussels, 16 April 2013), BS (Louvain-la-Neuve, 27 June 2013), LP (Brussels, 27 Jun 2013) and JK (Brussels, 27 June 2013) 78
David Marsh, Europe’s Deadlock: How the Euro Crisis Could Be Solved - and Why It Won’t Happen (Yale University Press 2013); Matthew Lynn, Bust: Greece, the Euro and the Sovereign Debt Crisis (1 edition, Bloomberg Press 2010). 79
Ivo Maes, ‘On the Origins of the Franco-German EMU Controversies’ (NBB Working Papers 2002). 80
Ibid. 81
Delors Report, paras 10-11. 82
Alexandre Lamfalussy, ‘Macro-coordination of fiscal policies in an economic and monetary union in Europe’ in Delors Report, Collection of papers (January 1989) 91.
18
coordination/convergence, the results shows a strong relationship between these
two sets of concepts. Coordination and convergence were therefore considered as
key approaches to maintain sound money policy, stability and sustainability. An
overzealous concentration on ‘convergence’ has drifted away from scientific risk
analysis and caused serious biases, as a senior official in the Commission recalled the
rationale behind the EMU fiscal rules discussion:
I will say that it doesn’t matter what you converge to as long as you converge to it. That was the point. The point was not the number; the point was the convergence.83
In fact, the emphasis on convergence/coordination in the EMU was about converging
to a number, not about converging to the best number (which, as many economists
will argue, may not exist), nor about how to converge. A comment from another
expert worked in the Commission at the time further support this argument:
There was a focus on nominal convergence criteria rather than real convergence criteria, because it was felt that nominal will be sufficient rather than asking for real convergence…. [One] could not focus too much on those real issues.84
Through the language of convergence, macroeconomic risks of the Eurozone were
radically narrowed down to the risk of excessive deficits, led to the creation of the
fiscal rules. This process has left many risks unrecognised: ‘we were aware of some
risks, but we were not fully aware of the others,’ and created several ‘analytical blind
spots.’85
Although this paper does not intend to discuss the cause of Eurozone crisis, pointing
out the source of these blind spots, due to overly narrowed discussion, help explain
why so many experts viewed the EMU fiscal rules critically with hindsight:
The 60% [rule] was quite simple and very unscientific, because that was the average [debt level of Member States] at that time. Yes, there was a debate like should it be higher or lower, […] but we couldn’t agree on anything else basically.86
The 60% debt criterion was actually the initial proposal of the Commission early in
the debate.87 Therefore, interestingly, it has become simultaneously the initial
position for discussion and the bottom line of compromise. This figure might not be
particularly reasonable, but there was no other more reasonable alternative either.
In fact, the 60% debt level of the Community was also part of the economic rationale
for the 3% deficit level, as one expert who took part in the MC debate explained,
again in a rather critical tone:
83
Interview with JB (Brussels, 16 April 2013). 84
Interview with MM (Brussels, 16 April 2013). 85
Interview with LP (Brussels, 27 June 2013). 86
Interview with HF (Copenhagen, 27 August 2013). 87
Commission, ‘Criteria for excessive deficit: applications of real world examples’, Brussels, 7 February 1991 (II/56/91-EN).
19
There is no optimal level of public debt in theory. There is no optimal level of deficit either. So what happened was at some meetings in the 90s, they did the kind of Sargent-Wallace calculation: growth in Europe, study says, was about 3%; stable inflation was defined as 2%; that makes long-term interest rate a number of 5[%]; the average debt ratio was 60[%] — they just reverse-engineered through the calculation to get 3[%]. So there was nothing economic about 3 and 60. […] It wasn’t that reasonable. It was not scientific. It was arithmetic. It came from the present monetary arithmetic, unfortunately.88
Is ‘arithmetic’ arbitrary? According to the minutes of the MC, many experts had
shown their concern about the arbitrariness of the rules; yet interestingly, while
some found the figures arbitrary and unacceptable, others favoured these figures
because they were arbitrary.89 In other words, it was not that experts did not see the
arbitrariness of the rules. On the contrary, they tried to use such arbitrariness in a
‘strategic’ manner. One example is the debate about having ‘simple’ rules, as the
minutes of the MC noted:
The majority of delegates in favour of the benchmark approach supported simple indicators as these would be most easily understood by politicians and the general public, and were in any case only providing an initial screening. Others argued that this screening needed to be as accurate as possible to avoid both wasting time and political embarrassment, and hence if complexity was needed, then so be it.90
Note that this discussion took place in the Alternates’ meeting, which was supposed
to be purely ‘technical’. However, it seems quite clear that their discussion about
whether the fiscal rules should be ‘simple’ or not had gone beyond the economic
rationale and become quite ‘political’. Similar discussions actually appeared several
times before and after this particular meeting.91
In the end, simple rules prevailed. The strategic choice of arbitrary rules was part of
the political compromise. Economic expertise, in this sense, should perhaps be more
than just providing economic analyses, as an expert commented:
Even though we were fully aware that this was arbitrary [we still need a rule]. I mean the question is that human being, being as what they are, and the politicians being what they are… perhaps technocrats conspired to create a rule, however arbitrary, but that would tie the hands of politicians. […] The arbitrary rule might be preferable than no rule.92
88
Interview with JB (Brussels, 16 April 2013). 89
Commission, ‘Monetary Committee Meeting of 22 January’, Brussels, 24 January 1990; MC, ‘Draft minutes of the 380th meeting of the Monetary Committee’, Brussels, 18 February 1991; MC, ‘Outstanding issues of the excessive-deficit procedure’, Brussels, 20 September 1991. 90
Nigel Jenkinson, ‘Criteria for Excessive Public Sector Deficits in Stag Three of EMU (Monetary Committee Alternates Meeting 15th November)’, 20 November 1990, 3 (emphasis added). 91
Commission, ‘Monetary Committee Meeting of 22 January’, 24 January 1990; MC, ‘Draft minutes of the 380th meeting of the Monetary Committee’, Brussels, 18 February 1991; MC, ‘Outstanding issues of the excessive-deficit procedure’, Brussels, 20 September 1991. 92
Interview with BS (Louvain-la-Neuve, 27 June 2013).
20
The role of economic expertise in the discussion of the EMU fiscal rules was hence
much more complex than conducting scientific assessments and giving professional
advices. They are in a special position to create arbitrary rules that reflect political
judgments. Many experts have acknowledged the arbitrariness of the fiscal rules, but
they also, somewhat paradoxically, considered the rules ‘reasonable’.93 Arbitrariness
is part of the technical consensus.
4. Conclusion: the art of arbitrariness
By examining the expert debate of the EMU fiscal rules, my case study demonstrates
how economic expertise and the economic view of risk operate in inter-expert risk
communication. The risk communication network can be described as a club, with
economic experts integrated in the wider policymaking circle. Economic experts
further adopted an optimistic culture, framing risks in a positive way and discussing
risks with a make-it-work mentality. The results of inter-expert risk communication
were therefore arbitrary, but such arbitrariness should be understood as part of the
strategic choice of economic expertise. The club structure, the optimistic culture and
the arbitrary outcomes are three different but interconnected aspects of inter-expert
risk communication among economic experts.
While mobilising economic expertise is the ‘art of government’, communicating risks
through an ‘economic view’ can be understood as the ‘art of arbitrariness’. Risks may
be uncertain, but they are considered calculable and as part of the process toward
positive results. Economic experts, at least in the case of the EMU negotiation, are
not merely providing technical inputs, and their risk communication activities are
politicised. However, it is unfair to say that these experts were not ‘professional’
simply because of the arbitrary nature of the fiscal rules:
It was not that we did not see risks or debate risks. It was mainly I think, huh, on certain point we misjudged. It was an error in judgment when it came to certain risks of the risk assessment. […] It was definitely not that everybody wanted the euro and you just go for it. That’s definitely not the case.94
Judgments of economic experts were shaped by the club structure and the optimistic
culture, but experts still sought to discuss the inevitable arbitrary rules strategically.
Against the background of the Eurozone crisis, it is of particular interest to ask how
we can avoid ‘misjudgements’ again. My paper may not provide a direct policy
93
Interviews with NT (Copenhagen, 27 August 2013), HF (Copenhagen, 27 August 2013) MS (Frankfurt, 8 April 2013), BS (Louvain-la-Neuve, 27 June 2013) and GR (Brussels, 4 April 2014). 94
Interview with HF (Copenhagen, 27 August 2013).
21
suggestion, but the important questions are who should make judgments and how
judgments should be made. These are questions of institutional design: Is the current
‘club’ structure best for mobilising economic expertise in risk regulation? Should the
‘optimistic culture’ of economic view be adjusted? What can be done to improve the
‘strategic’ element of the arbitrary risk regulatory standards? These issues require
further studies of the role of economic expertise in risk regulation and comparing the
‘economic view’ of risk to other conceptualisations of risk in those conventional risk
regulatory regimes.
