Rule Bending in International Organizations: Explaining Instability in the Stability and Growth Pact

In this paper, we consider how European institutions contributed to the euro crisis. In principle, the Stability and Growth Pact was intended to minimize externalities by preventing macro-economic "bad behavior" in the form of large budget deficits. In practice, it has had a difficult history, with several Member States running "excessive deficits" and the Pact clearly failing to prevent the crisis. An important part of the story, and one that is often ignored, is that Member States not only broke the rules but repeatedly bent them by augmenting and amending the European Commission's assessments. We operationalize what it means to bend rules under the Pact, and we consider explanations for why some Member States repeatedly bent the rules in the run-up to the crisis while others did not. Using a new dataset of Commission assessments of member state economic programmes and Council of Minister revisions of those assessments for the period 1998-2012, we find that big states and states with euroskeptic populations regularly undermined the "watchdog" function of the Commission. The evidence leads us to conclude that unlike some domains where rule flexibility leads to better, and deeper cooperation, such flexibility eroded cooperation in the run-up to the euro crisis.