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Do Partisan Ties Still Bind? The Impact of the European Union on Domestic Spending Agendas, 1980-1995*
Robert E. Bohrer II Department of Political Science
Gettysburg College Gettysburg, PA 17325-1486
Alexander C. Tan Department of Political Science
University of North Texas Denton, TX 76203
* Presented at the Annual Meeting of the Southwestern Social Science Association, Galveston, March 16-18, 2000.
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Introduction
With the ratification of the Maastricht Treaty in 1992, the member-states of the
European Union (EU) embarked on an ambitious project focusing on a common currency
through the Economic and Monetary Union (EMU). Under the conditions set forth in
Maastricht, countries seeking to join in the first wave of the EMU are required (beginning
in 1997) to demonstrate fiscal discipline by keeping annual deficits under 3% of GDP
while debt should be less than 60% of GDP (or, at a minimum, moving in that direction),
in addition to controlling inflation and minimizing currency fluctuations. As a result of
these criteria, governments across Europe imposed austerity measures to meet the entry
requirements. While such belt-tightening efforts were successful for 14 of the 15
member-states, the political impact of these efforts has been profound. Most noticeably,
parties of the left benefited and swept into government in 13 of 15 member states, and for
the first time in history the left simultaneously controlled the governments of the “big
four” – Italy, France, Germany and the United Kingdom (Bohrer and Tan, Forthcoming).1
Presumably, the gains of parties of the left can be attributed to voters reacting
negatively to austerity measures. Hence, parties of the left are viewed as defenders of the
welfare state and the most likely to roll back cuts made to meet the Maastricht criteria for
entry into the EMU. This view is in line with Huber and Inglehart’s (1995) findings that
today’s parties of the left are primarily reactive parties that seek to limit retrenchments of
the welfare state. The irony of the post-Maastricht period may be that electorates have
1 The eleven countries gaining membership in the EMU were: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Portugal and Spain. The UK, Denmark, and Sweden met the Maastricht criteria but did not elect to join while Greece sought membership but did not meet the criteria.
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shifted support to the left in order to keep the status quo, but governments of the left are
discovering that continued compliance with the entry criteria make such restorations
difficult, if not impossible, to put in place. Upon taking office, both Lionel Jospin in
France and Gerhard Schroeder of Germany have had to significantly modify campaign
promises on restoring social justice. External constraints – in the broad sense
globalization and specifically, those formally contained in the EMU entry criteria – have
limited domestic policy agendas.
In addition, the left restoration of the 1990s may result in dramatically different
policy agendas than the leftist governments of the past. While in the past the left was
grounded in Keynesian principles of heavy government involvement in economic
management, the modern European left is more in line with the so-called "Third Way".
This new path - most clearly illustrated by Tony Blair's remaking of the Labour Party in
the UK, but also influential in the German Social Democratic Party, the French Socialists
and the Italian Olive Tree - is much more moderate and less dedicated to principles of
government involvement in the economy.
We examine fluctuations in domestic social spending in the member states of the
European Union during the period 1980 to 1995. Using a pooled cross-sectional time-
series, we find that non-leftist governments, consensus institutions, unemployment and
the proportion of the population age 65 and older all lead to increased social expenditures
as a percentage of Gross Domestic Product. For social spending as a percentage of total
expenditures, leftist governments and unemployment both lead to increased expenditures
but the squeeze on budgets following the Maastricht Treaty has a negative impact on
social spending. Taken together, these results show that partisan ties do indeed still seem
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to bind, but how they bind differs across measures of expenditures. Most strikingly, the
priorities of the left seem to have shifted away from social spending as a priority in times
of economic growth. In addition, the constraints imposed by the Maastricht Treaty have
limited the relative impact of social spending in EU member-states.
Determinants of Domestic Spending
The existing literature identifies several factors that influence the level of
domestic spending. Specifically, economic factors, institutional design, the ideological
orientation of governments and demographic issues have all been pointed to as influential
determinants of social spending. Below we examine each of these factors as well as the
influence of the post-Maastricht era on social spending patterns.
Economic Factors
Economic forces have been found to influence domestic spending patterns in the
relatively well-developed welfare states of Western Europe. In particular, increases in
unemployment have been found to be positively related to social expenditures (Cameron
1978; Rotte 1998). The rationale is fairly straightforward: welfare state benefits for the
unemployed lead to greater expenditures as transfers to the unemployed must be made.
Hence, we expect, all else equal, increases in unemployment will lead to increased
domestic expenditures.
In addition to the influence of unemployment, in eras of economic growth
government expenditures are likely to grow. For example, during the heyday of the
welfare state in the 1960s, the Dutch government dramatically increased social
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expenditures as the economic situation of the country improved markedly from petroleum
profits. By contrast the dual oil shocks of the 1970s and the recession of the late 1980s
and early 1990s have meant increased scarcity across Europe. This development puts a
squeeze on domestic budgets, particularly in light of the Maastricht criteria for entry into
the EMU.
Taken together, increases in unemployment have been shown to cause increased
domestic expenditure levels, and the recent era has been one of slow growth for the
economies of the region. Considering the extremely high levels of unemployment across
the region of late, based on past behavior we would expect increased social expenditures
to offset the impact of joblessness.
Institutional Design
The debates over the effects of democratic institutional design have also revealed
differences in expenditure patterns. Essentially, this debate centers around majoritarian
and consensus-based institutional design questions. Majoritarian democracies tend to
have single-party government, an executive that dominates the legislative branch, lower
numbers of political parties and issue dimensions, greater electoral disproportionality, are
more likely to be unicameral or asymmetrically bicameral and centralized (Lijphart
1984: 212-22). In contrast, consensus systems are characterized by power sharing
accomplished through coalition governments, a multiparty system with several issue
dimensions, roughly equal executive-legislative relations, proportional representation,
balanced bicameralism and federalism. In a later analysis, Lijphart and Crepaz (1991)
added the level of corporatism to the characteristics of consensus systems.
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Lijphart (1994) and Crepaz (1996a; 1996b) have found that consensus-based
democracies have a host of positive attributes, including lower levels of inequality, higher
voter turnout, and greater support for family programs than their majoritarian
counterparts. Moreover, Bohrer (1997) finds that these differences hold in terms of
greater overall social expenditures and, consequently, higher taxation levels to fund these
expenditures also characterize consensus systems.
Similarly, Robertson and Cutcomb (1987) find that majoritarian systems display
greater policy energy while consensus systems are characterized by policy ballast. This
relationship meshes with Popper’s (1988) critique of proportional representation (PR)
systems. In consensus systems (with PR as a key component), the continuity of parties
and the nature of coalition government make large shifts in policy difficult. Conversely,
in a majoritarian system, the institutional concentration of power facilitates policy
changes when a new party takes power.
While Lijpart and Crepaz see consensus systems in a positive light, other scholars
have found less positive outcomes associated with systems where power is dispersed
widely. Roubini and Sachs (1989) find that in systems where political control is dispersed
across parties (as in coalitions) and/or institutions (such as separate parties in control of
the executive and legislative branches), inefficient budgetary policy is likely (Roubini
and Sachs 1989). Specifically, the stronger the government, the lower the deficit, and the
weaker the government, the greater the deficit. Moreover, they find that in times of fiscal
crises such as the oil crises of the 1970s, ‘strong’ governments were much more likely to
control deficits than their ‘weaker’ counterparts. Hahm (1994) finds a similar relationship
in Japan.
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Borrelli and Royed (1995) also offer a follow-up study to Roubini and Sachs.
Using a more sophisticated measure of government “strength”, they find no direct effect
of government strength on deficits, but they do find a significant effect for government
strength when the index numbers are interacted with a dummy variable representing poor
economic conditions. The upshot of these findings is that when economic times are good,
weaker governments manage deficits as well as stronger governments. In poor economic
periods, however, stronger governments are more effective at managing deficits (Borrelli
and Royed 1995: 246). Despite variations in measurement, the underlying issue remains
the dispersion of political power. On this issue all three works are in agreement – when
political power is dispersed broadly, fiscal discipline weakens. Based on these studies, we
would expect to find that consensus democracies have higher expenditures than
majoritarian systems, and this difference should be most acute in times of economic
scarcity.
Party Ideology
The ideological complexion government is another important factor affecting
spending levels. As Budge and Keman (1990) have shown, once in office European
political parties generally take the promises made in their manifestoes quite seriously.
Moreover, studies done by Castles and Mair (1984) and Huber and Inglehart (1994) have
shown that the ideological nature of political parties in Europe is more profound than
differences in the United States. In other words, there is a great deal of variation in left-
right terms within European countries. Given that these differences exist, it would seem
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to follow that government spending patterns would be influenced by the ideological
composition of government.
Indeed, left-leaning governments have been found to have higher levels of
government spending than governments of the center or right (Cameron 1978; Lewis-
Beck and Rice 1985; Blais, Blake and Dion 1993). It is reasonable to assume that higher
levels of spending will lead to higher total outlays to finance more extensive social
programs and possibly to service debt incurred as a result of such programs (Cusack
1996). Based on this evidence, we would expect left-leaning governments to have higher
social expenditures than right, centrist, or mixed governments.
However, given the nature of the "Third Way" adopted by several major parties of
the left, there is strong reason to believe that the patterns of the past will not necessarily
be followed. Particularly in terms of the priority given to social expenditures, the
moderate, almost liberal stance of parties such as the UK Labour Party may mean a lower
priority for social spending than in the past. Though much has been made of the "Third
Way" in the journalistic world, little scholarly attention has been paid to the outcomes
produced by these new governments of the left. Hence, based on past behavior we would
expect leftist governments to have higher levels of social spending. However, the shift in
leftist ideology may temper this pattern.
Demographic Forces
Another factor influencing the level of spending in a country is the demographic
composition of society. Specifically, the aging of the population places additional
demands for expenditures, as older groups require higher expenditures than the young
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(Oxley and Martin 1991, 176). Two recent examples of such pressures are the debate
over the future of social security in the United States and the bankruptcy of the Italian
pension system. Both of these programs face deep fiscal problems as the populations of
both countries age and the aged comprise a higher percentage of the population.
Moreover, across Europe, aging populations and declining birth rates have increased
dependency ratios (the proportion of those receiving passive welfare benefits to those of
working age population: 15-64), placing pressure on domestic spending agendas (Rhodes
1997). Thus, we would expect aging populations to result in higher social expenditure
levels.
The Maastricht Effect
In addition to the factors discussed above, the external constraints contained in the
Maastricht Treaty have limited spending agendas as well. These constraints may have
changed the nature of the European political-economic landscape as governments are
now bound to meet and maintain the EMU criteria. Hence, the wake of the Maastricht
Treaty has changed the fundamental nature of the determinants of domestic spending.
Rotte (1998) finds that prior to Maastricht increases in unemployment were related to
increased deficit levels, but after the passage of the Maastricht Treaty this relationship no
longer holds. It would appear that the constraints put into place for EMU have limited the
amount of intervention that domestic governments can undertake.
Similarly, Bohrer and Tan (Forthcoming) find a significant relationship between
the post-Maastricht budgetary squeeze and votes for the left, indicating a shift to the left
in response to austerity measures. This follows with the literature reviewed above that
party positions make a difference as it seems that voters are indicating a desire for greater
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social spending rather than austerity measures. However, given the constraints placed on
domestic budgets following the passage of Maastricht, parties may no longer be able to
significantly alter spending patterns. According to this explanation, following the passage
of the Maastricht Treaty the nation-states of Europe find themselves faced with a
situation similar to other, economically weaker states that find their agendas constrained
by external forces such as the International Monetary Fund (IMF) or currency markets. 2
Moreover, these constraints have had an effect prior to the implementation of the EMU
as governments anticipate the difficulties of meeting the entry criteria by 1997. Hence, if
this line of reasoning is correct, we would expect the factors traditionally viewed as
responsible for variations in spending patterns to exhibit less influence following the
ratification of the Maastricht Treaty in 1992.
Data & Methods
Given the above review, we expect unemployment, the institutional framework,
the ideological composition of government, and the percentage of the population age 65
and over to determine social spending in the member-states of the EU. In addition, the
external constraints of budgets included in the Maastricht criteria indicate that these
factors will be mitigated after 1992 as domestic agendas must respond to the entry
criteria. Our hypothesis is thus:
Social Spending = a+b1Unemployment+b2Govt. Ideology+b3Consensus + b4Aged Population+ b5Squeeze
2 The difference of course is that the EMU is at a certain level a voluntary commitment, though individuals do not have the right to opt out.
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Dependent Variables
“Social Spending” is operationalized in two ways, resulting in two models. First
we examine social spending as a percentage of GDP terms using data taken from the
OECD (1999). For the second model we look at social spending as percentage of total
expenditures, also from the OECD (1999). The rationale behind testing the model on two
dependent variables is grounded in the nature of these indicators. While social
expenditures as a percentage of public expenditures tells us about the impact of social
spending relative to other types of public spending, it does not tap into the priority given
to social spending relative to the size of the economy.
Put somewhat differently public expenditures can be relatively “locked in”
relative to one another. Matters like pensions and unemployment compensation compete
over the total public expenditure pool of funds with matters such as infrastructure
improvements (e.g., roads, railways). While social expenditures may command a larger
share of public expenditures from one year to the next, it does not tell us the priority of
social or public expenditures relative to the whole economy. To tap into this dimension,
the percentage of social expenditures relative to GDP is more appropriate as it allows us
to measure the priority governments place on social spending. Using two measures of
social expenditures allows for a more refined analysis of governmental priorities.
Independent Variables
The variable “Unemployment” is simply the annual rate of unemployment in a
country and data were collected from various issues of the OECD Main Economic Indicators
and OECD Economic Outlook. To measure the ideological composition of a government,
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data are taken from Woldendorp, Keman and Budge (1993). This measure consists of a
five-point scale coded “1” for right-wing dominance (66.6 percent of cabinet ministries
and supporting seats in government controlled by parties of the right, “2” if right-wing
and center parties control between 33.3 and 66.6 percent, “3” if center parties control
over 50 percent of parliamentary and cabinet seats or if right-wing and left-wing parties
for a government together and neither dominates, “4” if the share of cabinet and
supporting parliamentary seats controlled by the left and center is between 33.3 and 66.6
percent, and “5” if left-wing parties control over two-thirds of all ministries and
supporting parliamentary seats. When governments change within a year, ideological
scores are weighted by the time in office.
The variable “Consensus” is a dummy variable indicating if a system is consensus
or majoritarian in nature. Coding is based on Lijphart and Crepaz’s (1991) measures
which, unfortunately are static and do not include measures for Spain, Greece and
Portugal. All three of these systems are coded as majoritarian, as Greece is clearly
majoritarian and Portugal is similar to the majoritarian French system. While Spain has
some consensus elements – proportional representation and federalism – it is also
characterized by highly disproportional PR and minimum-winning or single party
governments. “Aged Population” is a variable representing the proportion of the
population aged 65 or older, and data are taken from the United Nations (1996).
To measure the impact of the scarcity of the post-Maastricht era, the variable
“Squeeze” is operationalized as the government budget balance (i.e., surplus or deficit) as
a percentage of GDP and the time period indicator for when the Maastricht Treaty was
signed (to distinguish pre- and post-Maastricht deficits and surpluses). Hence, this
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variable measures the deficit level relative to the 3% of GDP maximum mandated by the
Maastricht Treaty. As the entry criteria for the EMU specify a 3% maximum for deficits,
countries with higher deficits require austerity measures to meet this criterion and thus
experience more of a squeeze on domestic budgets and policy agendas.3
Based on our review of the literature, we expect more leftist governments, higher
levels of unemployment, consensus democracy, and a higher proportion of citizens age
65 or older to be associated with higher levels of social expenditures. Conversely, the
increased budgetary squeeze associated with the passage of the Maastricht Treaty is
expected to be negatively related to social expenditure levels.
Results
The results of our first empirical test – the determinants of social spending as a
percentage of GDP – our contained in Table 1 below.4 This analysis shows that
consensus democracy, unemployment, and the percentage of the population age 65 and
over all are associated with higher levels of social expenditures. These results are
consistent with our expectations based on the literature review above.
An interesting finding is shown for the role of government ideology. Our analysis
shows that more leftist governments are associated with lower levels of social spending
as a proportion of GDP. Based on this finding, it would appear that the priority that leftist
3 In order to ease interpretation of the empirical results, we multiplied the budget deficit figures with –1 so that higher positive numbers means a greater squeezing effect due to higher budget deficits. 4 Diagnostic tests revealed the presence of autocorrelation in our data, so the Cochrane-Orcutt method was used to correct this problem. In the tables shown below, corrected models are reported. Due to problems in obtaining complete data, Luxembourg was excluded from our empirical analysis.
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governments place on social spending relative to the economy as a whole is actually
lower than that of governments of the center or the right. Thus, in the present era of the
“New Left” the spending priorities of leftist governments are even less generous than
their ideological competitors.
While not statistically significant, the “Squeeze” variable is in the expected
negative direction. Though we do not want to put much stock in an insignificant finding,
it is interesting to the note the negative impact of the post-Maastricht squeeze on social
spending. The direction of this coefficient does provide some evidence of a negative
impact on social expenditures resulting from the budget squeeze to meet entry criteria.
Turning to our second model, we see some interesting differences from Model 1.
Table 2 indicates that government ideology and unemployment are significantly and
positively related to social expenditures as a percentage of total expenditures. While in
Model 1 leftist governments were associated with lower expenditure levels, in this model
our results indicate that governments of the left tend to dedicate a greater share of total
expenditures to social spending than rightist or centrist governments.
The post-Maastricht “Squeeze” also exerts a significant influence on social
expenditures, and in the expected, negative direction. This result indicates that in the
post-Maastricht era of scarcity and external constraints, deficit pressures lead to a lower
proportion of total expenditures dedicated to social spending than the era prior to the
passage of the Maastricht Treaty.
Model 2 also reveals two somewhat surprising results as neither consensus
democracy nor the percentage of the population age 65 and over exerts a significant
impact on social expenditures as a percentage of total expenditures. Hence, in terms of
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the priority given to social expenditures relative to expenditures in general, neither of
these variables influences outcomes. With regard to consensus democracies, the
variations between Model 1 and Model 2 may be attributable to the size of the economies
of these countries. Consensus systems tend to dominate the smaller nation-states of
Europe. As these countries tend to have smaller GDPs, the results in Model 1 may be
driven by differences in the size of the economies between consensus systems such as
Austria and Belgium and the larger majoritarian economies of the United Kingdom and
France.
The most interesting contrast between the two models concerns the role of
ideology on the two operationalizations of the dependent variable. While governments of
the left are associated with greater social expenditure levels as a percent of total social
expenditures, these same governments have lower levels of social expenditures relative to
GDP than governments of the center or right. What explains this apparent contrast?
Leftist governments seem to prioritize social spending at a higher level than other
types of public expenditures while assigning a lower priority to social spending as a
proportion of GDP. Strategically, social expenditures as a percentage of GDP may be an
issue more of interest to Brussels – showing a commitment to scaling back – while
domestically, dedicating a higher proportion of total spending to social spending may be
used as a way to placate concerns about welfare state cutbacks.
In addition, there is less transparency domestically in terms of GDP as???
Overall then, we see that only unemployment is statistically significant in a
consistent positive direction across both models. Given the high levels of unemployment
across the region and the constraints of EMU, governments of EU member-states are
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faced with more rigidity than in the past. The commitment of resources to unemployment
compensation combined with the convergence criteria means that there is little room for
flexibility in other areas of social spending. Hence, constraints of budget priorities, both
domestic and external, have limited the spending agendas of governments.
Conclusions
Based on our findings, we can conclude that partisan ties do indeed still seem to
bind in the member-states of the European Union. However, the nature of these ties
varies according to the dependent variable under examination. In terms of social spending
as a percentage of GDP, leftist governments are negatively associated with social
spending. With regard to social spending as a proportion of total expenditures, though,
governments of the left appear to place a higher priority to social spending than
governments of the center and the right.
The implications of this finding for the citizens of Europe are still unclear. The
combination of left-leaning governments currently dominating member-states of the EU
would seem to indicate that social spending would maintain a high priority. However, the
influence of the post-Maastricht “Squeeze” variable mitigates this expectation somewhat
as the deficit squeeze following the Maastricht Treaty is negatively associated with social
spending in terms of total expenditures. Hence, these two factors appear to be moving in
opposite directions. Given the strict nature of the Maastricht criteria, it would seem likely
that flexibility will have to come at the expense of social expenditures.
Finally, it is important to note that these results are based on data from the period
leading up to the EMU and do not account for the most severe constraints. These
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constraints became more profound in 1997 when entry criteria officially went into effect.
Hence, while our findings indicate a role for partisan ties, it would appear likely that the
external constraints found to be influential in Model 2 will become stronger in the future.
As a result, partisan ties may soon weaken. If this occurs, the increases in voter volatility
displayed in the 1990s (Bohrer and Tan 1999) can be expected to increase as parties are
unable to deliver on their electoral promises. As the present dilemma in Austria
illustrates, extremist political parties stand to benefit from such dissatisfaction.
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Table 1: Determinants of Social Spending per GDP
_______________________________________________________________ _ Variable Estimated Coefficients ________________________________________________________________ _ Gov’t Ideology -0.28 ** (0.14) Consensus 6.60*** (0.81) Squeeze -0.027 (0.065) Unemployment 0.244*** (0.071) Aged population 0.76*** (0.19) Constant 8.01*** (2.89) R-squared 0.898 Adjusted R-squared 0.895 Durbin H-stat 1.35 N=187 ______________________________________________________________________ ***p<0.01; **p<0.05; * p<0.10 (one-tailed)
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Table 2: Determinants of Social Spending as Percentage of Total Spending
____________________________________________________________________ Variable Estimated Coefficient ____________________________________________________________________ Gov’t Ideology 0.688*** (0.19) Consensus 0.074 (1.05) Squeeze -0.28*** (0.085) Unemployment 0.14** (0.083) Aged population 0.039 (0.26) Constant 44.75*** (3.98) R-squared 0.7849 Adjusted R-squared 0.778 Durbin H-stat 0.39 N=171 _____________________________________________________________________ ***p<0.01; **p<0.05; * p<0.10 (one-tailed)
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