Focus of the paper: The Fiscal Compact required the members of the eurozone to establish a structural deficit rule in their domestic legislation. This paper explores the impacts of the structural deficit rule on fiscal policy-making in Estonia and Latvia.
Theoretical Bakcground: The analytical framework of the paper draws on the literature on Europeanization, historical institutionalism and discursive institutionalism. It discusses how the interaction between institutions, interests and discourse influence policy-making and how an external imposition of a new policy rule by the EU can shape policy-making in a member state.
Methodology: In the empirical part, the paper explores how the introduction of a structural deficit rule has changed fiscal policy-making in Estonia and Latvia. The case studies draw on analysis of documents, media articles and semi-structured interviews conducted with policy actors.
Findings: We show that while the structural balance rule has led to some relaxation of fiscal policy in Estonia, it has been viewed as a more restrictive fiscal rule in Latvia. We argue that the use of structural deficit as a yardstick in fiscal decision-making has empowered the Ministries of Finance (vis-a-vis the line ministries) and the bureaucrats (vis-a-vis the elected officials) in the budgetary decision-making process. We also find that the use of the structural deficit rule to guide fiscal policy-making has changed the discourse surrounding the fiscal policy in those two countries. It can observed that the focus on structural deficit has led to more nuanced discussions on fiscal policy in both countries and to a conceptual re-interpretation of what happened in the run-up and during the crisis in 2008-2010. The case studies show that in order to understand and explain these developments, it is important to focus on the interactions between institutions, ideas, interests and discourse.
