The Euro Vs. Compliance: Treaty Violations as a Monetary Policy Substitute

While the European Union’s (EU) official infringement proceedings lack the conditionality available to the International Monetary Fund, World Bank, and other international organizations, the Lisbon Treaty provides the EU institutions with powerful and highly legalized tools to make sure that all member states fulfill their obligations under the treaties. However, we observe large variation in compliance rates both between member states and within individual member states over time. What explains this variation, and what are the scope conditions for the success or failure of the EU’s infringement proceedings? This paper analyze how the interplay between economic crisis and changes in European institutions themselves create incentives for the governments of EU member states to violate EU law and to resist pressure by the European Commission and the Court of Justice of the EU (CJEU) to (re)establish compliance. I show that institutional changes that go back to the introduction of the Euro affect European governments’ ability to assist domestic industries in times of crisis. While the advent of Economic and Monetary Union robbed Eurozone governments of exchange rate manipulation as a policy instrument, the Euro has not reduced member states’ exposure to the downside whims of the global market, the demand for government support and protection during economic downturns, or the responsiveness of reelection-minded governments to the demands of special interest groups that provide votes and contributions in exchange for government interventions on their behalf. Using original data on official infringement cases, I show that Eurozone governments are significantly more likely to engage in violations of state aid regulation and treaty provisions on the free movement of goods and services in times of economic crisis than their non-Eurozone counterparts. When their hands are bound by the firm institutional framework of the EU, governments substitute previously legal economic policy instruments with infringements on EU law. They (ab)use the EU’s enforcement mechanism as a flexibility provision that grants them temporary relive from the twin pressures of economic crisis and an ever closer-woven corset of European laws and institutions. These findings not only have implications for the EU’s infringement proceeding, but (the limits of) European integration overall. In addition, it contributes to the broader literature on the design of international and regional institutions, which has long held there is a depth-rigidity tradeoff or a positive relation between the depth and flexibility of agreements (cf. Rosendorff and Milner 2001, Baccini et al. 2015).