Revisiting paradigmatic change in European macroeconomic policy

The covid-19-induced-recession triggered a radically different economic response from member states and European institutions. In a span of a decade, the EU shifted from a paradigm of "sound money and sound finances" to expansionary policies enabled by a flexible interpretation of fiscal rules and supported by unconventional monetary policy. The landmark agreement of the Recovery Fund inaugurates a new epoch of integration in which horizontal fiscal transfers are established at a European level to buffer the negative externalities of the pandemic. What was considered impossible a few years ago is now a reality. How did this macroeconomic policy shift take place and what were the conditions that enabled it? Theories of paradigmatic change identify two mechanisms that induce change: social learning within policy communities, and authority contestation against the dominant paradigm. In 'normal times' policymakers are perceived as learners that 'puzzle on society's behalf' but often learning is mediated by ideology and interests. Policymakers - whether elected or not - are political animals, they learn taking into consideration reputational costs and political collateral damage. In crisis times where the limits of what is feasible and desirable are redefined, learning is intrinsically connected to contestation and partisan competition. During the last turbulent decade, crises were opportunities to learn but learning did not take place in a void. When elections are imminent or an institution's reputation is at stake, the political calculus of stakeholders is more complicated and what is framed as a lesson and subsequently codified in institutional reforms, is a fundamentally political process. In the case of European macroeconomic policy, I contend that both learning, and contestation were necessary to turn the page on austerity. Instead of searching for 'big bangs of change' where one paradigm dethrones another in an abrupt fashion, we should look for incremental, yet transformative processes in which rival political forces and power coalitions compete to shape the debate and delineate the range of available policy options. The negotiated nature of European rulemaking and crisis management requires a more dynamic and contingent theory of interactions between actors at a national and European level. This theoretical paper situates paradigmatic change between two critical junctures and tries to explain how empirical anomalies lead to cognitive change and translated to political contestation. Cracks in the dominant paradigm were a necessary condition to reach the Next Generation EU, an agreement that encapsulates a new economic consensus. Policy learning episodes took place in the face of existential threats, such as the asymmetric rise of spreads, deflationary trends but also BREXIT. Authority contestation manifested in the electoral punishment of mainstream parties who implemented welfare retrenchment reforms and the electoral triumph of challenger parties that politicized economic policy issues and clashed with European institutions against the orthodoxy of austerity. Learning and contestation are two processes that unfolded in a different pace but informed, reinforced, or even contradicted one another. Hence, we should study them in tandem to explain the gradual decay of the "Berlin-Washington consensus".