Central banks' quantitative easing as a cause for shifts in governments’ policy paradigms?

Democracies are constrained by what governing institutions can and cannot do. In the economic sphere, governments of advanced industrial countries are committed to multiple institutional arrangements to ensure the long-term functioning of the market economy, and prevent it from being undermined by short-term electoral commitments. At the same time, governments need to have some level of autonomous policy space, in order to give political parties and their leaders the possibility to offer a diversified range of options that are responsive to the demands of a heterogeneous electorate. What determines the expansion or reduction of governments’ policy-making space? The extensive use of quantitative easing policies by central banks in OECD countries in response to the Great Recession is an illustrative example of how the international consensus on what constitutes appropriate public policy is not fixed over time and can radically change. This paper investigates how the adoption of quantitative easing policies by the European Central Bank has affected the criteria by which governments in the Eurozone shape their annual budgets. The analysis shows how prior to the introduction of quantitative easing, governments were trapped into a policy paradigm in which fiscal discipline was the only pathway for economic recovery and growth. Subsequently, the policy ideas changed gradually into ideas about how productive investments could generate future fiscal returns. This change of paradigm also had major consequences for the balance between responsiveness and responsibility, as under the investment paradigm governments had more possibilities to devolve resources to domestic constituencies. The paper investigates the timing of the change of paradigm and identifies quantitative easing as the most plausible cause. The empirical analysis is based on the codification of governments’ annual budget plans in five Eurozone countries between 2009 and 2019. The cases analysed are Austria, Germany, France, Italy and Spain. The analysis traces how budgetary policies are justified and identifies different logics by which governments argue they maintain long-term financial sustainability. The five cases feature a common trend in the dominance of austerity ideas between 2009 and 2013, and a gradual increase of investment-oriented ideas in subsequent years. The paper assesses the extent to which this overtime variation can be explained by economic, financial and political factors. In terms of timing, quantitative easing appears as the most plausible explanation.