Are rewards more effective than punishments? The new EU’s take on conditionality in response to the Covid-19 pandemic

Whereas the European Union (EU) had been very successful in devising ex ante conditionality mechanisms required to join the EU or adopt the Euro, it struggled to push for domestic reforms once membership was secured. Soft governance coordination tools, such as the European Semester, were seen as feeble and in need of strengthening. In response to the Covid-19 crisis, the Next Generation EU (NGEU) funding programme introduced an incentive-based conditionality model, replacing the toothless sanction-driven enforcement of the Semester. As existing studies reached inconclusive results on the effectiveness of these tools, this article employs fractional logit regression models to analyse recently released data from the Country-Specific Recommendations (CSR) database. Our main finding shows that European Semester recommendations benefiting from NGEU incentives present higher implementation rates than those issued before or after. Several controls complement this insight. Our analysis based on multi-annual evaluations challenges the prevailing critiques of the Semester’s limited impact and qualifies the ‘benefit of crisis’ effect, as no macroeconomic indicator proves significant, except for lower budget deficits. Election periods reduce compliance. Sectorally, implementation is stronger where EU competences are firm, weaker in sensitive areas, and especially deficient where powerful interest groups block reforms in regulated markets.