Does RRF-induced centralization lead to structural reforms?

The Recovery and Resilience Facility (RRF) is an innovative governance instrument whereby the European Commission provides Member States with grants and cheap loans in exchange for negotiated policy and investment commitments. Current research has shown that the RRF has increased the leverage of the Commission over the governance of Member States policies. At a domestic level, the RRF has strengthened national government executives to the detriment of parliaments, subnational governments, and other organized sectoral interests (trade unions, employer and professional associations), in a dynamic that has been called centralization. At the same time, researchers have found that the RRF has positively affected domestic policy change towards compliance with EU policy recommendations, yet it remains unclear whether there is a 'RRF effect' on structural reforms –a specific kind of policy change that creates winners and losers among domestic organizations or groups– which EU leadership considers vital for prosperity. We contribute to this literature by explicitly linking the centralization effect of the RRF with domestic policy change and by delineating the conditions under which centralization can lead to structural reform, if at all. Based on the political economy literature on structural reform and following a rationalist approach, we take as starting point that governments are unlikely to engage in structural reforms without either support by opposition parties or sectoral organized interest, even if the RRF led to the centralization effect. The logic behind our argument is that, since structural reforms create winners and losers, governments need to either secure broad parliamentary support to share their political costs, or alternatively strike social pacts with the sectoral organizations who are affected by the reforms. We test our theory using a comparative case study method focusing labour and pension reform cases in Spain and Italy, the two largest nominal recipients of RRF funds. Our research is based on elite interviews and document analysis. We expect our research to contribute —from the perspective of Member States— to the ongoing debate over the Commission’s current capacity to affect domestic change under this current governance architecture based on the exchange between additional fiscal capacity and contractualized reform commitments, which now has also been embedded in the newly reformed Stability and Growth Pact.