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targets at the outset of the budget process and assume that some spending
ministers renege on the targets later on. Other cabinet members cannot
credibly threaten the defectors with dissolving the government, since they
would punish themselves. A credible threat is absent, the entire cabinet will
just walk away from the targets.5
The number of parties in government strongly depends on electoral
institutions. Intuitively, the chance that one party wins a majority in
parliament is the larger, the fewer parties there are. In two-party systems, the
emergence of an absolute majority is a virtual certainty. Empirical studies
show that plurality rule promotes the emergence of two-party systems and
one-party majority governments (Duverger 1954; Taagepera and Shugart,
1989, 1993). In contrast, proportional representation allows for more variation
in district magnitude, but is consistently characterised by multi-party
coalition governments (Lijphart, 1984, 1994; Taagepera and Shugart, 1989,
1993), especially if minimum-vote thresholds are low. These patterns suggest
that countries seeking to centralise their budgetary processes are more likely
to opt for the contract approach, if their elections are based on proportional
representation (and low thresholds), while they are more likely to opt for
delegation, if their elections are based on plurality rule. Hallerberg and von
Hagen (1998) and Hallerberg et al. (2001) test and confirm this hypothesis for
the European Union states.
This has important implications for the fiscal framework of EMU. The
Excessive Deficit Procedure and the Stability and Growth Pact strongly
resemble the contract approach to centralising budget processes. If so, one
should expect that these procedures are more effective in countries whose
institutional environment is favorable for this approach, and less effective in
environments where the delegation approach is appropriate. Empirical
evidence provided by Hughes-Hallett et al. (2001) confirms exactly that.
Between 1992 and 1996, debt ratios increased significantly in the European
states with fragmented processes and those relying on delegation, but very
little in states applying a contract approach. After 1996, states applying a
contract approach achieved much larger reductions in their debt ratios than
the others. Hallerberg et al. (2001) show that many states applying a contract
approach implemented new mechanisms at the national level strengthening
5 This conclusion is qualified by the observation, made above, that the effectiveness of the contract
approach depends on the availability of alternative coalition partners. German governments of the
past 30 years were coalitions between a large and a small party with no alternative partner
available for either one. Germany’s budget process, which was built on delegation, therefore fits
this environment. When the German government was formed by the two large parties CDU and
SPD in the late 1960s, elements of a contract approach were introduced to secure a high degree of
fiscal discipline.