Blog Post

Structural Reforms 0.0 – The case for strengthening institutions

Improvement in institutional quality, particularly concerning the rule of law, is the most essential and urgent structural reform the EU can make. Without it, the obtrusive lack of trust in the EU – which has thus far hampered expansionary and reformist efforts – will persist.

By: and Date: May 3, 2018 Topic: European Macroeconomics & Governance

The discussions on the future of Europe

Attempts to reform the euro zone, to expand the euro zone and indeed to expand the EU are stalled by an obtrusive lack of trust. We had argued here that this lack of trust comes, at least in part, from a divergence in the quality of governance and the quality of institutions. Good institutions matter for economic outcomes, willingness to reform and the smooth functioning of the economic and monetary union.

We show that perceptions of institutional quality in the EU are not only heterogeneous, they have also recently diverged. We look at the World Bank Governance Indicators for three country groups: those hit worst by the crisis in the euro area; central and eastern European (CEE) countries; and prospect countries that are on track to join the EU in the future.

We argue that improvement in institutional quality, particularly concerning the rule of law, is the most essential and urgent structural reform to be pursued – hence 0.0. To this end, the EU should design and implement a common framework for measuring, monitoring and enforcing the rule of law on a continuing basis, and not only upon entry.

Figure A1 in the appendix shows the World Bank Worldwide Governance indicator scores for the EU-28, as well as for EU prospect member countries. The indicators provide perception estimates of governance across six dimensions – voice and accountability; political stability and absence of violence; government effectiveness; regulatory quality; rule of law; and control of corruption – and run from -2.5 to 2.5.

These indicators, among others, are more illustrative of long-term trends, rather than two consecutive points in time, and they are not immune to criticism. Nevertheless, they offer an impression of how citizens of any given country have adjusted their perceptions over a period of 20 years.

Programme- and southern European countries

Figure 1 below presents the evolution of governance since 1997 for programme countries – Ireland, Portugal, Greece and Cyprus, as well as Spain and Italy. The pictures show that, with the exception of Ireland, these countries were below the average EU number at the start of this 20-year period. Spain, Portugal and Cyprus have maintained their relative positions since then. By contrast, Italy and Greece have diverged from their initial position and are now lagging far behind the current EU average.

Two issues are worth raising: firstly, the deterioration of governance indicators in Greece coincided with the onset of the financial crisis. This is particularly visible for the rule of law and control of corruption indicators. In Italy, by contrast, the deterioration in governance did not coincide with the financial crisis. The deterioration observed appears to be slower but started much earlier, at the beginning of the century. Similar to Greece, the rule of law and control of corruption are the main contributors to this deterioration in Italy.

CEE Countries

The quality of governance in CEE countries cannot be uniquely described. Here, too, there are important differences, although as a group these countries are generally below the EU average and further away than the previous group, according to these indices.

Hungary and Poland have evolved differently in this respect since they entered the EU in 2004. Poland has seen a general improvement in institutions since accession, whereas Hungary has seen an overall deterioration. This is particularly visible in the rule of law indicator.

As explained these perception indicators do not necessarily reflect short-term movements in the actual quality of governance. They do not, therefore, capture the decision of the European Commission to invoke Article 7 – for the first time – on Warsaw back in December, over the risk of a serious breach of the rule of law, which the European Parliament subsequently approved in March. Concerns about the rule of law in Hungary have also been expressed by MEPs in the past. These two cases are notable because they reflect policy changes that actively reduce the quality of governance, irrespective of whether perceptions have caught up.

Bulgaria and Romania are the two countries that score the lowest across the whole period. EU entry in 2008 appears to have helped Romania to improve, albeit in small numbers. It is notable that the rule of law is very poor in Bulgaria but, more importantly, it has seen little to no improvement over a period of 20 years.

Prospect of EU enlargement

The last group we look comprises countries that are potential candidates to enter the EU, and which are at different stages of EU accession negotiations. This group includes the western Balkan countries as well as Turkey and Ukraine. Less than a decade separates Serbia and Montenegro from the 2025 deadline set for their own EU accession. However, in 2016 these countries and their western Balkan peers were far behind EU Member States in terms of the quality of their institutions. This is also seen for Turkey and Ukraine.

Figure 3: Governance Indicators 2016, Western Balkans and EU-28 averages

Source: Bruegel based on World Governance Indicators. Note: Western Balkan countries are Albania, Kosovo, Montenegro, Bosnia and Herzegovina, FYROM and Serbia.

Figure 3 above shows the countries in this group are below the latest EU minimum value for most governance quality indicators. This is not to say that there has been no improvement but it has been very slow and still has a considerable distance to cover (Figure 4).

Effective measuring, monitoring and enforcing systems

Calls to improve governance and the quality of institutions across the world are now growing in number. The rule of law was one of the core values upon the foundation of the EU and its evolution is monitored with the EU Justice Scoreboard.

Implemented in 2013, the Scoreboard is an annual statistical comparison of the quality, independence and efficiency of judiciary systems across member-states. In 2017, the broad findings of the Scoreboard were considered within the European Semester and in some cases incorporated into country-specific recommendations. Likewise, the Venice Commission, an advisory body of the Council of Europe on constitutional matters, provides legal opinions and studies to 61 countries in “bringing legal and institutional structures into European standards in the fields of democracy, human rights and the rule of law” that lack enforceability.

Although valuable, these processes are not enough. On one hand there are data problems, partially due to the lack of cooperation from national authorities. On the other hand, enforcing these country-specific recommendations is a well-known difficulty.

Monitoring these institutions is crucial for sustainable economic improvements. Explicit annual surveillance on a par with the Macroeconomic Imbalance Procedure (MIP) and the fiscal compact can be very valuable to increasing convergence in this respect.

Despite its compliance problems, the MIP has emphasised the need for monitoring policies, identifying risks and even considering penalties when countries are in clear breach of agreements.  The same must happen when it comes to the quality of institutions.

To this end, it is important to rely not only on perceptions, but to have accurate measurements of the changing levels in the quality of institutions. Next, setting clear benchmarks on an annual basis will raise awareness and foster institutional reforms. Organising a firm and non-discriminatory way of monitoring the rule of law needs to be the priority in a time of economic cyclical recovery, in order to maintain EU cohesiveness.

 

Annex: Figure A.1 World Governance Indicators by country and indicator


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