Electronic copy available at: http://ssrn.com/abstract=1912072

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Knowing Your Limits. Informal Flexibility and Authority in the European Union

Mareike Kleine

London School of Economics and Political Science / Harvard University

Prepared for delivery at the 2011 Annual Meeting of the American Political Science Association, September 1-4, 2011

Very rough draft. Comments welcome at m.o.kleine@lse.ac.uk.

Abstract: An intriguing problem in institutional analysis is how institutions create order when the strategic environment in which they are embedded is volatile. The problem arises when the conditions that require flexibility are not perfectly observable, because ambiguity about its actual, situational demand opens the backdoor for defection. An important question in relation to the abovementioned problem is therefore how governments assess whether formal rules apply or flexibility is pertinent. The paper argues that previous studies failed to address this question due to implausible assumptions about states ability to design optimal flexibility mechanisms. The paper embeds the study of this question in an analysis of the EUs Council Presidency. The central argument is that the Presidency serves a crucial information-providing role due to its informal authority to adjudicate on demands to depart from the official procedures. Because some governments face incentives to exaggerate the actual demand for flexibility for personal gains, adjudicating authority is granted to a government that in normal times prefers to stick to the official procedure. This arrangement induces other government to increase the level of information in order to prevent the Presidency from rendering a false and unfavorable judgment. The member states defer to this judgment because it permits them to uphold a deep, yet fragile, level of cooperation that would otherwise prove impossible to sustain.

Electronic copy available at: http://ssrn.com/abstract=1912072

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Introduction An intriguing problem in institutional analysis is how institutions create order when the strategic environment in which they are embedded is volatile.1 Consider the topical example of monetary policy. Formal commitments to a low-inflation policy prevent inflationary bias that emerges when markets anticipate governments temptation to stimulate output beyond the natural level. In times of crisis, however, this commitment may need to broken in order to stabilize the economy. Flexibility can also be necessary for less heroic, political economic reasons. In international politics, formal rules that impose some cost on defection commit opportunistic governments to pursuing a liberal trade policy. Domestic demands for cooperation may change, however, and so it may suddenly be necessary to accommodate a government facing unexpected domestic pressure to break these rules, for unauthorized defection else prompts the unraveling of cooperation. A dilemma arises when the conditions that require flexibility are not perfectly observable, because ambiguity about its actual, situational demand opens the backdoor for defection. An important question in relation to the abovementioned problem is therefore how governments assess whether formal rules apply or flexibility is pertinent.

Variants of the literature on institutional flexibility, discussed below in more detail, address this question primarily by way of analyzing the rationale behind formal flexibility mechanisms. From this perspective, states are assumed to identify potential future threat(s) to the commitment and then design flexibility mechanisms that authorize temporary defection when the formal conditions for derogation are met.2 However, these findings leave us with a puzzle: Flexibility mechanisms, designed in the face of uncertainty, are necessarily incomplete and but broad guidelines that are too vague to be operational. Their use in practice inadvertently entails a great deal of judgment a judgment that has to be based on situational information about the actual demand for flexibility, for else this mechanism falls prey to moral hazard. If this kind of situational information is available, however, formal mechanisms become redundant, since governments that are fully aware about the need to depart from the commitment would do it also tacitly in order to protect the commitment. For commitments to be operational in a dynamic strategic context, it is both necessary and sufficient to draw on situational information about the actual domestic pressure for defection. The bulk of existing studies therefore fail to address the crux of the aforementioned problem: How do states constantly elicit the information that is necessary for them collectively to determine whether to comply with or depart from the formal commitment?

The paper embeds the study of this question in an analysis of an informal institution in the European Union (EU). The EUs legislative process commits the member states to advancing economic integration, since it allows for imposing trade-enhancing decisions on recalcitrant member states. The Council of Ministers, composed of government representatives, is the main intergovernmental bargaining forum in this process. On paper, its Presidency (an office rotating among governments on a six-monthly basis) is merely responsible for the organization and smooth operation of the Councils work. In reality, the Presidencys tasks go much further that. The government in office is endowed 1 For a brief summary see e.g. Shepsle 2006, 1042-1047. 2 The literature developed predominantly on the basis of WTO escape clauses. See e.g. Rosendorff 2005, Rosendorff and Milner 2001, Sykes 1991.

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with several informal prerogatives such as the micromanagement of the legislative agenda, the proposal of compromises among the member states, and the decision whether or not to conclude intergovernmental negotiations by calling a vote.3

The Presidency is a complex institution that performs a number of different tasks. But one of its key functions represents a solution to the aforementioned problem that confronts many other international organizations as well. The central argument is that the Presidency serves a crucial information-providing role due to its informal authority to adjudicate on demands to depart from the official procedures. Because some governments face incentives to exaggerate the actual demand for flexibility for personal gains, adjudicating authority is granted to a government that in normal times prefers to stick to the official procedure. This arrangement induces other government to increase the level of information in order to prevent the Presidency from rendering a false and unfavorable judgment. The member states defer to this judgment because it permits them to uphold a deep, yet fragile, level of cooperation that would otherwise prove impossible to sustain.

Informal authority is difficult to trace empirically. So far, the literature on the phenomenon of the Presidency has analyzed with mixed results whether its informal prerogatives provide it with added influence on negotiation outcomes. However, adjudicating authority need not translate into influence. On the contrary, the theory expects the Presidency to propose outcomes that depart from the outcome it would have preferred in normal times. This paper therefore employs a different analytical strategy, one that focuses on the behavior that the theory predicts governments to display in interaction. The testable implications are derived from the expectation that member states provide the context for the government in charge to perform its adjudicatory function. Specifically, they seek to keep issues from the agenda when, in normal times, the government in office stands to gain from a procedural departure, for this would induce the Presidency to misrepresent the actual demand for flexibility.

The paper is structured as follows. After a brief overview of the literature on institutional flexibility, the paper lays out a theory of informal authority. A section follows that specifies the theorys testable implications and alternative explanations for the formal institutional context of the EU. The remainder then uses a mix of qualitative and quantitative tools to put the theory to a test. The paper concludes by discussing how the findings can be generalized beyond the case of European integration.

The literature The literature on institutional flexibility first emerged in the field of monetary policy under labels such as rules versus discretion or rigidity versus stability. Because wages are sticky, governments are tempted to use a monetary stimulus to decrease real wages and thereby increase output and employment beyond the natural level. But since wage setters anticipate politicians time-inconsistent preferences and adapt contracts

3 For a cursory description see e.g. Hayes-Renshaw and Wallace 2006, chap 5.

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accordingly, the effect is washed out and results in inflation bias.4 In normal times, rules that commit governments to low inflation are therefore superior to discretionary monetary policy. In times of crisis, however, the rule might need to broken in order to stabilize the economy.

The problem is arguably more complex in international politics due to the multitude of factors that may generate a demand for flexibility. The analogous time-inconsistency problem in international politics stems from the fact that opportunistic governments may suddenly face incentives to renege on cooperation.5 States therefore tie their hands in formal international institutions in order to bolster the credibility of commitments to a cooperative policy. Because international institutions need to be self-enforcing to be effective, institutional stability crucially depends on their capacity to reinforce states interest in adhering to them. Preferences may change, however, and so the plethora of factors that determine states interests in cooperation are also a potential source of instability.

One strand of the literature focuses on factors at the systemic level. Bagwell and Staiger argue that exceptionally high trade volumes induce governments to defect unilaterally from a commitment in order to maintain the terms of trade.6 Stone argues that dominant states may suddenly be tempted to exercise viable outside options to institutionalized cooperation.7 Another stream focuses directly on the vicissitudes of domestic politics that determine governments policies. A group of legal scholars, economists and political scientists argue that unanticipated changes in economic8 and/or domestic political conditions9 suddenly create rewards for opportunistic governments to defect from an agreement. All these sudden defections, regardless what caused them, jeopardize the commitment both in the short run and the long run, because they trigger punishment strategy that escalate in trade wars10 and/or gradually diminish the value of a highly beneficial commitment.11

The literature has also proposed a number of institutional solutions for this problem. For example, Rogoff suggests appointing a conservative central banker who places more weight on low inflation than the society at large, but also enough weight on stabilizing employment to ensure that she react to economic shocks.12 Similarly, Downs and Rocke propose to establish sanctions for noncompliance that are low enough to allow politicians to break the agreement when interest group benefits are great, but high enough to encourage states to obey the agreement most of the time and thereby prevent trade war.13 Also Rosendorff and Milner expect states to combine the make the use of escape clauses dependent on an optimal penalty, one that balances the need for as much

4 Kydland and Prescott 1977. 5 Grossman and Helpman 1994. 6 Bagwell and Staiger 1990, 780. 7 Stone 2011. 8 Sykes 1991, 279. 9 Downs and Rocke 1995, 77, Rosendorff and Milner 2001, 832. 10 Downs and Rocke 1995, 91. 11 Kleine 2009. 12 Rogoff 1985, 1187. Modified models consist of conservative bankers in combination with a political counterweight or an escape clause. For s brief summary, see Lohmann 2006, 532-535. 13 Downs and Rocke 1995, 77.

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cooperation as possible, while allowing for some flexibility in times of domestic political pressure.14

Yet the literature has some shortcomings. In terms of prescription, many of the aforementioned models are based on implausible assumptions of states information about future demands for flexibility.15 If already the commitment is made in the face of uncertainty about the future, how can states know in advance the optimal measure of sanctions that is low enough to encourage a breach of the commitment and high enough to prevent it? Flexibility mechanisms are necessarily incomplete and but broad guidelines that require a great deal of political judgment to be operational in practice. This judgment in turn must be based on situational information, since ambiguity about the actual demand for flexibility will otherwise result in an abuse of the mechanism.16 The availability of situational information, however, renders the formal mechanism redundant, since states that are fully aware of the need to accommodate another government under pressure would do that also tacitly in order to sustain cooperation. Most studies therefore remain overly static and fail to address the crux of the question, namely how states elicit situational information about the actual demand for flexibility.

In light of this logical inconsistency, it is not surprising that there are gaps between the models prescriptions and the behavior that governments display in practice. For example, many of the abovementioned models, most of which are based on an analysis of the GATT Article XIX escape clause, seek to explain retrospectively the rationale behind the design of flexibility mechanisms. But Pelc finds that, contrary to what some of these models predict, that member states rarely ever use optimal sanctions in response to states appeals for exceptions.17 In addition, Stone (for the case of the IMF)18 and Kleine (for the case of the EU)19 show that states adopt practices of informal governance in order to add flexibility to formal commitments.

In sum, a burgeoning literature on institutional flexibility has suggested a number of ways for governments to commit to policies and still retain a measure of discretion to react flexibly to unforeseen events that render the commitment inadequate. However, the literatures focus on formal flexibility mechanisms brings about a number of shortcomings. Importantly, formal flexibility mechanisms do not solve the problem at hand. Since they are designed in the face of uncertainty about the future, they are likely to be too vague to be operational in practice. Unsurprisingly, empirical studies find that flexibility is often provided tacitly rather than formally. The crucial question in relation to the dilemma between stability and flexibility is therefore not the ex-ante formal design of flexibility mechanisms. The crux of the problem is how to elicit situational information about that allows states to assess on an everyday basis whether formal commitments apply or flexibility is pertinent. The following section suggests how this is done in the European Union.

14 Rosendorff and Milner 2001, 835. 15 See also the critique in Wendt 2001, 1029-1032. 16 For a similar critique in monetary policy see e.g. Svensson 2002, 57. 17 Pelc 2009, 350. 18 Stone 2011. 19 Kleine 2009.

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A theory of informal authority in the EU The core argument of this paper is that the Presidency of the Council of the EU serves a crucial information-providing role in that its informal authority to adjudicate on demands to depart from the formal procedures induces all governments to increase the level of situational information that is necessary to assess whether formal rules apply or flexibility is pertinent. This theory of informal authority is based on two assumptions about preferences and information in the EU. First, state preferences are mutable and may change in unpredictable ways.20 While inaccurate in some issue-areas, this assumption is plausible in the realm of economic integration, the very core of the European integration process, where patterns of societal interdependence are subject to all kinds of unforeseen economic (e.g. technology, demand and supply) and societal (e.g. elections, group clout) shocks that alter domestic demands for cooperation and governments incentives to heed to them. The second assumption is that governments are better informed about their preferences than their cooperating partners. Although the political systems of the European member states are transparent, the various aforementioned factors that determine a governments policy choice nonetheless render the process of preference complex and difficult to comprehend from outside.

The theory is introduced in four steps. Firstly, it is explained why governments enter formal commitments to cooperation, and what form they take in the European Union. The second step argues that unforeseen shifts in patterns of societal interdependence can suddenly render these formal commitments inadequate. In a third step, it is explained why this inadequacy creates a demand for informal authority, while the final, fourth step discusses how this informal authority can be provided.

The demand for commitments Institutions are critical for actors to capture gains from cooperation when preferences may change in unforeseen ways. Cooperation is untenable if one suspects another actor will renege on the promise to reciprocate.21 In order to reap joint gains under this condition of time-inconsistent preferences, governments therefore design rules that bolster the credibility of commitments to cooperation. By specifying conduct in contingent situations and delegating authority to make and enforce common policies to international organizations, rules constrain governments choices ex ante in favor of cooperation. The cooperating partners are consequently able to form stable expectations about each others future behavior.

The demand for formal commitments under conditions of time-inconsistent preferences explains large parts of the EUs institutional set up.22 The objective of deep economic integration that does away with any obstacle to the free circulation of goods, persons, services and capital implied a stream of individual decisions on the abolishment or

20 The economic literature therefore distinguishes between unpredictable uncertainty and measurable risk. On the application of this terminology in International Relations see e.g. Wendt 2001, 1029. 21 The seminal article is Kydland and Prescott 1977. 22 Majone 1994, 90, Moravcsik 1998, 3-4, Pollack 1997, 104.

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harmonization of diverse domestic regulations. In order to ensure that these decisions would constantly deepen the level of economic integration, the member states delegated agenda-setting and implementation powers to a supranational bureaucracy, the European Commission. Most decisions are furthermore adopted today jointly with the European Parliament23 by a qualified majority vote. The resulting legislative procedure constitutes a credible commitment in that it provides opportunities to impose individual decisions on one or more recalcitrant governments.

The demand for flexibility Absent external enforcement, institutions have to be self-enforcing, that is, the rules effect has to be as such as to constantly reinforce states interests in adhering to the institution. Yet, exactly because the rules are set up in uncertainty about the future,24 situations are bound to arise where sticking to the letter of the law fails to reinforce states interests in adhering to the institution. When societal patterns of interdependence are subject to change, the distribution of the gains and losses of cooperation at the domestic level may also change in unexpected ways. Situations may therefore arise where an indiscriminate use of formal rules suddenly imposes concentrated costs on an individual group, which subsequently mobilizes and pressure its government into defection, even if cooperation is in fact beneficial for the society as a whole.25

Todays Single Market is a good example in that regard. It is supposed to become an area in which the free circulation of the factors of production are as easy among the member states as it is within each one of them. However, the removal of trade impediments at the systemic level always also leads to redistribution at the domestic level. Furthermore, the amount of domestic redistribution increases with the depth of the initial level of integration. This in turn increases the number of people that are affected by the institution and seek to pressure their government into adopting a policy that most closely matches their interest. It is therefore not surprising that students of EU decision-making find no evidence for clear cleavages or coalition patterns among the member states. Dynamic preferences like this are evidence for shifting patterns of interdependence that are a fruitful ground for unforeseen domestic distributive conflicts and sudden pressure for defection.

Why does unauthorized defection generate a demand for flexibility? Apart from generating deadweight loss for the defecting state and its most intertwined trading partner, unauthorized rule violations inflict a cost on all states because they impair the credibility of the commitment that the formal rules embody.26 The commitment itself takes a value of itself as it enables the production of high joint gains. Defection consequently diminishes the value of the institution. All governments are therefore better off if they prevent this cost by adding situational flexibility to the formal rules a

23 To be sure, the empowerment of the European Parliament defies the credible commitment perspective. Yet it also never undermined this function. 24 It is therefore useful to distinguish between measurable risk and uncertainty. Cf. Wendt 2001, 1029. 25 Downs and Rocke 1995, chap 4, Kleine 2010, 4, Rosendorff and Milner 2001, 832. 26 Kleine 2010.

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flexibility that manipulates the domestic distributive effects of cooperation in a way as to restore the potential violators interest in adhering to the institution.

The demand for informal authority Let us briefly assume that the conditions that lead a government to renege on a commitment were observable for all cooperating partners. In this case, as mentioned before, the member states would accommodate this government tacitly in order to maintain the value of the institution. However, if the actual demand for flexibility is not perfectly obvious to everyone, the collective willingness to provide flexibility generates moral hazard in that governments have an incentive to claim to be facing unmanageable domestic pressure merely to receive rents or manipulate the terms of trade at their partners expense. In order to resolve the dilemma between flexible and credible commitments, governments therefore constantly need to elicit information about the actual demand for flexibility that the current situation requires.

How do member states elicit situational information about the actual demand for flexibility? If the conditions that justify flexibility were perfectly predictable and put in written, the authority to adjudicate on claims could be delegated to a legal body that merely assesses whether these official conditions are met. In fact, it has been argued that it is principal function of the WTOs Dispute Settlement Procedure to collect information that is necessary to allow for an efficient breach of commitments.27 However, institutions are necessarily designed in the face of uncertainty about the future. The description of the conditions that require flexibility cannot be but broad guidelines, and their use in practice will therefore leave much room for judgment. A legal body cannot take a decision like this, because there are no further legal norms on which it could draw for guidance. The decision to depart from the rules and, thus, to cede a right for procedure is consequently a political decision that needs to be taken by the member states on the basis of situational information.

The supply of informal authority How do governments adjudicate on claims for flexibility? This authority cannot lie with the government that demands flexibility, since its incentive to exaggerate the actual demand generates the problem of moral hazard to begin with. For the same reason, the authority cannot lie with a government that, in normal times, would gain from a procedural departure, since it has an incentive to collude with the government that demands flexibility. The member states can trust the judgment of a government that, in normal times, would stand to lose from a procedural departure, since the only reason for it to recommend flexibility in a way as to avert the costs associated with an unauthorized rule violation. Its counterparts are subsequently induced to increase the level of situational information about the legitimacy of the claim in order to prevent this government from rendering a false, unfavorable decision.

27 Rosendorff 2005, 391.

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Tracing informal authority Authority that is neither based on legal rules nor on enforcement capabilities is difficult to trace empirically. Previous qualitative and quantitative studies of the Presidency have sought to determine whether its prerogatives allow the government in charge to shift decision outcomes in its favor.28 However, although informal authority implies that governments restrain themselves and pay deference to the Presidencys decisions, it need not translate into distributive gains. From our perspective, the Presidencys authority is functional and derived from the fact that its decisions enable the member states to uphold a beneficial level of cooperation that they would otherwise not be able to sustain.

This paper therefore employs a different analytical strategy. Instead of focusing on the effect of the Presidency on decision outcomes, we focus on the behavior that the theory predicts the governments to display in interaction. This section derives three aspects of the Presidencys authority that can be observed in practices.

Testable implications To recap, all governments have an incentive to avert unauthorized rule violations, for it damages the value of the commitment that the formal rules embody. But when the conditions that justify flexibility are not perfectly observable, governments also face an incentive to exaggerate the demand for flexibility in order to reap rents at their cooperating partners demands. Governments therefore need to decide on the spot and on the basis of situational information whether it is necessary to depart from the procedures. Legal norms are likely to be too vague to allow legal bodies to take a decision like this. The decision has to be taken by a government that, in normal times, stands to lose from such a departure. While a government that else gains from a procedural departure has an incentive to misrepresent the demand for flexibility, the judgment of a government that loses can be trusted, since the only reason why this government would recommend flexibility is to avert a situation that sparks domestic conflicts, lead to unauthorized rule violation, and damage the value of the commitment. Other governments defer to the decision, because it enables them to uphold a highly beneficial level of integration.

How would this arrangement look like within the EUs formal institutional context? In principle, the member states could delegate adjudicatory authority for each issue under negotiation to a suitable government. But this solution seems prohibitively cumbersome in light of the hundreds of legal acts that the EU adopts each year. Given that the treaty already provides for the Council Presidency to play a special role in the legislative process, another solution lies in adapting this office with a view to creating the context that is necessary for the Presidency to perform its function. Specifically, the member states keep issues off the legislative agenda where the government holding the office would, in normal times, gains from a procedural departure.

28 Individual case studies include Beach and Mazzucelli 2007, Elgstrm 2003b, Tallberg 2006. Thomson (2008, 611-612) finds in a statistical analysis that the Presidency enjoys added bargaining power while Warntjen (2007) finds evidence for a Presidency bias on the agenda.

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Three testable implications follow:

Hypothesis 1: The Presidencys informal prerogatives co-evolve with a permanent informal practice to manipulate of the legislative agenda.

Hypothesis 2: It takes longer on average to conclude negotiations, everything else being constant, if one or more governments that preside the negotiations have an incentive to abuse their prerogatives.

Hypothesis 3: Governments pay deference to the Presidencys judgment if the government in charge has no incentive to abuse its prerogatives for personal gains. They deny deference when this condition is not met.

Alternative explanations for informal authority The curious development of the Presidencys informal prerogatives and the behavior that governments display in interaction may have alternative explanations that we need to control for. Classical regime theory regards institutions as a way to reduce the relative costs of transactions. Jonas Tallberg recently interpreted the emergence of the Council Presidency along these lines. In this theory, intergovernmental negotiations are subject to various problems such as overcrowded agendas or incomplete information that bring about a demand for leadership.29 The argument goes that states enhance the efficiency of negotiations by delegating the task of agenda management and brokerage to the Presidency.30 The Presidencys privileged position, in turn, provides each government in office the opportunity to shift decision outcomes in their favor. 31 Put differently, the Presidencys authority is based on the function of its office. Yet instead of eliciting information about the demand for flexibility, classical regime theorists argue that the office of the Presidency function enables governments to overcome interstate negotiation problems. While classical regime theory can in principle account for the co-evolution of informal prerogatives in agenda setting and negotiations, it nonetheless yields two testable implications that contradict our theory of informal authority.

Alternative Explanation (classical regime theory) ad 2: Since the Presidency wields authority by virtue of its office, there is no correlation between the duration of negotiations and the Presidencys stance on the issue under discussion.

Alternative Explanation (classical regime theory) ad 3: Governments pay deference to the Presidencys judgment regardless of its stance on the issue under negotiation.

Another potential explanation of the Presidencys informal authority is the power of the government in office. Stone argues that informal practices are often a means for dominant states (i.e. states that potentially have viable outside options) temporarily to eschew

29 Tallberg 2006, 3. 30 Tallberg 2006, 24-27. 31 Tallberg 2006, 31-33.

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institutional constraints when their vital interests are at stake.32 Accordingly, the Presidencys informal prerogatives are not permanent and emerge only when a powerful country takes over the helm. The authority to decide that legal commitments be suspended lies with the dominant state, which under incomplete information and repetition is expected gradually to build a reputation for restraint.33 But it is not expected to make its use of informal practices dependent on the judgment of another government. Two testable implications follow.

Alternative explanation (power-based institutionalism) ad 1: The Presidencys informal prerogatives in agenda setting and negotiations are not permanent practices.

Alternative explanation (power-based institutionalism) ad 2: Since the Presidencys authority is endogenous to power, there is no correlation between the duration of negotiations and the preferences and power of the government in office.

Alternative explanation (power-based institutionalism) ad 3: Dominant states do not pay deference to the decisions of small governments while small governments pay deference to the decision of dominant states in office.

The means to wield informal authority For the Presidency to fulfill its adjudicatory function, governments have to make sure that the agenda does not include issues for which the government in charge has an incentive to misrepresent the actual demand for flexibility. The member states therefore need to keep issues off the agenda on which this government would, in normal times, gain from a procedural departure. We consequently expect the Presidencys informal prerogatives to co-evolve with informal practices to manipulate the legislative agenda. This prediction is at odds with power-based institutionalism, which expects only dominant countries to adopt informal practices. Drawing on archival material and contemporary observations, this section evaluates this first testable implication in a descriptive inference of the development of informal practices in agenda setting and intergovernmental negotiations.

Informal prerogatives in intergovernmental negotiations The Treaty of Rome, the founding treaty of the European Economic Community, mentions the Council Presidency only briefly by stipulating that the Council met upon its initiative. To the surprise of all governments, this seemingly innocuous office soon came to play a central role in intergovernmental negotiations. In 1961, three years after the inception of the Community, an insider of the legislative process observes:

32 Stone (2011) argues that small states accept these practices of informal governance in exchange for more favorable formal votes. 33 Stone 2011, 45.

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There has been a very interesting development in the first three years of practical application of the Treaty. More frequently the Presidency finds itself released from its task of expressing its national position as a member of the Council of Ministers. Instead, it devotes itself to the organization of work and the search for a compromise among governments.34

Its new role in decision-making was based on several informal practices, which developed as early as the early 1960s and have remained remarkably stable since. The first informal practice was the establishment of intense contacts with recalcitrant governments. The Presidency consequently became the hub of Council negotiations very shortly after the treaty had become effective. The purpose of these contacts was, according to the German delegations description of its 1964 Presidency, to attain information about motives and problems of individual delegations.35 Also the Commissions executive secretary, Emile Nol, underscores the importance of this informal practice:

The chairman has a feeling for unformulated desiderata and requests. He knows where positions are reserved. He knows how to take account of and interpret remarks made in confidence.36

The practice proved remarkably stable over time. It was accentuated further with the gradual promotion of the European Parliament to the status of a co-legislator. Instead of negotiating face-to-face between MEPs and the Council in full session, governments usually rely on the Presidency to establish contacts with the Parliament and conduct negotiations on the Councils behalf.37

The Presidencys hub position in Council negotiations was accompanied by a second practice, the preparation of compromise proposals, which soon became known as presidency compromises. The term appears in Council documents as early as the early 1960s.38 Nol explains:

[The Commission] is more obliged to uphold, even practically on its own, the Simon-pure position, which the Commission has decided is most in accordance with the Community interest... So it is the chair that has the most scope for quietly taking soundings, putting out feelers, and coming forward at the right moment with compromise suggestions particularly suggestions some distance away from the Commissions original proposal.39

34 Mgret 1961, 636, 646. 35 Vertretung der BRD bei der EWG und EAG 1965. It was thereby assisted by the Council Secretariat, which gathered intelligence from the members of Permanent representations or in direct consultation in the capitals of other governments. 36 Nol 1967a, 238 taking account of Nol 1966, 32, Nol 1967a. 37 Council of the European Union 2000a, 15, Hayes-Renshaw and Wallace 2006, 151, 212. 38 Vertretung der BRD bei der EWG und EAG 1964. Cf. van Rijn 1973, 652, Sasse 1975, 143-147. Cf. Dewost 1987, 174. 39 Nol 1967b, 42, Nol and tienne 1971, 437-438 and Nol 1967a, 239.

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A third informal practice is the Presidencys prerogative to decide whether and when to conclude negotiations by calling a majority vote.40 It emerged in the late 1960s and became more prominent in the mid-1970s with an increased use of majority voting in Council negotiations. In line with our theory of informal authority, contemporary reports directly pinpoint its adjudicatory function. A report on the functioning of the European institutions describes and approves of the unwritten law that the Presidency decides whether and when to call a vote:

Each state must remain the judge of where its important interests lie. Otherwise it could be overruled on an issue which it sincerely considered a major one... The application of these solutions lies in the hands of the Presidency. The Chairman of the Council is best placed to judge whether and when a vote should be called.41

The Councils Jurisconsult, Jean-Louis Dewost, concurs:

[Overruling] a minority is just as reprehensible as insisting on concessions up to the point that it threatens the community interest Since the normal negotiation process has not allowed [such conflicts] to be prevented, the only alternative to the use of force is arbitration These rules of the game have led to the development of a decisive role of a new communitarian organ: the Presidency. It is the Presidencys responsibility to maintain normal political relations within the Community, to try to construct compromises between extreme positions, and at the same time to avert conflict.42

The informal manipulation of the legislative agenda The theory of informal authority argues that the Presidency wields authority on the condition that it has no incentive to exaggerate the need to depart from the procedures. Do the member states consequently drop these issues from the agenda? At the same time that the Presidency developed these aforementioned informal practices, the governments also began to manipulate the Councils legislative agenda. The Treaty of Rome had endowed the Commission with the exclusive right of legislative initiative. This monopoly implied that the Commission determined both the substance and the timing of draft proposals for legal acts. The Council of Ministers, later jointly with the European Parliament, would then adopt these proposals by qualified majority or change them unanimously. However, shortly after the treaty entered into force, the governments began to pass official Commission proposals to informal committees of government representatives for a preliminary evaluation. They lingered in this informal Council substructure often for an indeterminate period of time.43 The Council agenda consequently ceased to be determined by the Commission, which afforded governments the opportunity to structure the Council agenda according to new priorities.

40 Nol and tienne 1969, 47. Cf. Torrelli 1969, 91. 41 Council of the European Communities 1980. 42 Dewost 1983, 78-79. 43 Sasse 1972, 88.

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As soon as the agenda opened up to new priorities, the Presidency began to manage its specific composition. The member states permanent representatives recommended already in 1960 that the () choice of important subjects, which merit discussion in the Council, ought to be conferred to the Presidency44 This new task provided the Presidency the opportunity to structure the agenda according to its interests. It was able to prioritize issues it preferred and, ceteris paribus, let others slide. According to close observers, the Council Presidency usually neglects the Commission proposals for legal acts that it would like to see altered. Proposals, which the Presidency prefers as they are, consequently move up. The reason is, in accordance with our theory, that while it is expected to respect other delegations reservations against the Commission proposal, the Presidencys own demands to alter it usually go unheeded.45 Violations of this norm were considered surprising, inappropriate, and immediately inhibited. Attempts like this, an internal report on the conduct of the Presidency emphasizes, would meet with strong refusal.46 In light of this, the Presidency stalls these dossiers where possible until the next government takes over.47

The Presidencys micromanagement of the agenda became a generally accepted fact.48 In recognition of this development, the Council obligated incoming presidencies from 1973 onwards to publish their work program and timetables for meetings.49 This work program became the basis for the state of the Community address, in which each incoming Council Presidency announced a list of its objectives and priorities to the EP.50 But despite this phenomenal rise in importance, the Presidencys agenda setting function was barely formalized. In 1988, it was merely decided that each Presidency should present a more comprehensive work program for its six-month period. In 1993, this procedure was integrated into the Councils internal Rules of Procedure.51

The Presidency managed to retain its influence on the agenda despite the emergence of rival agenda setter like the European Council. For that purpose, governments establish contacts with the Commission well before their term in order to ensure a timely preparation of preferred issues.52 The Presidency also draws on more subtle strategies. In 1986, a confidential FCO document entitled Guidance on the Exercise of the Presidency instructed British officials on the respective tactics.53 Asked about it, a British official defended the document:

44 Conseil de la CEE et de la CEEA 1960. 45 Vertretung der BRD bei der EWG und EAG 1965. Today, the informal Presidency Handbook (Council of the European Union 2001) states right at the beginning: The Presidency must, by definition, be neutral and impartial. It is the moderator for discussions and cannot therefore favor its own preferences or those of a particular member state. 46 Vertretung der BRD bei der EG 1971. Cf. Elgstrm 2003a, 47. 47 Wallace and Edwards 1976, 544. Cf. Elgstrm 2003a, 50, Wallace 1985b, 16-17. 48 Council of the European Communities 1980. Dewost 1984, 32. Cf. Wallace 1985b, 5. 49 Amphoux, et al. 1979, 110, de Bassompierre 1988, 24. 50 Wallace and Edwards 1976, 543, Westlake 1995, 342. 51 Tallberg 2006, 50. 52 Edwards and Wallace 1978, 82, Wallace 1985a, 463. 53 Cited in Maass 1987, 10.

15

Everyone in the community uses the kind of maneuvers or procedures that were mentioned in the paper (). The only surprising thing is that the British put them on paper.54

The informal manipulation of the agenda has hardly changed since. Asked about the importance of an adequate balance of interests on the agenda, a former Permanent Representative explained succinctly:

Nobody cares if the Council agenda adequately balances the governments various interests. Its as simple as that: Governments decide what needs to be decided and what the Presidency thinks is important.55

In sum, at the same time as the Council Presidency gained informal prerogatives that allowed it to adjudicate on claims for flexibility, it also gained control of the Councils legislative agenda. Contemporary sources suggest that the government in office used this influence to drop legislative dossiers from the agenda that it preferred to alter. The reason is that its cooperating partner would strongly refuse any demand or attempt to change the proposal for as long as this government was in charge of the Presidency.

Creating the context for informal authority The previous chapter showed that the Presidency is able to manipulate the Councils legislative agenda despite the Commissions formal monopoly of initiative of the agenda. Qualitative data suggest that the Presidency uses this prerogatives in order to drop issues from the agenda if, in normal times, it stands to gain from a procedural departure, for else it forfeits its authority in intergovernmental negotiations. This section subjects the hypothesis to a further, very simple test. The following linear regression analysis evaluates whether it takes longer, everything else being equal, to adopt a legal act when one of the presiding governments faces such a conflict of interest.

The prediction is at odds with other theories of the Presidencys informal authority. Arguing that Presidencys wields authority by virtue of their office, classical regime theorists would not expect the Presidency to drop issues that it wishes to alter. Nor would power-based institutionalism, which expects authority to be endogenous to power, expect any correlation between the duration of negotiations and power or preferences.

The hypothesis is tested using an original data set of legislative dossiers adopted between 2000 and 2001. This time period was chosen for the practical reason that the Councils electronic register only covers dossiers including agendas and minutes from 2000 on. The data set was randomly narrowed down to Council directives adopted in the second term between the months of July and December of each year. The search in the Eur-Lex

54 Maass 1987. 55 Interview # 3.

16

database search yields 43 observations. Some Commission proposals go back to 1989 so that the data set includes all possible 15 Council Presidencies.

The central dependent variable is the duration of negotiations (DURATION) measured as the number of months from official submission of the Commission proposal until its official adoption. The central independent variable (PRES) is a dichotomous variable measuring whether or not a country that at one point during the entire lifespan of a legislative dossier holds the office of the Presidency demands to change the Commission proposal under negotiation. Demands like this are registered in the Council minutes. The variable takes on a value of 1 if the available documents show evidence for such a demand, and 0 otherwise. Another dichotomous control variable was created for the existence of conflict per se (CONFLICT). Conflict was measured in a similar way as the independent variable, namely by registering the existence or non-existence of opposing demands in the Council to change the Commission proposal. The variable has a value of 1 if such a conflict can be detected in the minutes, and 0 otherwise.56

The duration of negotiations may also be influenced by the formal voting rule, because a recalcitrant government can invariably block a decision under unanimity. If majority voting applies, however, governments can impose and outcome on a minority in the Council. We therefore added a control for the underlying voting rule (MAJORITY). This variable has a value of 1 if the legal base of the dossier provides for qualified majority voting, and 0 otherwise. Another factor that may increase the duration of negotiations is parliamentary participation in decision-making. A dummy variable was created in order to account for parliamentary participation. EPINVOLVE is a dichotomous variable measuring whether or not the legal basis provides for Parliaments participation in decision-making. It takes a value of 1 if it participates, and 0 otherwise. Assuming that Parliamentary involvement needs not increase the duration of decision-making per se, another dichotomous variable was created that measured the scope of involvement (EPSTRONG). If the legal basis provides for the weak consultation procedure, the variable takes a value of 0. If the strong codecision procedure applies, the variable has a value of 1.57

This simple regression discerns a relationship between the duration of negotiations and a conflicted Presidency. The models do a good job, explaining more than 60 per cent of the variation, despite the small number of observations. In both models, the PRES variable is correctly signed and significant at the 1 per cent level. The results also show that strong Parliamentary involvement on average increases the duration of negotiations. This is not surprising given that parliamentary involvement requires governments to conduct additional negotiations.58 Also of little surprise is the finding that majority voting 56 These categorical variables are admittedly crude. Yet they are arguably more precise than existing variables that measure the interval between actors ideal points, which lose their comparability when they are normalized on a scale of 0 to 100. Put differently, on a normalized scale, a distance of 80 between different ideal points can signify both a minor disagreement and a major conflict. These datasets are therefore not useful for our purposes. 57 The basic equation for the first model estimating the relationship between a conflicted Presidency and the duration of negotiations with parliamentary involvement is: DURATION = 0 + 1 PRES + 2 CONFLICT + 3 MAJORITY + 4 EPINVOLVE +. The equation for the second model including a variable for the strength of parliamentary involvement is: DURATION = 0 + 1 PRES + 2 CONFLICT + 3 MAJORITY + 4 EPSTRONG +. 58 See, for instance, the discussion in McElroy 2006, Schulz and Knig 2000.

17

decreases the duration in cases of strong parliamentary involvement. The existence of conflict slightly increases the duration of negotiations. But the effect is not statistically significant.

Table about here

In a nutshell, the data provide strong evidence for the validity of the hypothesis that the duration of negotiations on a dossier increases significantly when one of the governments at the helm faces a conflict of interest, that is, when it itself wishes that changes be made to the dossier under question. This can be interpreted as evidence that governments stall these dossiers at least for as long as the conflicted government chairs over the negotiations. However, the statistical analysis detects correlation, but it cannot unveil the exact causal mechanisms. This will be done in the following case study, which demonstrates that the Presidencys authority depends on its ability to render a judgment that other governments can trust.

The limits of informal authority The previous sections showed that the Presidency not only has the means to manipulate the legislative agenda despite the Commissions formal monopoly of initiative. The statistical analysis revealed that it also takes longer to find an agreement on dossiers when the government in office would, in normal times, gain from a procedural departure and consequently have an incentive to misrepresent the demand for flexibility. This section now eyeballs governments reaction in the event that the Presidency suddenly faces such a conflict of interest.

The negotiation of the so-called End-of-Life-Vehicles (ELV) directive constitutes a kind of natural experiment, because Germany during its Presidency suddenly changed its position from strong support to a strong opposition of the Commission proposal under negotiation. The theory of informal authority would expect Germany either immediately to drop this issue from the agenda or its cooperating partner to deprive it of its informal prerogatives. Classical regime theory, which holds that the Presidency wields authority by virtue of its office, would not expect that the German Presidency lose its authority in response to its sudden preference change. Power-based institutionalism expects the Presidencys authority to be endogenous to the interests of powerful states. Given that Germany is the largest economy in the Single Market, this theory would still expect other delegations to defer to Germanys decision and, conversely, the German delegation to ignore the decisions of smaller governments in office.

The European Commission officially submitted its proposal for the ELV directive in July 1997. The draft directive stipulated take back and recycling duties for the automobile industry. Initially, only Spain and the UK voiced opposition while the majority of governments, including Germany, Sweden, Denmark, and Austria, supported the Commission proposal.59 In line with our theory, negotiations in the Council substructure and with the EP did not make much progress under the conflicted UK Presidency in the

59 Agence Europe 1999c.

18

first half of 1998. The Austrian Presidency consequently inherited responsibility to find an agreement among the member states and announced its determination to adopt a common standpoint by December 1998.60 Under its chairmanship, the Council substructure quickly prepared a compromise text that all delegations were willing to accept.61 The Council declared that it expected the adoption of the Councils common position in March during the German Presidency.62 The German Minister for the environment, Jrgen Trittin of the Green Party (Bndnis 90/Die Grnen), announced that the adoption of this directive would be a key policy goal for Germanys term in charge of EU business.63 Shortly before the meeting in March, the German delegation announced that it felt confident of concluding the negotiations.64

Surprisingly, the social democratic German Chancellor Schrder (SPD) suddenly decided to revoke the German delegations support for the compromise. The reason was a direct intervention by the chairman of Volkswagen, Ferdinand Pich, who had complained about the extensive adjustment costs the automobile industry was going to face. Schrder invoked his prerogative as Chancellor to define the policy guidelines and instructed his coalition partner Trittin to postpone the scheduled decision in order to reopen negotiations.65 Trittins colleagues in the Council of Ministers heavily criticized this decision during a lively informal discussion at lunch.66 Trittin subsequently announced contrary to Schrder that the German delegation would no longer seek to make changes to the text or postpone a decision.67

The UK and Spain, who also opposed the directive, were subsequently rumored to have contacted the German chancellery in order to fathom the possibility of forming a blocking minority against the Commission proposal. In the event that a vote was called, this blocking minority would reject the directive once and for all. Other delegations reacted strongly to this rumor and regarded this imminent maneuver as an abuse of the Presidencys power and reminded the German delegation of the conditionality of its authority. If the German Presidency indeed decided to call a vote that would block the proposal, they threatened they would for the first time in the history of European integration overturn the Presidencys decision, which after all merely rested upon an informal agreement.68

In light of this tense situation, the German delegation decided to avoid further discussions by listing the ELV directive as the 10th item of an already loaded agenda.69 Furious demands on the part of the Commission, Finland, Sweden, Denmark and Austria to discuss the Presidencys conduct on this matter were rowdily brushed off. Trittin then decided to discuss the dossier in a strongly restricted session.70 In this session, he

60 European Voice 1998. 61 Council of the European Union 1998. 62 Agence Europe 1998a, Agence Europe 1998b. 63 European Voice 1999b. 64 Agence Europe 1999d. 65 On the conflict within the German delegation see Wurzel 2000. 66 Agence Europe 1999a. 67 Frankfurter Allgemeine Zeitung 1999b. 68 Agence Europe 1999c. 69 taz 1999. 70 Die Welt 1999c, Frankfurter Allgemeine Zeitung 1999a.

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demanded concessions for the German car industry and announced his intention to call a vote against the directive. Because one television camera was still recording sound, the European Voice was able to report the highlights of exchanges between the Ministers:

Fascinated journalists gathered round the screen as Trittin harangued ministers for refusing to accept his new compromise proposal What are you doing trying to talk us into a compromise when you are the problem? asked the Austrian Environment Minister, Martin Bartenstein. Denmarks Sven Auken was almost screaming with anger and Frances Dominique Voynet boomed: We cannot leave this room to tell the press and the public that we have dropped our trousers for the car industry! The only support for Trittins trousers came from the UKs Michael Meacher, who announced he was not performing a U-turn but had been told to reverse his stance by Premier Tony Blair under pressure from Schrder.71

The Council then noted the impossibility of securing at this point a qualified majority in favor of the text and decided to pass the issue for further discussion on to the Finnish Presidency.72 The incoming Finnish Presidency vowed to push for a swift agreement on the dossier despite German intransigence on the issue.73 Since it was obvious from its U-turn that the German delegation strongly exaggerated the unmanageability of its domestic pressure for non-compliance, it took only three more weeks of deliberations for the Council substructure to form a qualified majority in favor of the proposal and against a recalcitrant German delegation.74 The Ministers, in turn, decided to avoid a debate on the issue and adopted the common position by means of a written procedure.75 It was adopted as an A-item at the following Council at the end of June.76

German car manufacturers subsequently turned to the European Parliament for support,77 which in its final vote indeed tabled various amendments that were intended to lower carmakers expected costs.78 The Council largely stood to its common position,79 and also the Commission declared that it did not approve of Parliaments amendments.80 Council and Parliament consequently convened a conciliation committee that slightly modified the original text.81

In sum, the case of the ELV directive shows how the conditionality of the Presidencys informal authority. The German Presidencys attempts to abuse its prerogatives for personal gains met with very strong resistance. The member states clearly agreed that the government in charge is not in a position to adjudicate on claims for flexibility if it itself 71 http://www.europeanvoice.com/article/imported/car-recycling-backdown-skids-into-tv-trouble/38971.aspx, accessed 14 May 2011. 72 Agence Europe 1999e. 73 European Voice 1999d. 74 Die Welt 1999b. 75 Agence Europe 1999f, Die Welt 1999a. 76 Council of the European Union 1999. 77 Agence Europe 1999b, European Voice 1999c. 78 Financial Times 1999. 79 Council of the European Union 2000b. 80 European Voice 1999a. 81 Agence Europe 2000.

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demands that the Commission proposal be altered. The negotiation was quickly resumed as soon as the subsequent Finnish Presidency picked it up. Contrary to the expectations of classical regime theory, Germany was unable to use its prerogatives simply by virtue of its office. Power-based institutionalism is also unable to explain the governments behavior in this case. Germany, as the dominant state in the Single Market, should have been able to assert itself against a coalition of small states and make use of the practices of informal governance. Conversely, it would have continued its intransigence under the subsequent presidency of a small government.

Conclusion An intriguing question in institutional analysis is how states commit to cooperation and at the same time react flexibly to change in their strategic environment. This is difficult when the circumstances surrounding demands for flexibility are not perfectly observable, because this ambiguity opens the backdoor for defection under a different label. The bulk of the literature analyzes how formal flexibility mechanisms allow governments to distinguish between legitimate and false demands for discretion. Yet these predominantly formal studies are based on implausible assumptions of actors knowledge about future demands for flexibility. In reality, most of these mechanisms will turn out to be too vague to be operational in practice, and so their use will require a great deal of political judgment on the basis of situational information. The availability of situational information, however, renders the formal mechanisms largely redundant, since all states have an incentive to accommodate a government tacitly when this allows them to uphold the highly beneficial level of cooperation. The crux of the aforementioned problem is therefore not formal institutional design. It is the question of how governments elicit situational information in order to make formal commitments workable in a volatile strategic environment.

This paper embedded the study of this question in an analysis of the Council Presidencys informal authority in the EUs legislative process. This process constitutes a strong commitment to economic integration, since it allows in many ways for imposing integrative outcomes on one or more recalcitrant governments. The commitment must be considered fragile, however, because unforeseen shifts in patterns of interdependence may suddenly generate unmanageable pressure for defection. Situations like this require a departure from formal procedures with a view to accommodating the government under pressure in order to avert that unauthorized defection gradually erode the value of the commitment. Since the conditions that justify flexibility may not be obvious to all actors involved, the authority to adjudicate on such claims is delegated to the Council Presidency on conditions that the government in charge has no incentive to misrepresent the actual necessity to accommodate another government. This arrangement induces other governments to increase the level of available information in order to prevent the Presidency from rendering a false and unfavorable judgment.

While existing studies analyzed whether the Presidencys informal prerogatives give it a competitive edge in intergovernmental negotiations, this paper chose to investigate Presidencys informal authority at the level of behavior. The theory yielded three testable

21

implications that were derived from the expectation that governments seek to provide the context for the government in charge to perform its adjudicatory function. These implications were traced using a mix of qualitative and quantitative methods and in light of the predictions of alternative theories. First, it was demonstrated that the Presidencys informal prerogatives in negotiations are directly linked to its informal control of the agenda, since it needs to stall issues for which it is unable to wield authority. Second, we showed that it takes on average longer, everything else being constant, to adopt issues on which one or more governments in office face a conflict of interest. This was interpreted as further evidence that these issues are dropped from the agenda. Third, and finally, the case study of the ELV directive showed that member states stop paying deference to the government in office when it suddenly has an incentive to misrepresent the demand for flexibility. Neither classical regime theory, which argues that the Presidencys prerogatives serve to resolve agenda-setting and bargaining failure in intergovernmental negotiations, nor power-based institutionalism, which expects the Presidencys informal authority to be endogenous to power, were able to account for these curious practices.

Are the findings generalizable beyond the case of the European Union? The theory applies more generally to international institutions when a couple of scope conditions are met. First, the formal commitment is of very high, general value so that all cooperating actors consider it worth preserving. This is arguably true for other forms of voluntary cooperation that are propped up by formal commitments. Second, patterns of societal interdependence are subject to unpredictable fluctuations that disturb the distribution of the costs and benefits of cooperation at the domestic level. The theory is therefore unlikely to apply to areas like security where preferences are less volatile, but it can be expected to hold in the realm of economic integration where patterns of interdependence are far more erratic. Its testable implications, however, will vary with the design of the formal commitment.

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Duration of negotiations Model 1 (epinvolve) Model 2 (epstrong)

pres 37.0209*** (6.677) 38.6998***

(6.136)

conflict 7.3042 (5.246) 7.2156 (4.848)

majority -4.9544 (6.873) -12 9259*

(6.846)

epinvolve 14.3327 (10.345)

epstrong 13.4183*** (4.572)

_cons 9.8023 (12.102) 21.1332***

(6.030) Number of obs 43 43 Adj R-squared 0.5842 0.6427 * 0.10, ** 0.05, *** 0.01 significance