For more than three decades, the European Union has wrestled with a paradox: even as it has grown ever more involved in shaping national socioeconomic policies, it has often failed to persuade member states to implement the reforms it recommended.

The debate matters today more than ever. As Brussels deliberates the future of European economic governance, policymakers confront a fundamental question: how can the EU encourage national governments to undertake politically costly reforms? The answer emerging from the experience of NextGenerationEU and the Recovery and Resilience Facility (RRF) is disarmingly simple. Governments respond more readily to incentives than to threats.

The origins of the problem reach back to the sovereign debt crisis of 2009-12, which exposed grave weaknesses in the architecture of the eurozone. Existing coordination mechanisms — above all the Stability and Growth Pact — failed to prevent the accumulation of fiscal and structural imbalances across the member states. In response, the EU created the European Semester in 2011. Each July, the European Commission and the Council issue country-specific recommendations to the member states, covering almost everything a government must contend with: social policy, labour markets, the twin digital and energy transitions, public administration, and competition policy.

Despite the Semester’s centrality to fiscal and structural policy coordination, its record has been disappointing. After a relatively encouraging start, domestic implementation rates steadily declined.

The weakness boils down to the quasi-voluntary nature of national implementation. True, the prescriptions under the Stability and Growth Pact, which deal mainly with deficit and debt reductions, carry penalties for non-compliance — but those penalties have always been called off after reasoned requests from the member states concerned. Most structural recommendations, by contrast, carry no coercive mechanism at all, meaning that implementation is either voluntary or must be elicited by other means.

During periods of financial stress, governments could fear adverse market reactions in the form of surging yields on sovereign debt. In such moments, harsher supranational instruments — such as the European Central Bank’s “admonishment” letters sent to Italy and Spain in 2011 — provided the guiding principles by which member states could reassure markets. During calmer times, implementation has often relied on political exchanges between national governments and the Commission. In Italy, for instance, the centre-left Renzi government bartered a reduction in protections for permanent employment contracts in exchange for a modicum of fiscal leniency.

The result was a system that generated many recommendations but secured relatively little implementation. The Covid-19 crisis created an unexpected opportunity to rethink this model. With the launch of NextGenerationEU, the Union introduced a fundamentally different form of conditionality.

Instead of relying on sanctions, Europe this time offered financial incentives. Governments were invited to submit National Recovery and Resilience Plans (NRRPs) containing reforms and investments. In return, they gained access to substantial European funding. Rather than threatening governments with punishment for non-compliance, the Commission promised to release financial tranches once reforms had been delivered. Because NRRPs were operationally and legally embedded in the Semester, the cycle’s underlying logic shifted from wielding sticks to dangling carrots: money was released when agreed reforms and investments reached verifiable milestones and targets.

Examples of renewed reform élan abound. Italy’s NRRP helped unlock reforms that successive governments had previously struggled to implement, from speeding up court proceedings and modernising public administration to liberalising sectors long shielded from competition. Spain pushed through a far-reaching labour-market reform that curtailed excessive reliance on temporary contracts, expanded vocational training, and strengthened social inclusion.

Yet scholars disagree on how far the Semester has truly been transformed. Several authors argue that linking reforms to EU funding gave governments the political leverage needed to overcome resistance to changes that had been debated fruitlessly for years. Others are more sceptical. Researchers at Bruegel contend that the observed rise in compliance reflects the implementation of relatively easy recommendations, especially those concerning fiscal support during the pandemic. Some argue that the Covid-related suspension of the Stability and Growth Pact, which eased pressure on national budgets, had a similar effect. Critics also decry the limited progress in structurally difficult areas such as taxation and social policy, raising doubts about whether the new conditionality has fundamentally altered governments’ reform behaviour.

Our own analyses suggest that the shift from sanctions to incentives was consequential. First, compliance with recommendations folded into NRRPs is significantly higher than with recommendations issued before them, or immediately afterwards. The improvement cannot be explained by governments cherry-picking only easy reforms: most recommendations included in NRRPs were issued before the outbreak of the pandemic — that is, before the EU softened its stance towards indebted member states. Second, we found that money matters: countries that received a larger financial envelope relative to their GDP have implemented the Commission’s prescriptions more diligently. The performance of Germany and France, which received little more than a pittance, has been markedly worse than that of Greece, Italy, or Romania, whose EU-backed allocations exceeded 10 per cent of their 2021 GDP.

The key lesson is that incentives altered political calculations: reform became associated with visible benefits rather than externally imposed constraints. Yet not everything went according to plan. Three complications, particularly evident in Italy, deserve attention.

Alongside Romania and Spain, Italy received the highest number of Semester recommendations. This highlights a problem often overlooked in Brussels: governments cannot realistically implement an unlimited number of reforms simultaneously. Since administrative capacity and political capital are scarce, asking governments to do everything at once may ultimately reduce compliance rather than increase it.

Italy also illustrates the importance of deep sectoral differences. Recommendations concerning financial services or budgetary frameworks encounter fewer obstacles than reforms affecting sectors where interests are entrenched and the distributive consequences politically sensitive. Social policy has proven particularly difficult because reforms produce visible winners and losers. The same applies to competition in protected sectors: liberalising local public services or taxi licensing systems eluded Italian governments for decades. The NRRP put these issues back on the agenda, but tangible results remain limited.

Finally, member states tend to pick the low-hanging fruit instead of tackling harder issues head-on. “Some progress” on reforms was often sufficient for the Commission to release EU funding. In essence, the formal passage of a law was usually enough to clear the threshold, even as implementation lagged behind. Italy’s repeated postponement of competitive tenders for beach concessions along its prized coastline is a case in point.

In light of these shortcomings, NextGenerationEU cannot be hailed as an unqualified technocratic triumph. It did not eliminate political conflict. But it has unmistakably altered the balance of incentives surrounding reform.

The encouraging news is that the EU has learned valuable lessons from this experience. Elements of the incentive-based logic have percolated into the recently recast Stability and Growth Pact, which places greater emphasis on nationally designed medium-term fiscal-structural plans and country-specific adjustment paths. The same approach is set to be extended further through the proposed National and Regional Partnership Plans under the next Multiannual Financial Framework. Despite the differences, these instruments share a common premise: reforms are more likely to succeed when national governments are given ownership and tangible incentives, rather than merely confronted with rules and sanctions. The lesson emerging from decades of EU economic governance is remarkably simple. Conditionality works best when it helps governments to reform, rather than merely threatening them if they do not.

Acknowledgements

This short piece is based on a research project funded by Ministero dell’Università e della Ricerca (Project REPLANEU) within the PRIN 2022 Call for Proposals referred to in the Directorial Decree no. 104 of 02-02-2022 REPLANEU “Explaining the formulation and implementation of Recovery and Resilience Plans in Europe: a comparative approach” within the National Recovery and Resilience Plan, Mission 4 – Component 2. From Research to Enterprise – Investment 1.1 National Research Program Fund (NRP) and Research Projects of Significant National Interest (PRIN), funded by the European Union – NextGeneration EU – Project Code: 2022ABWLJA – CUP: B53D23010450006.

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