The enforcement dilemma of EU fiscal rules

Georg Kirchsteiger and Martin Larch

No 18304, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Effective enforcement is an essential element of any fiscal rule. The EU’s Stability and Growth Pact (SGP) has been struggling with this truism since inception. In this paper we show that its effectiveness goes beyond the threat of fines. The notion that deficit-prone member states would adopt a more virtuous fiscal behaviour to avert sanctions under the SGP is overshadowed by the understanding that in the event of a major shock the virtuous countries will come to their rescue as the survival of the entire system is at stake. Unless the underlying risks of running afoul of the SGP are addressed, the effectiveness of fines is limited. Beyond majorities in the decision-making bodies, SGP enforcement crucially depends on the resilience of member states’ economies and the macro-conditionality deficit-prone countries face in the wake of major shocks in return for financial support.

Keywords: Fiscal rules; Stability and growth pact; European union; Rule enforcement (search for similar items in EconPapers)
JEL-codes: D72 H62 H63 H77 (search for similar items in EconPapers)
Date: 2023-07
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