Addressing the EU’s Fiscal Dilemma: From ex-post Transfers to ex-ante Resilience

Georg Kirchsteiger and Martin Larch

No 21709, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: The EU’s fiscal governance framework was built to contribute to overall macroeconomic stability through compliance with fiscal rules and the commitment not to bail-out countries in trouble. Yet successive crises have revealed vulnerabilities under systemic stress: countries with a propensity to run deficits push frugal ones into ex-post bail-out arrangements to avert collapse, thus undermining the ex-ante credibility of the framework. The absence of a permanent, preventive instrument forces the Union to oscillate between leniency and emergency intervention. A permanent RRF-like mechanism - linking EU funds to reform and investment projects - offers an incentive compatible solution and a possible bridge to a larger EU budget.

JEL-codes: D72 H62 H63 H77 (search for similar items in EconPapers)
Date: 2026-07
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