Working Paper: CEPR ID: DP18304
Authors: Georg Kirchsteiger; Martin Larch
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; sanctions
JEL Codes: D72; H62; H63; H77
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Composition of the Council (F53) | Enforcement outcomes of the SGP (H76) |
| Expectations of support from virtuous countries (F35) | Fiscal policies of deficit-prone countries (E62) |
| Nature of conditionality (F35) | Willingness of countries to comply with fiscal rules (H68) |
| Lack of compliance (H26) | Credibility of sanctions (F51) |