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ABSTRACT
This paper shows that, contrary to their favourable effect in the EU non-FCC (Former Communist Countries), fiscal rules do not significantly affect fiscal performance in the group of EU FCC. This finding, which may echo differences between FCC and other EU inherited from the Cold War period, is robust when considering various estimation methods, dividing fiscal rules along various dimensions, and using several observed and computed measures of fiscal performance. However, when going beyond the simple presence of fiscal rules, we find that an improvement of the strength of fiscal rules significantly affects fiscal performance in EU FCC, with a magnitude higher than that in EU non-FCC. Our findings are particularly important from the perspective of the future Eurozone and EU enlargements, which involve former communist countries, and go along with the adoption of various types of fiscal rules.
Acknowledgments
I would like to thank the Editor Richard Connolly, the two Guest Editors of the Special Issue and the two anonymous referees for their insightful comments and suggestions. I am indebted to the participants at the 2019 GEBA-GDR Money, Banking and Finance Thematic Conference, and to Jean-Louis Combes and Nicoleta Sirghi for many useful discussions at various stages of this paper. I am very indebted to the French Ministry of Foreign Affairs and International Development for their Eiffel PhD scholarship. This work was supported by the Agence Nationale de la Recherche of the French government through the program “Investissements d’avenir’’ ANR-10-LABX-14-01. I am solely responsible for possible errors and omissions.
Disclosure statement
No potential conflict of interest was reported by the author.
Notes
1. The Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia entered the EU in 2004 (together with the two Southern Europe countries, Cyprus and Malta), while Bulgaria and Romania joined them in 2007 and Croatia in 2013.
2. For example, as of 2018 Bulgaria and Romania respect respectively 4 and 5 of the 7 convergence criteria needed to join the Euro Area (which will take place probably during the 2020s).
3. In addition to the fiscal performance, other dimensions of fiscal policy were found to be affected by fiscal rules, including fiscal policy cyclicality (with pros: Debrun et al., Citation2008; Combes et al., Citation2017; and cons: Blanchard & Giavazzi, Citation2004; Dessus et al., Citation2016) or government borrowing costs (see e.g. Afonso & Jalles, Citation2019; Badinger & Reuter, Citation2017; Thornton & Vasilakis, Citation2018).
4. Alternatively, following the work of Tapsoba (Citation2012), several studies, e.g. Guerguil et al. (Citation2017) and Combes et al. (Citation2019), considered the adoption of fiscal rules as random once its main determinants are controlled for, and compared countries that adopted FR and that did not adopt FR.
5. Given the complexity of the concept of fiscal performance, our robustness analysis will consider several alternative measures chosen to capture its various facets.
6. We report that the use of other variables does not allow improving this specification; for example, unemployment was found not to significantly affect fiscal performance, consistent with Fabrizio and Mody (Citation2006) or Hallerberg and Ylaoutinen (Citation2010).
7. These countries are: Austria, Belgium, Cyprus, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxemburg, Malta, Netherlands, Portugal, Spain, Sweden and the United Kingdom.
8. Comparable conclusions arise if we control for the Great Recession period (results are available upon request).
9. These results, which continue to hold if we instrument FR with both their first and second lag, join the conclusions of Caselli and Reynaud (Citation2019) who fail to find a significant effect of fiscal rules on fiscal balances when accounting for endogeneity.
10. We disregard the revenue rules for being fairly rare in our sample.
11. The LSDVC estimator fails to converge when using the CAPB and the CAB as alternative FP measures.
12. According to Eyraud et al. (Citation2018), a 3% deficit rule would be consistent with a 60% public debt in the long run provided that the annual nominal GDP growth is high, around 5%; instead, the required nominal GDP growth would be around 3% with a 2% deficit rule.
13. For example, in Bulgaria and Romania there exist both structural and nominal budget balance rules.
14. Prior to this analysis, we considered additional measures of fiscal performance, namely: government debt, tax revenues, value-added taxes, the fiscal balance in ratio of tax revenues, and sovereign debt maturity. Estimations reveal, yet again, the lack of significant effect of FR on these variables (results are available upon request).
15. Some of the key benefits include: (i) avoiding excessive deficits and improving international positions (a greater compliance with the rules improves countries’ risk profile by reducing reputation costs, which makes borrowing cheaper); (ii) enhancing fiscal transparency and accountability by reducing fiscal gimmickries (the presence of fiscal councils that monitor the compliance with the rule acting as public watch dogs); (iii) incentives for better compliance and flexibility (allowing for past deviations from the target, corrections mechanisms or escape clauses); or (iv) preserving fiscal space (by letting automatic stabilisers to operate over the cycle and allowing for discretionary fiscal support when necessary).
16. We report that our findings are equally supported when adding the FR variable whose effect continues to lack significance (results are available upon request).