The Politics of Risk-sharing: Fiscal Federalism and the Greek Debt Crisis

Abstract

Focusing on the ability of financial markets to discipline state economic performance, EU fiscal federalism specifies three conditions that need to be met for it to work effectively: clear market signals, no bailout, and corrective action driven by central rules and implemented by domestic populations. While some conditions have obviously not been met in the European response to the Greek sovereign debt crisis (2009–2012), evidence suggests the explanatory power of fiscal federalism is surprisingly robust. The study raises concerns with risk-sharing in EU economic governance and has implications for theories of EU institution-building.

Keywords:

• Greece
• sovereign debt crisis
• fiscal federalism
• risk management
• economic governance

Acknowledgements

The author wishes to thank Michele Chang, the College of Europe, and officers of EUSA’s political economy section. Special thanks to participants of the workshop on European Economic Governance organized in Bruges for reminding me how to blend social science and collegiality.

Notes

1. Evidence of the effectiveness of the SGP is generally mixed but positive. Some (e.g., Ioannou and Stracca 2011) find it has not had a statistically significant effect on fiscal improvements of the primary balance (deficit/surplus before interest), but others (e.g., Buiter 2006, 699) argue it has made a contribution to fiscal sustainability but only where its prescriptions were incentive-compatible for the target country.

2. Stein (2011) finds Greece and Portugal suffer from high government debt while Ireland and Spain turned private toxic assets into a government problem. While there may be different causes, it is clear both are now connected.