The politics of fiscal rules within the European Union: a dynamic analysis of fiscal rules stringency

ABSTRACT

Over the last 25 years, fiscal rules (FRs) have been proliferating in Europe bringing in-depth change to the architecture of fiscal institutions. This paper investigates different theories explaining the changes in national fiscal rules stringency (FRS) using a panel of 28 European countries from 1990 to 2013. The authors found evidence that fiscal stress prevents fiscal reform in the short term, and leads to stronger fiscal rules in the long term. This pattern corresponds to the ‘war of attrition’ argument formulated by Alesina and Drazen [(1989) ‘Why are stabilizations delayed?’, The American Economic Review 81(5): 1170–88]. The authors found evidence that countries eager to join the EU showed their commitment to Maastricht targets by incorporating FRs into national laws. Countries facing financial difficulties after the 2009 sovereign debt crisis were coerced into adopting more stringent FRs to obtain fiscal support from the EU. Both cases support the idea that coercive diplomacy might explain the strength of national fiscal rules in the EU.

KEYWORDS:

• Coercion
• diffusion
• fiscal rules
• fiscal stabilization
• government deficits
• political economy

Disclosure Statement

No potential conflict of interest was reported by the authors.

Notes on contributors

Pascal Doray-Demers is a PhD. Candidate at the University of British Columbia.

Martial Foucault is a full professor of political science at Sciences Po, Paris, and director of the CEVIPOF (CNRS 7048).

Notes

1. http://ec.europa.eu/economy_finance/explained/the_financial_and_economic_crisis/responding_to_the_debt_crisis/index_en.htm

2. We use Maddala and Wu (1999) and Pesaran (2007) panel unit root tests.

3. An alternative specification using effective number of party in parliament was tested. Effective number of party is better to identify the level of fragmentation in parliament. It did not affect the results.

4. We tried specifications with 0 lag and they posed serious estimation problems. One of the main problems with 0 lags is that they seize the feedback that fiscal rules have on explanatory variables.