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The Impact of Fiscal Rules on Public Finances in the Euro Area

 Wim Marneffe, Wouter Van der Wielen, Bas Van Aarle en Lode Vereeck (2011)

This paper reviews the principles underlying fiscal rules and applies them to the current European Union. In the European Union, the supranational Stability and Growth Pact (SGP) should provide the necessary guidance to limit governmental borrowing by member states. The recent fiscal turmoil in the Euro Area, casts some doubts on the adequacy of the Stability and Growth Pact in delivering fiscal stringency as it did not achieve satisfactory results in practice. Therefore, in addition to the SGP, European countries are implementing various other fiscal rules that bind central, regional and local governments. The empirical estimates indicate that the existing framework of national fiscal rules – notwithstanding the inconsistencies in design, implementation and enforcement – exerts a non-negligible effect on fiscal variables in the euro area, even if the effects may differ between countries and over time reflecting the idiosyncrasies of fiscal management and (changes in) the framework of national fiscal rules. Fiscal rules have a deficit reducing effect and are in that sense important for the workings of fiscal policy in the euro area: stronger fiscal rules in a country and over time contribute to a lower deficit. This paper can be downloaded here: http://www.cesifo-group.de/portal/pls/portal/docs/1/1211672.PDF

Journal of Institutional Comparisons, CESifo DICE Report 9/3, p. 18-26.

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