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Limited attention has been paid in the literature to the question of why some member states found it easier than others to comply with the euro area’s fiscal rules. Political institutionalism offers the most systematic attempt at an explanation, suggesting that the stability and growth pact provides a better institutional fit for member states that rely on numerical rules to enforce fiscal discipline than those that depend on delegation to strong finance ministers. Presenting data on electoral regimes and fiscal policy in euro area members during the first decade of the euro, this chapter challenges political institutionalism’s critique of the stability and growth pact but concurs with its more fundamental insight about the limits of policy coordination in the European Union in the absence of well-formed national institutions.

This chapter examines recent institutional reforms specifically aimed at fostering fiscal discipline and counter-cyclicality in the aftermath of the 2007 financial crisis. It begins with an overview of fiscal institutions, especially in the European Union, before and during the crisis and their shortcomings in terms of fiscal governance. It then considers key aspects of recent institutional reforms related to numerical fiscal rules, nonpartisan fiscal agencies, and major public financial management features. The chapter argues that the mixed results obtained with fiscal policy rules in the run-up to the 2008 to 2009 crisis have favored the emergence of a new generation of institutions. For instance, fiscal rules are now designed to better respond to cyclical output movements and are equipped with explicit enforcement mechanisms. In addition, the growing number of independent fiscal councils signals countries' interest in other forms of legitimate constraints on fiscal discretion, involving better operation of checks and balances in the political system and greater awareness by the electorate. Finally, these new institutions are backed by public financial management reforms aimed at a stronger medium-term orientation of the budget.

This chapter examines fiscal numerical rules and fiscal institutions, and is organized as follows. Section 12.2 explains the theoretical foundations for fiscal rules and their empirical relevance, while Section 12.3 presents the theory behind the need to adopt restraints on the budgetary process. Section 12.4 describes the various forms of rules. Section 12.5 considers a number of arrangements and draws policy implications, while Section 12.6 concludes. It is argued that fiscal rules and fiscal institutions are neither necessary nor sufficient to achieve fiscal discipline, yet they help. A commentary is also included at the end of the chapter.

Solutions to free riding, whether stability or growth free riding, are thought to be found in the provision of incentives. Yet the empirical findings of this chapter suggest that domestic fiscal rules, such as debt brakes, did not impact on the fiscal policy responses to the Great Recession. Similarly, EU-level agreements (the Stability and Growth Pact (SGP) and the newly created European Economic Recovery Plan (EERP)) did not impact on fiscal policy choices. First, the majority of domestic fiscal rules were equipped with exceptionality clauses. As a result, they did not impose stern constraints on fiscal policy in hard times. Second, the EERP and SGP were meaningless for fiscal policy outcomes; member states adopted stimulus programs as they saw fit with little concern for EU-level agreements or EU-wide aims for stability and growth.

Under pressure from the global financial crisis, Parliament enacted a rules-based fiscal policy framework that included creation of the Fiscal Council. The principal goals of the Council consisted of promoting fiscal transparency and restoring public debt sustainability. The authors discuss the brief experience of the Council, spanning two budget cycles under two different governments. The Council, supported by a technical staff, prepared model-based macro-fiscal projections, conducted real-time evaluation of the effects of each fiscal proposal prior to parliamentary debate, and monitored compliance with fiscal rules, including the pay-go rule. However, as part of a campaign to weaken all independent institutions, the government that assumed power with a parliamentary supermajority in the spring of 2010 effectively terminated the Council without cause by the end of the year. The authors conclude that, ironically, the demise of the Council in these circumstances can be interpreted as evidence of its effectiveness.

In this chapter, Shanna Rose and Daniel Smith investigate the extent to which various state budgetary rules have been successful in imposing fiscal discipline on U.S. state governments, and whether such provisions should be considered by the federal government as a means of promoting fiscal sustainability. They find that (1) balanced budget amendments have been fairly successful in limiting debts and deficits, especially in states that have rules that preclude carryover of deficits across budget years, (2) studies on state debt limits have been inconclusive regarding their success in limiting government spending, and (3) state tax and expenditure limits and the line item veto have had little success in restraining spending. The experience of state and local governments suggests that fiscal institutions have the potential to promote long-term fiscal sustainability. They conclude by noting that institutional and political barriers will make it difficult to impose such constraints on the federal government, but that such barriers may be surmountable, given the urgency of the current fiscal situation.

This chapter considers the determinants of fiscal policy outcomes during the Consolidation Years 2011–14. It disagrees with the claim that Europe is under the spell of an austerity illusion. Echoing Chapter 5, it finds that member states’ fiscal consolidation was by and large in line with domestic fiscal space. Proponents of fiscal rules would credit the strictures of the Stability and Growth Pact (SGP) or newly created debt brakes for bringing about consolidation. Yet there is no convincing evidence that these rules mattered for fiscal policy outcomes. Instead, financial market pressure mattered—this holds for the Stimulus Years and Consolidation Years alike. Market discipline is not felt equally across the EU. A prominent emerging fault line runs between program countries and those who fear the threat of market panic on the one hand, and credit countries who remain largely insulated from the vagaries of international capital markets on the other.

Italy has long refrained from strengthening its fiscal framework by entrusting an independent body with a mandate to monitor policy design and implementation. As observed by the authors, neither policymakers nor bureaucrats supported this reform: the former may have worried that greater transparency would have made decisions harder to take; the latter may have feared for the role and power of the institutions they are affiliated to. The picture changed with recent reforms aimed at improving the information system and strengthening rules-based legislation to comply with the reform of EU economic governance. A constitutional amendment, approved in spring 2012 calls for establishing an independent fiscal institution with the task of evaluating fiscal trends and monitoring the implementation of fiscal rules. The authors discuss the new institution’s likely mandate, organization, funding, and relationships with other public bodies—benefitting from the OECD principles on independent fiscal institutions.

The chapter discusses the future of rules-based fiscal policy, with a focus on fiscal rules in the European Union (EU). It argues that the European fiscal stance was at times too restrictive during the crisis, due to the incompleteness of the architecture of the European Monetary Union rather than its fiscal framework. The chapter also argues that fiscal rules need to achieve a double act: anchor public debt ratios while helping to stabilize the economy. Both goals are consistent with the present EU fiscal rules but are hidden in a framework that is overly complicated.

Fiscal policy coordination is marred by a classic collective action problem; it pays to be egoistical. Member states have an incentive to under- or over-stimulate their economies (what this chapter terms growth and stability free riding), despite a common interest in coordinated policies. Building on Mancur Olson’s premise on collective action failure, the chapter develops three research questions that guide the empirical investigation. These relate to the group latency of EU membership, the evidence for collective action, and finally the provision of incentives to keep free riding at bay. The theme running through this chapter is that the interdependence of EU economies requires cooperative solutions to common problems.

The author traces the common roots of fiscal watchdogs, namely, insufficient transparency in public finances. Traditionally, this problem has been dealt with by public audit institutions around the world. However, more recently, the aspiration of citizens in democratic societies, on the one hand, and the pressures from financial markets—in the light of the current urge in public indebtedness—on the other, have led to the establishment of a new generation of independent fiscal institutions entrusted with real-time monitoring of the soundness and consistency of fiscal policy. The relevance of these institutions is further underscored by initiatives in the European Union toward strengthening economic governance in member countries. The chapter provides a panoramic view of the volume and identifies some broad patterns and implications. Finally, it highlights the evolution of good practices that recently culminated in the OECD principles on independent fiscal institutions.

This chapter argues that principles in international law have their basis in comparative and analogical reasoning. It provides a taxonomy of principles ranging from general principles of law to soft legal principles and structural principles which are devoid of normative significance. The classification of principles in international law depends on the extent to which they find confirmation in domestic and/or international law and to which their extrapolation to the international level might be suitable. In this regard, international soft law codifications like the UNCTAD Principles on Promoting Responsible Sovereign Lending and Borrowing might corroborate the formation of principles in international law. The chapter analyzes this process by using two examples from the field of fiscal policy: Substantive fiscal policy rules on debt or deficit ceilings; and rules on fiscal transparency. In both respects, the UNCTAD Principles strengthen important trends in domestic fiscal policy and fosters the emergence of an array of principles of varying legal character.

This chapter provides a critique of formal debt sustainability analysis, including the Maastricht Treaty fiscal rules, stressing the problems of one-size-fits-all approaches. It examines patterns in public debt accumulation, including the roles of rent-seeking behaviour and economic, financial, and geo-strategic crises. The chapter looks at macroeconomic drivers of debt sustainability, notably GDP growth, as well as at structural drivers, in particular sector balance and dependency. The chapter also investigates the roles of cultural, ideological, and institutional drivers of debt sustainability. They include the ideological character of governments, cabinet duration and type of government, electoral cycle, domestic fiscal institutions, fiscal rules, veto players, economic culture, public opinion, state traditions, and governing competence of elites. The analysis of these drivers leads to the conclusion that formal debt sustainability analysis fails to address key determinants of public debt, notably governing competence.

This chapter provides an overview of experiences with fiscal and structural reforms in Denmark and Sweden. The focus is on the experiences with large-scale fiscal consolidations in Denmark, the record of national fiscal rules with fiscal councils and gradual improvement of public finances in Sweden, and the experiences with occupational pension schemes in Denmark. It is found that (a) longer-term debt sustainability requires symmetry in counter-cyclical fiscal policies, with public saving during upturns that creates room for manoeuvre for a more active policy during bad times; (b) fiscal and structural reforms are easier to move forward when the economy is under severe pressure; and (c) there is no easy way to copy successful fiscal frameworks, as the effects of and political support for budget consolidations typically differ across countries.

Elevated levels of deficits and debt in India raise serious questions of stability and sustainability from to time. The resulting interest payments crowd out allocations for the much needed social and physical infrastructures. Pre-emption of disproportionate share of household sector’s financial savings for government borrowing financially crowds out private investments. The attempts to keep government securities’ yield at low levels though financial repression and direct or indirect monetization of deficits to facilitate government borrowing compromises monetary policy objectives. The rule-based fiscal policy to limit fiscal deficits and limit the debt has not met with the desired success. The government has been changing the targets, resorting to creative accounting, and showing adherence through various obfuscations. This is an opportune time for the Parliament to appoint an Independent Fiscal Council to review the forecasts, cost the programmes announced from time to time, and monitor the compliance with fiscal rules.

For decades, a strong government balance sheet has been a cornerstone of macroeconomic stability in Korea, while offering ample room for countercyclical fiscal policy response. However, the political landscape has substantially changed recently. In the face of mounting social discontent amid slower growth and rising inequality, spending pressures have been building. Populist politicians’ calls for more ambitious fiscal programs have become louder and basic economic logic is often disregarded. Furthermore, the longer-term fiscal outlook paints a sobering picture for the country, mainly owing to the need to build an effective welfare state from a low base and the looming demographic challenge associated with rapid aging. Chapter 10 addresses a rich set of pertinent questions. Has the fiscal stimulus worked as intended? Are there any effects on current account balances from fiscal deficits? What are the longer-term fiscal risks and through which channels might these risks materialize? Can the favorable interest rate–growth differentials help avoid the need for fiscal austerity? What is the prudent debt level for Korea? What should be the key principles in (re)building the social welfare system to better reconcile the changing imperatives of equity and growth? In conclusion, it proposes a fiscal strategy, arguing that a credible commitment to a fiscal rule(s) that directly aims to curb the government debt path within a prudent limit should be a core element of the strategy.

This chapter looks at the effects of the crisis-induced legal and economic developments on the Member States, most notably in relation to their fiscal, economic, and social policy. It consists of three main parts. The first section of this chapter will analyse the substance and scope of the new EU economic rules. The second section of this chapter will look at the important changes that the EU legislation adopted during the crisis has brought about in EU economic surveillance. It will be argued that the new EU economic rules have redistributive effects in European societies and encroach on very sensitive areas of national policy, which underscores the need for a democratically legitimate EMU architecture. The third section of this chapter will look at the implementation of EU economic rules and assess the rigorousness of EU and independent national fiscal oversight. The principal default line is between lender states and borrower states. First, we will examine the bearing of the crisis-induced economic developments on Germany, as well as the EU economic guidance addressed to it in the context of the European Semester. Second, we will examine the bailout terms agreed with Greece in the context of the three rescue packages. It will be shown that these terms mandate far-reaching economic and social policy reforms, from which grave social repercussions have flown. In addition, it will be argued that there was very rigorous EU and independent national assessment of the progress Greece was making in relation to its economic adjustment programme.

The euro area crisis has affected the way in which fiscal and economic integration is pursued within EMU. The previous chapter showed that, in general, the crisis has changed the way in which EMU seeks to address certain challenges to its stability; there has been an evolution in the principles and assumptions underlying integration in this area. This chapter will now focus on more specific aspects of the mechanics of fiscal and economic integration—the choice of instruments and the boundaries of EU competence—and the effects that the crisis has had in this regard. Finally, it will also reflect on the broader effects of the crisis and its aftermath on social policy and the economic constitution.

This chapter looks at the crisis-induced legal, institutional, and economic developments within the Economic and Monetary Union. It consists of two parts. First, there will be a brief sketch of the crisis-related developments. These include the setting-up of financial mechanisms, the European Central Bank’s interventions to combat the crisis, the enhanced oversight of national fiscal and economic policy, and the increased supervision over the financial sector. Second, there will be a ‘first assessment’ of their constitutional and structural implications. Two sets of issues will be examined here: issues of legal principle; and the bearing of the enacted measures on European economic integration. Three key arguments will be made in this chapter. First, it will be argued that the measures enacted have led to legislative fragmentation and have exacerbated problems of transparency and complexity which already existed in this area. Second, it will be shown that the chosen form of action has consequences for institutional balance in the EU, democratic control, and judicial review. Third, it will be argued that the enactment of measures which are only applicable to Euro area Member States has served to deepen economic integration within the Euro area and to further differentiate it from economic integration in non-Euro area Member States. Further, certain areas of the single market have integrated more deeply in the Euro area. It will be concluded that the various reforms which have been implemented have strengthened the EU economic governance framework from a legal, institutional, and economic perspective.

This chapter describes the theory of fiscal policy when fiscal policy was assumed to promote the allocation of resources, stabilization of the economy, and the redistribution of income. The theory had several inputs but those from Nordic European countries were particularly important. The theory stated that there were various objectives to promote and various instruments that could be used to promote those objectives. It also established the system of equations that would relate instruments to objectives in econometric models that became popular in the 1960s. Using a concrete example from a specific country (Italy), the chapter describes how the theory can easily become unrealistic in at least some countries. Some of the main assumptions of the theory are seen to be unrealistic.