Enhanced Fiscal Governance in the European Union: The Fiscal Compact

Abstract

Several reforms aiming to strengthen budgetary discipline in the European Union have been implemented since the outbreak of the European debt crisis. Arguably the most important one is the Fiscal Compact, which stipulates that each signatory country must enshrine in domestic legislation an upper limit on the structural budget deficit, that is, the deficit after cyclical and other temporary factors have been excluded. This paper analyses the contents of the Fiscal Compact and discusses challenges for its implementation and efficacy. The conclusion is that the Fiscal Compact may be challenging to implement and enforce because the rules are very complex and require complicated calculations that are subject to very large forecasting uncertainty. The Fiscal Compact could, however, lead to a stronger national commitment to fiscal prudence.

Structural Budget Balance as a Fiscal Rule in the European Union—Good, Bad, or Ugly?

“…First, would the adoption of a domestic SBR alleviate potential informational asymmetries entailed in fiscal policy? On the one hand, an SBR is likely to face challenges in alleviating informational asymmetries because calculating structural balance is highly complex (Eyraud and Wu 2015; Hers and Suyker 2014; Kukk and Staehr 2015; Portes and Wren‐Lewis 2015). In the existing literature, there is widespread consensus that the estimation of the potential output and hence the output gap is complicated, uncertain, and contested (Fantacone, Garalova, and Milani 2015; Heimberger, Huber, and Kapeller 2019; Hers and Suyker 2014; Kukk and Staehr 2015; Marcellino and Musso 2011).…”

“…Structural budget balance indicates what the budget balance is without the impacts of the economic cycle and one‐off budgetary measures (for more details, see Ioannou, Leblond, and Niemann 2015; Kukk and Staehr 2015; Mourre, Astarita, and Princen 2014). In order to calculate the structural balance, the influences from the economic cycle and temporary measures are excluded from the headline balance.…”

“…However, only with the postcrisis EU fiscal governance reforms was the requirement set to adopt structural balance rule(s) in domestic legislation (Eyraud and Wu 2015). This requirement served the goal of increasing the domestic ownership of fiscal rules underpinning the monetary union (Eyraud, Gaspar, and Poghosyan 2017; Kukk and Staehr 2015). Given that the introduction of the SBR in the EU fiscal governance framework is considered a key change designed to help guide member states’ fiscal policies in the postcrisis period (Raudla, Bur, and Keel 2020), it is important to understand how this reform has influenced the budget processes in the member states.…”

Budget Reforms in Times of Austerity: A Centralization Cascade in Danish Central Government?

“…The increasing debts and budget deficits that followed led to a fiscal crisis (Kickert ; Kickert and Randma‐Liiv ) that was followed by cutbacks and budget institution reform, i.e., in 2012, most EU member states adopted the so‐called “Fiscal Compact,” which stipulates that the budgetary position of general government must be balanced or in surplus. According to the Fiscal Compact, these provisions must be passed into national law, preferably constitutional law, and the administration of these provisions must be overseen by a national fiscal council (Ghin and Kristiansen ; Kukk and Staehr ).…”

EU Independent Fiscal Institutions: An Assessment of Potential Effectiveness

“…Radice () sees the TSCG as yet another step towards depoliticization of economic policy and is concerned about an underlying ideological bias. The question of the TSCG's adequacy in dealing with the challenges faced by the euro area has also been considered (Aldasoro and Faia, ; Bird and Mandilaras, ; Kukk and Staehr, ). This article is empirical and focuses on the question of whether the practical implementation of independent monitoring bodies at Member State level carries the potential to enhance the efficiency of the functioning of the EU fiscal framework.…”