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.