The Political Economy of Enforcing Fiscal Rules

27 Pages Posted: 23 Jan 2017

See all articles by Sebastiaan Wijsman

Sebastiaan Wijsman

KU Leuven, Faculty of Business and Economics (FEB), Students

Christophe Crombez

Stanford University - Freeman Spogli Institute for International Studies; KU Leuven - Faculty of Business and Economics (FEB)

Date Written: January 2017

Abstract

A large literature is focused on governments’ fiscal policy making under the disciplining force of fiscal rules. That literature is devoted to map governments’ incentives for (non)compliance, but widely ignores the role of fiscal rule enforcement. This is remarkable, given the situation in the European Union, where we observe frequent breaches of the fiscal rules in the absence of sanctions. This paper focuses therefore on the incentives of the European Commission as enforcer of the Stability and Growth Pact (SGP) and on how individual governments take these incentives into account. Based on actual cases and literature on international agreements we distinguish rationales which make the Commission lenient. Accordingly, we present a game theoretical model to map the interaction between the Commission and governments under incomplete information. We find that unforeseen fiscal needs stemming from crises or other contingencies enhance enforcement costs for the Commission. Given that crises require additional public expenditures, our model shows that some enforcement costs are welfare enhancing. We also find that governments have an incentive to emphasize the fiscal impact of crises to increase the Commission’s enforcement costs. Moreover, governments might even overstate crises’ fiscal impact to hide other expenditures. In doing so, governments exploit their informational advantage over their budget allocation and crisis solving costs. Finally, we provide examples related to Europe’s migrant crisis and national security to support our theoretical findings.

Keywords: Fiscal rules, Stability and Growth Pact, enforcement

Suggested Citation

Wijsman, Sebastiaan and Crombez, Christophe, The Political Economy of Enforcing Fiscal Rules (January 2017). Available at SSRN: https://ssrn.com/abstract=2902546 or http://dx.doi.org/10.2139/ssrn.2902546

Sebastiaan Wijsman (Contact Author)

KU Leuven, Faculty of Business and Economics (FEB), Students ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Christophe Crombez

Stanford University - Freeman Spogli Institute for International Studies ( email )

Stanford, CA 94305
United States

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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