Enforcement of EU Fiscal Rules: Lessons from the Fiscal Compact

Abstract

In 2012, 22 EU countries signed the Fiscal Compact, an intergovernmental agreement aimed at backing EU fiscal rules with national arrangements. The main goal of the initiative was to strengthen compliance through an automatic correction mechanism triggering fiscal adjustment in case public finances deviate from ‘the path of virtue’. Although the Compact de facto ceased to exist with the 2024 reform of the EU fiscal framework, it still offers useful insights for the future. Our analysis shows that better compliance was associated with a superior design of the correction mechanism, higher government efficiency and a stronger media presence of independent fiscal institutions. Economic growth can make up for a less sophisticated design. We also show that many countries had linked the trigger of the correction mechanism to decisions at the EU level. This choice defeated the original purpose of correction mechanisms to decouple key fiscal policy decisions from political considerations and discretion and bodes ill for 2024 reform of the Stability and Growth Pact (SGP).