Do commitment and enforcement of fiscal rules enhance fiscal stability? Evidence from European Union countries

Abstract

We study the impact of fiscal rules on EU countries’ fiscal stability, particularly within the Stability and Growth Pact (SGP) framework. By rigorously addressing endogeneity concerns, we show that, among all the rules imposed by the SGP, compliance with budget balance rules (BBR) and to a lesser extent, deficit rules, are the only ones that contribute to fiscal stability. However, countries that comply with other targets – either individually, simultaneously, or by adopting a constitutional BBR – do not perform better than those that comply exclusively with the budget balance rule. Finally, our results suggest that strong fiscal rules are not necessary to achieve better fiscal discipline.