The Coherence of the EU's Fiscal Constitution: An Empirical Assessment

Abstract

Fiscal constitutions comprise the set of rules and frameworks guiding fiscal policy that are enshrined in a country's fundamental laws. This paper compares empirically the fiscal constitutions of 15 federal countries with the arrangements that shape fiscal relations between the European Union (EU) and its member countries. Fiscal constitutions can be ranked along two indicators, namely constitutionally guaranteed decentralisation and institutional coherence, which measures the extent to which the elements of the institutional arrangements fit together. The fiscal constitution of the EU is decentralised yet quite incoherent. This incoherence derives from an unusual mix of the models of competitive and collaborative federalism with large fiscal autonomy of the Member States combined with strict EU budget oversight. Simple correlations imply that institutional incoherence is associated with higher deficits, higher debt or vulnerability to crises, suggesting that the current European fiscal framework is structurally prone to economic and fiscal imbalances. Since incoherence is a feature of the fiscal constitution as a whole, institutional reform requires a holistic approach.