Paper Titles & Abstracts

The original fiscal governance framework of EMU was based on two pillars; the Stability and Growth Pact (SGP) and the no bail-out clause in the European treaties. In view of the on-going sovereign debt crisis in the euro area, the failure of this framework is commonly blamed on the SGP and the weakness of the EU Council's multilateral surveillance and enforcement tools. Accordingly, recent reforms of the governance framework work towards reducing the influence of the Council and providing the European Commission with more intervention rights in the fiscal policies of the Member States. This paper argues that the SGP failed not because surveillance and enforcement mechanisms were too weak per se, but because these mechanisms are incompatible with the no bail-out clause. Using a Principal-Agent Model, it shows how the exemption from liability implied by the no bailout clause disallows effective multilateral enforcement of fiscal rules, for example through the exertion of peer pressure and the imposition of fines. This problem is exacerbated by a free rider problem if the principle is not a unitary actor, but is composed of several actors - as is the case with the EU Council. Looking forward, the paper argues that providing the Commission with more intervention rights is unlikely to improve the fiscal governance in EMU. Rather, the weakening of the no bail-out clause and the emergence of joint liabilities - particularly also through the establishment of the European Stability Mechanism - may result in a proper implementation of the SGP through the Member States.