Fiscal Governance in Europe

This book presents a theoretical framework to discuss how governments coordinate budgeting decisions. There are two modes of fiscal governance conducive to greater fiscal discipline, a mode of delegation and a mode of contracts. These modes contrast with a fiefdom form of governance, in which the decision-making process is decentralized. An important insight is that the effectiveness of a given form of fiscal governance depends crucially upon the underlying political system. Delegation functions well when there few, or no, ideological differences among government parties, whereas contracts are effective when there are many such differences. Based on original research, the book classifies European Union countries from 1985 to 2004. Empirically, delegation and contract states perform better than fiefdom states if they match the underlying political system. Additional chapters consider why countries have the fiscal institutions that they do, fiscal governance in Central and Eastern Europe, and the role of such institutions in the European Union. • Compelling team of scholars - academic economist, policy-making economist based at the European Central Bank, and academic political economist • Unprecedented detail about fiscal norms, rules and institutions across time and countries is combined with illustrative and accessible case examples • Innovative formal model of the budget process in Chapter 2 for economists

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Reviews:

'Over the past several years, Mark Hallerberg, Rolf Strauch and Jürgen von Hagen have made path breaking contributions on the way fiscal institutions shape budgetary behaviour and on the interplay between fiscal policy and politics in Europe. This book is the summa of such intellectual journey. It brings together and updates their theoretical and empirical research and provides new insights on fiscal governance in the European Union. As the financial crisis shakes the foundations of policy making in Europe and beyond, this book will help understand why countries' budgetary policies will react in different ways and how fiscal institutions may evolve as a response to new economic and policy challenges.' - Marco Buti, Director General, Directorate-General for Economic and Financial Affairs, European Commission 'Once upon a time, people spoke of fiscal discipline and indiscipline in Europe. Now, instead, they think in terms of budgetary rules and institutions - a much less normative and more insightful approach. Hallerberg, Strauch and von Hagen are largely responsible for this shift. The present book, summarizing their arguments and evidence, is no less than a classic of the New Public Economics.' - Barry Eichengreen, University of California, Berkeley 'A landmark contribution in advancing our understanding of the interactions of political and fiscal institutions and their impacts on fiscal and economic outcomes. In this seminal contribution, Hallberg, Strauch and von Hagen demonstrate the critical importance of tailoring institutions of fiscal governance (rules, norms and institutions that guide budgetary decision making) to country-specific political environment - such adaptation determines whether political masters serve public interest or pursue heedless self-interest. The book would be an invaluable reference for all thinkers and doers interested in creating public institutions that advance accountable governance while facilitating economic growth with stability.' Anwar Shah, Lead Economist and Program Leader for Governance, World Bank Institute 'In Fiscal Governance in Europe, Hallerberg, Strauch, and von Hagen shed new light on how governments might successfully address the 'common resource pool problem' of debt restraint in the face of political incentives to maximize tax-financed constituency benefits. The answer is centralization of budget procedures through either 'delegation' or 'contracts' institutions. Yet, the authors show that the political context of centralized fiscal institutions is crucial. Where one-party governments prevail, delegation of authority to the finance minister is appropriate. In multiparty systems, the contracts approach of negotiated multi-year targets is the preferred form of centralization. When political context and institutions diverge, benefits from centralization decline. The authors draw on extensive data, including surveys of EU national policy makers, and expertly employ formal methods, econometric analysis and case studies to develop and assess their theory, and to draw compelling conclusions and recommendations for policy makers. Indeed, this excellent book can be strongly recommended to practitioners as well as scholars and advanced students in the areas of public finance and budgeting as well as of political economy, public policy, and comparative and European politics.' Duane Swank, Marquette University

1. Introduction 2. Electoral and fiscal institutions and forms of fiscal governance 3. An account of fiscal norms and rules in the European Union from 1985–2004 4. How forms of fiscal governance affect fiscal performance 5. Why do countries have different fiscal institutions? 6. Institutional choice in new democracies: fiscal governance in Central and East European countries 7. EMU and fiscal governance in Europe 8. Conclusion