The Network on SSRN: R. Daniel Kelemen and Terence Teo, "Law, Focal Points and Fiscal Discipline in the United States and the European Union"

We wanted to alert readers to this piece by network member R. Daniel Kelemen and Terence Teo (both Rutgers University) on "Law, Focal Points and Fiscal Discipline in the United States and the European Union," forthcoming in the American Political Science Review. An abstract is reproduced below and the full article can be downloaded from SSRN here.

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Many studies suggest that strict balanced budget rules can restrain sovereign debt and lower sovereign borrowing costs, even if those rules are never enforced in court. Why might public officials adhere to a rule that is practically never enforced in court? Existing literature points to a legal deterrence logic in which the threat of judicial enforcement deters sovereigns from violating the rules in the first place. By contrast, we argue that balanced budget rules work by coordinating decentralized punishment of sovereigns by bond markets, rather than by posing a credible threat of judicial enforcement. Therefore, the clarity of the focal point provided by the rule, rather than the strength of its judicial enforcement mechanisms, determines its effectiveness. We develop a formal model that captures the logic of our argument, and we assess this model using data on US states. We then consider implications of our argument for the impact of the balanced budget rules recently imposed on eurozone states in the Fiscal Compact Treaty.

The Network on SSRN: Alicia Hinarejos, "Fiscal Federalism in the European Union: Evolution and Future Choices for EMU"

Network member Alicia Hinarejos (University of Cambridge) has let us know that her article on "Fiscal Federalism in the European Union: Evolution and Future Choices for EMU," is now posted on SSRN. The article has also appeared in the latest issue of the CMLRev (Common Market Law Review, Vol. 50, No. 6, 2013). The full article can be downloaded here and the abstract is below:

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The euro area sovereign debt crisis was, in part, the result of the institutional and legal design of the Economic and Monetary Union (EMU). The crisis highlighted the fact that, for EMU to be fully sustainable as a multilevel system of fiscal and economic governance, it should be able to address the following challenges: (1) enforcing fiscal discipline; (2) addressing structural inequalities between different euro area economies; and (3) preventing and countering asymmetric shocks in an efficient manner. These are challenges that all federal, multilevel or fiscally decentralized systems face when allocating fiscal powers to different levels of government, and when attempting to find a balance between excessive centralization/decentralization.

Over the years, from its creation through the euro area sovereign debt crisis and its aftermath, EMU has evolved to address these problems in different ways. This paper analyses the evolution of the EU’s multilevel system of fiscal governance in relation to these three challenges, showing that they have been only partially addressed. The paper argues that, if it were to address the three highlighted obstacles more fully, the EU would face a crucial choice between two ideal models of fiscal integration: The ‘surveillance model’, where Member States continue to maintain all taxing power and where the EU is an enforcer of discipline, and the ‘classic fiscal federalism’ model, where the EU acquires its own independent sphere of fiscal authority, and thus its own fiscal tools for macroeconomic stabilization. The paper has discussed how to articulate a classic system of fiscal federalism — i.e., where different fiscal functions and instruments are attributed to different levels of government — within the Union, and the problems that this raises.

The main aim of this paper is to provide a clear overview of the obstacles facing EMU and, more importantly, of the two ideal models of further fiscal integration available to the Union. Furthermore, although it may seem counterintuitive, the paper will show that the surveillance model poses just as much of a threat to Member States’ autonomy, and presents us with the same democratic legitimacy problems, as the classic fiscal federalism model. The danger is that, in an effort to avoid the radical changes that come with classic fiscal federalism, the euro area may be edging slowly towards the surveillance model without the necessary awareness and debate.

Book Announcement: Political, Fiscal and Banking Union in The Eurozone? (Free E-Book from Wharton/FIC Press)

A new (and free) e-book, Political, Fiscal and Banking Union in The Eurozone?, is now available from the FIC Press, the publishing arm of the Financial Institutions Center at the Wharton School at the University of Pennsylvania.  The book, which built on a conference at EUI last spring, includes contributions from network members Mattias Kumm (NYU) and Peter Lindseth (UConn), along with those from leading economists, policymakers, journalists and lawyers.  The publisher’s blurb for the book is below and the full book may be downloaded here free-of-charge.

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The European University Institute (EUI) and the Wharton Financial Institutions Center (FIC, Wharton School, University of Pennsylvania) organised a conference entitled “Political, Fiscal and Banking Union in the Eurozone” at the EUI in Florence, Italy, on 25 April 2013. The event was financed by the PEGGED project (Politics, Economics and Global Governance: The European Dimension) and a Sloan Foundation grant to the FIC. The conference brought together leading economists, lawyers, political scientists and policy makers to assess the prospects and potential for, as well as obstacles to, the various forms and degrees of integration needed within the Eurozone in order to address the root causes of Europe’s current malaise. The aim was for open discussion and debate on the relationships between these different levels of union. Was one type of union achievable without the other? Or would the intractable difficulties of achieving each level of union spill over to lessen the chances of the other ever being a likely practical possibility?

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