In search of the ideational foundations of EU fiscal governance: standard ideas, imperfect rules

This article investigates the ideational foundations of the European Union fiscal governance by perusing economic theories and models and determining which would recommend the provisions we observe. Sustainability apart, these rules are designed to prevent negative cross-country externalities arising from expansionary fiscal policies adopted by authorities with short-term incentives to boost output at the expense of inflation. I argue that this reasoning is based on standard macroeconomic theories while, in addition to misreading these rules, Blyth’s claims that they have been influenced by theories based on rational expectations, including even the Ricardian equivalence proposition, are unconvincing. These theoretical variants suggest a diminished effectiveness of expansionary fiscal policies and would recommend looser oversight. Supporting these rules means that one must doubt expansionary fiscal consolidation – the key idea behind austerity. I conclude highlighting the uncertainties and unavoidable arbitrariness of these rather imperfect commitment devices to maintain sustainable public finances.