Restoring Balance in Public Finance in Europe in the Light of the Fiscal Compact

Abstract

The aim of this article is to assess the extent to which Member States have achieved their medium-term budgetary objectives (MTOs) and the benchmark for government debt reduction in the light of the Fiscal Compact's provisions. It also identifies the risks involved in this process. By carrying out a statistical analysis and a review of the subject literature, the author shows that less than half of Member States have managed to meet the requirements imposed by the Fiscal Compact. The analysis suggests that the impact of fiscal consolidation on economic growth is seen as one of the main reasons for this state of affairs. The author regards the provisions of the Fiscal Compact as a welcome step towards anchoring fiscal discipline in Europe. If it is implemented and strictly enforced, they should strengthen the existing fiscal governance framework and foster its credibility in the future, substantially reducing the risk of another sovereign debt crisis.