Do Fiscal Rules Foster Fiscal Discipline in the EU? Reassessing Evidence Using Novel Instruments

The Stability and Growth Pact has proven to be a steady pillar of EMU architecture, yet has not shifted public preferences for fiscal discipline. Violations of the Pact are recurrent, and the renegotiation of its rules is unremitting. This study re-examines the impact of fiscal rules in EU countries on fiscal prudence using IV and dynamic CCE panels with two novel instruments based on countries’ moral hierarchies. We also correct for common correlated effects on the panel of 27 EU member states from 1990 to 2023. The main robust result is that stronger fiscal rules do not enhance fiscal prudence, and at best do so only in a few EU countries.