The vast literature on the political determinants of fiscal discipline has primarily paid attention to three sets of factors: political fragmentation, national budgetary rules, and proximity to elections. But political fragmentation has had a diminished influence in western European countries since the 1990s and the impact of budgetary rules is hardly consistent. Extant works pay either no attention or poorly operationalize the influence of the European Union’s excessive deficit procedure, perhaps because it is considered failing and, thus, irrelevant.
This study extends the recent work of Fortunato and Loftis (2018) to the 1994-2019 period. It shows that if an excessive deficit procedure is ongoing for the full calendar year when the budget is drafted, a government of a eurozone country reduces, on average, its deficit by 0.46% of GDP, compared to when there is no procedure. Considering the 3% deficit ceiling, this is quite a substantial effect. It almost fully offsets the impact on deficit of a two-year shortening of the expected duration of a government.
This result has important implications for the fledgling EU-wide fiscal policy.