Balanced Budget Rules in Europe: A Comparative Institutional Analysis

Abstract

One of the main economic problems of our time is that of reducing budget deficits. In Europe the “Stability and Growth Pact” should reduce deficit spending and government debts. But EU core countries such as France, Germany and Italy have been in violation of the Pact consistently for a lot of years. In contrast some countries at the European periphery are very successful in reducing their deficit. Others are able to prevent their budgets from being unbalanced. For instance Denmark - a long term member of the European Union and typical welfare state - has recorded a surplus in its national budget since 1997. Ireland - sometimes the poorest member of the Union and nowadays one of the richest ones - reduced its debts from more than 80% of GDB to less than 40%. The new EU-member Estonia has been successful in keeping the budget deficit low since independence in 1992.

In this paper the different balanced budget rules in Denmark, Ireland and Estonia are analyzed in brief and compared. As can be shown balanced budget rules are able to reduce budget deficits respective to hinder the development of larger deficits. But it must be also emphasized that political consensus about the reduction of deficits respective of a consequently balanced budget is the most successful strategy. Primarily, this seems to be possible in small sized countries. Here formal rules can be seen as more or less redundant. But even where no consensus exists constitutional rules and additional application rules are necessary. As result the author demands stronger balanced budget rules in the European Union treaties to force also larger member countries into fiscal stabilization.