1

Nawid Hoshmand1, University of Cologne, Cologne Centre for Comparative Politics

Stephan Vogel2, University of Cologne, Cologne Graduate School of Management,

Economics and Social Sciences

Tightening of Fiscal Rules in the European Union: A Multi-Level Response

to the Financial Crisis

Paper prepared for the ECPR General Conference, Glasgow, 3-6 September 2014.

Section/Panel:

Comparative Territorial Politics and Policy / Federalism and the Financial and Economic

Crisis

*** Work in progress. Please do not cite without authors’ permission. ***

Abstract:

We examine whether explanations for the adoption as well as for the design of the new fiscal

debt brakes are equivalent among the European Union countries and German states. In order

to test this assumption we conduct a cross-sectional regression analysis applying both partisan

and economic factors. As similarities we find that neither public debt nor budget balances are

conducive to stronger fiscal rules. In addition, we identify that the government parties’

attitude towards economic conservatism is positively associated with fiscal rule strength.

Also, states that support others in inter-state financial schemes have significantly stronger

debt brakes. Our results point out that the effects of government parties’ right-left position and

the receipt of extraordinary financial assistance differ among the two investigated levels.

While the former might be valid at the German state level the latter only proves significant at

the EU level.

1 PhD Candidate, E-Mail: nawid.hoshmand@uni-koeln.de, P.O. Box 411020, 50870 Cologne.

2 PhD Candidate, E-Mail: stephan.vogel@wiso.uni-koeln.de, P.O. Box 411020, 50870 Cologne.

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1. Introduction

In the sovereign debt crisis European governments rushed to regain market confidence by

establishing new fiscal institutions. At the EU-level, according to the Fiscal Compact,

member states committed to introduce stricter national debt rules until the end of 2013. The

German debt brake that was established in 2009 through agreement of the federal government

and its subnational counterparties was taken as a reference. To strengthen the debt brake’s

credibility German subnational governments agreed to complementarily adopt debt brakes in

their state constitutions and state budget regulations. Even though the deadline applied to the

German subnational level (year 2020) was set more generously than at the EU-level, still,

both conventions were seen as indispensable steps in order to enhance public finance

sustainability. Given that, we find congruent variance at both political levels, not only in

regard to compliance and non-compliance but also with respect to the legislative processes

that led to the adoption of the new debt brakes.

This suggests that similar factors might drive the implementation and institutional design of

these fiscal rules at both the national and subnational level of the EU polity. In order to check

this assumption we first establish a fiscal rule strength index (FRSI) that enables us to

compare these new fiscal governance measures. Then we conduct a cross-sectional analysis

for a sample of all EU countries and German states examining whether partisan as well as

economic factors have a consistent significant influence on FRSI. Our study thus scrutinizes

whether explanations for fiscal rules that are provided by the literature with partly

controversial results are also valid in this multi-level set-up.

Our econometric results suggest a nuanced picture of similarities and differences regarding

the explanatory factors at the two investigated levels. On the one hand, neither the amount of

public debt nor the budget balances can be regarded as influencing factors for the institutional

design of the debt brakes at both levels. Additionally, we identify that the government parties’

attitude towards economic conservatism is positively associated with FRSI. Also, states (EU

and German state level) that support others in inter-state financial schemes have significantly

stronger debt brakes. On the other hand, government parties’ right-left position proves

insignificant at the EU level while we find some evidence at the German state level that right

parties implement stronger rules than left parties. Finally, the receipt of extraordinary

financial assistance can only be attributed with a positive impact on FRSI at the EU level.

In the remainder of this paper, we first outline the fiscal framework of the EU and the German

subnational units and their respective reform policies. By reviewing the theoretical

background and empirical findings of fiscal rules’ determinants in the third section we

develop hypotheses drawing both on political and economic factors. In the fourth section we

lay out the research design by first describing the concept and measurement of our established

fiscal rule strength index (FRSI) and then defining formal models in order to scrutinize the

causal effects of its variation. Additionally, the utilized data as well as the variables’

computation is explained. The empirical analysis in the fifth section provides descriptive

information on the debt brakes’ FRSI and the independent variables and further presents the

regression results. In the conclusion we summarize our findings.

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2. Fiscal rule regimes in the EU and in Germany

In the following section we depict the changes of the fiscal rule regimes in the EU member

states and the German states since 2009. In these political systems debt brakes were

introduced to replace ineffective budget rules. We define a debt brake as a balanced budget

rule that prohibits net borrowing or limits it to a marginal portion of the economic output of a

jurisdiction.

The EU reacted to the sovereign debt crisis with a number of policies targeted at stabilizing

the economy, restoring market confidence and preventing future financial crises. We focus

here on the creation of new fiscal institutions. In October 2011, six legislative acts, referred to

as the “Sixpack”, were adopted to strengthen the ineffective Stability and Growth Pact (SGP).

The SGP was first outlined in 1997 and primarily limited the general government deficit to

3% of the GDP and public debt to 60% of GDP. Moreover, it obliged member states'

budgetary balance to converge towards the country-specific medium-term objective (MTO).

The “Sixpack” extended fiscal surveillance, for example by quantitatively defining significant

deviations from the MTO or the adjustment path towards it. It also allowed an excessive

deficit procedure (EDP) to be launched when a country’s debt level exceeds 60% of GDP and

does not diminish at a satisfactory pace. The Council Directive 2011/85, as part of the

“Sixpack”, prescribed independent bodies to monitor compliance with the mentioned numeric

rules on debt levels and deficit (Art. 6 (1)).

On March 2nd of 2012, representatives of 25 EU member states signed the Treaty on Stability,

Coordination and Governance in the Economic and Monetary Union (TSCG or “Fiscal

Compact”). This intergovernmental agreement restates some of the provisions of the revised

SGP/”Sixpack” such as the requirement of member states to converge towards the MTOs

(which now had to be enshrined into national legislation). However, it also adds to the

strictness of fiscal rules as it limits annual structural deficits to 0.5% of the GDP (or 1% of the

GDP if the country’s debt level is below 60% of the GDP and sustainability risks are low)

(Art. 3 (1) TSCG). This debt brake is the main innovation of the Fiscal Compact; we focus on

its implementation in the remainder of this paper. Escape clauses are limited to exceptional

circumstances (Art. 3 (1, 3) TSCG). Countries need to foresee automatic correction

mechanisms if the structural deficit limit or the adjustment path specified by the Commission

towards it is breached (Art. 3 (1) TSCG). Furthermore, the Fiscal Compact reinforces the

“Sixpack” provision that ratifying states have to reduce the public debt level to 60% of the

GDP (Art. 4 TSCG), adding that a qualified majority of the Economic and Financial Affairs

Council can open an EDP if a country violates this debt rule. If an EDP is launched due to a

violation of the debt or deficit rule by a euro-area member state, reverse qualified majority

voting applies to all Council decisions regarding the procedure.

The Fiscal Compact entered into force on January 1st of 2013 when 16 states had completed

ratification (see appendix A.1 for a summary of the ratification processes). The TSCG applies

fully to all ratifying Eurozone states, while non-Eurozone member states are allowed to

choose provisions to comply with. The ratifying countries had a one year time span to

implement the debt brake into their national legislation (Art. 3 (2) TSCG), ending December

31st of 2013. The so called 2-pack further elaborated the EU fiscal surveillance regime: the

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Commission will now examine and give an opinion on each draft budget by November 30th to

detect non-compliance earlier.

In Germany, prior to the federal reform II of 2009, the constitution only limited the ability of

the central government to run into debts. According to the so-called golden rule the net debt

was not allowed to exceed the expenditures for investments (Art. 115 (1) Basic Law/GG). As

this budget rule proved inept to limit the exponential growth of public debt, Bundestag and

Bundesrat decided in May/June 2009 to implement a significantly stricter rule. This debt

brake constraints the structural deficit for the central government to 0.35% of the GDP from

2016 onwards and for the Länder governments to zero from 2020 onwards (Art. 115 (2), 143d

(1) GG). Exceptions from these rules are only permitted in case of natural disasters and

extraordinary emergencies that originate outside the scope of control of the state and affect

the state’s budget considerably.

The Länder parliaments are requested to implement the debt brake into their legal systems

(Art. 109 (3) GG). While they have to comply with the no-structural-deficit-clause of the

Basic Law, they are given considerable scope in regulating the specifics of their fiscal rule

regime (Härtel 2013, p. 235). They can clarify vague legal concepts such as “borrowing” and

define autonomously the calculus to determine deviations caused by the business cycle.

Moreover, the Länder can either adopt the escape clauses set in the Basic Law or refrain from

them. Apart from the pure implementation of the federal debt brake the Länder are free to

adopt a stricter version that for example comes into force prior to 2020. Before 2009,

similarly to the federal level, most Länder subscribed to the “golden rule”. Only Bavaria,

Baden-Wuerttemberg, Hamburg and Saxony already established a debt brake in their state

budget regulations (Art. 18) between 2006 and 2008, however, not in their constitutions.

While at the European level quasi-bailouts or financial emergency assistance were provided to

Hungary (2009), Latvia (2009), Rumania (2009), Greece (2010), Ireland (2011), Portugal

(2011) and Spain (2012) during the course of the financial and sovereign debt crises, five

German Länder were also considered unable to achieve a structurally balanced budget by

2020 under their own power. Thus they were awarded consolidation assistance from 2011 to

2019, amounting to a total of €800 million per year (Art. 143d (2) GG).3 In the last two

decades two of these Länder already received similar payments (quasi-bailouts). Saarland and

Bremen were awarded special additional grants by the federal government between 1994 and

2004, as mandated by a decision of the Federal Constitutional Court on May 27th of 1992. In

another judgment of October 18th of 2006 the court, however, refused to recognize an extreme

budgetary emergency in the case of Berlin. The introduction of the debt brake accompanied

by consolidation assistance can be viewed as a reaction to escalating fiscal deficits and

ongoing law suits for financial recovery aid.

3 Berlin, Saxony-Anhalt and Schleswig-Holstein each receive 80 million Euro from the central and regional level

per year, if they comply with the deficit reducing plan set by the Consolidation Assistance Act; Saarland and

Bremen are assigned 260 and 300 million Euro yearly.

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3. Theoretical background and hypotheses development

In the following chapter we derive and present our hypotheses on the relationships between

fiscal rule strength and (i.) the misfit of macroeconomic features of public finance, (ii.)

governmental party positions and (iii.) external public finance schemes.

(i.) Misfit of macroeconomic features of public finance

Drawing on the misfit hypothesis which is frequently applied to explain phenomena such as

compliance and Europeanisation (cf. Duina 1999, Börzel/Risse 2003, Sturm/Dieringer 2005),

we assume that the strength of fiscal rules depends on the adaption costs they put on fiscal

policy-makers. While macroeconomic features such as debt levels and budget balances cannot

be steered by politics alone, they fundamentally are subject to political decisions. Reducing

excessive debt levels and deficits, however, creates high adaption costs, meaning that (a) risk-

averse governments should rather refrain from a complete budgetary overhaul as tax increases

and spending cuts may cost votes at the ballot, and (b) governments extensively lose scope for

action, limiting future opportunities to pursue expansive policies. By contrast, governments in

countries with low public debt levels and budget surpluses face small adaption costs when

introducing a debt break as they have to amend only few fiscally relevant policies and are

likely to be only mildly constrained when setting up future budgets. Concluding this section

we deem important the misfit between a state’s recent budgetary policy (as expressed by its

debt level and deficit) and a balanced budget policy according to the debt brake and thus we

hypothesize:

H1: The lower the consolidated gross public debt and the more positive the budgetary

balance of a state, the stricter is its debt brake.

(ii.) Governmental party positions

The partisan composition of government is considered to influence public policy-making as

parties serve different electorates with particular needs and demands (according to Hibbs

1977 and others) and party members share specific sets of values. Left parties are expected to

implement weaker fiscal rules than right parties because they prefer a higher public spending

ratio (de Haan/Sturm 1994, Cusack 1997, Garrett 1998). Furthermore, achieving a balanced

budget often requires significant cuts of government spending as increasing tax rates or bases

might have strong adverse effects. Largely cutting government expenditures puts groups

traditionally represented by left parties such as low income earners in worse position as

redistributive expenditures, such as social spending, can be reduced rather quickly from a

technical point of view, yielding considerable fiscal effects. Nevertheless, it can be argued

that right parties do object debt brakes, too, as they prefer low taxation while left parties not

only raise expenditures but revenues as well (Schmidt 1996, Wagschal 1996). Consequently

we arrive at nuanced expectations for the two levels of government. For the German Länder

we expect that right parties introduce stricter debt rules as Länder lack the autonomy to set

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(and reduce) most tax rates, while left parties can only raise expenditures (not revenues) at

will. On the national level member states have fiscal autonomy and this differentiation does

not apply. Overall, however, we still expect right parties to adopt stricter debt brakes than left

parties (to a lesser degree than in the Länder), given their ideological proximity to balanced

budget rules.

As the right-left-dimension is inherently generic, the position of government parties towards

economic governance should better predict the fiscal rule strength of a country. Governments

that promote traditional economic orthodoxy (i.e. reduction of budget deficits, retrenchment

in crisis, etc.) should be more likely to limit budgetary deficit. Our hypothesis on partisan

government effects thus states:

H2: The more right the state government parties and the more they support traditional

economic orthodoxy, the stricter is the debt brake adopted by a state.

The implementation of European legislation is influenced not only by the support of the

content of a specific EU policy, but also by the general perception of and attitude towards the

EU. Governmental parties that reject or criticize European integration in general (cf.

Szczerbiak/Taggart 2008) are less likely to comply with European legislation and the Fiscal

Compact in particular and thus expected to adopt rather weak debt brakes. On the other hand,

parties which endorse European politics should more fully comply with European laws and

the requirement of the TSCG to establish strong debt brakes. Since the implementation of

German Länder debt brakes was not triggered by EU legislation, we only expect an effect of

governmental preferences towards European politics for EU member states. Our hypothesis

states:

H3: The more governmental parties endorse European politics, the stricter is their debt

brake.

(iii.) External public finance schemes

Political systems consisting of multiple territorial units are characterized by (explicit or

implicit) temporary and structural fiscal solidarity schemes. While transfers are usually based

on structural characteristics such as revenues (in the Länder) or the economic framework (in

the EU), extraordinary financial aid is given temporarily in cases of emergencies. For both

instruments of fiscal support givers and takers can be identified. We assume they take the

following roles. States which contribute to transfer and financial assistance payments act as

role models vis-a-vis their financially weak counterparts and introduce strict debt brakes in

order to convince the other states of the suitability of effective balanced budget rules. From an

opposite point of view, referred to as political reciprocity, states that receive transfer

payments and financial aid might introduce stronger debt brakes as they wish to signal to

paying states that they will strive to budget without external assistance and close the gap to

affluent states regarding transfer payments. Also pressure can be put on them by net

contributing states. We thus test two rival hypotheses:

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H4: The higher the financial assistance and transfer contributions of a state to the other

states of a political system, the stricter is its debt brake.

H5: The more financial assistance and transfer payments a state receives from the other

states of a political system, the stricter is its debt brake.

The first and fourth hypotheses may seem closely related at first glance since they both

incorporate features of public finances. However, the amount of transfers a state pays or

receives is not linked to its level of indebtedness or deficit at the European level. For the

Länder deficits and transfers are closely related though again not equal as transfers from the

fiscal equalization scheme are based on state revenues and not budget balance deficits.

Therefore, at the European level the concepts for transfers and debt/deficits are stronger

distinguishable so that even opposing results could be possible.

4. Research Design

4.1. Measuring Fiscal Rule Strength

The Treaty for Stability, Coordination, and Governance, the Council Directive 2011/85 as

well as the German debt brake represent measures to contain budgetary imbalances. In our

endeavor to quantitatively analyze the rationale of changes in fiscal frameworks induced by

these conventions it is not only important for us to distinguish dichotomously whether a

parliament has passed a corresponding legal act to alter the budgetary process but go beyond

that by scrutinizing to which degree the implementation laws credibly secure the commonly

agreed goal. Hence, it is crucial to check whether the provisions of these conventions, which

feature the institutional framework of these new budgetary rules, are met appropriately.

In this sense, we develop a fiscal rule strength index (FRSI) that is closely related to the one

established by the Directorate General for Economic and Financial Affairs of the EU

Commission. For the latter, the data on numerical fiscal rules of the EU member states is

retrieved from national administrations which annually provide information on the description

and definition of each fiscal rule and its statutory base, monitoring and enforcement

mechanisms. The latest available update is of 2012. It neither examines rules set by

subnational units, such as the German state debt brakes, nor covers the elements of the

aforementioned conventions at the EU level specifically. Consequently, we construct our own

index to capture these features, using information on (i) the statutory base of the new fiscal

rules, (ii) the body in charge of monitoring and (iii) enforcement of the rule, (iv) the

enforcement mechanisms, and (v) the specification of escape clauses of the rule. Table 1

presents the different categories of each of the above criteria with their respective scores.

In absence of a strong theoretical base or preference regarding the weight to be given to each

criterion the country specific composite FRSI is obtained by summing up the scores of the

five components. Hence, a score of 11 is the highest possible fiscal rule strength attributed to

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a debt brake. Correspondingly, a state that has not yet passed any new fiscal rule is given a

score of zero in our dataset.

As stated above, our research interest lies exclusively on the explanatory factors of the newly

established (structural) balance budget rules that have been commonly agreed on at the

German state as well as at the European level. We include all legislative initiatives beginning

with the adoption of the agreements until the foreseen deadline. This means that in the case of

adopting multiple acts our FRSI incorporates the legal information accumulatively, reflecting

a final evaluation of all composite dimensions of the fiscal rule at the end of the fixed term.4

Criterion 1: Statutory/legal base of the rule

3 constitutional base for the rule determines most of the rule's specific dimensions5

2 constitutional base for the rule only lays down crude elements (a legal act determines most of

the rule's specific dimensions)

1 the rule is based on a legal act (e.g. Public Finance Act, Fiscal Responsibility Law)

0 there is no legal act to implement provisions of the TSCG or the Directive 2011/85 or Art.

115, 143d GG respectively

Criterion 2: Nature of the body in charge of monitoring compliance of the rule

2 monitoring by an independent authority (Fiscal Council, Court of Auditors or any other Court)

or the national Parliament

1 monitoring by the ministry of finance or any other government body

0 no regular public monitoring of the rule (there is no report systematically assessing

compliance)

Criterion 3: Nature of the body in charge of enforcement of the rule

2 enforcement by an independent authority (Fiscal Council or any Court) or the national

Parliament

1 enforcement by the ministry of finance or any other government body

0 no specific body in charge of enforcement

Criterion 4: Enforcement mechanisms of the rule

2 there are automatic correction and sanction mechanisms in case of non-compliance

1 there is an automatic correction mechanism in case of non-compliance in the form that the

authority responsible is obliged to take corrective measures or is obliged to present corrective

proposals to Parliament or the relevant authority

0 there is no ex-ante defined actions in case of non-compliance

Criterion 5: Specification of escape clauses of the rule

2 escape clauses are foreseen and clearly specified in law as well as in line with Fiscal Compact

1 escape clauses are foreseen and clearly specified in law but not in line with Fiscal Compact

0 no legal statement regarding escape clauses

Table 1: The five criteria of the Fiscal Rule Strength Index (FRSI)

As to the European level, we mark the arrangement of the Council Directive 2011/85 (on the

requirements for budgetary frameworks of the EU Member States) on November 8th of 2011

4 Regardless of the level (European or German state), legislative initiatives increased the strength of the

institutional framework designed for the debt brake. The only exception is Lower Saxony where a reverse

development took place; a debt brake was first passed but then abolished again. As we are interested in the

factors conducive to introducing or strengthening debt brakes we include the first legislative act in our analysis.

5 Dimensions refer to the remaining four criteria. Hence, if more than two criteria are covered by a constitutional

amendment, we classify the statutory base with a score of “3”.

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as the starting point since it is fundamentally aligned to the provisions of the Fiscal Compact

(comprising the structural balanced budget rule and monitoring body)6. Both documents state

December 31st of 2013 as the end of the fixed term. For the German states, the statutory

period to adopt analogous measures started with the Upper House decision on June 12th of

2009 to implement the federal debt brake and ends by December 31st of 2019. As this time

limit has not yet been exceeded we analyze which conditions led to legal actions until now.7

4.2 Model outline

In section 3 we presented a series of relationships between fiscal rule strength and factors

characterizing governments’ political positions as well as (macroeconomic) features of public

finance. In order to scrutinize these hypotheses by means of cross-national data analysis they

are translated into econometric models in this section. Additionally, we discuss the

operationalization as well as data selection of each model’s variables. In order to examine our

proposition that the factors underlining the institutional credibility of newly established debt

brakes at the European-wide national level could be similar to those at the German state level

we conduct all of our subsequent models firstly for a sample covering all EU member states

and German states altogether and secondly for the EU member states separately.8

For the purpose of demonstrating the impact of determinants of public finance on this

particular development of fiscal governance (H1), our first model incorporates public debt and

budgetary balances.

(1) FRSIi = α0 + α1 DEBTi + α2 BUDGETi + α3 GDPi + εi

As stated above, our regressand FRSIi, the countries’ specific fiscal rule strength index, is

presented as a discrete metric variable incorporating all corresponding information combined

until the reference date.9 The countries’ consolidated gross public debt as well as their

budgetary balances are described by DEBTi and BUDGETi, respectively, and calculated as

lagged mean values referring to the years from 2009 to the year of the latest legislative act.10

Consequently, when a country has passed two acts in different years to implement the

provisions of the directive or/and the Fiscal Compact, the year of interest is the one of the

latest act. On the one hand, this avoids any temporal inconsistency with our FRSIi, which also

6 Exceptions are the cases of Germany, which served as the policy model for the EU debt brake, and Spain which

adopted related measures slightly before this starting point (September 27th of 2011). As this Spanish legislative

act was actively perceived as the first in line to apply the debt brake we include it in our investigation.

7 Legal actions were screened until August 10th of 2014.

8 As a particular sample comprising the 16 German states would not guarantee all necessary properties to

conduct econometric statistics, we implicitly regard differences between the results for the “overall sample” and

the “EU sample” as possible influence by the German states.

9 To simplify the reading of the description of the models and the computation of the variables we only mention

the EU member states even though all specifications also apply to the German states.

10 2009 is taken as the starting point because in that year Germany has passed its federal debt brake, which

served as the reference for modeling the EU-wide debt brakes and initiated the debate for extended coordinated

fiscal governance measures.

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represents the final state in a scenario of multiple legal acts in one (composite) figure. On the

other hand, we thereby account for pressure that was exerted by the circumstances that were

present during all those years.

Furthermore, we take the lagged value of the mean because of two reasons. First, some

legislative acts were passed in the beginning of certain years so that year-end figures might

erroneously link them to circumstances that only occurred afterwards. Second, in this manner

we take the length of legislative processes into account, i.e. there is a significant time lag

between events triggering legislation and the adoption of a law in parliament.

Since high levels of public debt and continuous fiscal mismanaging leading to negative

budget results express structural deficits in public finance, we suppose that their association

with fiscal rule strength is adverse, meaning a negative sign for DEBTi and a positive one for

BUDGETi.

In addition, our first model, as all our subsequent models, accounts for the fact that fiscal

frameworks, as suggested by previous research, vary among levels of economic development

(Allen, 2009)11. Hence, we include GDP per capita as a control variable and expect its

relationship to the fiscal rule strength to be positive.

In our second model we put the political sphere into the focus and test the governments’

programmatic position towards social and economic issues (H2) as well as their perspective on

the European Union and integration (H3).

(2) FRSIi = β0 + β1 RILEi + β2 ECOi + β3 EUi + β4 GDPi + εi

The variable RILEi indicates the governments’ programmatic positioning on a “Right-Left”-

axis at the time of the adoption of a corresponding legislative act. Respective information is

provided by a composite index of the Comparative Manifestos Project (CMP) (Budge, 2001;

Klingemann, 2006) which codes party manifestos on the basis of a number of predefined

categories. This metric variable takes up negative values reflecting relatively more content of

the government’s party manifesto attributed to “left” issues, and positive values vice versa.12

Even though empirical analyses investigating the relationship of supposedly “left/right”-

governments to economic outcomes come to ambiguous results, we anticipate that the more

“right” a government is characterized, the stronger the fiscal rules are designed. Hence, a

positive sign for the association between RILEi and FRSIi is anticipated.

If the government is formed by a coalition of two or more parties at the time of passing

(elements of) the debt brake an aggregated value is calculated by the sum of their

11 Developing countries are shown to be more prone to political economy factors that lead to rent-seeking. This

can put severe constraints on the progress of modernizing budget institutions (Allen, 2009).

12 The CMP first counts the amount of (quasi)sentences belonging to one category and then puts this in relation

to the overall number of (quasi)sentences in a party’s manifesto. Thus, all variable scores presented in the

database reflect percentage points. RILEi represents the difference between the sum of a variety of issues labeled

as “right” and the sum of “left” issues.

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corresponding RILE-values weighted by their respective parliamentary seats. In the case that

multiple legal acts are adopted by different governments or in the case that no legal act has

been adopted at all an aggregated value is calculated by the sum of the government’s

(coalition’s) corresponding RILE-values weighted by their respective relative time in office.13

For the EU countries governments’ relative time in office is related to the time span of

November 8th of 2011 to December 31st of 2013. Similarly, German state governments’ time

in office is related to the time span of June 12th of 2009 to August 10th of 2014. Thereby we

account for actions and non-actions of all responsible governments.

Besides the review of the very broad right-left allocation of the respective governments,

which is not an uncontroversial concept14, we further utilize another variable, ECOi, provided

by the CMP that examines governments’ position regarding traditional economic orthodoxy.15

This concept is framed more narrowly around the idea of assessing a government’s attitude

towards economic governance. Since higher scores are ought to represent stronger

government tendencies to traditional economic orthodoxy, we assume a positive sign for the

association between ECOi and FRSIi.

In order to check whether a government’s perception of and attitude towards the EU in

general and the integration process in particular has any favorable impact on the institutional

design of the new fiscal rules we implement EUi. It is calculated as the difference between

two variables also coming from the CMP database. Whereas the first one measures the

relative amount of a government’s manifesto spent on arguments supporting the idea of

expanding the EU or of increasing its competence (also of the European parliament in

particular), the second one captures the relative amount of hostile statements against the EU,

emphasizing the opposition to specific European policies or to the net-contribution of the

country to the EU budget. Consequently, EUi is assigned a positive value if a government’s

endorsement towards European politics is higher than its disaffirmation. Since the project of

consolidating EU member states’ public finance by European-wide coordinated fiscal policies

and its implementation is regarded crucial for the Union’s future, we assume a positive

connection between EUi and FRSIi.

Having described the meaning and computation of the variables that capture party politics it is

important to note that two limitations apply to the data. Firstly, no specific data is available

for the parties at the German state level that could consistently be put in relation to the EU

national level. We assume that the values ascribed to their federal counterparties serve as

plausible proxies for subnational party positions. Second, for a number of countries the CMP

13 Only in Spain and Rhineland-Palatinate different governments have passed legislative acts relevant to the

computation of our FRSI.

14 Criticism focuses predominantly on the reliability of the coding process and the conceptional selection of

distinct policy issues (Mölder, 2013).

15 Traditional economic orthodoxy is defined by the CMD as the pursuit of the reduction of budget deficits,

retrenchment in crisis, thrift and savings as well as the support for a strong currency and traditional economic

institutions such as stock markets and the banking system.

12

dataset is outdated. In those cases we resort to the information available for the latest

election.16

Our third model integrates the concept of governments’ political agenda into the context of

public finance factors so that the robustness of both findings can be shown.

(3) FRSIi = γ0 + γ1 RILEi + γ2 ECOi + γ3 EUi + γ4 DEBTi + γ5 BUDGETi + γ6 GDPi + εi

We proceed with our forth model by accounting for external public finance schemes and thus

testing the validation of hypotheses H4 and H5.

(4) FRSIi = δ0 + δ1 TRANSFERSi + δ2 F_AIDi + δ3 DEBTi + δ4 BUDGETi + δ5 GDPi + εi

TRANSFERSi describes a country’s financial dependence or independence on other member

states as it is defined as the share of net benefits to own government revenues. For the

European level, a country’s net benefit is calculated as the difference in total EU expenses for

this country to the country’s total contribution to the EU budget. Comparably, in the German

fiscal equalization scheme a state’s net benefit is the breach between its received and

expended horizontal payments.

Analogously, the variable F_AIDi complements the picture of financial relations to other

member states by indicating whether a country has been relying on extraordinary financial

assistance. Even though these transfers were in direct connection to the advent of the financial

crisis at the European level and more specifically evoked by structural deficits at the German

state level the comparison can be justified in so far as in both cases governments could not

achieve structural balanced budgets on their own. Since the payments are tremendously

different within the European Union and even more compared to the German states we

incorporate F_AIDi only as a dichotomous variable.

The theoretical arguments outlined in the fourth hypothesis point to a negative link between

TRANSFERSi, F_AIDi and FRSIi. According to the rivaling fifth model higher values in

TRANSFERSi and F_AIDi induce stronger motivation for political reciprocity and/or stronger

external pressure to consolidate. Hence, the expected association carries a positive sign.

16 For Austria, Czech Republic, France, Luxembourg, the Netherlands, Romania and Slovenia information is

taken from the previous election. In the cases of Cyprus, Greece and Malta we have to go back to the years 2001,

2004, and 1998, respectively. Unfortunately, Italy and Latvia cannot even be recorded in this manner as there are

no reference information in respect to the technocratic regime under president Monti which passed the Italian

debt brake and Lativia’s biggest party in government, “Zatlers' Reform Party“.

13

Table 2 summarizes all variables used above.

Variable Hypothesis

(predicted sign) Verbal explanation Sources

Explained variable

FRSIi Fiscal rule strength index of country i’s

“debt brake”.

See table A.2

Explanatory variables

DEBTi (-) Country i’s general government gross

public debt as a share of GDP.

Eurostat (2014)

BUDGETi (+) Country i’s balanced budget result as a

share of GDP.

Eurostat (2014)

RILEi (+) Government’s allocation on a “Right-

Left”-axis in country i.

Volkens et al. (2013)

ECOi (+) Government’s agenda regarding

traditional fiscal orthodoxy in country i.

Volkens et al. (2013)

EUi (+) Government’s agenda regarding the EU

idea in country i.

Volkens et al. (2013)

TRANSFERSi (+ / -) Country i’s net financial benefit as a

share of own government revenue.

EU Commission (2014e), German Federal Statistical

Office (2014).

F_AIDi (+ / -) Binary variable, where country i

receiving financial assistance coded ‘1’

and coded ‘0’ otherwise.

EU Commission (2014d),

German Federal Statistical Office (2014).

Explanatory variables - control variables

GDPi (+) Country i’s GDP per capita. Eurostat (2014)

Table 2: Definition, explanation and sources of variables

5. Empirical analysis

5.1 Descriptive information: dependent and independent variables

The further development of the fiscal frameworks in the member states and the German states

has been as diverse as the fiscal rules prior to the reforms.17 Until the expiration of the

deadline 18 of the 28 EU countries (64.3%) adopted legislative measures to implement a debt

brake.18 At the German state level an equal disposition to comply can be detected. Here, 10 of

the 16 German states (62.5%) have passed corresponding laws until now. Table A.2 in the

17 Until 2012 a handful of member states such as Cyprus had neither fiscal rules nor a binding medium-term

budgetary framework (MTBF), while it also lacked a fiscal council. Others like Denmark had neither budget

rules for general government level nor regulations requiring a balanced budget for the central government (EUI

Law Department Project, 2013-2015).

18 Even though Croatia has not yet ratified the Fiscal Compact we consider it as part of our sample since it

acceded to the EU in July 2013 and is thus eligible to accede to the Fiscal Compact. Moreover, even before July

1st of 2013 Croatian leaders such as current Croatian President of Government Zoran Milanovic pointed out that

Croatia would respect the rules of the Fiscal Compact (EUI Law Department Project, 2013-2015).

14

Appendix lists and describes all legislative initiatives conducted by the EU countries and the

German states as well as their status towards possible future engagements.

The legislative processes can be distinguished by the timing and the number of respective

legal acts. Whereas the majority of countries (10 out of 16) and states (6 out of 10) only

passed one law to fulfill the agreed provisions, others elaborated two or, in the case of Spain,

even three corresponding laws. On the one hand, some countries and states amended their

constitutions and thus designed an additional implementation law. On the other hand,

countries like Austria drew a separate legal framework for the creation of an independent

fiscal council. To a similar note, in contrast to countries such as Italy, Austria or Latvia that

eagerly passed their laws in one year, legislative processes in Spain and Rhineland-Palatinate

persisted over several years, even stretching over changes in ruling government. Finally, the

debt brakes vary in their date of coming into force. In most cases they are immediately

binding, however, in several countries like Slovenia an adjustment period is granted until the

new rules apply. Conversely for the German states for which the constitution earmarks 2020

as the reference date for compliance, some states’ debt brake have already come into power,

e.g. in Saxony-Anhalt.

Analogous to the diverse legislative processes we also find significant variance with respect to

the content of the established debt brakes, in particular regarding the fiscal rule strength. Even

though a comprehensive majority of the legal acts as shown in table A.2 specifically refer to

the provisions of the Fiscal Compact, the Council Directive 2011/85 or the German federal

debt brake, only six countries and seven states complied with the agreement to amend their

constitutions correspondingly. Furthermore, we can discriminate between constitutional

amendments that cover rudimentarily the crucial elements of the institutional framework of

the debt brake and those that regulate them comprehensively. The Slovak as well as the

German (federal) constitutional amendments are the only ones that can be classified as

determining most of the rule's specific dimensions.19 Interestingly, this is not the case for any

German state.

To monitor compliance with the debt brakes most countries have established new independent

institutions or authorized already existing ones. Portugal, for example, created by means of

the Budget Framework Law in 2011 the Portuguese Public Finance Council (Conselho das

Finanças Públicas, CFP), which publishes reports and recommendations and holds the

government accountable for the budgetary development. If the government does not comply

with the given recommendations it has to provide an explanation (Burret/Schnellenbach,

2014, p. 46). Slovenia presents a special case as the country has not yet passed an

implementation law to complement the constitutional amendment and thus does not define the

institution which will supervise compliance with the fiscal rule. Cyprus also currently lacks a

fiscal institution to act as an independent referee and provider of economic and fiscal

expertise. Its Ministry of Finance is expected to submit a proposal to the Council of Ministers

for the establishment of such a fiscal institution (EU Commission, 2013b, p. 51). For the

19 Slovakia’s (Art.3; Art.4; Art.5(1)-(8); Art.5(10)-(12)) and Germany’s amendments (Art.109a; Art.109(3);

Art.115) specify provisions concerning the monitoring body, the automatic mechanism and the escape clauses of

the debt brake.

15

German states the federal constitution declares that the newly established “Stability Council”

will also monitor their annual budgets from 2020 onwards (Art. 109a GG), which implies that

Länder rules do not vary in this specific dimension.

In case of non-compliance with the established debt brakes usually the ministry of finance is

the final actor that is in charge of the enforcement. However, in some countries and states

such as the Netherlands or Mecklenburg-Western Pomerania there is no legal definition of or

reference to any specific actor. Contrarily, Finland is an example of an independent authority,

here the National Audit Office of Finland, being in charge and having the duty to decide

whether the measures taken by the government are sufficient (§ 4 and § 5 of Law 869/2012).

With regard to the enforcement mechanisms, almost all countries and states have specific

numerical thresholds that oblige them to take corrective measures. The German states are

usually obligated to recover the current excess amount of credit assumed in the second year at

the latest. Correspondingly, most EU countries aligned their thresholds to the provisions of

the TSCG (Art. 3(1)). Accordingly, if deviations from the target occur that add up to more

than 0.5% of the GDP in one year or more than 0.25% in two consecutive years, an action

plan should be compiled to correct the deviation. However, legislation in some cases like in

Mecklenburg-Western Pomerania and Hungary lacks a maximum level of allowed deviation

or a correction mechanism in the event of a deviation. Stronger commitment to a balanced

budget can be expected in countries such as Austria where sanctions of 15% of the

overshooting value are imposed if the limits are exceeded.

Finally, credibility of the fiscal rules is accomplished if the underlying escape clauses are

foreseen and clearly specified in law. However, specifications can be in line with those

commonly approved in the Fiscal Compact (natural disasters and emergency situations that

are beyond the government’s control and severely affect public finances) or go beyond and

include additional exceptional circumstances, for example for reforms of the pension scheme

like in Latvia. Even worse, in some jurisdictions (e.g. Cyprus or the Netherlands) the laws do

not comprise any exceptions from the budget rule or the correction mechanism.

Adding up all scores of the five institutional dimensions, figure 1 and figure 2 show the fiscal

rule strength index of the newly established debt brakes in the EU countries and the German

states respectively. At the EU member state level, Germany appears with the highest FRSI-

score closely followed by Slovakia. As mentioned before both countries adopted

comprehensive constitutional amendments and implemented well defined monitoring and

enforcement mechanisms. Slovenia holds the last rank of all countries that have established a

debt brake as it has yet passed only a constitutional amendment with rudimental information

on its debt brake. For the German states the picture is more compressed as the highest score,

which is attained by five states, is only two points above the lowest score attributed to the

weakest of all state debt brakes. If we focus only on the FRSI of the established debt brakes it

is clear that the variance between EU member states is significantly higher than between the

German states. However, if all cases are taken into account for the comparison of the two

groups it can be seen in table 3 that the variance and mean values of the FRSI get closer.

16

Notes: The figure presents the fiscal rule strength index (FRSI) values for the 28 EU member states’ debt brakes.

Source: Own calculation.

Figure 1: Fiscal rule strength index of the EU member states’ debt brakes

Notes: The figure presents the fiscal rule strength index (FRSI) values for the 16 German states’ debt brakes.

Source: Own calculation.

Figure 2: Fiscal rule strength index of the German states’ debt brakes

Figure 3 illustrates the consolidated general government debt as well as the balance budget

deficits as shares of the GDP. Both figures correspond to the variables DEBT and BUDGET

and are thus mean values for the years from 2009 to the year before the adoption of the last

legislative act. For those cases that have not passed any laws the values represent the mean

from 2009 to 2012. In ordering the cases by their public debt values we first see that there is a

considerable association between public debt and balanced budget deficits. This is also

confirmed by a significant correlation coefficient of -0.5874. Second, even though the

German states are rather dispersed over the sample, the majority of them are located at the

bottom of the range. Table 3 confirms this impression; the German states’ mean value as well

17

as their variance of public debt is significantly lower than those of the EU member states. The

same applies for the balanced budget values. This suggests that there might also be a

systematic difference between our groups in the association to FRSI.

The information provided in figure 4 characterizes the EU member states and German states

governments’ position towards left-right issues, their approval of traditional fiscal orthodoxy

and their attitude towards the European idea. EU member states are presented at the top and

the German states at the bottom of this distribution. First, we identify that “left” as well as

“right” party governments held offices in both groups during our investigated time period. In

line to this, the range of this variable presented in table 3 is similar in both groups. However,

EU member states’ governments tend to be characterized as more “left” and also vary less

among themselves. In contrast, EU governments’ attitudes towards conservative fiscal politics

are more diverse. The mean of this variable is the same for both groups though. To the same

note, the values of EU are almost identical in all concerns, with the single exception that the

EU-sceptic position of the Conservative Party in Great Britain is unique in our samples.

In regard to the horizontal transfers we observe in figure 5 a comparable distribution for both

groups. On the one hand, we have extreme cases like Lithuania and Berlin whose net benefits

make up unto 14% of their own government revenues. On the other hand, even though net

contributions to the EU do not come close to what Hessen provides for the German financial

equalization scheme (6.3%), overall in both groups a substantial number of states receive

more than they give. On average this amounts to 2-3% of their own government revenues.

As mentioned earlier, besides these continuous payments several EU countries as well as

German states have received financial assistance in critical times in order to regain the

opportunity to restore a balanced budget. At EU member states’ level, in October 2008

Hungary was the first country to request and eventually receive financial help from the

European Union (in conjunction with the IMF). The EU share of the guaranteed sum

constituted €6.5bn amounting to 15.2% relative to the then total of Hungarian general

government revenues (EU Commission, 2014d).20 Shortly afterwards Latvia followed with

arranged €5.4bn (84.5% of own revenues). Until now, eight EU countries were assigned

financial support with a maximum settled amount of €144.7bn (168.4% of own revenue). At

the German state level, additionally to the quasi-bailouts of Saarland and Bremen starting in

the beginning of the 1990s, in 2011 five states (Berlin, Bremen, Saarland, Saxony-Anhalt and

Schleswig-Holstein) were granted extraordinary yearly payments of €800mio until 2019

(Consolidation Assistance Act, § 1(2)). Applying the same rational, the total settled amount

represents 3.2% (Berlin) up to 60.2% (Bremen) of own government revenues. The given

figures underline that the relative amount of incidents of financial assistance is comparable

between our two groups but their absolute as well as relative values are extremely different.

20 Of course, the total settled amount of financial support was not disbursed in that single year. Figures stating

the agreed financial support in relation to own government revenues should only give an indication what these

numbers signify in the country-specific context. Hence, the question is what magnitude and thus importance does

the financial support have related to a country’s own revenue generation if the total amount was disbursed in the

year of the agreement.

18

After describing the properties of our models’ variables, especially accounting for the

discrepancies between our two groups, we proceed by testing whether their interrelations are

likely to distort our regression estimations. This is done by computing the variance inflation

factors (VIF) for each model separately. 21 Since the VIFs don’t even reach the score of 2,

multicollinearity does not seem to be an issue here.

Min Max Mean Std. Div

FRSI EU 0 8 4.56 3.71

States 0 10 4.18 3.54

DEBT EU 7.43 151.38 61.75 32.09

States 9.43 68.70 35.83 16.41

BUDGET EU -19.14 -0.20 -5.27 3.91

States -4.01 1.38 -1.43 1.38

RILE EU -21.26 17.54 -3.35 10.87

States -20.29 23.90 3.91 15.58

ECO EU 0.00 10.53 2.78 2.69

States 0.38 5.37 2.77 1.22

EU EU -0.45 6.11 2.13 1.68

States 0.88 5.75 2.24 1.72

TRANSFERS EU -0.73 14.49 3.19 4.10

States -6.34 13.96 2.48 5.48

F_AID EU 0 1 0.25 0.44

States 0 1 0.25 0.45 Notes: The table provides descriptive statistics of the used variables. Variables’ explanation can be reviewed in

table 2. Sources: see table 2.

Table 3: Summary statistics of the variables used

21 The results for the variance inflation factors are presented in appendix A.3.

19

Notes: DEBT is presented by the wider bars with their values displayed on the left-hand axis. DEFICIT is the inverse of the variable BUDGET with its values displayed on the

right-hand axis. Sources: Eurostat (2014) and German Federal Statistical Office (2014).

Figure 3: Public debt and deficit of the EU member states and the German states

20

Notes: RILE is presented by black bars, ECO by dark grey bars and EU by light grey bars.

Source: Volkens et al. (2013).

Figure 4: EU member states and German states governments’ positions

21

Notes: The figure illustrates the values of the variable TRANSFERS.

Sources: EU Commission (2014e) and German Federal Statistical Office (2014).

Figure 5: EU member states’ and German states’ transfer contributions and receipts

22

5.2 Regression results

The results of our first regression model which investigates the impact of determinants of

public finance on fiscal rule strength are reported in table 4.

Variable

Model 1.1 Model 1.2 Model 1.3

Overall EU Overall EU Overall EU

DEBT -0.0052 0.01461

-0.0059 0.0136

(-0.27) (0.57)

(-0.24) (0.47)

BUDGET 0.0178 -0.0708 -0.0106 -0.0160

(0.12) (-0.44) (-0.06) (-0.08)

GDP -0.0000 -0.0000 -0.0000 -0.0000 -0.0000 -0.0000

(-0.42) (-0.57) (-0.41) (-0.43) (-0.4) (-0.55)

Cons 5.2107*** 4.0095* 4.9979*** 4.4151** 5.1930*** 3.9591*

(2.75) (1.90) (2.93) (2.42) (2.71) (1.82)

F-Test 0.11 0.34 0.09 0.19 0.07 0.22

(p-value) 0.8932 0.7155 0.9172 0.8249 0.9738 0.8841

adjusted R²

(%) 0.56 2.47 0.41 1.31 0.57 2.49

N 44 28 44 28 44 28 Notes: This table reports the impact of consolidated gross public debt as well as of general government budget

balance on the fiscal rule strength index of new debt brakes. Control variable regarding economic development is

included in all model specifications. A model assigned with “EU” means that the specification is applied only to

the sample of EU countries. For variable definitions see table 2. The figures in parentheses below the parameter

estimates indicate the t-values based on robust standard errors. R² is the corrected coefficient of determination. *,

**, and ***: Significant at the 10, 5 and 1 percent levels, respectively.

Table 4: Regression results for model 1

The table shows that neither the amount of public debt nor the outcomes of the budget balance

have a significant impact on the institutional design of the fiscal rules. This is supposed to be

a stable outcome regardless of the application of only one or both determinants of public

finance. Correspondingly, the F-test results as well as the adjusted R² indicate the

unsystematic relationship between our regressors and regressand, rejecting our assumptions in

H1. However, the ambiguous results for DEBT and BUDGET induced by the sample selection

point to the fact that there is a contrarious connection between the public finance factors and

the fiscal rule strength at our different levels of analysis.

With the help of model 2, we try to identify the impact of governments’ party positions

towards conservative economic governance and in respect to the European idea. Model 3 tests

these relationships in light of the first model’s derived framework. Table 5 exhibits the results

for the various specifications of model 2 and the model 3. First to note is that the coefficient

of RILE is significantly positive for the overall sample in model 2.1 and its corresponding F-

test suggests that the regression models’ variables are significantly different from zero. Even

though this relationship vanishes when we include other explanatory factors its value remains

23

positive albeit the corresponding value for the EU countries is negative. This suggests that

RILE constitutes a significant effect at the German state level.22

Furthermore, the variable EU is only significant once and loses its statistical explanatory

power. Based on this we can already reject the assumed association formulated in H3. What

remains noteworthy is the result for the variable ECO. Regardless of model 2’s sample its

coefficient persists to be significantly positive. However, accounting additionally for the

public finance context (model 3) the results for ECO have to be differentiated in regard to the

samples applied. For the EU-sample the coefficients remains significantly positive. In

particular, the more emphasis a government puts on traditional economic orthodoxy the

stronger is the design of its debt brake. Hence, we fail to reject our supposed relationship

stated in hypothesis H2 in respect to the EU member states.

In order to test our hypothesis H4 and H5 with their rivaling relationships between horizontal

financial transfers and fiscal rule strength we conduct several specifications of our model 4.

The first result that is presented in table 6 is that the coefficient of TRANSFER bears a

negative sign and is significantly different from zero throughout all specifications.

Furthermore, since the discrepancy in the coefficient’s values for the different sample sizes is

negligible it implies that a similar effect is present on both group levels. The contrary is the

case when interpreting the results for variable F_AID. Its outcomes in the full sample models

are always insignificant whereas for the EU-sample the positive values turn out to be

significant. This is probably due to a different association at the German states level. Thus, we

conclude that while our assumptions provided in hypothesis H4 cannot be rejected for the full

sample, only for the EU-samples hypothesis H5 is kept valid.

22 Results of a cross-sectional regression for a sample only including German states affirm this assumption.

24

Variable Model 2.1 Model 2.2 Model 2.3 Model 3

Overall EU Overall EU Overall EU Overall EU

RILE 0.0918** 0.0377 0.0539 -0.0183 0.0602 0.0018

(2.57) (0.49) (1.30) (-0.20) (1.26) (0.02)

ECO 0.5558*** 0.4138** 0.3986* 0.4422* 0.3880 0.4819**

(2.84) (2.16) (1.75) (1.86) (1.66) (2.10)

EU 0.4850 0.5314* 0.4920 0.6082 0.5803 0.5542 0.6096 0.7588

(1.16) (0.74) (1.09) (0.97) (1.33) (0.75) (1.31) (0.91)

DEBT 0.0001 0.0233

(0.00) (0.69)

BUDGET -0.0581 -0.0158

(-0.32) (-0.07)

GDP -0.0000 -0.0000 -0.0000 -0.0000 -0.0000 -0.0000 -0.0000 -0.000

(-0.23) (-0.57) (-0.26) (-0.57) (-0.21) (-0.55) (-0.14) (-0.63)

Cons 3.6097** 4.1291** 2.0873 2.7544 2.2646 2.7191 1.8884 0.9002

(2.05) (2.20) (0.91) (1.18) (0.98) (1.14) (0.71) (0.34)

F-Test 2.38 0.21 2.92 1.84 2.65 1.37 1.68 1.29

(p-value) 0.0845 0.8897 0.0462 0.1697 0.0485 0.2775 0.1560 0.3077

adjusted R²

(%)

10.33 4.36 12.2 12.21 14.57 12.38 14.9 16.21

N 42 26 42 26 42 26 42 26

Notes: This table reports the impact of governmental party positions on the fiscal rule strength index of new debt brakes. Control variable regarding economic

development is included in all model specifications. A model assigned with “EU” means that the specification is applied only to the sample of EU countries. For

variable definitions see table 2. The figures in parentheses below the parameter estimates indicate the t-values based on robust standard errors. R² is the

corrected coefficient of determination. *, **, and ***: Significant at the 10, 5 and 1 percent levels, respectively.

Table 5: Regression results for model 2 and model 3

25

Variable Model 4.1 Model 4.2 Model 4.3 Model 4.4

Overall EU Overall EU Overall EU Overall EU

TRANSFERS -0.2731*** -0.2588*

-0.3059*** -0.2987** -0.3347*** -0.3750**

(-3.16) (-1.83)

(-3.52) (-2.54) (-3.55) (-2.33)

F_AID

0.0011 1.9997 1.0134 2.4101* 1.6377 3.4755**

(0.00) (1.52) (0.92) (1.90) (1.27) (2.64)

DEBT

-0.0110 -0.0114

(-0.49) (-0.40)

BUDGET

0.0757 0.1403

(0.44) (0.73)

GDP -0.0000 -0.0000 -0.0000 -8.76e-06 -0.0000 -0.0000 -0.0000 -0.0000

(-1.35) (-1.57) (-0.38) (-0.13) (-1.32) (-1.04) (-1.59) (-1.07)

Cons 6.6537*** 6.4829*** 4.8906*** 3.8885** 6.4716*** 5.5295*** 7.5476*** 7.0868**

(4.83) (4.38) (3.00) (2.14) (4.56) (3.38) (4.37) (2.62)

F-Test 5.83 2.73 0.08 1.32 4.77 5.85 3.21 4.52

(p-value) 0.0059 0.0849 0.9267 0.2864 0.0062 0.0038 0.0164 0.0055

adjusted R²

(%) 11.76 8.84 0.37 6.57 13.13 17.16 14.87 20.11

N 44 28 44 28 44 28 44 28

Notes: This table reports the impact of horizontal financial schemes on the fiscal rule strength index of new debt brakes. Control variable regarding economic

development is included in all model specifications. A model assigned with “EU” means that the specification is applied only to the sample of EU countries. For

variable definitions see table 2. The figures in parentheses below the parameter estimates indicate the t-values based on robust standard errors. R² is the

corrected coefficient of determination. *, **, and ***: Significant at the 10, 5 and 1 percent levels, respectively.

Table 6: Regression results for model 4

26

6. Conclusion

The aim of our study is to scrutinize whether partisan as well as economic determinants are

conducive to the adoption and crucial for the design of the newly established debt brakes in

EU countries as well as in German states. In order to grasp the institutional framework of the

rules we establish a new composite fiscal rule strength index (FRSI) that captures each rule’s

statutory base, the actors responsible for monitoring and enforcing the rule as well as its

underlying enforcement mechanisms with its possible escape clauses. Applying the FRSI to

the corresponding legislative acts of our sample presents a substantial variation, especially

within the EU countries. We then conduct cross-sectional regression analyses that test the

assumed association of our five hypotheses.

Our econometric results first point out that neither the amount of public debt nor the budget

balances can be regarded as influencing factors for the institutional design of the debt brakes.

Second, the “right-left” classification of governments as provided by the Comparative

Manifesto Project is not consistently significant throughout our model specifications. Only

when examining the German states separately a significantly positive effect can be noted,

supporting our theoretical argument that right parties are more prone to adopt stronger fiscal

rules. We assumed that this connection would be more powerful in the overall sample since

debt brakes contain a high level of uncertainty regarding the budget balancing pressure. In

other words, we presumed that left parties are more reluctant to accept fiscal rules that might

necessitate unexpected deep expenditure cuts in the future. Furthermore, we find that utilizing

a narrower concept of fiscal conservatism helps considerably to explain the institutional

strength of debt brakes. Together with the non-significant effect of RILE this supports the idea

that a mere classification of parties into right and left is a too broad and imprecise concept in

order to be a meaningful proxy for fiscal governance measures.

Concerning the position of countries and states in the horizontal financial scheme, we find out

that the higher the paid continuous transfers are with respect to own revenues the stronger the

debt brakes become. This association is also found to be robust when we account for other

public finance characteristics. Hence, we confirm our hypotheses that countries and states

which have acted as role models implement strong debt brakes in order to convince other

members of its suitability to achieve sustainable public finances. In addition, our analysis

revealed that the receipt of financial assistance is not a significant explanatory factor for the

whole sample. Nevertheless, when we regard only the EU countries the instance that a

country has received financial assistance during the aftermath of the financial crisis induces it

to adopt a stronger debt brake. It remains to be analyzed whether this is due to former

contractual concessions or (voluntary) reciprocity.

27

Appendix:

Table A.1: Ratification of TSCG

Country Notification Entry into force

Austria 30.07.2012 01.01.2013

Belgium in process

Bulgaria 14.01.2014 01.02.2014

Croatia not signed yet

Cyprus 26.07.2012 01.01.2013

Czech Republic opted out

Denmark 31.05.2012 01.01.2013

Estonia 05.12.2012 01.01.2013

Finland 21.12.2012 01.01.2013

France 26.11.2012 01.01.2013

Germany 27.09.2012 01.01.2013

Greece 10.05.2012 01.01.2013

Hungary 15.05.2013 01.06.2013

Ireland 14.12.2012 01.01.2013

Italy 14.09.2012 01.01.2013

Latvia 22.06.2012 01.01.2013

Lithuania 06.09.2012 01.01.2013

Luxembourg 08.05.2013 01.06.2013

Malta 28.06.2013 01.07.2013

Netherlands 08.10.2013 01.11.2013

Poland 08.08.2013 01.09.2013

Portugal 25.07.2012 01.01.2013

Romania 06.11.2012 01.01.2013

Slovakia 17.01.2013 01.02.2013

Slovenia 30.05.2012 01.01.2013

Spain 27.09.2012 01.01.2013

Sweden 03.05.2013 01.06.2013

United Kindom opted out

28

Table A.2: Description of legislative initiatives to implement new fiscal rules in EU

countries and German states

Country Legislation until

31.12.2013 Date and brief description of law

Belgium No A task force has released a report on the possible options for the implementation of the Fiscal Compact into Belgian law. However, a draft bill has yet to be introduced to parliament.

Bulgaria Yes 31.01.2013: The Public Finance Law has been adopted at second reading.

Czech Republic

No

Work on a comprehensive reform of the fiscal framework began in 2011 but its adoption and implementation is still uncertain. The adoption of the relevant legislation ensuring compliance with Council Directive 2011/85 on budgetary frameworks has also been delayed.

Denmark Yes 12.06.2012: The Budget Law was passed by a very large majority in Parliament ensuring that Denmark implements its obligations under the Fiscal Compact.

Germany Yes

12.6.2009: German Upper House agrees on the new constitutional budget rule (amending Art. 109, 115 and 143d). 15.07.2013: Constitutional budget rule does not fully meet the requirements of the Fiscal Compact. These inconsistencies led to the adoption of the "Law for the implementation of the Fiscal Compact".

Estonia No Draft law on the state budget was passed to the ECB in December 2013.

Ireland Yes 27.11.2012: Ireland passed the Fiscal Responsibility Act. It stipulates a budget and debt rule and implements an independent Irish Fiscal Advisory Council.

Greece No The upcoming overhaul of the organic budget law will introduce a budget balance rule for the first time in Greece according to the Fiscal Compact.

Spain Yes

27.09.2011: The reformed Art. 135 of the Spanish constitution includes both a deficit and a debt rule. 27.04.2012: An organic law was passed that stipulates further details (Ley Orgánica 2/2012, de Estabilidad Presupuestaria y Sostenibilidad Financiera, LEP). 14.11.2013: Law 6/2013 establishes an independent fiscal council, the Autoridad de Responsabilidad Fiscal (AIRF).

France Yes 17.12.2012: France has implemented the Fiscal Compact (LOI organique no 2012-1403)

Croatia No

Croatia was supposed to transpose the provisions of Directive 2011/85/EU into its national legal system by the end of 2013. However, by the end of 2013 this Directive was not transposed. In December 2013, the Croatian Government was discussing the final proposal of the Law on amendments and modifications of the Law on Fiscal Responsibility adopted in 2010. The main goal of this Law is transposition of Directive 2011/85 into Croatian law. However, this law is still not adopted by Croatian Government and proposed to the Parliament for adoption. (December 2013)

Italy Yes

20.04.2012: Articles 81, 97, 117 and 119 were amended, introducing the requirement of a balanced budget at both the national and the regional level. 24.12.2012: An extensive implementation law (LAW 243) stipulates the details (such as the provisions for the application of the balanced budget principle pursuant to article 81.6 of the constitution).

Cyprus Yes 20.12.2012: Cyprus has adopted a Law 194 (I) in order to implement the provisions of the Fiscal Compact (Medium-Term Budgetary

29

Framework and Budgetary Rules – MTBF).

Latvia Yes

31.01.2013: The parliament passed the Fiscal Discipline Law (Fiskālās disciplīnas likums) that is intended to implement the Fiscal Compact into the national legislation 19.12.2013: The Fiscal Council of Latvia was approved to serve as an independent institution supervising the Fiscal Discipline Law.

Lithuania No Amendments of the National Budget law to implement Council Directive 2011/85 are planned for 2014.

Luxembourg No The European central bank is consulted for their opinion on the bill draft (CON/2013/90).

Hungary Yes

23.12.2011: Act CXCIV. of 2011 on the economic stability of Hungary was passed by the National Assembly. September 2012: The Fiscal Council (FC) received some reinforcement both in terms of optional tasks and resources. 31.12.2013: Amendment of the Public Finance Act and the Government Decree on the Implementation of the Public Finance Act in order to meet the requirements of the Council Directive 2011/85.

Malta No Plans for new Fiscal Council and Fiscal Responsibility Act with numerical fiscal rules which should be introduced in the Constitution.

Netherlands Yes 10.12.2013: The bill (Wet Houdbare Overheidsfinanciën/Sustainable Public Finances Law) has been approved by the Dutch Upper House in order to meet the provisions of the Fiscal Compact.

Austria Yes

08.05.2012: Austrian (Internal) Stability Pact (BGBI. Nr. 30/2013) comprises a budget rule that encompasses the general government. 18.07.2013: A federal law was adopted in order to establish a fiscal council.

Poland Yes

8.11.2013: Act on public finances and some other acts (Law 1646) was passed by the parliament. 28.12.2013: The stabilizing expenditure rule was established pursuant to the amendment of the Act on Public Finance. It allows a security margin with regard to the 3% budget deficit, so that the risk of the excessive deficit procedure is minimized, but also some flexibility in the budgetary planning (especially investment).

Portugal Yes

13.10.2011: Budget Framework Law creates the Portuguese Public Finance Council as an independent body in order to supervise and control the budget rule of the general government. 14.06.2013: The seventh amendment of the budgetary framework law came into effect (Lei 37/2013) in order to meet the provisions of the Fiscal Compact.

Romania Yes

December 2013: The Fiscal Responsibility Law (377/2013) was amended to implement Fiscal Compact provisions, in particular to introduce a structural balance rule and an automatic correction mechanism. The role of the independent fiscal council, which was set up in 2010, was strengthened.

Slovenia Yes 24.05.2013: Slovenia has amended its constitution (Art. 148) in order to implement the Fiscal Compact. An implementation law has not yet been passed.

Slovakia Yes

8.12.2011: The Slovak parliament adopted a constitutional law on fiscal responsibility (Law 493/2011). It establishes an independent Fiscal Council and introduces a system of early sanctions related to the level of public debt.

Finland Yes

21.12.2012: Finland has implemented the Fiscal Compact (Law 869/2012: so-called FIPO Act - Act on the implementation of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union).

30

Sweden No

In December 2012, the Government decided to set up a parliamentary ‘Inquiry Body’ (called the ‘Budget Process Committee’), which has the task to review the budget process in light of Directive 2011/85. They proposed amendments of the Swedish legal framework in light of the EU Directive. The Committee emphasizes that the Swedish budgetary framework ‘has proven to function well and in line with the Directive’.

United Kingdom

No No specific efforts have been undertaken to align UK's fiscal framework with EU developments which impact the UK.

Sources: Countries’ legislative acts, EU Commission (2014a), EU Commission (2014b), EU Commission (2014c), EU Commission (2013a), EU Commission (2013b), Commission (2013c), Member States’ Government or Ministry of Finance (2014), Burret/Schnellenbach (2014), EUI Law Department Project (2013-2015).

German State Legislation until

10.08.2014 Date and brief description of law

Baden-Wuerttemberg

No

Baden-Württemberg implemented stricter budget rule in the state budget regulation (LHO - Art. 18) in 2007. However, it does not apply to the structural budget, there are no strict enforcement mechanisms and the constitution remained unchanged until now.

Bavaria Yes 11.11.2013: Amendment of the Bavarian constitution (Art. 82) corresponding to the one the federal constitution specifies for the states.

Berlin No Berlin did not change its budget rule, yet. It is close to the former federal budget rule.

Brandenburg No The budget rule in Brandenburg still resembles the former federal rule.

Bremen No A new budget rule is currently being discussed by the state parliament.

Hamburg Yes

19.06.2012: Constitutional amendment (Art. 72 and 72a) corresponding to the one the federal constitution specifies for the states. 17.12.2013: Amendment of the state budget regulation (Law for the new strategic orientation of the state budget) specifying, among other things, details of the rule.

Hesse Yes

29.04.2011: Constitutional amendment (Art. 141 and 161) corresponding to the one the federal constitution specifies for the states. 26.06.2013: Implementation law for Art. 114 is passed.

Mecklenburg-Western

Pomerania Yes

20.06.2011: Constitutional amendment (Art. 65(2) and 79a) corresponding to the one the federal constitution specifies for the states. However, no implementation law has been passed so far.

Lower Saxony Yes

29.09.2012: Amendment of the state budget regulation (LHO § 18a) prescribes a budget balance rule including a adjustment plan for the period until 2017. 1.1.2014: Amendment (LHO § 18a) is abolished by state budget accompanying law (Art. 10)

North Rhine-Westphalia

No No law has been passed so far. Its budget rule is similar to the former federal rule.

Rhineland-Palatinate

Yes

23.12.2010: Constitutional amendment (Art. 117) corresponding to the one the federal constitution specifies for the states. 03.07.2012: Implementation law for Art. 117.

Saarland No Saarland still does not have a corresponding budget rule.

Saxony Yes

11.07.2013: Constitutional amendment (Art. 95) corresponding to the one the federal constitution specifies for the states. 06.05.2014: Amendment of the state budget regulation (LHO § 18a) in order to implement Art. 95.

31

Saxony-Anhalt Yes 08.12.2010: Amendment of the state budget regulation (LHO § 18a) to implement a stricter budget rule similar to the federal law. However, the constitution remains unchanged.

Schleswig-Holstein

Yes

22.07.2010: Constitutional amendment (Art. 53 and 59a) corresponding to the one the federal constitution specifies for the states. 29.03.2012: Implementation Law for Art. 53. 13.12.2013: Amendment of the Implementation Law for Art. 53 adjusting the calculation of structural public revenues.

Thuringia Yes 08.07.2009: Amendment of the state budget regulation (LHO § 18) prescribes a budget balance rule similar to the federal law. However, the constitution remains unchanged.

Sources: States’ constitution and budget regulation, Ciaglia/Heinemann (2012).

Table A.3: Variance inflation factors

Variables Model 1 Model 2 Model 3 Model 4

DEBT 1.53 1.77 1.58

BUDGET 1.58 1.74 1.76

RILE 1.65 1.84

ECO 1.60 1.65

EU 1.30 1.38

TRANSFERS 1.31

F_AID 1.49

GDP 1.05 1.10 1.15 1.16

32

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