Institutional Changes for Effective Fiscal Rules

A ‘No-bailout’ Rules Blankart, C. 2011. An Economic Theory of Switzerland, CESifo DICE Report 3/2011. Blankart C., 2015. What the Eurozone Could Learn from Switzerland, CESfio FORUM 16(2): 39-42. Mause, K. and F. Groeteke. (2012). New constitutional “debt brakes” for

Introduction The U.S. can learn much from the experience of European countries that have enacted new fiscal rules to address their debt crises. Debt brakes were adopted by the European Union for member states in the Stability and Growth Pact

Mause and Groeteke (2012) argue that when a subnational government operates under a debt brake, it may not have sufficient taxation/expenditure autonomy. Historically, U.S. state and local jurisdictions operated within a strong federalist system, with clear autonomy from the federal

The loss in ‘dynamic credence capital’ in the U.S. has magnified the difficulties in solving the debt crisis. The expectation is that in a financial crisis the federal government will again suspend the fiscal rules now in place. The precedent

When fiscal rules were enacted in the European countries, critics questioned whether the rules would be effective in achieving fiscal stabilization. For several decades the European countries have experimented with different fiscal rules to limit deficits and debt, at both

An efficient capital market can impose a debt brake by charging higher interest rates on jurisdictions that incur deficits and accumulate debt, compared to jurisdictions that balance their budgets and limit debt. At the national level this form of capital

Over the past half century the federal government has failed to respond to the rising debt burdens imposed on citizens. The fiscal rules enacted to address the debt crisis have proven to be ineffective in reducing debt levels below debt