The Fiscal Compact and the Excessive Deficit Procedure: Relics of Bygone Times?

Abstract

This paper takes a critical look at the Fiscal Compact as a key element of the future EU governance. It shows that the "Excessive Deficit Procedure (EDP)" is representing an Achilles heel of the fiscal pact. We put a finger in a wound that has been neglected up to now, probably because it has evaded daily politics analysis as a statistical-econometric issue: the "purposefully structured" data revisions in GDP and the government budget balance figures. The road to a sustainable "economic governance" of Europe can only work through fiscal federalism in conjunction with an incentive-compliant banking union. In that case, market-based interest rates provide a better incentive and sanction mechanism than the "Excessive Deficit Procedure" which is plagued by inherent manipulation leeway and political cycles but is decisive for the success of the Fiscal Compact. A further important omission of the Fiscal Compact is that it scarcely focuses on the relation between France's lack of budget consolidation and the country's shrinking international competitiveness an economic relationship which is referred to based on the example of Greece.