Searching under the Lamp Post: The Evolution of Fiscal Surveillance

Since the earliest days of monetary union, the Commission and the Council have looked for the key to macroeconomic stability under the lamp-post of fiscal surveillance. The recent return to an emphasis on control, supported by additional and swifter sanctions for more ‘excesses’, may seem to be a natural response to the stresses now facing the Euro area. However, the original ‘free-riding’ or ‘moral hazard’ rationales for control do not hold up generally and may even be counterproductive in the context of the financial crisis. The moral hazard lay elsewhere, with banks that were over-extended in the boom and too big (and numerous) to fail in the bust. In paying heightened attention to fiscal indicators following a banking crisis, the EU resembles the drunk who looks for his lost keys under the lamp-post, not because he can be sure that they are there but because ‘that’s where the light is’. We argue that the EU has reverted to the original disciplinarian formulations at just the wrong time. In our view, the return to a disciplinarian approach can be explained by the stark emergence of asymmetry between borrowing and lending nations. We contrast this explanation with two others. There is first an institutional interpretation: the focus is on fiscal surveillance because this is the main existing mode of economic governance in the EU. Another possibility is that tighter fiscal control is seen as necessary to reassure markets; in other words the driver of the surveillance regime is the market ‘audience’.