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. In this paper, we examine why the EU policy process is locked into constraining instead of enabling fiscal policy. Our analysis proceeds in three steps. First, we show how accounting practices reinforce the appearance of financial crises as fiscal profligacy. Second, we review recent reforms to fiscal surveillance, showing how fiscal monitoring has become more focused on restraining public debt levels, which impedes the deleveraging of households and firms. Third, we show how the fiscal surveillance process relies on effective monetary policy, and how problems in the conduct of monetary policy are affecting fiscal surveillance. We conclude by challenging ideational and comparative political economy interpretations of the euro crisis which suggest that the tightening of fiscal controls is creating a political union in the German image. We argue instead that the aim of fiscal surveillance is to limit and reduce the financial interdependence of the member states, regardless of the potential adverse effects on macroeconomic stability.