Economic governance in Europe has changed significantly since the financial and sovereign debt cirsis. Before the criris, the EU relied on a set of relatively simple numerical fiscal rules that were not, however, reliably enforced. The crisis has been widely interpreted as a failure of the original framework. Consequently, far-reaching reform packages have been implemented starting in 2011. These reform packages strengthen vertical mechanisms of control of fiscal policies and of their coordination. One could argue that this implies a loss of national-level fiscal sovereignty. However, proponents of these measures also argue that they are necessary in order to deal with the tensions that occur when a monetary union and decentralised fiscal policymaking co-exist.
On the other hand, one could also argue that, instead of relying on political measures, market discipline would be a preferable option. Financial markets that correctly price country-specific sovereign risks send efficient price signals to political decision-makers. The price signals in turn serve as incentives. Ideally, national-level policymakers are guided towards fiscally sustainable choices through risk premiums determined by the markets. The core problem is that this framework, which preserves national-level fiscal sovereignty to the greatest extent, depends crucially on a credible no-bailout clause and, unfortunately, restoration of such credibility is difficult starting from the current status quo.
Schnellenbach, J. (2018). “Fiscal Sovereignty in a Globalised World: The Pressure of European Economic Governance on Domestic Public Finance”. In Comparing Fiscal Federalism. Leiden, Niederlande: Brill | Nijhoff. doi: https://doi.org/10.1163/9789004340954_015