Market Discipline

Abstract

Free riding is endemic. But it is not the type of first-order free riding that politicians and EU officials publicly chastised. Instead, fiscal policy coordination is burdened by a serious internal enforcement problem; that is, second-order free riding. The argument presented here is different from the usual decrying of a lack of enforcement in fiscal policy coordination, which is said to invite member states to engage in rampant fiscal free riding. This chapter contests that without internal enforcement within the EU, fiscal policy coordination has come to rely on market discipline with dire consequences for its members. The chapter demonstrates that, in contrast to fiscal rules and intergovernmental agreements, the incentives provided by market discipline shape public finances.