Bulletin n. 3/2014
February 2015
CONTENTS
  • Section A) The theory and practise of the federal states and multi-level systems of government
  • Section B) Global governance and international organizations
  • Section C) Regional integration processes
  • Section D) Federalism as a political idea
    • Michael D. Arena
    The Legal Framework Governing Sovereign Debt and Borrowing in the United States and European Union
    in Columbia Journal of European Law , vol. 20, issue 3 ,  2014 ,  283-305
    The United States and European Union-the two prime producers of public debt instruments take starkly divergent legal approaches to managing sovereign debt and borrowing. In the United States, the bifurcation of the federal budgeting process from the procedures for limiting total public debt results in marginal incentives for fiscal discipline. Instead of imposing accountability mechanisms on policymakers that actively compel balanced budgets and sovereign debt reduction, the U.S. regime simply necessitates periodic increases to the federal debt ceiling to avert default pushing serious reconsideration offiscal policy into the future. In comparison, the European Union's Fiscal Compact introduces prospective fiscal rules that bind Member State governments to budgetary discipline under both domestic and international law. Under this regime, Member State policymakers must maintain balanced budgets and minimize sovereign debt on a perpetual basis. Unlike the U.S. debt ceiling, therefore, the Fiscal Compact affirmatively incentivizes long-term fiscal sustainability, albeit at the cost of Member State budgetary sovereignty. Given the fundamentally distinct macroeconomic circumstances in these jurisdictions, however, neither approach is optimal. This Note argues that in the United States, the empowering combination of monetary independence, a strengthening economic recovery, and the low yields produced by the markets' near-insatiable appetite for U.S. government obligations should spur policymakers to implement fiscal rules akin to those in the Fiscal Compact. The United States' problem is not the aggregate level of debt, but rather the structural disincentives to achieving long-term fiscal sustainability. In Europe, however, where sovereign debt crises are ongoing, the economic recovery remains fragile, and monetary independence is nonexistent, the Fiscal Compact is a recipe for crippling austerity in the short-to-medium-term. While fiscal rules are a prudent and far-sighted policy for the future, the European Union should consider relaxing the fiscal restrictions of the existing Compact to mitigate the immediate social and economic costs of a sovereign debt hangover.
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