When Do Fiscal Rules Work? Institutional Quality and the Effectiveness of Fiscal Rules in the European Union

The European Union combines a broadly common framework of rules-based fiscal governance with markedly heterogeneous domestic institutions, raising the question of whether legally similar fiscal rules are equally effective across member states. This article studies the effectiveness of fiscal rules by asking whether they constrain fiscal policy around elections, when the incentive to deviate from fiscal discipline is strongest. Using an unbalanced annual panel of EU-27 member states over 1995–2023, we relate the general-government primary balance to a fractional election-timing variable, the European Commission's Standardised Fiscal Rules Index, and the Worldwide Governance Indicators, estimated in dynamic two-way fixed-effects models. Election years are associated with weaker primary balances across the Union, but the moderating role of fiscal rules is not uniform: stronger rules significantly attenuate election-related fiscal deterioration in Western member states, whereas no comparable effect is found in Central and Eastern Europe. Triple-interaction estimates indicate that this heterogeneity tracks domestic governance quality (rule of law, control of corruption, and democratic accountability) rather than region as such. The findings suggest that the effectiveness of fiscal rules is conditional on the institutional environment in which they operate, with implications for EU fiscal governance and post-accession institutional development.