The European sovereign debt crisis continues to hold Europe and the world
captive. Will the euro and the fiscal mechanism of the eurozone survive? And
how effective is the Stability and Growth Pact (SGP)? Do the euro countries
generally fail to comply with the rules of fiscal governance, or does the
eurozone need a more member-specific fiscal mechanism? This article examines
whether and how the SGP influenced the development of government debt making
in the euro countries after the introduction of the common currency. While
the SGP could not prevent euro countries from exceeding their deficits, this
study’s synthetic control analysis reveals that the mechanism has
effectively reduced the overall government debt of euro countries since
1999. In particular, donor countries were able to control governmental
spending, while many recipient countries—including Greece, Portugal and
Italy—have increased government debt ever since, resulting in the European
sovereign debt crisis. This suggests that while the SGP effectively
constrained overall government debt making, a more sophisticated mechanism
is required for safeguarding compliance in large recipient countries.