U.S. politicians adhere to balanced budget rules because they fear the bond markets, not judicial intervention

In the wake of the European financial crisis, European Union (EU) leaders have reformed Eurozone governance to empower national and EU courts to enforce deficit and debt limits. In designing these reforms, policymakers drew lessons on balanced budget rules in U.S. states. But is the threat of court enforcement actually effective in ensuring balanced budgets in the states? In new research, R. Daniel Kelemen and Terence Teo find that despite their 170-year history, these judicial mechanisms are almost never enforced in court, and that they do not act as a deterrent to breaking budget rules for state officials. They argue instead, that clear balanced budget rules can act as a ‘red line’ for investors and bond markets, which, if broken, will act as a signal for them to punish sovereigns.