The Sustainability Dilemma: Fiscal Rules, Institutional Quality, and Economic Outcomes in the EU

Given that the European Union is facing complex fiscal challenges arising from recent crises, understanding the impact of fiscal rules, institutional governance, and economic performance is critical. This paper examines the effects of fiscal rules and sustainable development trajectories in the context of effective governance of EU member states, analysing how these rules affect fiscal resilience, which is understood as the government’s ability to maintain discipline, absorb shocks, and sustain growth without undermining macroeconomic stability. This study focuses in particular on 2012 to 2023: a period marked by post-crisis adjustments and institutional consolidation. To carry out the proposed empirical analysis, we apply a panel vector autoregressive (VAR) model to capture the dynamic interdependence between fiscal policy indicators, governance quality, and economic performance, offering a temporal and comparative perspective across countries with varying levels of compliance with fiscal rules. Our results indicate that strong fiscal rules are embedded in robust institutional frameworks that enhance fiscal resilience, stabilise public finances, and foster long-term, sustainable economic growth. This study also demonstrates that effective governance is essential for translating fiscal discipline into improved economic outcomes, providing insights for policymakers and researchers on sustainable development strategies. These findings contribute to the literature by highlighting how institutional quality and fiscal rules interact dynamically, particularly during periods of economic restructuring and regulatory adaptation.