Focal points and fiscal discipline. ACES Cases No. 2013.2

Many studies suggest that balanced budget rules can restrain sovereign debt and lower sovereign borrowing costs, even if those rules are never enforced in court. Typically, this is explained as a result of a legal deterrence logic, in which the threat of judicial enforcement deters sovereigns from violating the rules. By contrast, we argue that balanced budget rules work by coordinating decentralized punishment of sovereigns by bond markets, rather than by posing a credible threat of judicial enforcement. Therefore, the clarity of the focal point provided by the rule, rather than the strength of its judicial enforcement mechanisms, determines its effectiveness. We develop a formal model that captures the logic of our argument, and we assess this model using data on US states. We then consider implications of our argument for the impact of the balanced budget rules recently imposed on eurozone states in the Fiscal Compact Treaty.

Road to Proscription: The EU and Hezbollah since the Arab Spring. EU Diplomacy Paper 07/2013

The European Union (EU) has traditionally taken a rather nuanced view of the activities of Hezbollah. Despite historic links to violent activity, Europe always remained reluctant to place the Lebanese militant group on its list of terrorist organisations. Internal divergences among member states, as well as the strategic-realist goals of the EU in both Lebanon and the Middle East more generally meant that such a listing never materialised. This remained the case even in the initial turmoil following the Arab uprisings, when Hezbollah’s relatively moderating objectives were viewed as a force for stability. However, the EU shifted policy in July 2013 by listing the military wing of Hezbollah as a terrorist entity. This paper will investigate the reasons behind this decision, as well as the likely implications and effectiveness of the new policy. Two principal catalysts were behind the decision. The first was a Hezbollah-linked bombing in Bulgaria which provided the focal point around which a consensus of the EU member states could emerge in the Council. Secondly, the escalation both of the Syrian conflict and Hezbollah’s role in it provided a more political and strategic impetus for the decision. This paper maintains that although a change in policy was somewhat necessary, it is questionable whether the artificial separation of Hezbollah’s political and military wings and the symbolic proscription of the latter is the most propitious choice to achieve European objectives.