Toward a European Fiscal Community: Treaty Design and Club Formation

Europe’s fiscal stalemate rests on a premise: that a fiscal union must include its most creditworthy members—the “frugals”—from day one, and must be diluted until they consent. We invert the premise. A fiscal community of the willing pays even without the frugals, and their very absence disciplines it, as the quality of common spending becomes the currency with which their entry is bought. We give this idea a legal and institutional form: the European Fiscal Community (EFC), established by an international treaty outside the EU framework, with a federal executive elected by an interparliamentary assembly, and a common bond financing growth-oriented European public goods. Our contribution is twofold. First, we draft the full treaty and ensure its compatibility with EU primary law and national constitutional law. Second, we develop a game-theoretic model in which spending quality is chosen under a common-pool distortion, but the prospect of accession generates a recruitment dividend that disciplines insiders. Two stable equilibria emerge, selected by expectations about enlargement, with sharp design implications: independent evaluation, conditional scaling rules, and a portfolio that starts with excludable club goods. A calibration exercise prices the funding cost of the bond under alternative club compositions: a fiscal community can start without Germany, and German accession is the prize that disciplines it until quality is locked in by institutional design.