The euro-area sovereign debt crisis is receding. Europe is on a recovery path, growth is broad-based and unemployment is falling. One after the other, countries hit hardest by the crisis are exiting their adjustment programmes. However, debt remains high in most countries and future debt crises...

With a unique data set summarizing the quality of rules-based fiscal governance in EU member states, we show that stronger fiscal rules in euro area members reduce sovereign risk premia, in particular in times of market stress. To do so, we develop a model of sovereign spreads that are...