During the euro area (EA) sovereign debt crisis, lenders in financial markets raised default risk premiums on sovereign bonds issued by countries that were then consid-ered too risky. Among some of these countries (especially Greece), fiscal policy had not been implemented according to good...

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...