Focusing on the ability of financial markets to discipline state economic performance, EU fiscal federalism specifies three conditions that need to be met for it to work effectively: clear market signals, no bailout, and corrective action driven by central rules and implemented by domestic populations. While some conditions have obviously not been met in the European response to the Greek sovereign debt crisis (2009–2012), evidence suggests the explanatory power of fiscal federalism is surprisingly robust. The study raises concerns with risk-sharing in EU economic governance and has implications for theories of EU institution-building.