Changing Institutions in the European Union

Changing Institutions in the European Union

A Public Choice Perspective

Edited by Giuseppe Eusepi and Friedrich Schneider

This book makes a valuable, analytical contribution to recent debates on the ongoing institutional changes occurring within the European Union. It provides a comprehensive and diverse insight into a variety of areas, including in-depth studies of fiscal, monetary and voting issues, to help elucidate the current period of transitional change.

Chapter 1: EMU fiscal rules: new answers to old questions?

Fabrizio Balassone and Daniele Franco

Subjects: economics and finance, public choice theory, politics and public policy, public choice


European Monetary Union represents a new historical development. For the first time a number of sovereign countries adopt a common currency while retaining independent fiscal policies. The need for fiscal rules complementing monetary union has been at the core of the debate on EMU since the early 1990s.19 Some arguments were put forward against the introduction of fiscal rules at the European level. It was noted that fiscal rules may have costs in terms of stabilization policies and may hamper the achievement of allocative and distributive objectives. It was also noted that excessively stringent rules may be counterproductive. If the Pact leads to an unduly tight fiscal stance in one or more countries, pressure may mount on the European Central Bank (ECB) to deliver a monetary offsetting (Canzoneri and Diba, 2001). Otherwise, the credibility of the Pact may be endangered.20 However, the prevailing view in the policy debate was clearly in favour of the introduction of formal rules. It was argued that procedural or fiscal rules are necessary because the factors that in recent decades have determined fiscal profligacy in several countries have not disappeared. Moreover, the multinational dimension of EMU is likely to increase the need for such rules. 14 The underside of EU fiscal institutions Stark (2001, p. 79) describes the genesis and the rationale of the Stability and Growth Pact;21 he stresses how in Europe, up to the early 1990s, lax fiscal policy occurred although it is indisputable that unsound fiscal policy practices have...

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