Fiscal Policy in Economic and Monetary Union

Fiscal Policy in Economic and Monetary Union

Theory, Evidence and Institutions

Marco Buti and Daniele Franco

This book explores the origins, rationale, problems and prospects of the European fiscal policy framework. It provides the reader with a roadmap to EMU’s budgetary framework by exploring its theoretical and empirical foundations, uncovering its historical roots and emphasising its supranational nature.

Chapter 2: The Maastricht Treaty and the Stability and Growth Pact

Marco Buti and Daniele Franco

Subjects: economics and finance, money and banking, public finance


* 1. INTRODUCTION The European Economy and Monetary Union (EMU) is built on solid fiscal discipline requirements. The Stability and Growth Pact (SGP), which aims to uphold fiscal discipline once in EMU, demands that member states achieve a budgetary position which allows them to respect the Treaty’s deficit criterion, even during periods of unfavourable growth. The SGP makes it clear that the 3 per cent of GDP reference value can be breached only temporarily and in exceptional circumstances. The waivers foreseen in the SGP are subject to such stringent conditions that the 3 per cent of GDP threshold becomes de facto a strict upper limit for the deficit, which EMU members will want to avoid breaching in order not to be put into excessive deficit and risk incurring sanctions. Countries participating in the euro area need to attain a sound fiscal position to face the budgetary consequences of adverse economic developments without having to resort to pro-cyclical behaviour. As spelled out in the Resolution of the European Council on the SGP, ‘adherence to the objective of sound budgetary positions close to balance or in surplus will allow all member states to deal with normal cyclical fluctuations while keeping the government deficit within the value of 3 per cent of GDP’. Fiscal discipline and flexibility are thus the main principles governing budgetary policy in EMU. Fiscal discipline strengthens the credibility of monetary policy, while flexibility is required to deal with country-specific shocks (European Commission, 1990). The Pact...

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