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 6: Public Investment

Marco Buti and Daniele Franco

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

Extract

* INTRODUCTION The slowdown in actual and potential growth in the early years of EMU raises worries and doubts concerning the fiscal rules set in the Treaty of Maastricht and in the Stability and Growth Pact. It has been argued that these rules may represent an excessively binding constraint for appropriate counter-cyclical action and that the attempt to reach rapidly a budget position ‘close to balance or in surplus’ may worsen the slowdown. The risk that the rules may permanently reduce the public sector’s contribution to capital accumulation has also been pointed out. In this framework the adoption of a golden rule has been suggested. The rule would exclude investment spending from the computation of the fiscal parameters relevant to the Excessive Deficits Procedure.117 In the opinion of those supporting the amendment, this would allow EU member states to loosen their fiscal stance while positively affecting long run growth: debt finance would thus not harm future generations. Underlying the debate there are several issues. It is important to separate problems concerning the current economic situation from those concerning the design of the EMU’s fiscal constitution per se. The solution to the potential conflict between the objective of moving towards a close to balance position and the need to avoid a worsening of short-term economic prospects may not require changes to the rules set in the Treaty and in the Pact. Furthermore, the risk that a revision of the rules could harm the credibility of the commitment to fiscal...

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