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 11: Reforming EMU’s Fiscal Rules

Marco Buti and Daniele Franco

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


11. 1. Reforming EMU’s fiscal rules* INTRODUCTION As recalled through this book, the Stability and Growth Pact (SGP) is one of the pillars of EMU. It is a discipline device aiming at ensuring sound budgetary balances and low public debts. While widely regarded as a major innovation (Artis, 2002), the Pact has been the subject of heated controversy ever since its inception. It has been extensively criticized by academics and opinion makers. Proposals for radical changes have been put forward and even the suppression of the Pact has been considered. This debate accelerated in 2002 under the influence of public finance developments in a number of euro area countries which called into question its effectiveness and wisdom. In a way, these policy problems and debates are related to the success of EMU rules in curbing deficits. When the public finances in a number of EU countries appeared to be on an unsustainable path, the benefits of lower deficits were evident. Fiscal discipline was recognized as a pre-condition to lower interest rates and to use fiscal policy for cyclical stabilization (Chapter 2). The arbitrary nature of the 3 per cent deficit limit appeared acceptable in view of the need to enforce fiscal discipline. Now that deficits have been lowered, the issue of the proper balance between fiscal discipline and other targets has come to the fore. Our analysis and proposals take as given the current preferences for political integration. This implies that fiscal policies...

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