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European Monetary Integration

Past, Present and Future

Edited by Eric J. Pentecost and André Van Poeck

This highly topical book examines the development and future prospects for economic and monetary union in Europe. European Monetary Integration examines the background to economic and monetary union from a historical perspective that distinguishes between national and supranational currency areas, and an optimal currency area theory. The gradualist transition process is also considered.
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Chapter 6: Fiscal policy in EMU

Frank Barry


Frank Barry* 1 INTRODUCTION The adoption of a single currency removes a number of macroeconomic instruments from the control of national authorities. Exchange rate policy clearly becomes redundant while monetary policy, formerly determined by national central banks, becomes the preserve of the European Central Bank in Frankfurt. Fiscal policy, representing government expenditure and taxation, is one of the few macroeconomic instruments over which national authorities retain control. Yet even with the reduced set of instruments at their disposal, governments have willingly accepted important constraints on its operation. These constraints are embodied in the ‘Maastricht criteria’ which countries have been required to satisfy in order to qualify for participation in the single currency, and in the ‘Stability and Growth Pact’ which membership of the Economic Monetary Union (EMU) entails. This chapter explores the motivation for, and likely consequences of, these fiscal constraints, as well as the impact of monetary union (and increasing integration) on the role of fiscal policy. We begin with an analysis of the general role of fiscal policy in the economy. Government expenditure and taxation decisions have implications for long-term economic growth as well as medium-term stability. These issues are discussed in turn. High government consumption is generally found to be detrimental to growth, while government investment up to some point is generally agreed to be beneficial. Yet government consumption has been climbing inexorably. This has led in recent times to the study of circumstances under which fiscal consolidation can be effected with least adverse short-term consequences....

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