The Challenge of the Early Years
Edited by Marco Buti and André Sapir
5. Fiscal policy and EMU: challenges of the early years* Antonio Fatás and Ilian Mihov 1. INTRODUCTION This chapter studies the behaviour of ﬁscal policy in the EMU countries after January 1999 and the challenges faced by national governments in the medium term. To provide a benchmark, we ﬁrst look at the years that preceded the creation of the single currency area and then we ask whether the ﬁrst two years after the launch of the euro represent a signiﬁcant change in the overall trend towards ﬁscal discipline started with the Maastricht Treaty in 1991. In accordance with the basic prescriptions of this treaty, the current members of the European Economic and Monetary Union went through signiﬁcant ﬁscal adjustments in preparation for the introduction of the new currency. In some cases, these adjustments took place in an unfavourable economic environment due to the low growth rates experienced during the ﬁrst half of the 1990s. Overall, the process of ﬁscal adjustment complied with the Maastricht criteria and led to large reductions in budget deﬁcits, especially in the years 1994–1997. The introduction of the euro in January 1999 and the replacement of the Maastricht Treaty criteria by the rules of the Stability and Growth Pact have added new challenges in the conduct of ﬁscal policy under EMU. Although the Stability and Growth Pact should be conducive to an environment characterized by discipline in ﬁscal policy, there are still many unanswered questions on what is the best way...
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