The Challenge of the Early Years
Edited by Marco Buti and André Sapir
Anne Brunila and Carlos Martinez-Mongay 1. INTRODUCTION The new policy framework of EMU with a single monetary authority and multiple ﬁscal authorities poses unique challenges for economic policy making. By underpinning the creation of a genuinely integrated single market, EMU increases economic interdependence and policy spillovers between its members. Within this framework, ﬁscal policy, in carrying out its objectives of maintaining budgetary discipline, providing cyclical stabilization and enhancing the long-run performance of the economy, has to take into account not just national considerations but also the area-wide dimension and the appropriateness of the resulting policy mix. To face such challenges and ensure smooth functioning of EMU, Member States agreed on a set of institutional arrangements and procedures in the Treaty of Maastricht, adopted in 1992, and ﬁve years later in the Stability and Growth Pact (SGP).1 The Treaty laid down the ﬁscal criteria for joining EMU and established the Excessive Deﬁcit Procedure (EDP) with a view to restraining persistent budget deﬁcits higher than 3 per cent of GDP, and high debt levels. The SGP was adopted to clarify the Treaty provisions and to ensure the continuation of ﬁscal discipline in EMU. To guarantee that the 3 per cent deﬁcit ceiling is not breached, government budgets should be ‘close to balance or in surplus’ in the medium term. The rationale behind this close-to-balance provision not only concerns discipline, but also recognizes that a certain degree of ﬂexibility and room for manoeuvre for ﬁscal stabilization is needed in...
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