A Public Choice Perspective
Edited by Giuseppe Eusepi and Friedrich Schneider
European Monetary Union represents a new historical development. For the ﬁrst time a number of sovereign countries adopt a common currency while retaining independent ﬁscal policies. The need for ﬁscal rules complementing monetary union has been at the core of the debate on EMU since the early 1990s.19 Some arguments were put forward against the introduction of ﬁscal rules at the European level. It was noted that ﬁscal rules may have costs in terms of stabilization policies and may hamper the achievement of allocative and distributive objectives. It was also noted that excessively stringent rules may be counterproductive. If the Pact leads to an unduly tight ﬁscal stance in one or more countries, pressure may mount on the European Central Bank (ECB) to deliver a monetary oﬀsetting (Canzoneri and Diba, 2001). Otherwise, the credibility of the Pact may be endangered.20 However, the prevailing view in the policy debate was clearly in favour of the introduction of formal rules. It was argued that procedural or ﬁscal rules are necessary because the factors that in recent decades have determined ﬁscal proﬂigacy in several countries have not disappeared. Moreover, the multinational dimension of EMU is likely to increase the need for such rules. 14 The underside of EU ﬁscal institutions Stark (2001, p. 79) describes the genesis and the rationale of the Stability and Growth Pact;21 he stresses how in Europe, up to the early 1990s, lax ﬁscal policy occurred although it is indisputable that unsound ﬁscal policy practices have...
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