Changing Institutions in the European Union
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Changing Institutions in the European Union

A Public Choice Perspective

Edited by Giuseppe Eusepi and Friedrich Schneider

This book makes a valuable, analytical contribution to recent debates on the ongoing institutional changes occurring within the European Union. It provides a comprehensive and diverse insight into a variety of areas, including in-depth studies of fiscal, monetary and voting issues, to help elucidate the current period of transitional change.
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Chapter 1: EMU fiscal rules: new answers to old questions?

Fabrizio Balassone and Daniele Franco

Extract

1. EMU fiscal rules: new answers to old questions? Fabrizio Balassone and Daniele Franco* INTRODUCTION 1. Fiscal sustainability is a central tenet of European Monetary Union (EMU); it is a precondition for financial and monetary stability. Budgetary flexibility is needed for stabilization policy; it has become more important in EMU as member states can no longer rely on a monetary policy tailored to national needs or to exchange rate adjustments. EMU fiscal rules have been designed with the goal of ensuring that national policies keep a sound fiscal stance while allowing sufficient margins for budgetary flexibility in bad times.1 The Stability and Growth Pact commits EMU member states to a medium-term objective of a budgetary position close to balance or in surplus. The main rationale for such a target is that its attainment will allow member states to deal with normal cyclical fluctuations while keeping the government deficit within the value of 3 per cent of GDP set in the Treaty of Maastricht.2 Compliance with this threshold, and with the 60 per cent ceiling for the debt to GDP ratio, will prevent the public finances of EMU member states from taking unsustainable paths. In this chapter we try to assess to what extent the issue facing the founders of EMU was a new one in the field of public finance and to what extent the solution chosen can be regarded as innovative. To this end, we review the literature on budgetary rules from its very beginning to the...

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