Theory, Evidence and Institutions
1. EMU’s ﬁscal rules in a historical perspective* 1. INTRODUCTION Fiscal sustainability is a central tenet of European Monetary Union (EMU); it is a pre-condition 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 meet national needs nor on exchange rate adjustments. EMU ﬁscal rules have been designed with the goal to ensure that national policies keep a sound ﬁscal stance while allowing suﬃcient margins for budgetary ﬂexibility in bad times. The Stability and Growth Pact (SGP) commits EMU member states to a medium-term objective of 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.1 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, in the second section we review the literature on budgetary rules from its very beginning to the years...
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