Fiscal Policy in Economic and Monetary Union
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Fiscal Policy in Economic and Monetary Union

Theory, Evidence and Institutions

Marco Buti and Daniele Franco

This book explores the origins, rationale, problems and prospects of the European fiscal policy framework. It provides the reader with a roadmap to EMU’s budgetary framework by exploring its theoretical and empirical foundations, uncovering its historical roots and emphasising its supranational nature.
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Chapter 1: EMU’s Fiscal Rules in a Historical Perspective

Marco Buti and Daniele Franco


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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