Theory, Evidence and Institutions
* INTRODUCTION Europe’s Economic and Monetary Union (EMU) is based on an original arrangement of public ﬁnance relations between member countries: ﬁscal policy remains decentralized, but is subject to rules which are meant to combine discipline and ﬂexibility. The Stability and Growth Pact (SGP), which complements and tightens the ﬁscal provisions laid down in the Maastricht Treaty, is the backbone of ﬁscal discipline in EMU. The SGP is unquestionably the most stringent supranational ‘commitment technology’ ever adopted by sovereign governments on a voluntary basis in the attempt to establish and maintain sound public ﬁnances. The SGP, if applied according to its letter and spirit, will have important implications for the behaviour of budgetary authorities in both the short term (cyclical stabilization, policy coordination) and the long term (sustainability of public ﬁnances). The experience of the early years of EMU has, however, been disappointing. While many euro area countries continued the ﬁscal retrenchment, even moving into surplus, the three largest members – Germany, France and Italy – and Portugal remain trapped in high deﬁcits. This short chapter argues that failure to abide by the SGP’s ‘ﬁscal philosophy’ can, at least in part, be traced back to resurrection of incentives – once EMU had been accomplished – to run politically motivated ﬁscal policies during important electoral episodes. The chapter is organised as follows. The next section brieﬂy reviews the budgetary developments in the early years of EMU and discusses the alleged asymmetric working of the Pact in bad times and good times. The third section...
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