Academic journal article The European Journal of Comparative Economics

The New Fiscal Rules for the EMU. Threats from Heterogeneity and Interdependence

Academic journal article The European Journal of Comparative Economics

The New Fiscal Rules for the EMU. Threats from Heterogeneity and Interdependence

Article excerpt

1. Introduction

In the eye of the sovereign debt storm provoked by the 2008-10 world crisis, the member states of the European Monetary Union (EMU) agreed upon, and the EU Commission adopted in September 2010, a revision of the Stability and Growth Pact (SGP) which resets the fiscal rules of member states. The Commission (IP/10/1199) presented this revision as part of "the most comprehensive package of legislative measures" aimed at the "reinforcement of economic governance in the EU and the euro area since the launch of the Economic and Monetary Union". Subsequently, a more ambitious comprehensive reform on "Stability, coordination and governance in the Economic and Monetary Union" with a treaty status was approved in December 2011 (EU 2011, http://ec.europa.eu/economy finance/economic governance/index en.htm). Such a far-reaching re-regulation has been prompted by strong speculative attacks against the Euro Zone as a whole, but it is also motivated by the worrisome leaks that the crisis has opened up in the EMU institutional construction, and which are largely responsible for unleashing the speculators' bets against the survival of the EMU itself. A key tenet of the reform is that fiscal stabilization will be a long and painful endeavour that will engage all major member states for a number of years to come, during which their creditworthiness in the financial markets will have to be underpinned by a tighter institutional framework and credible consolidation plans. As a result, "the SGP will become more 'rule based' and sanctions will be the normal consequence to expect for countries in breach of their commitments" (EU Commission, IP/10/1199).

The aim of this paper is not a "normative" discussion of the pros and cons of the reform or of alternative proposals. Rather, the aim is a "positive" analysis of one of its new elements in the so-called corrective part, each year member states should submit a Stability and Convergence Plan (SCP), a key component of which is commitment to debt control and convergence towards a defined target. Member states in excess of the 60% debt/GDP ratio in the previous three years should reduce it at a pace defined in 1/20th of the excess per year.

Whilst the shift of focus from current budget deficits to medium-long term debt management is welcome and long awaited, the feasibility of the SCPs has to be examined more carefully. SCPs will be designed and applied according to the spirit of the Maastricht Treaty, or what we may by and large define the "Brussels Consensus", treats each single member country as an independent, isolated entity, fully responsible for its own conduct and results. According to several observers two are the major faults in this approach that the crisis has dramatized. One is the original conceptual mistake inherent in the "rules + sanctions" approach in a context of sovereign governments under democratic control. The other is the total lack of consideration of the systemic dimension of national fiscal policies in a monetary union, where 'systemic' means that heterogeneity and interdependence across member countries are key factors (e.g. De Grauwe, 2011). The paper highlights why and how these factors may impinge upon SCPs.

In the first issue of the new Annual Growth Survey (EU Commission, 2011a), the Commission acknowledges the heterogeneity issue, since "EU Member States experienced highly different fiscal and external conditions, which call for tailor-made policies" (p. 9). In other words, different countries facing different initial conditions and debt dynamic paths will have to adopt different policies. At first sight, this does not seem to be a major problem within the country-by-country framework of the SCPs. However, heterogeneity may have important consequences because EMU members are required, and hence are expected by investors, to manage their sovereign debts in such a way that they smoothly converge towards the common Promised Land of the 60% of GDP (or below). …

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