Economic Governance in the European Union - Fiscal Policy Discipline versus Flexibility

Abstract

This contribution examines fiscal policy co-ordination in the Economic and Monetary Union (EMU) and discusses whether the amendments of the Stability and Growth Pact proposed in the past, some of which have since been implemented, enhance budget discipline. In doing so, it provides a detailed analysis of the legal provisions on multilateral surveillance and the excessive deficit procedure based on the concepts of open and closed method of coordination. Arguably, it is the mixing of these two distinct concepts which stands at the heart of the current controversies. This has to be taken into account when assessing the recent proposals to introduce greater flexibility. Indeed, rather than introducing more flexibility, the analysis of the current system presented in this contribution suggests that those elements of economic coordination which prevent the existing rules from being implemented properly should be amended, thereby to some extent depoliticising economic coordination. The contribution begins with a discussion of the fiscal policy rules previously in place, followed by a political-economy analysis of these rules. Thereafter the reform proposals of the Commission, as well as other proposals for institutional reforms, including those originally foreseen in the Treaty establishing a Constitution for Europe, are examined. It is concluded that the reforms of the pact do little to redress the failure of some Member States to consolidate their public finances in times of economic prosperity.