Abstract
Stability and Growth Pact is the main rule-based framework for the coordination of national fiscal policies in the economic and monetary union (EMU). It was established to safeguard sound public finances, an important requirement for EMU to function properly. Member states had a lot of determination before setting up a monetary union (nominal criteria were a condition to adopt common currency). In the next years, coordination of fiscal policy was not so successful. In many countries, revenues were temporarily boosted by tax-rich activity, while they didn’t restrict their expenditures. In most countries fiscal policy was pro-cyclical (not anti-cyclical) and they didn’t achieve their MTO. Financial crisis has sharpened budgetary problems in member states and showed the weakness of coordination rules.
Highlights
The condition for effective functioning of monetary union is to obey the coordination rules in fiscal policy
The community rules established imposed upon national fiscal policies aimed at ensuring the effective uniform monetary policy, lowering the public debt coefficients and budget deficit that increased in the nineties, and at changing the character of the fiscal policy, i.e. to limit its expansiveness and shaping the proper budget structure that could increase the competitiveness of European economies
The analysis of budget indices and the character of current fiscal policy allows to formulate the conclusion that member states showed great determination in reducing the budget deficit coefficients in the second half of nineties, and fulfilled this criterion already before entering the monetary union
Summary
The condition for effective functioning of monetary union is to obey the coordination rules in fiscal policy. On the base of member countries budgetary performance, the state of nominal convergence in the area of public finance has been verified, the extent to which the structural balance rule is obeyed, and the character of current fiscal policy. The choice of this subject has been stimulated mainly by the ongoing discussion on the necessity to reinforce budgetary coordination. First formal rules to coordinate fiscal policy within the EU have been defined in the Maastricht Treaty, an later extended in the Stability and Growth Pact of 1997 Under these regulations member countries were obliged to obey two nominal criteria in the public finance area: budget deficit lower than 3% GDP and public debt lower than 60% GDP. In practice no financial sanctions have ever been imposed to any country
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