Fiscal Policy and the EMU

Abstract

By fiscal policy we mean decisions on taxation and public expenditure. Two aspects are central in connection with the monetary union. The first concerns how large government budget deficits and debts can be accepted. The second aspect relates to the role of fiscal policy in stabilising aggregate demand. The Maastricht Treaty contains fiscal policy rules for the size of government budget deficits and debts in each country. These rules were amended in the Stability and Growth Pact. There is also an ongoing discussion on what demands for flexibility of fiscal policy that arise because of the loss of monetary policy autonomy in a currency union.