The Design of Fiscal Rules in the European Monetary Union

Abstract

AbstractIn recent years, the financial crises of 2007–2008 and the pandemic crises brought forth the issue of government debt, which again has drawn the attention of economists. The issue of debt becomes more complicated when the analysis concerns member states of a monetary union. In the case of EMU, though the need for fiscal cooperation is essential for the stability of the union, it is quite complex. Recently, fiscal rules have been criticized for been too strict and quite recessionary. This paper aims to shed light on these issues by analyzing fiscal design in monetary unions and assessing the framework of fiscal cooperation in the European Monetary Union. The first contribution of the paper is the comparative analysis of the alternative ways of fiscal cooperation in a monetary union (we discuss especially the case of the European Monetary Union). Accordingly, the second contribution of the paper is to critically examine the viability of the new (i.e., after financial crisis) fiscal framework. This analysis will reveal that the revised fiscal rules attempted to strengthen the pre-existing fiscal framework instead of, fundamentally, changing it. Thus, we conclude that procyclicality, high bureaucracy, and rigidities remained as the basic characteristics of the fiscal cooperation of EMU.KeywordsFiscal policyEuropean Monetary UniondebtFiscal cooperationFiscal designPandemic crisis