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Saving Europe's Automatic Stabilizers

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  • Eichengreen, Barry

Abstract

European policy makers have repeatedly suggested that fiscal-policy coordination and fiscal federalism will play key roles in Europe's monetary union. This paper warns that this hope is misplaced. Fiscal federalism will not be available to offset recessionary shocks for the foreseeable future. The effects of coordination designed to internalize the cross-border spillovers of fiscal policies are too weak. Freeing up fiscal policy to replace national governments' loss of monetary independence requires allowing European countries' automatic stabilizers to operate. That in turn requires a flexible application of the Excessive Deficit Procedure and the Stability Pact. The solution suggested here is that the Excessive Deficit Procedure and any fines and sanctions associated with the Stability Pact be applied to the constant-employment budget balance, not the actual deficit. Applying them to actual deficits when European countries enter EMU up against the 3 per cent limit will render fiscal policy strongly procyclical, aggravating the problem of macroeconomic fragility created by the loss of monetary autonomy. Still, countries like Germany haunted by the specter of fiscal profligacy need to be reassured that member states will not abuse their fiscal discretion. Procedural and institutional reform to offset the deficit bias in national political systems is the obvious quid pro quo.

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Paper provided by Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley in its series Center for International and Development Economics Research, Working Paper Series with number qt9zb6q3ms.

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Date of creation: 01 Nov 1996
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Handle: RePEc:cdl:ciders:qt9zb6q3ms

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Keywords: International economics; monetary union; fiscal federalism;

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References

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  1. Buiter, Willem H & Corsetti, Giancarlo & Roubini, Nouriel, 1992. "`Excessive Deficits': Sense and Nonsense in the Treaty of Maastricht," CEPR Discussion Papers 750, C.E.P.R. Discussion Papers.
  2. Jacques MÉLITZ & Silvia VORI, 1993. "National Insurance against Unevenly Distributed Shocks in a European Monetary Union," Discussion Papers (REL - Recherches Economiques de Louvain) 1993014, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  3. Barry Eichengreen., 1990. "Is Europe an Optimum Currency Area?," Economics Working Papers 90-151, University of California at Berkeley.
  4. von Hagen, Jurgen & Hammond, George W, 1998. "Regional Insurance against Asymmetric Shocks: An Empirical Study for the European Community," The Manchester School of Economic & Social Studies, University of Manchester, vol. 66(3), pages 331-53, June.
  5. Tamim Bayoumi & Barry Eichengreen, 1995. "Restraining Yourself: The Implications of Fiscal Rules for Economic Stabilization," IMF Staff Papers, Palgrave Macmillan, vol. 42(1), pages 32-48, March.
  6. repec:fth:inseep:9219 is not listed on IDEAS
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Cited by:
  1. Jorg Bibow, 2003. "On the 'burden' of German unification," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 56(225), pages 137-169.
  2. Issing, Otmar, 2001. "The Single Monetary Policy of the European Central Bank: One Size Fits All," International Finance, Wiley Blackwell, vol. 4(3), pages 441-62, Winter.
  3. Jorg Bibow, 2003. "On the 'burden' of German unification," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 56(225), pages 137-169.
  4. Jörg Bibow, 2001. "On the 'Burden' of German Unification: The Economic Consequences of Messrs. Waigel and Tietmeyer," Macroeconomics 0106004, EconWPA.

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