The 'Sense and Nonsense of Maastricht' Revisited: What Have We Learnt About Stabilization In EMU?
AbstractThis paper revisits the paper 'Excessive deficits: sense and nonsense in the Treaty of Maastricht', co-authored with Giancarlo Corsetti and Nouriel Roubini and published during 2003 in Economic Policy. The first section of the paper addresses the problem that the exchange rate and inflation criteria for EMU membership contained in the Treaty of Maastricht may well prevent two or more of the new EU members that now participate in ERM2 from becoming full EMU members as soon as they have spent the required two years in the ERM purgatory. This despite the fact that there are no fundamental economic obstacles to their successful participation in monetary union. I propose that, if an inflation convergence condition for EMU membership is deemed necessary, it be formulated in terms of the maximum permitted excess of a candidate country's inflation rate of traded goods prices over the average rate of price inflation of traded goods prices in the Eurozone. Revisiting the Excessive Deficit Procedure turns out to be attending a wake. The reforms of the Pact adopted in March 2005 effectively killed it. I argue that the death of this Pact is not a tragedy. While individual nation states are well-advised to adopt intelligent rules for their public debt and deficits to ensure fiscal-financial sustainability of the state and to enhance macroeconomic stability, the case for the supranational imposition, monitoring and enforcement of public debt and deficit rules is weak, except in one respect - one not addressed by the Pact. Effective demand spillovers in a world with nominal price and wage rigidities can lead to first-order welfare losses. The Pact, in its old or its new incarnation, does not address these issues as it prescribes or proscribes behaviour one country at a time, without reference to economic policy actions and other economic developments in the rest of the EMU or EU. The Pact is not designed to ensure coordinated fiscal policy in the E(M)U, let alone coordinated monetary and fiscal policy in the E(M)U. There is nothing in it that ensures that the E(M)U-wide fiscal stance and fiscal-monetary mix is appropriate given economic developments in the rest of the world and given the monetary-fiscal policy mix in the other key national and regional economies. From the perspective of the Principle of Subsidiarity, the Pact was therefore subject to both a Type 1 and a Type 2 error. It addressed (albeit ineffectively) matters of national fiscal sustainability and national macroeconomic stabilisation that ought to have been handled at the national level. It failed to address the appropriate Europe-wide fiscal stance and monetary-fiscal policy mix for which a supranational approach might have been desirable.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5405.
Date of creation: Dec 2005
Date of revision:
Contact details of provider:
Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
Other versions of this item:
- Willem H. Buiter, 2006. "The 'Sense and Nonsense of Maastricht' Revisited: What Have we Learnt about Stabilization in EMU?," Journal of Common Market Studies, Wiley Blackwell, vol. 44, pages 687-710, November.
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-01-24 (All new papers)
- NEP-EEC-2006-01-24 (European Economics)
- NEP-MAC-2006-01-24 (Macroeconomics)
- NEP-MON-2006-01-24 (Monetary Economics)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Fabrice Capoen & Jerome Creel, 2007.
"Efficiency of stability-oriented institutions: the European case,"
Documents de Travail de l'OFCE
2007-06, Observatoire Francais des Conjonctures Economiques (OFCE).
- Fabrice Capoen & Jérôme Creel, 2007. "Efficiency of stability-oriented institutions: the European case," Sciences Po publications NÂ°2007-06, Sciences Po.
- Ioannou, Demosthenes & Stracca, Livio, 2011. "Have euro area and EU economic governance worked? Just the facts," Working Paper Series 1344, European Central Bank.
- Fiorella Kostoris Padoa Schioppa, 2006. "The 2005 Reform of the Stability and Growth Pact: Too Little, Too Late?," Bruges European Economic Research Papers 6, European Economic Studies Department, College of Europe.
- Rui Henrique Alves & Óscar Afonso, 2006.
"The “New” Stability and Growth Pact: More Flexible, Less Stupid?,"
FEP Working Papers
218, Universidade do Porto, Faculdade de Economia do Porto.
- Rui Alves & Oscar Afonso, 2007. "The "New" Stability and Growth Pact: More Flexible, Less Stupid?," Intereconomics: Review of European Economic Policy, Springer, vol. 42(4), pages 218-225, July.
- Konrad Szelag, 2008. "A Single Fiscal Policy in the Euro Area: Vision or Utopia?," National Bank of Poland Working Papers 46, National Bank of Poland, Economic Institute.
- Óscar Afonso & Rui Henrique Alves, 2006. "“To Deficit or Not to Deficit”: Should European Fiscal Rules Differ Among Countries?," FEP Working Papers 219, Universidade do Porto, Faculdade de Economia do Porto.
- Buiter, Willem H, 2008.
"Economic, Political, and Institutional Prerequisites for Monetary Union Among the Members of the Gulf Cooperation Council,"
CEPR Discussion Papers
6639, C.E.P.R. Discussion Papers.
- Willem Buiter, 2008. "Economic, Political, and Institutional Prerequisites for Monetary Union Among the Members of the Gulf Cooperation Council," Open Economies Review, Springer, vol. 19(5), pages 579-612, November.
- Buti, Marco & Sapir, André, 2006. "Fiscal Policy in Europe: The Past and Future of EMU Rules from the Perspective of Musgrave and Buchanan," CEPR Discussion Papers 5830, C.E.P.R. Discussion Papers.
- International Monetary Fund, 2008. "Inflation Differentials in the EU: A Common ( Factors ) Approach with Implications for EU8 Euro Adoption Prospects," IMF Working Papers 08/21, International Monetary Fund.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.