IDEAS home Printed from https://ideas.repec.org/a/bla/ecopol/v29y2017i3p252-275.html
   My bibliography  Save this article

Monetary integration, soft budget constraints, and the EMU sovereign debt crises

Author

Listed:
  • Thushyanthan Baskaran
  • Zohal Hessami

Abstract

One possible explanation for the European sovereign debt crises is that the European Economic and Monetary Union (EMU) gave rise to consolidation fatigue or even deliberate over-borrowing. This paper explores the validity of this explanation by studying how three decisive stages in the history of the EMU affected public borrowing in EU member states: the signing of the Maastricht treaty in 1992, the introduction of the Euro in 1999, and the suspension of the SGP in late 2003. The methodology relies on difference-in-difference regressions covering 26 OECD countries over the 1975-2009 period. The findings indicate that the first two 'treatments' reduced deficits especially in traditional high-deficit countries. In contrast, the watering down of the original SGP encouraged borrowing in countries which traditionally have had high deficits.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Thushyanthan Baskaran & Zohal Hessami, 2017. "Monetary integration, soft budget constraints, and the EMU sovereign debt crises," Economics and Politics, Wiley Blackwell, vol. 29(3), pages 252-275, November.
  • Handle: RePEc:bla:ecopol:v:29:y:2017:i:3:p:252-275
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1111/ecpo.12093
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Bernoth, Kerstin & von Hagen, Jürgen & Schuknecht, Ludger, 2012. "Sovereign risk premiums in the European government bond market," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 975-995.
    2. Jamal Ibrahim Haidar, 2015. "Can the Euro Survive?," The World Economy, Wiley Blackwell, vol. 38(3), pages 553-567, March.
    3. Ludger Schuknecht & Philippe Moutot & Philipp Rother & Jürgen Stark, 2011. "The Stability and Growth Pact: Crisis and Reform," CESifo DICE Report, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 9(3), pages 10-18, October.
    4. János Kornai, 2014. "The soft budget constraint," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 64(supplemen), pages 25-79, November.
    5. Mikosch, Heiner & Sturm, Jan-Egbert, 2012. "Has the EMU reduced wage growth and unemployment? Testing a model of trade union behavior," European Journal of Political Economy, Elsevier, vol. 28(1), pages 27-37.
    6. Jacopo Cimadomo, 2012. "Fiscal Policy in Real Time," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(2), pages 440-465, June.
    7. Lee, Jong-Wha & Shin, Kwanho, 2008. "IMF bailouts and moral hazard," Journal of International Money and Finance, Elsevier, vol. 27(5), pages 816-830, September.
    8. Joshua D. Angrist & Jörn-Steffen Pischke, 2009. "Mostly Harmless Econometrics: An Empiricist's Companion," Economics Books, Princeton University Press, edition 1, number 8769, April.
    9. Hans-Werner Sinn, 2014. "Austerity, Growth and Inflation: Remarks on the Eurozone's Unresolved Competitiveness Problem," The World Economy, Wiley Blackwell, vol. 37(1), pages 1-13, January.
    10. A. Colin Cameron & Jonah B. Gelbach & Douglas L. Miller, 2008. "Bootstrap-Based Improvements for Inference with Clustered Errors," The Review of Economics and Statistics, MIT Press, vol. 90(3), pages 414-427, August.
    11. Michael Ehrmann & Michel Soudan & Livio Stracca, 2013. "Explaining European Union Citizens’ Trust in the European Central Bank in Normal and Crisis Times," Scandinavian Journal of Economics, Wiley Blackwell, vol. 115(3), pages 781-807, July.
    12. Baum, Anja & Checherita-Westphal, Cristina & Rother, Philipp, 2013. "Debt and growth: New evidence for the euro area," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 809-821.
    13. Timothy Goodspeed, 2002. "Bailouts in a Federation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 9(4), pages 409-421, August.
    14. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2004. "How Much Should We Trust Differences-In-Differences Estimates?," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 249-275.
    15. Jakob de Haan & Niels D. Gilbert & Jeroen Hessel & Silvie Verkaart, 2013. "How to Enforce Fiscal Discipline in EMU: A Proposal," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 149(II), pages 205-217, June.
    16. Roel Beetsma & Massimo Giuliodori, 2010. "The Macroeconomic Costs and Benefits of the EMU and Other Monetary Unions: An Overview of Recent Research," Journal of Economic Literature, American Economic Association, vol. 48(3), pages 603-641, September.
    17. Elżbieta Bednarek-Sekunda & Richard Jong-A-Pin & Jakob de Haan, 2010. "The European Economic and Monetary Union and Labour Market Reform," European Union Politics, , vol. 11(1), pages 3-27, March.
    18. Bertrand Candelon & Joan Muysken & Robert Vermeulen, 2010. "Fiscal policy and monetary integration in Europe: an update," Oxford Economic Papers, Oxford University Press, vol. 62(2), pages 323-349, April.
    19. Petroulas, Pavlos, 2007. "The effect of the euro on foreign direct investment," European Economic Review, Elsevier, vol. 51(6), pages 1468-1491, August.
    20. Beck, Thorsten & Clarke, George & Groff, Alberto & Keefer, Philip & Walsh, Patrick, 2000. "New tools and new tests in comparative political economy - the database of political institutions," Policy Research Working Paper Series 2283, The World Bank.
    21. José de Sousa & Julie Lochard, 2011. "Does the Single Currency Affect Foreign Direct Investment?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 113(3), pages 553-578, September.
    22. Russell Cooper & Hubert Kempf & Dan Peled, 2008. "Is It Is Or Is It Ain'T My Obligation? Regional Debt In A Fiscal Federation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(4), pages 1469-1504, November.
    23. Schuknecht, Ludger & Morris, Richard & Ongena, Hedwig, 2006. "The reform and implementation of the Stability and Growth Pact," Occasional Paper Series 47, European Central Bank.
    24. Baskaran, Thushyanthan, 2009. "Did the Maastricht treaty matter for macroeconomic performance?," MPRA Paper 30106, University Library of Munich, Germany.
    25. Baskaran, Thushyanthan, 2012. "Soft budget constraints and strategic interactions in subnational borrowing: Evidence from the German States, 1975–2005," Journal of Urban Economics, Elsevier, vol. 71(1), pages 114-127.
    26. Per Pettersson-Lidbom, 2010. "Dynamic Commitment and the Soft Budget Constraint: An Empirical Test," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 154-179, August.
    27. Thushyanthan Baskaran, 2009. "Did the Maastricht treaty matter for macroeconomic performance? A difference‐in‐difference investigation," Kyklos, Wiley Blackwell, vol. 62(3), pages 331-358, August.
    28. Dell'Ariccia, Giovanni & Schnabel, Isabel & Zettelmeyer, Jeromin, 2006. "How Do Official Bailouts Affect the Risk of Investing in Emerging Markets?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1689-1714, October.
    29. Jordi Gali & Roberto Perotti, 2003. "Fiscal Policy and Monetary Integration in Europe," NBER Working Papers 9773, National Bureau of Economic Research, Inc.
    30. Russell Cooper & Hubert Kempf & Dan Peled, 2008. "Is it is or is it ain't your obligation? Regional debt in a fiscal federation," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00310512, HAL.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Piotr Ciżkowicz & Andrzej Rzońca & Rafał Trzeciakowski, 2015. "Windfall of Low Interest Payments and Fiscal Sustainability in the Euro Area: Analysis through Panel Fiscal Reaction Functions," Kyklos, Wiley Blackwell, vol. 68(4), pages 475-510, November.
    2. Adrian Chadi & Matthias Krapf, 2017. "The Protestant Fiscal Ethic: Religious Confession And Euro Skepticism In Germany," Economic Inquiry, Western Economic Association International, vol. 55(4), pages 1813-1832, October.
    3. Alison Johnston & Bob Hancké & Suman Pant, 2013. "Comparative Institutional Advantage in the European Sovereign Debt Crisis," Europe in Question Discussion Paper Series of the London School of Economics (LEQs) 6, London School of Economics / European Institute.
    4. János Kornai, 2014. "The soft budget constraint," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 64(supplemen), pages 25-79, November.
    5. Thushyanthan Baskaran, 2013. "Do bailouts buy votes? Evidence from a panel of Hessian municipalities," Economics of Governance, Springer, vol. 14(3), pages 257-278, August.
    6. Kornai, János, 2014. "Bevezetés A puha költségvetési korlát című kötethez [Introduction to the author s volume entitled Soft Budget Constraint]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 845-897.
    7. Ansgar Belke & Jens Klose, 2017. "Equilibrium Real Interest Rates and Secular Stagnation: An Empirical Analysis for Euro Area Member Countries," Journal of Common Market Studies, Wiley Blackwell, vol. 55(6), pages 1221-1238, November.
    8. Alison Johnston & Bob Hancké & Suman Pant, 2013. "Comparative Institutional Advantage in the European Sovereign Debt Crisis," LEQS – LSE 'Europe in Question' Discussion Paper Series 66, European Institute, LSE.
    9. Johnston, Alison & Hancké, Bob & Pant, Suman, 2013. "Comparative institutional advantage in the European sovereign debt crisis," LSE Research Online Documents on Economics 53177, London School of Economics and Political Science, LSE Library.
    10. Jäger, Jannik & Grigoriadis, Theocharis, 2016. "Soft budget constraints, European Central Banking and the financial crisis," Discussion Papers 2016/7, Free University Berlin, School of Business & Economics.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Thushyanthan Baskaran & Zohal Hessami, 2011. "A Tale of Five PIIGS: Soft Budget Constraints and the EMU Sovereign Debt Crises," Working Paper Series of the Department of Economics, University of Konstanz 2011-45, Department of Economics, University of Konstanz.
    2. Ioannou, Demosthenes & Stracca, Livio, 2014. "Have the euro area and EU governance worked? Just the facts," European Journal of Political Economy, Elsevier, vol. 34(C), pages 1-17.
    3. Thushyanthan Baskaran, 2017. "Local fiscal policy after a bailout: austerity or soft budget constraints?," Economics of Governance, Springer, vol. 18(3), pages 209-238, August.
    4. Dietrichson, Jens & Ellegård, Lina Maria, 2015. "Assist or desist? Conditional bailouts and fiscal discipline in local governments," European Journal of Political Economy, Elsevier, vol. 38(C), pages 153-168.
    5. Baskaran, Thushyanthan, 2014. "The political economy of special needs transfers: Evidence from Bavarian municipalities, 1993-2011," Center for European, Governance and Economic Development Research Discussion Papers 211, University of Goettingen, Department of Economics.
    6. Baskaran, Thushyanthan, 2014. "Bailouts and austerity," Center for European, Governance and Economic Development Research Discussion Papers 212, University of Goettingen, Department of Economics.
    7. Hope, David, 2016. "Estimating the effect of the EMU on current account balances: A synthetic control approach," European Journal of Political Economy, Elsevier, vol. 44(C), pages 20-40.
    8. Bettina Fincke & Marcin Wolski, 2016. "Are European fiscal rules that bad? Discretionary fiscal policies in New Member States," Empirical Economics, Springer, vol. 51(2), pages 517-546, September.
    9. Gianmarco Daniele & Amedeo Piolatto & Willem Sas, 2018. "Who Sent You? Strategic Voting, Transfers and Bailouts in a Federation," Working Papers. Serie AD 2018-05, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    10. Sönke Hendrik Matthewes, 2020. "Better together? Heterogeneous effects of tracking on student achievement," CEP Discussion Papers dp1706.pdf, Centre for Economic Performance, LSE.
    11. Mikosch, Heiner & Sturm, Jan-Egbert, 2012. "Has the EMU reduced wage growth and unemployment? Testing a model of trade union behavior," European Journal of Political Economy, Elsevier, vol. 28(1), pages 27-37.
    12. Diego Martínez-López, 2021. "Subnational borrowing and bailouts: when the federal government looks at the votes (diferently) and its borrowing matters," Working Papers. Collection A: Public economics, governance and decentralization 2101, Universidade de Vigo, GEN - Governance and Economics research Network.
    13. Kornai, János, 2014. "Bevezetés A puha költségvetési korlát című kötethez [Introduction to the author s volume entitled Soft Budget Constraint]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 845-897.
    14. Sari Pekkala Kerr & Tuomas Pekkarinen & Roope Uusitalo, 2013. "School Tracking and Development of Cognitive Skills," Journal of Labor Economics, University of Chicago Press, vol. 31(3), pages 577-602.
    15. Christofzik, Désirée I. & Kessing, Sebastian G., 2018. "Does fiscal oversight matter?," Journal of Urban Economics, Elsevier, vol. 105(C), pages 70-87.
    16. Cockx, Bart & Ghirelli, Corinna, 2016. "Scars of recessions in a rigid labor market," Labour Economics, Elsevier, vol. 41(C), pages 162-176.
    17. Huebener, Mathias & Marcus, Jan, 2017. "Compressing instruction time into fewer years of schooling and the impact on student performance," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, pages 1-14.
    18. Holm-Hadulla, Fédéric, 2020. "Fiscal equalization and the tax structure," Regional Science and Urban Economics, Elsevier, vol. 81(C).
    19. Baskaran, Thushyanthan & Brender, Adi & Blesse, Sebastian & Reingewertz, Yaniv, 2016. "Revenue decentralization, central oversight and the political budget cycle: Evidence from Israel," European Journal of Political Economy, Elsevier, vol. 42(C), pages 1-16.
    20. Jay Pan & Xiaoyan Lei & Gordon G. Liu, 2016. "Health Insurance and Health Status: Exploring the Causal Effect from a Policy Intervention," Health Economics, John Wiley & Sons, Ltd., vol. 25(11), pages 1389-1402, November.

    More about this item

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:ecopol:v:29:y:2017:i:3:p:252-275. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0954-1985 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0954-1985 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.