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How to Enforce Fiscal Discipline in EMU: A Proposal

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Listed:
  • Jakob de Haan
  • Niels D. Gilbert
  • Jeroen Hessel
  • Silvie Verkaart

Abstract

Based on Inman's (1996) classification of successful fiscal policy rules, we argue that the Stability and Growth Pact suffers from two serious weaknesses: a politicized decision-making process and lack of effective instruments to enforce that Member States adjust their fiscal policies if needed. Although recent changes in the European Union's governance of national fiscal policy are considered to be an improvement, we argue that they do not address these shortcomings sufficiently. More independent enforcement is needed, and our preferred long-term solution would be to delegate the enforcement of European budgetary rules to a fully independent Budgetary Authority. Once the enforcement by this authority is well established and government debt-to-GDP ratios have declined towards 60%, fiscal discipline could be strengthened even further by introducing well-designed Eurobonds as the capstone of EMU. We propose centrally issued Eurobonds for the full public debt under the condition that Member States will no longer be allowed to independently raise funds in the money or capital markets. The independent Budgetary Authority only distributes funds to Member States if they have sustainable fiscal policies as defined under the SGP or if they properly implement a strictly monitored adjustment program.

Suggested Citation

  • 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.
  • Handle: RePEc:ses:arsjes:2013-ii-7
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    References listed on IDEAS

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    1. Charles Wyplosz, 2012. "Fiscal Rules: Theoretical Issues and Historical Experiences," NBER Chapters, in: Fiscal Policy after the Financial Crisis, pages 495-525, National Bureau of Economic Research, Inc.
    2. Alberto Alesina & Guido Tabellini, 2007. "Bureaucrats or Politicians? Part I: A Single Policy Task," American Economic Review, American Economic Association, vol. 97(1), pages 169-179, March.
    3. Buti, M. & Eijffinger, S.C.W. & Franco, D., 2003. "Revisiting the Stability and Growth Pact : Grand Design or Internal Adjustment?," Other publications TiSEM 2e5a01d9-9a1f-492d-995f-a, Tilburg University, School of Economics and Management.
    4. von Hagen, Jurgen & Harden, Ian J., 1995. "Budget processes and commitment to fiscal discipline," European Economic Review, Elsevier, vol. 39(3-4), pages 771-779, April.
    5. Jakob De Haan & Helge Berger & David‐Jan Jansen, 2004. "Why has the Stability and Growth Pact Failed?," International Finance, Wiley Blackwell, vol. 7(2), pages 235-260, July.
    6. Buti, Marco, 2003. "Revisiting the stability and growth pact: grand design or internal adjustment?," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 34908, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    7. Philip Lane, 2010. "Some Lessons for Fiscal Policy from the Financial Crisis," The Institute for International Integration Studies Discussion Paper Series iiisdp334, IIIS.
    8. Bénétrix, Agustín S. & Lane, Philip R., 2013. "Fiscal cyclicality and EMU," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 164-176.
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    Cited by:

    1. Jakob de Haan & Jeroen Hessel & Niels Gilbert, 2014. "Reforming the architecture of EMU: Ensuring stability in Europe," DNB Working Papers 446, Netherlands Central Bank, Research Department.
    2. 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.
    3. Niels Gilbert & Jasper de Jong, 2014. "Does the Stability and Growth Pact induce a bias in the EC's fiscal forecasts," DNB Working Papers 451, Netherlands Central Bank, Research Department.
    4. Niels Gilbert & Jeroen Hessel & Silvie Verkaart, 2013. "Towards a Stable Monetary Union: What Role for Eurobonds?," DNB Working Papers 379, Netherlands Central Bank, Research Department.
    5. Niels D. Gilbert & Jasper F.M. Jong, 2017. "Do European fiscal rules induce a bias in fiscal forecasts? Evidence from the Stability and Growth Pact," Public Choice, Springer, vol. 170(1), pages 1-32, January.

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    More about this item

    Keywords

    debt; debt brake; fiscal rules; European Monetary Union;

    JEL classification:

    • H6 - Public Economics - - National Budget, Deficit, and Debt

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