The 'Sense and Nonsense of Maastricht' Revisited: What Have We Learnt About Stabilization In EMU?
This 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.
If 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.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
|Date of creation:||Dec 2005|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:5405. 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: ()The email address of this maintainer does not seem to be valid anymore. Please ask to update the entry or send us the correct address
If references are entirely missing, you can add them using this form.