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The 'Sense and Nonsense of Maastricht' Revisited: What Have We Learnt About Stabilization In EMU?

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  • Buiter, Willem H.

Abstract

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.

Suggested Citation

  • Buiter, Willem H., 2005. "The 'Sense and Nonsense of Maastricht' Revisited: What Have We Learnt About Stabilization In EMU?," CEPR Discussion Papers 5405, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:5405
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    References listed on IDEAS

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    1. Schuknecht, Ludger & von Hagen, Jürgen & Bernoth, Kerstin, 2004. "Sovereign risk premia in the European government bond market," Working Paper Series 369, European Central Bank.
    2. Paul van den Noord, 2000. "The Size and Role of Automatic Fiscal Stabilizers in the 1990s and Beyond," OECD Economics Department Working Papers 230, OECD Publishing.
    3. Hughes Hallett, Andrew & McAdam, Peter, 1996. "Fiscal Deficit Reductions in Line with the Maastricht Criteria for Monetary Union: An Empirical Analysis," CEPR Discussion Papers 1351, C.E.P.R. Discussion Papers.
    4. Uhlig, H.F.H.V.S., 2002. "One Money, But Many Fiscal Policies in Europe : What are the Consequences?," Discussion Paper 2002-32, Tilburg University, Center for Economic Research.
    5. Eijffinger, Sylvester & Haan, Jakob de, 2000. "European Monetary and Fiscal Policy," OUP Catalogue, Oxford University Press, number 9780198776161.
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    Cited by:

    1. 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.
    2. 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.
    3. Salma Slimani, 2016. "Threshold Effects of Fiscal Policy on Economic Activity in Developing Countries," International Journal of Business and Social Research, MIR Center for Socio-Economic Research, vol. 6(3), pages 20-37, March.
    4. Fabrice Capoen & Jérôme Creel, 2007. "Efficiency of stability-oriented institutions: the European case," Sciences Po publications N°2007-06, Sciences Po.
    5. 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.
    6. Willem H. Buiter, 2010. "Economic, Political and Institutional Prerequisites for Monetary Union Among the Members of the Gulf Cooperation Council," Chapters,in: Currency Union and Exchange Rate Issues, chapter 3 Edward Elgar Publishing.
    7. Alberto Bagnai, 2010. "CEEC vs. PIGS: a comparative panel assessment of financial sustainability and twin deficits," Working Papers LuissLab 1088, Dipartimento di Economia e Finanza, LUISS Guido Carli.
    8. Borgersen, Trond-Arne & King, Roswitha M., 2014. "Structural origins of debt-sustainability in mature and transition economies: Domar, Balassa–Samuelson and Maastricht," Structural Change and Economic Dynamics, Elsevier, vol. 30(C), pages 101-119.
    9. Rui Alves & Oscar Afonso, 2007. "The "New" Stability and Growth Pact: More Flexible, Less Stupid?," Intereconomics: Review of European Economic Policy, Springer;German National Library of Economics;Centre for European Policy Studies (CEPS), vol. 42(4), pages 218-225, July.
    10. 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.
    11. Stracca, Livio & Ioannou, Demosthenes, 2011. "Have euro area and EU economic governance worked? Just the facts," Working Paper Series 1344, European Central Bank.
    12. Manuela Moschella, 2014. "Monitoring Macroeconomic Imbalances: Is EU Surveillance More Effective than IMF Surveillance?," Journal of Common Market Studies, Wiley Blackwell, vol. 52(6), pages 1273-1289, November.
    13. Elzbieta Szulc & Karolina Gorna & Dagna Wleklinska, 2016. "The share of European economies in the process of convergence of long-term interest rates in the EU in the period of 2006–2016," Dynamic Econometric Models, Uniwersytet Mikolaja Kopernika, vol. 16, pages 165-187.
    14. Slimani Salma & El Abbassi Idriss & Tounsi Said, 2016. "Threshold effects of fiscal policy on economic growth in developing countries," Journal of Economic and Financial Studies (JEFS), LAR Center Press, vol. 4(3), pages 24-37, June.
    15. Grégory Claeys & Zsolt Darvas & Alvaro Leandro, 2016. "A proposal to revive the European Fiscal Framework," Policy Contributions 13490, Bruegel.
    16. repec:spo:wpecon:info:hdl:2441/2977 is not listed on IDEAS
    17. Konrad Szelag, 2008. "A Single Fiscal Policy in the Euro Area: Vision or Utopia?," NBP Working Papers 46, Narodowy Bank Polski, Economic Research Department.
    18. 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.

    More about this item

    Keywords

    excessive deficit procedure; fiscal sustainability; macroeonomic stabilization; Stability and Growth Pact;

    JEL classification:

    • 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

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