How much Fiscal Discipline in a Monetary Union?

Paul De Grauwe and Yuemei Ji ()

Journal of Macroeconomics, 2014, vol. 39, issue PB, 348-360

Abstract: The nature of fiscal policies was changed dramatically by the creation of the Eurozone. While prior to the start of the Eurozone, national governments were sovereign in that they could back up the issue of debt by the issue of money, they lost this sovereignty in the Eurozone. This had dramatic effects that were largely overlooked by the designers of the Eurozone. First it made self-fulfilling liquidity crises possible that degenerated into solvency crises. Second, it led to the imposition of intense austerity program. We provide empirical evidence for these two effects. We argue that contrary to what was expected, i.e. that a monetary union loosens fiscal discipline, it actually leads to too much fiscal discipline.

Keywords: Fiscal policy; Austerity; Eurozone; EMS (search for similar items in EconPapers)
JEL-codes: E42 E58 F33 F36 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (39)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:39:y:2014:i:pb:p:348-360

DOI: 10.1016/j.jmacro.2013.08.016

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