Saving Europe's Automatic Stabilizers

Barry Eichengreen

Center for International and Development Economics Research, Working Paper Series from Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley

Abstract: European policy makers have repeatedly suggested that fiscal-policy coordination and fiscal federalism will play key roles in Europe's monetary union. This paper warns that this hope is misplaced. Fiscal federalism will not be available to offset recessionary shocks for the foreseeable future. The effects of coordination designed to internalize the cross-border spillovers of fiscal policies are too weak. Freeing up fiscal policy to replace national governments' loss of monetary independence requires allowing European countries' automatic stabilizers to operate. That in turn requires a flexible application of the Excessive Deficit Procedure and the Stability Pact. The solution suggested here is that the Excessive Deficit Procedure and any fines and sanctions associated with the Stability Pact be applied to the constant-employment budget balance, not the actual deficit. Applying them to actual deficits when European countries enter EMU up against the 3 per cent limit will render fiscal policy strongly procyclical, aggravating the problem of macroeconomic fragility created by the loss of monetary autonomy. Still, countries like Germany haunted by the specter of fiscal profligacy need to be reassured that member states will not abuse their fiscal discretion. Procedural and institutional reform to offset the deficit bias in national political systems is the obvious quid pro quo.

Keywords: International economics; monetary union; fiscal federalism (search for similar items in EconPapers)
Date: 1996-11-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://www.escholarship.org/uc/item/9zb6q3ms.pdf;origin=repeccitec (application/pdf)

Related works:
Chapter: Saving Europe’s Automatic Stabilizers (2000)
Working Paper: Saving Europe's Automatic Stabilizers (1998)
Journal Article: Saving Europe's Automatic Stabilisers (1997)
Journal Article: Saving Europe's Automatic Stabilisers (1997)
Working Paper: Saving Europe's Automatic Stabilizers (1996)
Working Paper: Saving Europe's Automatic Stabilizers (1996)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cdl:ciders:qt9zb6q3ms

Access Statistics for this paper

More papers in Center for International and Development Economics Research, Working Paper Series from Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley Contact information at EDIRC.
Bibliographic data for series maintained by Lisa Schiff ().