Monetary Integration, Soft Budget Constraints, and the EMU Sovereign Debt Crises

Thushyanthan Baskaran and Zohal Hessami

No 2013-03, Working Paper Series of the Department of Economics, University of Konstanz from Department of Economics, University of Konstanz

Abstract: One possible explanation for the European sovereign debt crises is that the European Economic and Monetary Union (EMU) gave rise to consolidation fatigue or even deliberate over-borrowing. This paper explores the validity of this explanation by studying how three decisive stages in the history of the EMU affected public borrowing in EU member states: the signing of the Maastricht treaty in 1992, the introduction of the Euro in 1999, and the suspension of the SGP in late 2003. The methodology relies on difference-in-difference regressions covering 26 OECD countries over the 1975-2009 period. The findings indicate that the first two 'treatments' reduced deficits especially in traditional high-deficit countries. In contrast, the watering down of the original SGP encouraged borrowing in countries which traditionally have had high deficits.

Keywords: EMU; monetary union; fiscal policy; public deficits (search for similar items in EconPapers)
JEL-codes: F15 F42 H62 H63 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2013-03-14
New Economics Papers: this item is included in nep-cba, nep-eec and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Journal Article: Monetary integration, soft budget constraints, and the EMU sovereign debt crises (2017)
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