Abstract
This chapter argues that the decision to constrain fiscal policy in the EMU is not intrinsically linked to the implementation of the single currency, but it is the result of the dominant New Keynesian macroeconomic framework at the time of the Maastricht Treaty. The New Keynesian theory emphasizes the role of market adjustments in absorbing macroeconomic shocks; the return to the natural of the economy happens spontaneously, and monetary policy can at best, through inflation targeting and the anchoring of expectations, speed the process. The New Keynesian model has no real role in fiscal policy. The chapter then argues that both the original Stability and Growth Pact, and the subsequent fiscal rules (including the recent Fiscal Compact) fare rather poorly in terms of the classic criteria for the optimality of fiscal rules put forward by Kopits and Symanski in 1998. We link the poor performance of the Eurozone economy including during the recent crisis to the existence of these rules, and we conclude with some remarks on how the current reform debate should take stock of recent theoretical and empirical developments most notably on the size of multipliers.
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Notes
- 1.
Real rigidities may also cause a departure of the natural rate from the Walrasian first best equilibrium.
- 2.
In the past few years, it became a somewhat depressing habit to see national governments and the Commission argue about the estimation of potential output, and therefore of the cyclical position and of the structural balance.
- 3.
It is worth noticing that this created a further inconsistency: while automatic stabilization was given the task of stabilization, the long-term evolution of public finances yielded lower and lower capacity of the tax and expenditure system to act countercyclically. For details, see Creel and Saraceno (2010b).
- 4.
The EDP is triggered by deficits above 3% (or, within the framework of the Fiscal Compact, by structural deficit that is not consistent with the debt reduction path). The EDP is a complex procedure that starts with an early warning, and eventually leads, after a few years of repeated misbehaviour, to a fine. No country was ever sanctioned so far.
- 5.
It is worth recalling that Blanchard and Perotti (2002) revived the academic debate about the effectiveness of fiscal policy at a time only monetary policy was praised for its stabilization properties. Despite their conclusions in favour of the use of fiscal policy for macrostabilization, a gap remained between the academia and policy makers in the wake of the global financial crisis.
- 6.
The communique can be found at https://www.imf.org/external/np/sec/pr/2009/pdf/g20_040209.pdf.
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Creel, J., Saraceno, F. (2018). Fiscal Policy: A Useful Tool After All?. In: Creel, J., Laurent, É., Le Cacheux, J. (eds) Report on the State of the European Union. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-98364-6_5
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DOI: https://doi.org/10.1007/978-3-319-98364-6_5
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