Fiscal Policy Under the EMU: Facts and Prospects

Abstract

Although the criteria, that had been used to justify the establishment of the Economic and Monetary Union (EMU), were challenged, in particular on the issues of labor mobility, flexibility of wages, and harmonization of the fiscal policies of the member-states, EMU moved on towards completion through three stages. Nowadays, monetary policy is conducted by the European Central Bank (ECB), while national governments have maintained their authority over fiscal policy. However, the orientation and independence of the national fiscal policies depends a lot on the priorities and rules set by the “Stability and Growth Pact” (SGP). Does the SGP take into account the differences among states concerning prospects of economic growth? It could be argued, that some degree of flexible implementation of the SGP is necessary in order to reduce social imbalances and that the recent Euro Plus Pact (EPP) would have greater chances of success under the given circumstances. The economic crisis of 2008 was violent, and so were the policy responses. The fact remains that there is a widespread discussion of the need for an efficient program of fiscal management, which, however, would allow economic development prospects to remain alive, in particular in the fragile European Union’ economies.