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Saving Europe's Automatic Stabilisers

Published online by Cambridge University Press:  26 March 2020

Barry Eichengreen
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Abstract

European policymakers 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 internalise 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 stabilisers 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 spectre of fiscal pro fligacy 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.

Type
Articles
Information
National Institute Economic Review , Volume 159 , January 1997 , pp. 92 - 98
Copyright
Copyright © 1997 National Institute of Economic and Social Research

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Footnotes

Based on a presentation to the staff of DG II of the European Commission. As with all my work on this subject, this paper owes much to my ongoing collaboration with Jürgen von Hagen of the University of Bonn. I thank also the members of the editorial board of the NIER for helpful comments. Financial support for this research is provided by the DAAD's Transcoop Program.

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