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Economic And Legal IntegrationMonetary and Fiscal Policy In EU
● Treaty of Maastricht (1992), it codified a restrictive Monetary and Fiscal Policy, Monetary
Policy (Price stability) example countries - Germany and Netherlands.
● Fiscal Policy : Budget constraint ( Stability and Growth Pact) Closing off Keynesian style
policies that advocate more activist Monetary and Fiscal Policy.
Stability and Growth Pact ( SGP)
● Additional Fiscal Rules for Eurozone/Monetary Union ( agreed in Dublin 1996,
implemented in Treaty of Amsterdam 1997). - Initiative of Germany and aimed at fiscal
discipline.
Objective of this is 3 steps - 1) Balanced Budget ( beyond 60% GDP of spending). Why is the
fiscal SGP added, is because the economic rationale is the consequences of overspending will
have a negative spillover effect in another nation of similar or same currency. 3 different
spillover effects occur (1 member state deficit is forced to borrow more on capital markets, 2)
Extra borrowing on capital markets and higher interest rates may put extra pressure on ECB:
Member states with budget deficit could put pressure on ECB to engage in expansionary
monetary policy. 3) Membership of Monetary union may lead to problem of Moral hazard.
1) Effects the market of other member states economically speaking.
2) ECB: Are there for pressure sitations of economic spillover and collapse, would
compromise the effects of independence and not run up to much of a deficit.
Problem of Moral hazard : Because you think you will be saved, you become more reckless,
another example is if you are insured you will behave in riskier fiscal behaviour.
SGP Reform
● Criticism of early SGP - At times of economic recession: too rigid.
● Excessive deficit procedure does not work : Portugual, France and Germany (2002).
● Without consequences for France and Germany
SGP Reform 2
● Additional measures since Eurocrisis
● 2011: Six Pack ( Fiscal: strengthen survelliance of deficits and excessive deficit
procedure. Macroeconomic Imbalances Procedure : Survelliance and excess
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