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Saving Europe's Automatic Stabilisers

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  • Eichengreen, Barry

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.

Suggested Citation

  • Eichengreen, Barry, 1997. "Saving Europe's Automatic Stabilisers," National Institute Economic Review, National Institute of Economic and Social Research, vol. 159, pages 92-98, January.
  • Handle: RePEc:cup:nierev:v:159:y:1997:i::p:92-98_7
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    References listed on IDEAS

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    1. Barry Eichengreen, 1992. "Is Europe an Optimum Currency Area?," Palgrave Macmillan Books, in: Silvio Borner & Herbert Grubel (ed.), The European Community after 1992, chapter 8, pages 138-161, Palgrave Macmillan.
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    6. Gilles Oudiz & Jeffrey Sachs, 1984. "Macroeconomic Policy Coordination among the Industrial Economies," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 15(1), pages 1-76.
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    8. Christopher Allsopp & David Vines, 1996. "Fiscal Policy and EMU," National Institute Economic Review, National Institute of Economic and Social Research, vol. 158(1), pages 91-107, October.
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    Cited by:

    1. Bernhard Winkler, 1999. "Co-ordinating Stability: Some Remarks on the Roles of Monetary and Fiscal Policy under EMU," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 26(3), pages 287-295, September.
    2. Ray Barrell & Ian Hurst & Álvaro Pina, 2002. "Fiscal Targets, Automatic Stabilisers and their Effects on Output," Working Papers Department of Economics 2002/05, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    3. Barrell, Ray & Pina, Alvaro M., 2004. "How important are automatic stabilisers in Europe? A stochastic simulation assessment," Economic Modelling, Elsevier, vol. 21(1), pages 1-35, January.
    4. Mr. Roel M. W. J. Beetsma & Mr. Xavier Debrun & Mr. Franc Klaassen, 2001. "Is Fiscal Policy Coordination in EMU Desirable?," IMF Working Papers 2001/178, International Monetary Fund.
    5. William Mitchell, 2016. "Eurozone Groupthink and Denial on a Grand Scale," World Economic Review, World Economics Association, vol. 2016(7), pages 43-55, July.
    6. repec:bla:intfin:v:4:y:2001:i:3:p:441-62 is not listed on IDEAS
    7. Tamborini, Roberto & Tomaselli, Matteo, 2020. "The determinants of austerity in the European Union 2010–16," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    8. Michael J. Artis & Marco Buti, 2000. "‘Close‐to‐Balance or in Surplus’: A Policy‐Maker's Guide to the Implementation of the Stability and Growth Pact," Journal of Common Market Studies, Wiley Blackwell, vol. 38(4), pages 563-591, November.
    9. Xavier Debrun, 2000. "Fiscal Rules in a Monetary Union: A Short-Run Analysis," Open Economies Review, Springer, vol. 11(4), pages 323-358, October.
    10. William Mitchell, 2015. "Eurozone Dystopia," Books, Edward Elgar Publishing, number 16478.
    11. Jorg Bibow, 2003. "On the 'burden' of German unification," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 56(225), pages 137-169.
    12. Nazaré Costa Cabral, 2016. "Which Budgetary Union for the E(M)U?," Journal of Common Market Studies, Wiley Blackwell, vol. 54(6), pages 1280-1295, November.
    13. Asdrubali, Pierfederico & Kim, Soyoung, 2004. "Dynamic risksharing in the United States and Europe," Journal of Monetary Economics, Elsevier, vol. 51(4), pages 809-836, May.
    14. Jorg Bibow, 2001. "Making EMU Work: Some lessons from the 1990s," International Review of Applied Economics, Taylor & Francis Journals, vol. 15(3), pages 233-259.
    15. Dominique Bureau, 1998. "Pacte de stabilité, crédibilité et stabilisation dans l'union monétaire européenne," Économie et Prévision, Programme National Persée, vol. 132(1), pages 49-57.
    16. Jorg Bibow, 2001. "On the 'Burden' of German Unification The Economic Consequences of Messrs. Waigel and Tietmeyer," Economics Working Paper Archive wp_328, Levy Economics Institute.
    17. Arne Heise, 2014. "Zwangsjacke Euro. Die Fehlkonstruktion des Europäischen Economic Governance-Systems," Wirtschaft und Gesellschaft - WuG, Kammer für Arbeiter und Angestellte für Wien, Abteilung Wirtschaftswissenschaft und Statistik, vol. 40(1), pages 17-31.
    18. AILINCA, Alina Georgeta, 2014. "Automatic Social Stabilizers What They Are And How They Function," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 18(3), pages 45-57.
    19. Luca Onorante, 2006. "Interaction of Fiscal Policies on the Euro Area: How Much Pressure on the ECB?," Economics Working Papers ECO2006/9, European University Institute.

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    More about this item

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • F0 - International Economics - - General

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