EMU - Fiscal Challenges: Conclusions for the New Members of the EU

The aim of the paper is to evaluate the fiscal challenges which have appeared before EMU (Economic and Monetary Union) countries after four years of monetary union functioning. Then the author formulates conclusions for accession countries, which plan to be members of EMU in the near future. The first part of the paper deals with criteria of fiscal stabilization within EMU, their meaning and connections with economic growth. The fiscal stabilization criteria were taken from the Pact of Stabilization and Growth and in the Maastricht Treaty. The first criterion concerns budged deficit, whose relation to the GDP should be no higher than 3%. The second criterion concerns public debt, whose relation to the GDP should be no higher than 60%. Special procedure and sanctions are forecasted in case of a country which does not respect those criteria. It fundamentally limits possibilities of using fiscal policy to stabilize economy after the economic shocks. On the other hand, the fiscal criteria have also positive influence, because of implementation of discipline to the economic policy, which is created by the policymakers who act under policy cycle pressure. At that point, a problem of contradictions between short ormedium period of economic policy and long period in policymaker?s actions appears. If we assume that effective economic policy should be based on the long-run stable rules to assure economic development in long period, we can conclude that fiscal discipline is necessary. But if we assume that government should apply fiscal policy for short run fine tuning of economic processes, we can consequently conclude that fiscal stabilization criteria limit government possibilities. After four years of EMU functioning, budged deficit and public debt have appeared as challenges again. Those selected countries are: Portugal, Germany and France. Reasons of budged deficit and public debt are different in each country. An explanation may be found in processes of adjustment to the Maastricht criteria in the period of the 90's. Research by M. Demertzis, M. Hallet and A.H. Rummel indicates that the convergence degree, which was revealed by fulfilling the Maastricht criteria at the end of the 90?s resulted from applying appropriate instruments of economic policy rather than from natural convergence processes in the area of economic and structural adjustments. The authors of the research also emphasise that although politics helped to create conditions which enabled the existence of the Economic and Monetary Union, from that time on the whole project has depended on the impact of all political changes. In the case of fiscal stabilization, governments of many EMU countries increased tax burden rather than cut the budged expenditure to achieve lower deficit. In Germany, France, Portugal and many other countries governments did not implement radical reform of public finance structure. Recession which has started from 2000 is another problem. Especially deep recession has appeared in Germany. One of the reasons is rigidity of German economy and lack of deep public finance reform. The prospect of EMU is dependent on economic reforms in member countries. One of them is deep reform of public finance structure. The new member countries of the EU are facing the necessity of economic adjustment to the convergence criteria, and among them criteria of fiscal stabilization. Experiences of selected EMU countries let conclude that nominal convergence should be the result of real convergence processes. Thus fiscal stabilization should be the result of deep changes in the structure of public finance and tax systems.