Fiscal governance in the European Union

The European Commission and the Member States of European Union (EU) are currently engaged in updating the framework of EU economic governance, with a focus on the rules-based Stability and Growth Pact (SGP). The reform effort is deeper this time than on earlier occasions since the Maastricht Treaty, because it coincides with a major swing in the paradigm for fiscal policy towards greater ambitions - not only to stabilize output around potential, but also to raise the latter. It marks a shift from the defensive attitude in the Treaty which aimed to build monetary dominance through constraints on fiscal activism, but also a return to the start of the debate on EU integration half a century ago which also focused on fiscal ambitions. The chapter traces these long swings in perceptions; it looks at how to best design the impact on growth in closely integrated economies that fall well short of a federation.