Implications for Fiscal and Regional Policies

A number of issues have arisen in the context of fiscal consequences of EMU, and its implications for fiscal policy. In summary, these are: 1. The budgetary conditions for entry to EMU are controversial. These were discussed in Chapter 13. 2. Compliance with the budgetary conditions will have economic consequences for a number of countries, notably those whose deficits considerably exceed the reference value. This will be discussed immediately below. 3. In terms of the treaty, the same budgetary conditions will have to be observed permanently. The extent to which this will prove true in practice will not be observable until EMU has been in operation for some time. 4. A number of economists have argued that the budgetary rules in the Maastricht treaty are inappropriate (or economic nonsense) mainly because of their asymmetrical nature; and even more (including this author) have maintained that the unavailability of monetary policy to deal with shocks or demand deficiency in particular countries will increase the need for fiscal policy in EMU. There are several strands to this argument, as well as the usual two sides (for and against the Maastricht rules). 5. Will there be a need for an EMU-wide fiscal policy, either by co-ordination or centralisation? 6. Some countries will, it is argued, be more vulnerable than others in EMU, and the same can be said about regions within countries. Indeed, the difference between countries and regions will more or less disappear with the removal of national monetary policy. However, regions within countries have much less power to change their rates of tax, and their ability to vary discretionary expenditure also tends to be less than that of nation states. Will there, then, be a need for radically different regional policies?