Fiscal policy and monetary integration in Europe

Abstract

Fiscal policy

Economists, policy-makers, and the media often argue that the Maastricht Treaty and the Stability and Growth Pact make it difficult for governments of EMU countries to stabilize their economies with appropriate fiscal policy and to provide adequate public investment. Our empirical analysis offers little support to this view. Discretionary budget deficits have actually become more counter-cyclical in EMU countries after the Maastricht Treaty, as well as in the other EU and non-EU industrialized countries we study. And while public investment has declined recently in EMU countries, a similar tendency is apparent in other countries and started well before the Maastricht Treaty was signed.

— Jordi Gali and Roberto Perotti