Publication detail

Does the Enlarged European Union Need a Better FIscal Pact?

Author(s): PhDr. Petr Hedbávný ,
doc. Ing. Ondřej Schneider MPhil., Ph.D.,
PhDr. Jan Zápal Ph.D.,
Type: IES Working Papers
Year: 2004
Number: 55
ISSN / ISBN:
Published in: IES WP 2004/55
Publishing place: Prague
Keywords: fiscal policy, European Union, sustainability
JEL codes:
Suggested Citation:
Abstract: In this paper, we set out to examine an efficient fiscal policy framework for a monetary union. We find that a monetary union can survive with diverging fiscal policies and that the financial markets are efficient enough to separate between “good” and “bad” fiscal policies and punish the latter with higher costs of borrowing. Therefore, there is only limited spill over effect of “bad” fiscal policy within a monetary union if financial markets work efficiently. We argue, consequently, that fiscal rules in a monetary union are still important as they allow to overcome incentive incompatibility of national fiscal rules and as they may guide financial markets in assessing sustainability of national fiscal policies. Finally, we argue for adoption of an institutional rule, Fiscal Sustainability Council for enlarged European Union. The Council would periodically assess fiscal policies and set guidelines for annual deficits. We argue that in order to make the FSC relevant, governments would be obliged to deposit with the Council a substantial amount of bonds that would be regularly rolled over by the Council. By doing so, the Council would connect fiscal policy sustainability principle with financial markets and would guide financial markets evaluation of national fiscal policies.
Downloadable: WP 55

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