Bruegel, a recently established Think-tank in Brussels, released a working paper on “Fiscal Policy in EMU – Towards a sustainability and growth pact?”. The report intends to take stock of the academic and policy discussions on the fiscal institutions of EMU, to confront the framework in place to what is known of the desirable properties of fiscal policy in a monetary union, and to discuss possible improvements.
The report starts with a discussion of three requirements for the fiscal framework of a monetary union:
first, it should be conducive to public finance sustainability, because market discipline cannot be relied on to foster it;
second, it should leave room for stabilisation at the national level;
third, it should not discourage, and possibly encourage, structural reform, which is a key requirement for European countries.
The report finds that the Stability and Growth Pact has mostly failed on all these three accounts. Therefore, the institute propose five building blocks towards an effective Stability and Growth Pact, including that the Pact should focus on broader concepts than the current one and the creation of independent fiscal audit councils.
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