Abstract
The most important element holding possibility to destroy stability in monetary unions is fiscal policies left under monopoly of countries. There have been debt and public finance policies conducted by member states causing sovereign debt crisis triggered by Global Crunch in Eurozone. Therefore, fiscal framework of European Monetary Union is examined in the study. Fiscal rules adopted by Treaty of Maastricht being the founding charter of European Union and additional measures taken due to hinder experienced are assessed besides theoretical foundations of fiscal policies recommended for Monetary Unions. During analysis of the process, it is remarkable that both such rules and measures taken afterwards have followed each other however, that radical changes have not actually occurred. Only restrictions to national policies have been used instead of common policies in the fiscal field to prevent Eurozone member states to deprive fiscal policies: the only tool, which may be used to handle asymmetrical shocks. However, it is observed that sanctions on the implementation of rules adopted for the fiscal field have always been weak and could, from time to time, easily be broken despite the fact that such rules are qualified as binding.
This study is derived from unpublished PhD thesis titled as “Fiscal Policy Debates in the Context of Fiscal Discipline and Economic Growth in the Eurozone Countries that have been suffered from Sovereign Debt Crisis” completed in December 2014, after revising and updating the same.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
For instance, some European countries have followed first examples of supply biased economy strategies of Social Democratic Parties in 1990s. Based on this, they have reduced unproductive expenses, increased public investments and relative tax income acquired from direct taxation. Thus, they have implemented fiscal regulations combining different policies: Netherlands (1990–1994), Greece (1994–1999) and Finland after 1999. Some countries have maintained expense based fiscal regulations: Austria (1995–1997), Ireland (1990–1993/1998–2000), Denmark (1990–1993) etc. (Mulas-Granados 2006).
- 2.
EMU abbreviation is used for both European Monetary Union and economic and monetary union. This is a natural circumstance, for, widest state of economic and monetary union has come to existence at the monetary union of European Union (El-Agraa 2007).
- 3.
According to Frankel and Rose (1996), trade volume is high, business cycle and shocks are similar, labour mobility is high amongst optimum currency area members. Also, a fiscal transfer system may exist. For, regions in the space called as optimum currency area and conditions expected to remove possible deviations at such area’s relations with outer world and solution ways are important. Therefore, mechanisms existing to deal with asymmetric shocks are deemed as integral part of optimum currency area.
- 4.
A common monetary policy implemented for all the countries means ECB to use a single nominal interest rate for Eurozone countries. However, while this circumstance decreases real interest rates in countries holding high inflation such as Greece, Spain and Ireland; it causes real interest to be higher in countries where inflation rates are lower such as Germany. Lower real interest increases domestic inflation by encouraging economic activity. Thus, while Eurozone inflation could be as targeted, the inflation rates of each country will be different (Neck and Sturm 2008; Wickens 2010). Accordingly, money and fiscal policy coordination should be under economic conditions of each country.
- 5.
ECB has been purchasing Greece, Ireland and Portugal government bonds since May 2010; Spain and Italy government bonds since August 2011. Such bonds have been purchased for 211 billion euros (Gloggnitzer and Lindner 2011; Barth et al. 2011). However, according to Belke (2011) ECB’s such acquisition holding high risk may prejudice the trust towards its political and financial independency.
- 6.
The criteria of Treaty of Maastricht are five. Criteria regarding inflation rates; inflation rate of a country may not be 1.5 % more than average of three countries with lowest inflation rates. Criteria regarding interest rates; interest rates of long-term government bonds may not be 2 % more than average of three countries with lowest rates. Budget criteria; central government budget deficit may not exceed 3 % of GDP. Debt criteria; government debt/GDP rate should be under 60 %. Exchange rate criteria; national money should fluctuate at 2.25 interval. Also, currency exchange rate mechanism of European Monetary System should remain at narrow fluctuation interval within first 2 years and no devaluation should be imposed on other members within same period.
- 7.
There are two views on this circumstance. One of them is coronation theory and it is the view, which accepts that only small and relatively homogeneous core countries group should be member at the beginning. Countries reaching required competition power might be accepted to the union by time. In other words, membership to economic and monetary union should be the last crowning step of a real convergence process. The second one is the locomotive theory and advocates that it should be a as comprehensive as possible club. For, the member countries will act by compelling each other on reforms to be made towards a more efficient competition need. In this case, locomotive theory is the one accepted (Cohen 2012).
- 8.
- 9.
European Commission has warned one Eurozone country for the very first time on January 30, 2003. This country is Germany, which is the biggest of European economies and insisting on strict fiscal rules in an ironic manner (Von Hagen 2008; Prokopijevic 2010). Afterwards, the Commission has warned France, Italy, Greece and Portugal. In 2003, sanctions on France and Germany, since they have not observed this clear limit, has been prevented with the voting made; thus, Germany and France has avoided from rules without suffering any penalty. For, it is understood that there would be a set of rules imposed for big countries and another set of rules for small countries (Buti et al. 2008; Inotai 2011; Jovanović 2012).
References
Avellaneda SD, Hardiman N (2010) The European context of Ireland’s economic crisis. Econ Soc Rev 41(4):473–500
Barth JR, Li T, Prabhavivadhana A (2011) Greece’s “unpleasant arithmetic” containing the threat to the global economy. Glob Econ J 11(4):1–13
Belke A (2011) The Euro area crisis management framework: consequences for convergence and institutional follow-ups. J Econ Integr 26(4):672–704
Blanchard O, Giavazzi F (2008) Improving the stability and growth pact through proper accounting of public investment. In: Perry GE, Servén L, Suescún R (eds) Fiscal policy, stabilization and growth: prudence or abstinence? The World Bank, Washington, DC, pp 259–272
Bureau D, Champsaur P (1992) Fiscal federalism and European economic unification. Am Econ Rev 82(2):88–92
Buti M, Eijffinger S, Franco D (2008) The stability pact pains: a forward-looking assessment of the reform debate. In: Neck R, Sturm JE (eds) Sustainability of public debt. MIT Press, Cambridge, pp 131–160
Catenaro M, Morris R (2008) Fiscal policy and implementation in EMU: from Maastricht to the SGP reform and beyond. In: Farina F, Tamborini R (eds) Macroeconomic policy in the European Monetary Union from the old to the new stability and growth pact. Routledge, New York
Coeuré B, Pisani-Ferry J (2005) Fiscal policy in EMU: towards a sustainability and growth pact? Oxf Rev Econ Policy 21(4):598–617
Cohen BJ (2012) The future of the euro: let’s get real. Rev Int Polit Econ 19(4):689–700
Corsetti G, Roubini N (1993) The design of optimal fiscal rules for Europe after 1992. In: Torres F, Giavazzi F (eds) Adjustment and growth in the European Monetary Union. Centre for Economic Policy Research and Cambridge University Press, New York, pp 46–82
De Grauwe P (2010) The fragility of the Eurozone’s institutions. Open Econ Rev 21(1):167–174
De Tramezaigues GRS (2010) Assessing the 2005 growth and stability pact reform: a new fiscal policy rule for the Eurozone is required. Int J Econ Financ 2(5):140–150
Dullien S, Fritsche U (2009) How bad is divergence in the euro zone? Lessons from the United States and Germany. J Post Keynesian Econ 31(3):431–456
EC (2014) Communication from the commission. Annual growth survey
Eichengreen B (1991) Is Europe an optimum currency area? NBER Working Paper Series, 3579
El-Agraa A (2007) The theory of monetary integration. In: El-Agraa A (ed) The European Union economics and policies. Cambridge University Press, New York, pp 193–207
Enders Z, Jung P, Müller GJ (2012) Has the Euro changed the business cycle? CEPR Discussion Papers, 9233
Frankel JA, Rose AK (1996) The endogeneity of the optimum currency area criteria. National Bureau of Economic Research Working Paper Series, 5700
Gloggnitzer S, Lindner I (2011) Economic governance reform and financial stabilization in the EU and in the eurosystem: treaty based and intergovernmental decisions. Monet Policy Econ Q4:36–58
Gros D (2006) Will EMU survive 2010? Centre for European Policy Studies, January
Hajek-Rezaei M (2011) Chronology of European initiatives in response to the crisis. Monet Policy Econ 11:125–134
Hughes Hallett A, Jensen SEH (2011) Stable and enforceable: a new fiscal framework for the Euro area. Int Econ Econ Policy 8(3):225–245
Inotai A (2011) The management of the costs of crisis management Eurozone, EU 2020 and the future of European integration. Econ Stud 20(2):3–17
Jovanović MN (2012) Is the Eurozone rescue strategy tantamount to the rearrangement of the deckchairs on the Titanic? J Econ Integr 27(1):33–79
Kenen PB (1995) Economic and monetary union in Europe: moving beyond Maastricht. Cambridge University Press, Cambridge
Krugman PR, Obstfeld M (2009) International economics: theory and policy. Pearson Education, Boston
Masson PR, Taylor MP (1993) Currency unions: a survey of the issues. In: Masson PR, Taylor MP (eds) Policy issues in the operation of currency unions. Cambridge University Press, Cambridge, pp 3–51
Mayes D (2007) The operation of EMU. In: El-Agraa A (ed) The European Union economics and policies. Cambridge University Press, New York, pp 227–238
Mayes D, El-Agraa A (2007) The development of EU economic and monetary integration. In: El-Agraa A (ed) The European Union economics and policies. Cambridge University Press, New York, pp 208–226
Mulas-Granados C (2006) Economics, politics and budgets, the political economy of fiscal consolidations in Europe. Palgrave Macmillan, New York
Neck R, Sturm JE (2008) Sustainability of public debt: introduction and overview. In: Neck R, Sturm JE (eds) Sustainability of public debt. MIT Press, Cambridge, pp 1–14
Obstfeld M (2013) Finance at center stage: some lessons of the Euro crisis. EC European Economy Economic Paper, 493, pp 1–77
Profumo A (2010) Doubling the stakes: towards a wider, deeper, stronger Euro area. Revue d’Économie Financière 96(1):55–62
Prokopijevic M (2010) Euro crisis. Panoeconomicus 57(3):369–384
Rose AK (2006) Currency unions. New Palgrave, New York
Sala-i Martin X, Sachs J (1991) Fiscal federalism and optimum currency areas: evidence for Europe from the United States. NBER Working Paper Series, 3855
Schuknecht L, Moutot P, Roher P, Stark J (2011) The stability and growth pact crisis and reform. European Central Bank Occasional Paper Series, 129, pp 1–21
Stein JL (2011) The diversity of debt crises in Europe. Cato J 31(2):199–215
Visser H (2004) A guide to international monetary economics, exchange rate theories, systems and policies, 3rd edn. Edward Elgar, Cheltenham
Von Hagen J (2008) European experiences with fiscal rules and institutions. In: Garrett E, Graddy EA, Jackson HE (eds) Fiscal challenges an interdisciplinary approach to budget policy. Cambridge University Press, Cambridge, pp 103–126
Von Hagen J, Eichengreen B (1996) Fiscal restraints, and European Monetary Union. Am Econ Rev 86(2):134–138
Welfens PJ (2011) From the transatlantic banking crisis to the euro crisis? Int Econ Econ Policy 8(1):15–29
Wessels GM (2012) The future of the Euro as a global key currency: first place or second fiddle? J Stud Econ Econometr 36(1):107–125
Wickens M (2010) Some unpleasant consequences of EMU. Open Econ Rev 21(3):351–364
Wyplosz C (2013) Europe’s quest for fiscal discipline (No 498). Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2017 Springer International Publishing AG
About this chapter
Cite this chapter
Kırmızıoğlu, H. (2017). Fiscal Framework Changes in European Monetary Union Before and After Sovereign Debt Crisis. In: Hacioğlu, Ü., Dinçer, H. (eds) Global Financial Crisis and Its Ramifications on Capital Markets. Contributions to Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-47021-4_7
Download citation
DOI: https://doi.org/10.1007/978-3-319-47021-4_7
Published:
Publisher Name: Springer, Cham
Print ISBN: 978-3-319-47020-7
Online ISBN: 978-3-319-47021-4
eBook Packages: Economics and FinanceEconomics and Finance (R0)