Working Paper: NBER ID: w11249
Authors: Martin Feldstein
Abstract: This paper begins by discussing the inherent conflict between the simultaneous existence of a single currency for the countries of the European Economic and Monetary Union (EMU) and the independent fiscal policies of those countries. The Stability and Growth Pact was an attempt to reconcile that conflict. I describe how EMU governments have chosen to ignore the Stability Pact's constraint on budget deficits and how they sought to undermine it by changing the rules themselves. The final part of the paper describes the actual resolution of the issue by the agreement reached at the end of March 2005 by the European Council. The new policy effectively abandons the Stability Pact and leaves the way open to much larger sustained deficits.
Keywords: No keywords provided
JEL Codes: F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Centralized monetary policy of the EMU + Decentralized fiscal policies (E63) | Strong bias towards large, chronic fiscal deficits (E62) |
| Excessive fiscal deficits in one country (H68) | Collective problem for the eurozone (E66) |
| Absence of market feedback mechanisms (D52) | No rising interest rates or currency depreciation in response to deficits (E62) |