The financial crisis and the subsequent European sovereign debt crisis have highlighted the high degree of interdependence among EMU member states. The crisis period made much more clear that a macroeconomic policy coordination framework is indispensable as there is great sensibility and high risk for contagion effects. The structure of EMU in its highest level of integration as of one monetary authority vis-à-vis many fiscal authorities brings about several specific aspects regarding coordination.
In order to achieve and ensure economic stability in such a unique constellation there have been established several measures and frameworks with the Stability and Growth Pact as the centre point. Designed on the grounds of and motivated by the objective of stabilising the overall economy, the pact promotes fiscal discipline through limiting government deficits and debts in order to prevent adverse fiscal spillover effects and freeriding behaviour of national fiscal authorities which could risk price and overall macroeconomic stability of the common currency area. This however brings about limitations for governments to discretionarily react to national economic needs and conditions.
This bachelor thesis addresses the resulting tension between a theoretical and fundamental need for macroeconomic policy coordination in a monetary union environment and the politico-economic reality. The main goals are: to examine the main arguments in favour and against the pact under the areas of content, objectives and enforcement design; to highlight the resulting trade-offs; and to link these to developments and reforms of the pact but also to different economic contexts, namely the time period before and the time period during and after the crisis.
The main finding is that reforms regarding macroeconomic policy coordination which were introduced after the beginning of the crisis period do not represent a rearrangement of the SGP framework and rather address the same debate on economic trade-offs only with a changed set of conditions. The reforms regarding the pact can be described as developments refocusing on the core of the pact while still shifting it in the directions of some propositions along with criticism which had been expressed long before the crisis period.
Table of Contents
1 Introduction
2 Macroeconomic policy coordination under the Stability and Growth Pact before the crisis
2.1 Stability and Growth Pact content: numerical constraints
2.1.1 Economic rationale: the role of debts and deficits as the background of the Stability and Growth Pact content
2.1.2 Critical assessment: the need for country-specific constraints
2.2 Stability and Growth Pact objective: fiscal discipline
2.2.1 Economic rationale: negative externalities and the reasons of fiscal laxity
2.2.2 Critical assessment: the need for discretion and flexibility
2.3 Stability and Growth Pact governance: coordination through rules and mechanisms
2.3.1 Rule-based architecture and mechanism design
2.3.2 Economic rationale: The reasons for and the consequences of a rule-based framework
2.3.3 Critical assessment: credibility issues with the Stability and Growth Pact
3 Macroeconomic policy coordination during and after the crisis
3.1 The Stability and Growth Pact during the crisis
3.2 Reforms regarding macroeconomic policy coordination
3.3 Comparison of ante-crisis propositions and reforms
3.3.1 Dimensions and trade-offs of the Stability and Growth Pact design
3.3.2 Requested dimensional changes compared to actual developments of the SGP
4 Conclusion
Research Objectives and Thematic Focus
This thesis examines the fundamental necessity of macroeconomic policy coordination within the Economic and Monetary Union (EMU), specifically focusing on how the Stability and Growth Pact (SGP) functioned before, during, and after the financial and sovereign debt crises. It analyzes the theoretical rationales, the inherent trade-offs in rule-based governance, and the effectiveness of subsequent reforms.
- The Stability and Growth Pact as a rule-based governance framework.
- Economic rationales behind deficit and debt constraints in a monetary union.
- The tension between fiscal discipline and the need for counter-cyclical flexibility.
- Evaluation of policy reforms (Six Pack, Two Pack, Fiscal Compact) in the post-crisis era.
- Institutional critique of the SGP’s governance and enforcement mechanisms.
Excerpt from the Book
2.1.1 Economic rationale: the role of debts and deficits as the background of the Stability and Growth Pact content
The aforementioned Delors report laid the foundation of the numerical constraints and the rule-based framework of both the Maastricht convergence criteria and the later introduced SGP. Proposal number 19 of the report states that with monetary unification "a wide range of decisions would remain the preserve of national and regional authorities. However, given their potential impact [...] implications for the conduct of a common monetary policy, such decisions would have to [...] be subject to binding procedures and rules. This would permit the determination of an overall policy stance for the Community as a whole [...] and place binding constraints on the size and the financing of budget deficits" (Delors, 1989, p. 14). Since the establishment of the EMU framework, the focus regarding rules for the functioning of a monetary union has lied on budget deficits in terms of their size and their financing. The justification is mainly based on externalities that decentralised fiscal decisions could have on the common currency union as a whole as well as price stability and effectiveness of monetary policies followed out by the single centralised monetary authority. The propositions of the report were first implemented in the Maastricht Treaty in 1992 as concrete convergence criteria. These specific numerical reference values on budget deficits and debt levels which were originally defined in the Protocol on the Excessive Deficit Procedure referred to in Article 104 TEC1 still apply today. The reference values are, as stated above, a maximum of 3% for government deficit to GDP and a maximum of 60% for the ratio of government debt to GDP.
Summary of Chapters
1 Introduction: Provides an overview of the interdependence within the EMU and defines the scope of the thesis regarding macroeconomic policy coordination and the SGP.
2 Macroeconomic policy coordination under the Stability and Growth Pact before the crisis: Analyzes the theoretical and institutional design of the SGP, focusing on numerical constraints, fiscal discipline, and rule-based governance.
3 Macroeconomic policy coordination during and after the crisis: Examines how the SGP failed to prevent the crisis and discusses the subsequent reforms, comparing them with pre-crisis academic propositions.
4 Conclusion: Summarizes findings, noting that the reforms refocused the SGP on its core while leaving its fundamental structure largely untouched.
Keywords
EMU, Stability and Growth Pact, SGP, Macroeconomic Policy Coordination, Fiscal Discipline, Excessive Deficit Procedure, Fiscal Spillover, Monetary Union, Economic Crisis, Budget Deficits, Public Debt, Eurozone, Fiscal Rules, Economic Governance, Institutional Credibility
Frequently Asked Questions
What is the core subject of this thesis?
The work focuses on the necessity and implementation of macroeconomic policy coordination within the European Economic and Monetary Union, specifically through the Stability and Growth Pact.
What are the primary thematic fields covered?
The thesis covers fiscal discipline, rule-based governance, the economic rationale for deficit and debt limits, and the impact of the Eurozone crisis on existing policy frameworks.
What is the central research question?
The thesis aims to examine the arguments for and against the SGP’s design, highlight the inherent trade-offs, and assess whether post-crisis reforms represent a fundamental shift or merely an adjustment of the existing framework.
Which scientific methods are employed?
The work utilizes a qualitative analysis based on literature reviews, legal and institutional analysis, and the evaluation of selected empirical economic data to assess the performance of the SGP.
What is treated in the main section of the work?
The main sections analyze the pre-crisis rationale of the SGP, critical assessments of its flexibility and enforcement, and the post-2007 developments including the Six Pack, Two Pack, and the Fiscal Compact.
How would you characterize this work using keywords?
The work is characterized by terms such as EMU, Stability and Growth Pact, Fiscal Discipline, Excessive Deficit Procedure, and Eurozone Governance.
How does the SGP differentiate between its "preventive" and "corrective" arms?
The preventive arm focuses on surveillance and medium-term objectives to maintain balance, while the corrective arm (Excessive Deficit Procedure) is triggered only after a breach of specific numerical reference values.
What is the "no-bailout clause" mentioned in the text?
It is Article 104b(1) TEC, which is designed to prevent joint and several liability for public debt among EMU members, theoretically forcing countries to maintain fiscal discipline.
How does the thesis explain the "freeriding behaviour" of states?
Freeriding is linked to the existence of "club goods" in the EMU, where states may rely on the central bank or other member states to handle the costs of their fiscal actions, potentially destabilizing the common currency.
What conclusion does the author reach regarding post-crisis reforms?
The author concludes that while the reforms added complexity and reinforced disciplinary mechanisms, they did not fundamentally rearrange the framework, but rather refocused on existing core objectives with a new set of experiences.
- Quote paper
- Theresa Petra Hauck (Author), 2016, Macroeconomic Policy Coordination in EMU, Munich, GRIN Verlag, https://www.grin.com/document/340157
