Fiscal policy in EMU:: Towards a sustainability and growth pact?

This paper takes stock of the academic and policy discussions on the fiscal institutions of EMU confronts the framework in place with what is known of the desirable properties of fiscal policy in a monetary union, and discusses possible improvements. We start with a discussion of three requirements for the fiscal framework of a monetary union: it should be conducive to public finance sustainability, leave room for stabilization at the national level, and encourage structural reform. We then examine how the Stability and Growth Pact (SGP) measures up to these requirements and find that it has mostly failed on all three accounts. Whether the 2005 reform of the SGP fixes those deficiencies remains an open issue. To this end, we propose five building blocks towards an effective SGP: a better concept of sustainability harmonized general government balance sheets; appropriate targets; refined procedures; and better institutions.