Fiscal policy in EMU: Rules, discretion and political incentives

The fiscal philosophy of EMU's budgetary rules is to bring deficits close to balance and then let automatic stabilisers play freely. Given the large tax and benefit systems in Europe, relying mainly on automatic stabilisation would allow a relatively high degree of cyclical smoothing while avoiding the typical pitfalls of fiscal activism. While this is, in most circumstances, good economic policy, it is evidently not regarded as good politics. The current difficulties of EMU's fiscal policy framework have little to do with its alleged fault lines and much to do with the resurgence of electoral budget cycles amid a weak system of incentives to abide by the agreed rules.

http://ec.europa.eu/comm/economy_finance/publications/economic_papers/2004/ecp206en.pdf http://ec.europa.eu/comm/economy_finance/publications/economic_papers/2004/ecp206en.pdf

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