Economic logic or political logic? Economic theory, federal theory and EMU

Abstract:

The problems associated with the implementation of the Stability and Growth Pact have inspired a number of economists to suggest recommendations for improvement and reform. The purpose of this paper is to place these recommendations in the context of federal theory and in particular to establish a link between policy choices deemed to be economically sustainable and those that may be politically sustainable. To facilitate this, the paper employs recent perspectives in the rational choice and comparative politics literature on the self-sustainability of federal systems and applies these to European monetary union. The paper concludes that the economic case both for the Stability and Growth Pact in its present form and for those proposals that provide alternative means of imposing fiscal discipline on member states is fraught with problems. In particular, the economists' prescriptions conflict with the conditions necessary for maintaining political sustainability. The paper concludes that, given the problems associated with federal level fiscal rules, fiscal discipline should be reserved to the member state policy level.

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