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RESEARCH PRODUCT

The Economic Rationale of Fiscal Rules in OCAs: The Stability and Growth Pact and the Excessive Deficit Procedure

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This chapter examines the case of different regions within a single country that wish to share a common currency, even though they have divergent trends in unemployment, inflation, wages, non-wage costs and productivity. This situation compares with the case of a group of EU countries, each with its own decentralised national budget, that have established a monetary union and that are facing asymmetric shocks. As such an economic context requires fiscal commitments from national governments, we analyse the economic rationale of setting fiscal rules for a common currency area and the resulting EU institutional frame for the Stability and Growth Pact (SGP) and the Excessive Deficit Procedure (EDP). We discuss the legal basis for the EDP and the relevant accounting definitions. We also provide the initial settings of the SGP, as well as a summary of the contents and the related assessment of the revised SPG in March 2005. The chapter concludes with a brief comment on the so-called “Six Pack” adopted by the EU in December 2011, which provides a wide range of macroeconomic indicators to improve the governance of EMU within Eurozone countries, through the Surveillance of Macroeconomic Imbalance Procedure.