DP5830 Fiscal Policy in Europe: The Past and Future of EMU Rules from the Perspective of Musgrave and Buchanan
During the ?Golden Age? that lasted until the mid-1970s, Europe witnessed a "public finance" phase, when the three sides of Musgrave?s triangle - allocative efficiency, redistribution and cyclical stabilisation - seemed to reinforce one another. EMU's fiscal rules - embodied in the Maastricht Treaty and the Stability and Growth Pact - can be regarded as the attempt by European governments to overcome the subsequent "public choice" phase à la Buchanan which was characterised by increasing budget deficits and trade offs between allocative efficiency and redistribution. The original Stability Pact delivered only partly. A rigorous enforcement of the reformed Pact will depend on two conditions: the renewed ownership of the rules by key players and the relative weight of the perceived negative externalities of fiscal misbehaviour versus the political costs of attempting to limit the partner countries? room for manoeuvre.