The consequences of adopting a single currency in Europe encompass four popular fiscal themes: first, whether highly indebted countries can benefit from entering EMU via the reduction in interest rates that credible monetary policies imply; second, the relationships between monetary and fiscal aggregates; third, the practical implications of the debt and deficit criteria; and fourth, the interrelationships between budgetary deficits and the stock of public debt.

In Discussion Paper No. 1505, Andrew Hughes Hallett and Peter McAdam examine these issues. They discover first that the existence of a credibility dividend depends on the way that real interest rates are affected, and, thus, relies on the fall of nominal interest rates being larger than the fall in inflation. Second, they argue that the inevitable linkages between monetary and fiscal aggregates imply that credibility in the monetary sphere cannot be independent of fiscal decisions. Markets, they argue, have been largely correct in their focus on the required monetary accommodation to fiscal stances. Third, the authors argue that for debts and deficits to fall to the specified limits, growth rates must exceed their current levels by much more than current history justifies, especially if the Maastricht timetable is to be followed. Lastly, they demonstrate that, because of the stock-flow distinction, far from being necessarily complementary targets, deficits and debts may actually move in opposite directions and thus undermine each other. These arguments lead the authors to announce the ‘funeral’ of the Maastricht Treaty.