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Introduction: The Role of Fiscal Rules and Institutions in Shaping Budgetary Outcomes
Abstract
Economic literature has provided a wide range of analyses on how taxes, government spending and budget balances should be set over the cycle in order to ensure sound and sustainable fiscal policies. However, recent economic history has shown that fiscal policy often departs from what could be considered optimal. The large increases of debt ratios over recent decades and the tendency to conduct pro-cyclical fiscal policies, notably in good times, are well-known examples of such sub-optimal behaviour. The causes for the deficit and pro-cyclical biases have been extensively researched in the literature. The explanations generally point to political economy considerations, notably to the fact that policy-makers may not always have the right incentives to conduct sustainable and time-consistent policies in the long run.
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References
Alesina, A. and G. Tabellini (1990), ‘A Positive Theory of Fiscal Deficits and Government Debt’, The Review of Economic Studies, 57(3) (Jul. 1990), 403–14.
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Despite reforms during the crisis, EMU remains in the middle of the river. There is by now consensus in both political circles (see the Rome Declaration of March 2017) as well as academic ones (e.g. Enderlein, Letta et al. 2016, Bénassy-Quéré and Giavazzi 2017) on the need to take further steps to complete EMU. There are, however, still diverging views on the problems that need to be overcome and, partly as a consequence, on the measures to be taken. Against this background, the Commission has re-launched the debate, with a Reflection Paper on the deepening of the EMU (European Commission 2017).1 It builds on the proposals in the Five Presidents’ Report (Juncker et al. 2015) and suggests a series of concrete steps on how to complete EMU by 2025. But it also marks an important shift in one important aspect: the need for a better balance between common tools for shock absorption (i.e. risk sharing) and a greater role for markets as incentives for fiscal and financial discipline (i.e. risk reduction).
EMU has been reformed but is still in an unsustainable equilibrium
Despite the progress in recent years, EMU today continues to rest on an unsustainable equilibrium (Figure 1): the incomplete nature of the financial union (banking union and capital markets union) and the absence o