Fiscal Governance in the Eurozone: From Maastricht to crisis and back again?*
Published:
Jul 29, 2020
Keywords:
Fiscal governance fi scal rules moral hazard risk reduction risk sharing
Abstract
Determining the optimal level and instruments of fiscal governance in a monetary union of sovereign states is not an easy task. A monetary union needs to have in place a comprehensive framework of fiscal governance, which allows enough flexibility to deal with asymmetric shocks in different member states; discourage fiscal mismanagement, and minimize spillover effects when it happens; provide the means for effective fi scal management over the business cycle; and build the necessary mechanisms to deal with a common external shock. The fiscal governance designed at Maastricht was imbalanced and incomplete. It instituted a decentralized ‘individual responsibility’ approach, with no effective compliance mechanism and no support facilities for times of economic turbulence. Its weaknesses, revealed by the global financial crisis, contributed to Eurozone’s deterioration into a second, debt crisis and a double dip recession. The lack of institutional provisions for dealing with the crisis, turned its handling into a de facto political, and therefore, intergovernmental process where creditor countries, enjoying a highly asymmetrical negotiating advantage, dictated both the terms of the bailout agreements and the provisions of the new fiscal governance. Being essentially a reinforced version of the precrisis framework, the ‘reformed’ fiscal governance has tried to balance conflicting objectives with little success; it is simultaneously more constraining and more prone to political maneuvering, increasingly complex while leaving more room for variable interpretations, and ultimately it is not more effective than its predecessor. As a result, a short few years after its implementation, the calls for a new reform are multiplying.
Article Details
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Katsikas, D. (2020). Fiscal Governance in the Eurozone: From Maastricht to crisis and back again?*. Perifereia, (9), 83–112. https://doi.org/10.12681/rp.23780
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