Once upon a time, there was a European dream: Joining Europe and the European Monetary Union would bring prosperity, fiscal stability, and a strong European currency to master the challenges of the continent. The forthcoming elections this Sunday are held in the face of rising unhappiness about Europe, although the need to deal with the substantial challenges would require more collaborations and a stronger, not weaker Europe. Among the challenges are the Russian aggression, climate change, terrorism, illegal immigration, labor shortages, US-China tensions, public health issues, and the rise of the right across European member countries, among many more issues. Hence, voting is an obligation in the current European elections.
Fiscal restraint and the political economy of Europe: In the past, member states instrumented the popularity of the European idea to enforce national fiscal discipline and implement important reform policies. Looking back at what happened over a quarter of a century:
The paper “Fiscal Restraint and the Political Economy of EMU” by Ralph Rotte and Klaus F. Zimmermann, published in Public Choice in 1998, discussed the impact of the Maastricht Treaty on fiscal policies.
The authors argued that the Maastricht Treaty provided a unique international commitment that enabled governments to follow restrictive fiscal policies by attributing their negative effects to Europe. This allowed them to implement austerity measures despite rising unemployment or declining growth.
The authors suggested that the popularity of the European idea was used to enforce fiscal discipline. While the principle of delegation had become well established on the national level for monetary policy, fiscal policies remained in the hands of policymakers depending on rent-seeking interest groups.
The study outlined the political-economy framework and presented new econometric evidence. The findings provided insights into the dynamics of fiscal restraint within the context of the European Monetary Union.
Abstract: “While the principle of delegation has become well established on the national level for monetary policy, fiscal policies remain in the hands of policy makers depending on rentseeking interest groups. We argue that the Maastricht Treaty provides a unique international commitment that enables governments to follow restrictive fiscal policies by attributing their negative side-effects to Europe, and to implement austerity measures despite rising unemployment or a decline in growth. Hence, the popularity of the European idea is instrumented to enforce fiscal discipline. The paper outlines the political economy framework and presents new econometric evidence.”
From the conclusions: “Our empirical evidence shows that there is a distinguished effect of the Maastricht commitment on fiscal policies in Europe, and strengthens the conjecture that it is the support for the EU and the character of EMU as a genuinely European project which has made a fundamental change in economic policy all over Western Europe possible. The unique combination of the international character of the Maastricht commitment and the Europeans’ persistent support of the EU project thus provide the framework for fiscal reform in Europe.”
Rotte, R., Zimmermann, K.F. Fiscal restraint and the political economy of EMU. Public Choice 94, 385–406 (1998).
https://doi.org/10.1023/A:1005042015560
Featured image: arnaud-jaegers-unsplash
