FISCAL POLICY AND EXTERNAL CONSTRAINT IN THE EUROPEAN MONETARY UNION
FISCAL POLICY AND EXTERNAL CONSTRAINT IN THE EUROPEAN MONETARY UNION

Author(s): Rosaria Rita Canale
Subject(s): Economy, Supranational / Global Economy, Business Economy / Management
Published by: ASERS Publishing
Keywords: fiscal policy; debt crisis; European Monetary Union
Summary/Abstract: The European policy model was built upon the idea that state intervention has just a destabilizing role. The chapter puts in doubt this conclusion and connects fiscal crises with the balance of payments. A stylized model is presented. Its results are: 1) public expenditure can have positive effects not only on growth but also on deficit and debt if it is not accompanied by an a interest rate increase by the Central Bank; 2) when an external constraint is introduced fiscal policy can have negative effects if it comes with a balance of payment deficit. The same negative effects result from whatever shock causing negative expectation about the future growth of the national economy. The results suggest that to make a currency union work it is necessary to overcome national boundaries.

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