ABSTRACT
Introduction The pace of European integration accelerated considerably during the past decade, stimulated by the agreement to form the SM and enhanced by the process of forming an EMU amongst EU member states. However, whilst the nature of this community of nations significantly changed over this period, many aspects of the EU financial and administrative apparatus failed to evolve to meet these challenges. Whilst detailed consideration has been given to whether individual member states will meet the MCC for membership of EMU, the inadequacies of the EU’s budgetary arrangements have received far less attention. Nevertheless, the advent of EMU would necessitate a fundamental review of fiscal policy within the EU. The present crisis talks, arising from the Greek fiscal crisis and destabilization of the eurozone, have meant tentative moves in this general direction, but as this chapter is written, a final consensus on these issues remains elusive and further work would appear necessary. The MCC, combined with the proposed stability pact, would both reduce national fiscal flexibility whilst the operation of EMU promises to strengthen financial market integration and thereby reduce seigniorage revenues particularly for the Mediterranean member states. The combination of these factors will constrain the ability of participants to stabilize their own economies within an EMU which requires the transfer of monetary and exchange rate instruments to federal rather than national control. If perfect convergence had occurred and could be sustained in the long term, these changes would be of little importance. However, the likely persistence of asymmetric external shocks requires an alternative stabilizing mechanism to be developed to prevent monetary union being undermined by diverse economic and social forces to the extent that it could collapse, as have almost all other similar international monetary arrangements that have not been based upon a firm national identity.1 This chapter seeks to complement and extend the existing literature which discusses the evolution of fiscal policy within the context of EMU, and examines the potential for fiscal federalism to negate certain design flaws within EMU economic architecture, whilst providing a degree of stabilization for a diverse eurozone economy.
