ABSTRACT
This chapter establishes the need for a more active fiscal policy to be utilised within the Keynesian model of EMU. This will involve the replacement of the current approach to constrained fiscal policy with an approach based upon the principles of functional finance – i.e. that the objective of fiscal policy is to be measured by its impact upon the real economy rather than the maintenance of any arbitrary accounting rule on balanced budgets or ‘sound finance’. Fiscal policy would become the principal instrument with which to counteract asymmetric external shocks whilst simultaneously promoting full employment within each individual economy. This would take place primarily at national level, but there could be a role for the establishment of a form of fiscal federalism designed to stabilise EMU against external asymmetric shocks. The ICU system would complement these policy goals by seeking to ensure that such macroeconomic management would not be fatally undermined by leakages from the circular flow of income through the recycling of idle balances from surplus to deficit economies within the currency zone.
