ABSTRACT
This chapter seeks to complement and extend the existing literature that discusses the evolution of fiscal policy within the context of an emerging Economic and Monetary Union (EMU). It suggests that the development of a discretionary or semi-automatic stabilisation mechanism is both feasible and essential for EMU to succeed. The chapter outlines the principal economic challenges EMU creates for national and federal fiscal policy, before evaluating the justification for an expansion of the federal budget, or automatic stabiliser mechanism to satisfy these new responsibilities. The variant of EMU agreed in the Treaty on European Union (TEU) involves the replacement of national currencies with a community currency, whilst monetary policy is transferred to a European Central Bank (ECB) that determines a single interest rate encompassing the whole EMU zone. The chapter explains the likely distributional consequences of budgetary enlargement and the establishment of a semi-automatic stabiliser and how such an expansion in federal EU resources might impact upon all potential participants.
