ABSTRACT
This chapter deals with the imbalances in the Union, both those pre-existing to its creation and those that loomed later. It compares expectations as to their permanence to realizations, ending with the private and public debt crisis in more recent years. The chapter explores the effects of the monetary and fiscal discipline imposed by the European institutions and policies. It focuses on the incentives arising before and after the institution of the Economic and Monetary Union (EMU), due to the change in the perspectives, the incoming budget constraint and the different signals. The chapter discusses the interconnection between signals, moral hazard and the adverse selection of politicians. It presents a model of signalling imbalances in the EMU. The “transition” to the EMU of the various countries, in particular of the peripheral countries that were not part of the European Monetary System, implied a number of effects on incentives.
