Fiscal Rules in European Monetary Union: a Comparison between Stability and Growth Pact and the Golden Rule

Introduction 4 1. Introduction In less than six months the Euro (European single currency) will be effectively introduced. During the process of the creation of European integration a lot of effort has been made by European Monetary Union (EMU) member states in order to generate a positive and common framework, in which to introduce the single currency. There have been many milestones in this long process: the introduction of European supranational institutions such as the European Commission, the Parliament and the European Court of Justice, the introduction of the common market for goods, labour and capital, the creation of the European Central Bank. The introduction of the common currency has also been preceded by the introduction of some budgetary regulations for all countries. In this thesis we will focus on these budgetary regulations that countries joining the EMU have to respect before and after joining the EMU. The budgetary discipline has been set up in two different stages. In the first stage there was The Treaty of European Union (Maastricht, 1992). The core of this treaty defines the requirements for achieving a sound budgetary position in order to join the single currency and maintain budgetary prudence. In the second stage, the general principles and procedures of the Treaty were spelled out in detail in a secondary legislation, which forms the so-called Stability and Growth Pact (SGP). This pact was adopted by the European Council in Amsterdam (1997). Both of these treaties impose some fiscal constraints upon governments wishing to join the EMU. These fiscal constraints also imply that most capital expenditure will have to be financed from current revenues. This thesis discuses the following key issues: do the