| Abstract: | Fiscal discipline to safeguard the credibility of the singlemonetary authority and fiscal flexibility to respond to country-specificshocks are two core principles governing budgetary policy inEMU. The Stability and Growth Pact aims at ensuring the firstobjective. To comply with the requirements of the pact, EU membersneed to achieve a 'close to balance or surplus' position andchange their budgetary behaviour in periods of cyclical upturnsby refraining from spending the 'growth dividend'. Past experienceshows that fiscal laxity does not buy more effective stabilization.Once EMU countries have achieved their medium-term target, theirautomatic stabilizers will be able to operate fully, thus helpingin smoothing out cyclical fluctuations. The main potential problemsin the implementation of the pact may arise in the early yearsof EMU, during the transition to a balanced budget, in the eventof a slow-down in economic activity. |
