The political economy of fiscal policy in EMU

Abstract:

This paper treats low inflation in the Economic and Monetary Union (EMU) as a collective action problem for ECOFIN. The Stability and Growth Pact (SGP) and more broadly the Broad Economic Policy Guidelines (BEPG), operating against a background of the European Central Bank (ECB) and wage-setting, are the instruments for this. The ECB delegates sanctioning to the member-states while preserving the authority to set interest rates. Labour relations systems in different countries pursue disinflationary wage settlements. The BEPG (including the SGP) therefore have to be understood as a critical element in a signalling game between the ECB, ECOFIN and the wage-setting systems.