The fiscal constraints of the Economic and Monetary Union

The construction of the Economic and Monetary Union and its fiscal policy agenda have not been conducive for the attainment of full employment, ‘Fiscal discipline’ has been a major pillar of the structure of EMU since before its formation through the role of budget deficits and debt ratios in the convergence criteria of the Maastricht Treaty, then in the Stability and Growth Pact (SGP), and reinforced by the fiscal compact. As such, the objectives of the fiscal policies of the euro area appear only concerned with budget deficits and debt and not with economic performance including high levels of employment. Many of the countries of the euro area have been plagued by unemployment for a long time, and the favoured ‘structural reforms’ of labour markets to address high levels of unemployment have not worked. The SGP and fiscal compact seek to enforce a ‘one size fits all’ policy arrangement across all countries. These policy arrangements make no allowance for the differing needs across countries for public expenditure and investment. The central assumption of the fiscal compact relates to the feasibility of a balanced structural budget, despite the historical record that such a position is rarely achieved. Seeking to impose such a requirement on all countries without regard to their current account and savings/investment positions ensures that there will be a climate of austerity. The ‘excessive deficit procedures’ put further austerity measures in place. The fiscal compact seeks to prevent political parties campaigning on a fiscal expansion as such a policy would break the terms of the compact.