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To Centralise or Decentralise? Implications of German and US Fiscal Performance For EMU

Michael Herman

Since the 2010 sovereign debt crisis, debates on fiscal discipline in the EU have centered on the need tocentralise further economic governance under EMU. Reforms to the Stability and Growth Pact (SGP), thebasis for EMU's supranational governance framework, have sought to strengthen centralised mechanismsof fiscal surveillance and enforcement. Is this the correct approach? The paper poses two related questions. 1) Has increased centralization of EMU's governance framework succeeded in instilling fiscal discipline among Member States? 2) If not, under what conditions could fiscal discipline be achieved? The paper argues that the Stability and Growth Pact (SGP) has failed because it is incompatible with budgetary sovereignty prescribed by the Maastricht Treaty. It also argues that the specific rules envisioned in the Pact have consistently failed to find an appropriate balance between rules and discretion. Using fiscal data from the US and Germany, the paper argues that fiscal discipline can best be achieved through the strengthening of national instead of supranational fiscal institutions. However, this is contingent upon a firm re-commitment to the Maastricht Treaty's 'no-bailout principle' and the transferal of financial sector risk from the national to the supranational level.e

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