Monetary Integration, Soft Budget Constraints, and the EMU Sovereign Debt Crises

24 Pages Posted: 4 Oct 2017

See all articles by Thushyanthan Baskaran

Thushyanthan Baskaran

University of Goettingen (Göttingen)

Zohal Hessami

University of Konstanz, Department of Economics

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Date Written: November 2017

Abstract

One possible explanation for the European sovereign debt crises is that the European Economic and Monetary Union (EMU) gave rise to consolidation fatigue or even deliberate over‐borrowing. This paper explores the validity of this explanation by studying how three decisive stages in the history of the EMU affected public borrowing in EU member states: the signing of the Maastricht Treaty, the introduction of the Euro, and the suspension of the Stability and Growth Pact (SGP). The methodology relies on difference‐in‐difference regressions for 26 OECD countries over the 1975–2009 period. The findings indicate that the Maastricht treaty reduced deficits especially in traditionally high‐deficit countries. In contrast, the introduction of the Euro and the watering down of the original SGP led on average to higher borrowing. These results indicate that the introduction of the Euro and the suspension of the SGP led to soft budget constraints in the EMU.

Keywords: EMU, fiscal policy, monetary union, public deficits

Suggested Citation

Baskaran, Thushyanthan and Hessami, Zohal, Monetary Integration, Soft Budget Constraints, and the EMU Sovereign Debt Crises (November 2017). Economics & Politics, Vol. 29, Issue 3, pp. 252-275, 2017, Available at SSRN: https://ssrn.com/abstract=3047514 or http://dx.doi.org/10.1111/ecpo.12093

Thushyanthan Baskaran (Contact Author)

University of Goettingen (Göttingen) ( email )

Platz der Gottinger Sieben 3
Gottingen, D-37073
Germany

Zohal Hessami

University of Konstanz, Department of Economics ( email )

Box 138
Konstanz, 78457
Germany

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