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The process of European integration that culminated in European monetary union was based on the belief that fiscal discipline is a necessary precondition for a functioning monetary union. This belief has been enshrined in the fiscal criteria of the Maastricht Treaty setting deficit and debt limits for EMU member states. The Stability and Growth Pact (SGP) is in keeping with the general thrust of the Treaty insofar as it attempts to establish an enduring regime that will circumscribe fiscal policy choices. The SGP specifies the deficit limit over the business-cycle, details monitoring procedures and names sanctions for incurring an excessive deficit. Policy-makers thus have clearly relied on formal fiscal restraints as mechanism to safeguard public discipline. Until now, they have largely refrained from incorporating regulations which try to preclude a unsustainable development of public finances through the allocation of decision-making authority and structuring of budgetary processes. During the immediate run-up to EMU the Maastricht fiscal restraints apparently were quite effective in re-aligning public finances in Member states showing a large excessive deficit. However, there are some objections concerning this initial sign of institutional effectiveness. First, the restraining effect is much less apparent in the early stages of the post- 1992 for some bigger countries, where the deficit actually increased rather than decreased. Second, most countries consolidated their public finances later on until 1997, but empirical evidence indicates that they probably would have done this even without the Maastricht fiscal criteria, given their debt level and the macro-economic environment at the time. Although

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Formal Fiscal Restraints and Budget Processes as Solutions to a Deficit and Spending Bias in Public Finances: US Experience and Possible Lessons for EMU