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Monetary integration, soft budget constraints, and the EMU sovereign debt crises
Author(s) -
Baskaran Thushyanthan,
Hessami Zohal
Publication year - 2017
Publication title -
economics and politics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.822
H-Index - 45
eISSN - 1468-0343
pISSN - 0954-1985
DOI - 10.1111/ecpo.12093
Subject(s) - maastricht treaty , stability and growth pact , economics , consolidation (business) , economic and monetary union , european monetary union , debt , international economics , deficit spending , sovereign debt , treaty , european debt crisis , sovereignty , european union , monetary economics , european integration , macroeconomics , member states , monetary policy , political science , finance , politics , law
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.