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Mr. Massimo M Beber Fellow in Economics Sidney Sussex College Cambridge CB2 3HU [email protected] www.cus.cam.ac.uk/~mb65/mpes European Economics Lecture 8 EXPENDITURE MANAGEMENT II: FISCAL POLICY AND THE GSP (Provisional Version: last updated 24th February 2006) M.Phil. in Contemporary European Studies 2006/7 ©Massimo M Beber 2006 Lecture Outline • From budget to financial statement • One market, one money, many budgets • The political economy of aggregate expenditure management • Maastricht criteria vs the “5 economic tests” • The re-nationalisation of fiscal policy? TRADE-OFFS IN THE INTERNATIONAL FINANCIAL ARCHITECTURE C’ B C’’, C A,D Free Mobility of Capital A: B: C: C’, C’’: D: the Gold Standard as an “anchor” to the price level the Bretton Woods compromise the German model, Mrs Thatcher’s monetarist experiment the Keynesians’ Last Hurrah between autarchy and stagflation back to the anchor: EMU, currency boards, dollarisation... REAL AND NOMINAL EXCHANGE RATES - ITALY Bretton Woods Stagflation 400 Transition to EMU ERM disinflation 300 250 200 150 100 Source: AMECO Ch. 15 (accessed Dec. 05) Nominal Real 20 04 20 02 20 00 19 98 19 96 19 94 19 92 19 90 19 88 19 86 19 84 19 82 19 80 19 78 19 76 19 74 19 72 19 70 19 68 19 66 19 64 19 62 50 19 60 1995=100 - exchange rate against EU-14 350 Gordon Brown’s economic tests for British Membership Source: HM Treasury (2003) Government Policy on EMU and the Five Economic Tests, Ch. 1. [WWW] REPORTS OF THE DEATH OF (CREDIBLE, NEW-KEYNESIAN) ECONOMICS HAVE BEEN GREATLY EXAGGERATED... Source: Gordon Brown’s Budget Speech, 17th March 2004. (HM Treasury 2004a [WWW]) Conclusions • Europe’s macroeconomic constitution is asymmetric - unified monetary policy but no (legal) fiscal stabilisation mechanisms • The Maastricht architecture reflects an increasingly obsolete 1980’s policy consensus, while (limited) stabilisation policy has since been rehabilitated • The recent interest in national fiscal rules may offer greater, UK-style fiscal flexibility to EMU