1. Mr. Massimo M Beber Fellow in Economics Sidney Sussex College Cambridge CB2 3HU mb65@cam.ac.uk www.cus.cam.ac.uk/~mb65/mpes European Economics Lecture 8 EXPENDITURE MANAGEMENT II: FISCAL POLICY AND THE GSP (Provisional Version: last updated 24 th February 2006) M.Phil. in Contemporary European Studies 2006/7 ©Massimo M Beber 2006

2. 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?

4. TRADE-OFFS IN THE INTERNATIONAL FINANCIAL ARCHITECTURE Monetary and Macroeconomic Sovereignty Stable Real Exchange Rate Free Mobility of Capital A,D B C’’, C C’ A:the Gold Standard as an “anchor” to the price level B: the Bretton Woods compromise C: the German model, Mrs Thatcher’s monetarist experiment C’, C’’: the Keynesians’ Last Hurrah between autarchy and stagflation D:back to the anchor: EMU, currency boards, dollarisation...

5. Bretton Woods StagflationERM disinflation Transition to EMU

6. Source: HM Treasury (2003) Government Policy on EMU and the Five Economic Tests, Ch. 1. [WWW] Gordon Brown’s economic tests for British Membership

7. Source: Gordon Brown’s Budget Speech, 17th March 2004. (HM Treasury 2004a [WWW]) REPORTS OF THE DEATH OF (CREDIBLE, NEW-KEYNESIAN) ECONOMICS HAVE BEEN GREATLY EXAGGERATED...

8. 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