| Government budgetary positions are an important issue for members of the EMU and those who are awaiting entrance. Under the Maastricht treaty in the run up to the creation of the EMU and under the Stability and Growth Pact (SGP) since its formation, countries are required to keep their budget deficit to GDP ratio under three percent. The majority of current EMU members had to reduce their deficits in order to join the EMU. Maintaining these deficit levels under the SGP has proven difficult for a number of EMU countries. The first chapter of this dissertation looks at legislated fiscal actions of five EMU members. By classifying these actions into structural, temporary, or mixed, I conclude that deficit rules have played an important role in inducing structural changes to budgetary positions. However, the numerical nature of these restrictions has led to temporary changes that detract from needed structural change. In the second chapter I empirically test why budgetary positions worsened soon after the formation of the EMU and find fiscal fatigue to be an important explanation. As the current members of the EMU wrestle with the deficit question, the new member states are watching the influence that the EU's rules have on the current members' budgetary positions. In the final chapter I construct a dynamic general equilibrium model of a new member state, the Czech Republic, in the process of catching-up to Western Europe. The catching-up process leads to budget surpluses and inflation. I simulate and compare welfare outcomes of fiscal responses to inflation under the direction of the EU. I also simulate and compare welfare outcomes of the fiscal authority responding to political pressure to reduce accumulated government surpluses. |
