JEL-Keywords: Fiscal Policy.
JEL-Classification: E62.

This paper’s main points:

• The consolidation of public finances has improved in all 15 EU countries in the 1990s. This has been due to restrictive fiscal policy stances and the improvement of the macroeconomic environment in recent years with lower interest rates and higher growth.
• Although in most countries anticyclical behaviour is observable, this does not seem to have caused the rising debt levels. Rather the high interest burden and low growth were the principal causes for the rising debt ratio in EU countries.
• The fiscal policy reactions in recent years have been consistent with stable government finances and sustainable budgetary positions . The high debt levels are of no significant concern for the sustainability of EMU. A continuation of the fiscal policy stance of recent years would imply a stabilisation of the debt ratio around 70% given Europe’s low growth rates. However, the speed of policy adjustment is likely to accelerate under the provisions of the Growth and Stability Pact.
• The sustainability of the debt position of highly indebted countries like Italy would be significantly higher within EMU than outside.
• Growth is expected to improve in the single market through the elimination of the exchange rate risk and lower interest rates. This is an important contribution to the persistent consolidation of public finance and will favour private investment and economies of scales for firms.

In conclusion: The countries’ ability and willingness to consolidate public finances will be better within Monetary Union than outside.