Fiscal Policy in the EMU
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Fiscal policy in the EMU
There is no European-wide fiscal authority. Each individual country in the EMU maintains power over its own budget and thus fiscal policy. This arrangement has advantages and disadvantages.
- In the case of economic fluctuations:
- Disadvantage: The EMU cannot smooth asymmetric economic fluctuations with fiscal transfers from one region to another.
- Advantage: The individual country can conduct its own fiscal policy to react to an asymmetric shock.
- Disadvantage: It is more difficult to coordinate policy between the European Central Bank and the fiscal authority of each individual member.
- Disadvantage: Allowing members to maintain control over their own fiscal policy could lead to a moral hazard and high budget deficits.