Monetary union and fiscal and macroeconomic governance

This paper analyses three questions related to the EU/EMU integration infrastructure: (i) interrelation between monetary and fiscal integration; (ii) interrelation between monetary integration and closer coordination of macroeconomic policies and (iii) fiscal discipline vs. fiscal solidarity. On the first issue, we suggest that rationale of further fiscal and political integration should be guided by the cost-benefit analysis based on the theory of fiscal federalism rather than OCA theory. On the second issue, we express conceptual and practical doubts regarding the way in which the Macroeconomic Imbalance Procedure has been designed and operated. On the third issue, we believe returning to the market discipline (based on credible danger of sovereign default) supplemented by clear and consistently enforced fiscal rules will have a key importance for long-term sustainability of a monetary union in Europe and avoiding dysfunctional fiscal federalism.