Rules Versus Flexibility : Does the Stability Pact Limit Budgetary Stabilisers?

Bertholt Leeftink investigates whether a potential trade-off exists between budgetary sustainability and budgetary stabilisation and whether monetary union requires closer budgetary co-ordination than currently envisaged. Leeftink argues that the Stability Pact far from limiting member countries' capability to cushion asymmetric shocks, may even facilitate stabilisation. The reason being that the prudent budgetary policy induced by the Pact reduces uncertainty about the sustainability of fiscal policy and therefore restores the stabilising properties of the budget: by enhancing credibility, sustainability allows effective stabilisation policy. Leeftink also compares the intertemporal stabilisation provided by the national budgets of EU member countries with that offered by the federal budget in the USA and finds that the two systems offer a similar degree of stabilisation