Monetary integration, soft budget constraints, and the EMU sovereign debt crises

30 Pages Posted: 13 Jul 2012 Last revised: 3 Aug 2012

See all articles by Thushyanthan Baskaran

Thushyanthan Baskaran

University of Goettingen (Gottingen)

Zohal Hessami

University of Konstanz, Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: 2012

Abstract

One possible explanation for the European sovereign debt crises is that the European Economic and Monetary Union (EMU) led to soft budget constraints, which in turn resulted in consolidation fatigue or even deliberate over-borrowing. This paper explores the validity of this explanation by studying how three decisive stages in the history of the EMU affected public borrowing in EU member states: the signing of the Maastricht treaty in 1992, the introduction of the Euro in 1999, and the suspension of the SGP in late 2003. The methodology relies on difference-in-difference regressions with a dataset covering 26 OECD countries over the 1975-2009 period. The findings indicate that especially the failure to censure Germany and France led to soft budget constraints in countries with traditionally high deficits and is, therefore, partially to blame for the sovereign debt crises.

Keywords: EMU, monetary union, fiscal policy, public deficits

JEL Classification: F15, F42, H62, H63

Suggested Citation

Baskaran, Thushyanthan and Hessami, Zohal, Monetary integration, soft budget constraints, and the EMU sovereign debt crises (2012). APSA 2012 Annual Meeting Paper. Available at SSRN: https://ssrn.com/abstract=2105312

Thushyanthan Baskaran (Contact Author)

University of Goettingen (Gottingen) ( email )

Platz der Gottinger Sieben 3
Gottingen, D-37073
Germany

Zohal Hessami

University of Konstanz, Department of Economics ( email )

Box 138
Konstanz, 78457
Germany

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