The political economy of fiscal policy coordination in EMU: from disciplinarian device to insurance arrangement

The fiscal policy framework of EMU and possible reforms of the Stability and Growth Pact have elicited much debate. The pact has been predicated on a conception of it as a device to discipline Member States. This gives rise to a paradox in which the credibility of policy-makers it is supposed to enhance is undermined. The article puts forward an alternative conception of policy co-ordination — collective insurance — designed to enhance the effectiveness of fiscal stabilization. The two approaches lead to different interpretations of how domestic interests affect policy-making. The insurance approach is shown to support various reform proposals by the Commission.