Budgetary Collective Action Problems: Convergence

Read the article, “Budgetary Collective Action Problems: Convergence and Compliance under the Mastricht Treaty on European Union”. Be prepared to discuss.

6. Discuss, give examples of, the problem of compliance in budgeting in the United States.

There has been a problem of compliance in budgeting in the United States where political actors and administrators often seek to evade or manipulate budgetary laws and constraints. In the United States, after state governments enacted constitutional balanced budget requirements in the 19th century, politicians and bureaucrats devised special taxing districts, non-guaranteed borrowing, off budget spending, and capital budgets to spend beyond their constitutional limits. Also, in response to Gramm-Rudman-Hollings and other budget agreements aimed at balancing the budget and restraining spending, politicians created “rosy scenarios” and endless scorekeeping and accounting tricks as efforts by government to evade or manipulate budgeting rules.

7. What are some of the problems the European Central Bank might have to deal with in relation to the European Monetary Union? Why? A government running a loose fiscal policy could threaten the independence of the European Central Bank by pressuring it to accommodate the needs of an EMU country with high deficits by weakening the euro.

Moreover, the contagion effect is possible such that if the government is successfully engaged in free riding, its behavior and that of a tolerant ECB would encourage other governments to act similarly. Finally, the fiscal stimulus produced by these deficits might “spill over” and lead to undesirable aggregate demand effects in other member countries.

8. What does the Mastricht Treaty state in Article 104C concerning member country debts? What are some of the problems with its provisions? The treaty states in article 104c that EMU member countries “shall avoid excessive” deficits and debt, where excessive was defined as no more than 3 percent of Gross Domestic Product (GDP) for budget deficits and no more than 60 percent of GDP for the national debt. These ceilings were not absolute, however, they are considered as “reference values”. The treaty declared that a country might still qualify for membership if the level of deficit and debt as a percent of GDP “has declined substantially and continuously and reached a level that comes close to the reference value”. Some of the problems with its provisions have been separating capital or investment expenditures and debt from the operating budget. Furthermore, such a limitation would cripple anti-cyclical policies during recessions. There have also been measurement problems, multi-year budget targets were ruled out due to their dependence on fiscal estimates rather than actual revenues, expenditures, and debt, and precise deficit targets were objected for greater fiscal flexibility because they ignored broader economic and fiscal dynamics.