Fiscal convergence and discipline in monetary unions: Evidence from the European Union

Abstract

We empirically examine the fiscal discipline of the recent ten European Union (EU) members with respect EU15, using the Maastricht fiscal convergence criteria. Our tests include alternative measures of fiscal discipline and employ vastly flexible methods, allowing for structural breaks. The results suggest poor fiscal discipline in the Union in general, suggesting that monetary unions may not provide fiscal discipline for its members. We also provide some estimates of the impact of fiscal indiscipline on interest rates and find that capital markets may require risk premium for lack of fiscal discipline.