3. Fiscal Sustainability and Fiscal Rules in a Monetary Union: Theory and Practice in Europe

Over the last three decades, both macroeconomists and policymakers involved in fiscal policy have mainly focused on long-run issues. The consensus was government should adopt rules ensuring the long-run sustainability of public finance, and let an independent central bank take charge of controlling inflation and stabilizing GDP growth and unemployment. To a large extent, the Great Recession has challenged this view, and (partially) restored fiscal policy as a powerful macroeconomic stabilization instrument, while insisting on long-run fiscal sustainability requirements. First, this chapter reviews the literature on fiscal sustainability analysis and monetary-fiscal interactions; in particular, the author argues that long-run fiscal sustainability requirements and countercyclical fiscal policy should not be seen as necessarily antagonistic. Second, he proposes a critical appraisal, based on theoretical and empirical research, of the European fiscal framework and argues why it might be both too tight and too loose.