Political Economy of Eurozone Crisis: Toward Political Union or Disintegration?

* Objectives

The extent and dynamics of government deficits and debts is a feature of most European economies, which cannot be neglected. 
Due to real debt consequences, the problem of government deficits and debts has traditionally been in the centre of interest of 
public economics theoretical and empirical research. The problem of government deficits and debts has recently been highlighted
by the economic crisis, which had made many governments involved in a massive discretionary fiscal stimulus. The consequent 
structural deficits rapidly accelerated the government debts. Obviously, due to the time inconsistency of government policies, the 
sustainability of public finances of many countries is at stake. This, of course, provides very strong motivation to search for 
mechanism to solve the deficit bias of public finance. This paper tries to identify motivation for specific positions during the crisis
at the level of EMU member countries. Then author provides arguments for future development of EMU. Two possible scenarios are 
discussed: the transformation of EMU (EU) to highest level of economic integration according Ballassa scale – political union or collapse 
of EMU project and process of disintegration. 

* Data/Methods
The first part of the paper offers a view of deficit deviation of government finances within EU countries and offers some explanations 
of it. Further, the possible role of fiscal rules is investigated. The sources of data used for analysis were AMECO and Fiscal rules 
database (EC, DG ECFIN).
 * Results/Expected Results
Generally, data analysis shows a relatively clear picture of the public finance deficit bias and the government debt accumulation in most EU countries. 
However, a closer examination reveals differences among countries. Important role in explaining the deficit bias can be attached to 
the political and institutional factors. Interestingly (but in line with expectations), these factors have unequal explaining power in 
different countries. Results of this paper suggest, that the variability of fiscal rules has, in spite of various methodological difficulties, 
good potential to explain different levels of fiscal discipline in EU countries. Between 1990 and 2008, EU countries generally experienced 
an increase in strength and coverage of numerical fiscal rules. The evaluation of fiscal rules effects does not give unambiguous results. 
In spite of the fact that there probably exists a positive causality between numerical fiscal rules and cyclically adjusted primary balances of 
government budgets, the discretion of government to involve in time inconsistent fiscal policy is still high.