RECON Online Working Paper 2007/14

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Theoretical Models of Fiscal Policies in the Euroland

The Lisbon Strategy, Macroeconomic Stability and the Dilemma of Governance with Governments

Stefan Collignon (London School of Economics and Political Science)

Abstract

Due to collective action problems, the Eurozone is stuck in a sub-optimal macro-policy mix of too expansionary fiscal policy and too restrictive monetary policy. Although the Lisbon Strategy pays lip service to macro-economic policy coordination, no mechanisms, institutions or effective rules are established in order to overcome the collective action problem. Empirically, the failure is demonstrated by comparing the Eurozone policy mix with the US policy mix and attributing it to the low investment performance which resulted in low average GDP growth and low average productivity growth – contrary to the aims of the Lisbon Strategy to make the EU the world’s most dynamic economy. The paper also argues that in order to overcome these difficulties, a proper government for the European Union is needed. More delegation to the European level is only legitimate if European citizens can exert their democratic rights.

Democracy – Economic growth – European Central Bank – Fiscal policy – Legitimacy – Policy coordination

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