In the 1970s, research and debate on macroeconomic issues focused largely on monetary policy. In the 1980s, the focus shifted to fiscal policy, and much of the recent debate about EMU has thus been concerned with its implications for the conduct, financing, and coordination of national fiscal policies.

The dimensions of fiscal policy

Any analysis of fiscal policy must deal with three macroeconomic issues: the stabilization problem, the coordination problem, and the solvency problem. All three take on special forms in a monetary union.

The stabilization problem

When a country joins a monetary union, forgoing the use of monetary and exchange rate policies to stabilize its national economy, the independent use of fiscal policy becomes more attractive, despite the political obstacles to fiscal flexibility. It is indeed the only instrument available for dealing with country-specific shocks – disturbances different in nature or timing from those affecting other members of the union, as well as those that are common to all members but affect them differently.

It is easy to devise hypothetical cases in which fiscal policies, used independently, can offset country-specific shocks without harming other members of a monetary union or forcing them to alter their own fiscal policies. It is equally easy, however, to devise cases in which a change in one country's fiscal policy affects other countries adversely and thus leads them to change their own fiscal policies in ways that nullify the intended effects of the initial policy change.