Fiscal Deficits in Monetary Unions: A Comparison of EMU and United States

Abstract

The stringent deficit criterion followed by the EMU is motivated by the belief that a sustainable fiscal arrangement is a must for a viable monetary union. In this paper we provide an empirical analysis of the issue of deficit convergence in the Euro area and compare and contrast the Euro-zone deficit with the US federal deficit. We find (i) evidence of fiscal convergence in most of the Euro-11 countries; (ii) achievement of 3% criteria by all Euro-countries immediately before the launch of the Euro; (iii) similar magnitudes and variability of deficit in Euro-11 and US and that (iv) Europe is subjected to smaller fiscal shocks than the US.Deficit; EMU; Monetary Union; Monetary