The crisis of economic governance in the European Union

This paper deals with the origin and the evolution of the European system of fiscal rules and discusses the perspectives for future developments. The early debate about the design of establishing a monetary union in a not optimal currency area, with decentralized fiscal policies, is reconsidered. The main developments of the European rulesDbased fiscal governance are discussed, starting with the Maastricht Treaty and going through the institution and the evolution of the Stability and Growth Pact (SGP). After drawing a brief outline of the system of fiscal rules in force at present, the key issue of the estimation of potential output is considered. The shortcomings of the estimation practices are, to a large extent, responsible for the inadequate results produced by the shift from nominal to structural targets, which was the main aim of the SGP reforms. The paper concludes sketching the debate on the reform of the European economic governance.