Fiscal policy in EMU has to be evaluated in the light of the changing nature of capital mobility in Europe and its effects on growth. Most arguments about the effects of fiscal policy in EMU assume that we live in a perfect competition world with a unique natural rate of output for each country....

There are new monetary and fiscal frameworks in place for the countries in the Euro Area. The European Central Bank has a remit to maintain price level stability in the medium term, and it has developed a two pillar strategy, with interest rates being set in relation to a reference value of M3...