While these two arguments apply in fact to any country, the need for fiscal discipline in a monetary union, like the one we have in Europe, is even higher. An important reason for this is that the negative side-effects in the form of higher interest rates of expansionary budgetary policy in one country, are not entirely borne by this country alone.
Instead, these are widely shared by all their fellow participants in the monetary union. To guarantee budgetary discipline and to strengthen mutual trust in each other’s budgetary policy, a fiscal policy framework has been established in Europe. This framework basically consists of two rules. The EU Treaty stipulates that Member States should avoid excessive deficits, which are defined as deficits above 3% of GDP.