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The paper argues that an improved fiscal policy process might result in improved macro-economic performance within Europe. Within EMU, a country may have difficulty ensuring stability in the face of asymmetric shocks; the response may be unstable, or, even if not, the real exchange rate might overshoot. In this context, the rules of the SGP may interfere with the control of inflation control, with the short-run stabilization of demand, and also with the longer term adjustment of intra-European real exchange rates. The authors recommend using fiscal policy to stabilize inflation and also to target the real exchange rate rather than deficits or debt. Such a policy would require a more active use of fiscal policy.
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