One answer to these concerns is to allow member countries – now expanded to include Austria (1995), Finland (1995), and Sweden (1995) — to run decentralized, country-specific deficit fiscal policies. But Maastricht, as recently amended by the inclusion of a Pact for Stability and Growth, will deny member countries this policy assignment. Concerned that economic spillovers from high deficit countries would threaten promised price stability in EMU monetary policy, the Stability Pact imposes tight limits on allowed deficits. Countries included in the EMU must maintain an overall budget deficit for each fiscal year equal to or below 3 percent of GDP. If this target is not met, the violating country will be required to make a noninterest bearing deposit of .2 percent of GDP up to a maximum of .5 percent of GDP for increments in deficits above 3 percent. If deficits do not fall within two years, the deposit is lost and becomes a fine. Only in exceptional circumstances of a more than 2 percent decline in GDP can the deficit regulation be ignored.

Facing constraints on their use of counter-cyclical deficit policies, yet bearing the costs of economic downturns, the members of the new EMU have begun to redesign the political institutions for making economic policies. If member countries are not allowed to run significant deficits, and EMU monetary policy remains committed to the objective of price stability, then EMU (i.e., central government) counter-cyclical measures will be needed (Inman and Rubinfeld 1994). These might include EMU funded and managed unemployment insurance and/or crossregion transfers. Neither policy is precluded by Maastricht and cross-region transfers are now an established EMU policy. Both unemployment insurance and regional transfers are redistribution policies, however. In voluntary economic unions, redistribution policies can only be decided through majoritarian, democratic politics. When compared to the Commission dominated pre-Maastricht institutional structure, member countries rightly sensed a potential “democratic deficit.” The Maastricht Treaty was responsive to this new democratic reality in two ways: First by constraining the Commission as an executive through the logic of subsidiarity and, second by significantly expanding the role of the European Parliament through a “co-decision” procedure.

Subsidiarity as principle of governance, articulated for the Maastricht Treaty by the 1992 Edinburgh Summit, permits the Community to act only if the objectives of the Community’s policies “cannot be sufficiently achieved by Member State action (and) can … be better achieved by action on the part of the Community” (Edinburgh Summit cited in Bermann 1994 p. 369). The Commission has taken this directive to heart, recasting or cancelling hundreds of existing regulations and dropping several of the Commission’s previously favored legislative initiatives (Bermann 1994 p. 378, 381).