DEFICITS, BAILOUT AND FREE RIDERS - FISCAL ELEMENTS OF A EUROPEAN CONSTITUTION

European economic and monetary integration provides further incentives to increase public deficits and debt in Europe, and EMU states may try to act as free riders. on the federal European budget. Highly indebted countries can be expected to exert pressure on the European Central Bank in order to prevent interest rate increases that would lead to a significant rise of interest payments on outstanding government debt. We propose the introduction of constitutional rules designed at containing deficits and debt on the European federal level. The institution of a popular referendum can serve as an important means to keep European fiscal policies on a path that is in conformity with citizen-taxpayers' preferences.