Countries seeking to adopt the euro as their currency must meet certain criteria, including the requirements to keep their government budget deficit equal to 3% or less of GDP, and to hold government indebtedness to less than 60% of GDP.

a. Discuss why there are fiscal policy criteria for joining a monetary union.

b. For countries that exceed or are near these limits (e.g., Greece, Portugal, Cyprus, etc.), the EU imposes so-called “austerity” measures (such as increased taxes and reduced government spending). What is the rationale for imposing austerity measures and what are their likely macroeconomic effects (especially on growth)?