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EMU fiscal rules: Is there a gap?

Author

Listed:
  • Fabrizio Balassone

    (Bank of Italy, Research Department)

  • Daniela Monacelli

    (Bank of Italy, Research Department)

Abstract
The Stability and Growth Pact sets a medium-term target for fiscal policy of a budgetary position 'close to balance or in surplus'. This addition to the deficit rule defined by the Maastricht Treaty has been interpreted as an attempt to reconciliate the objective of sound public finances with the availability of adequate margins for stabilisation. However, with the debt rule set in the Treaty unchanged, there is a risk that the Pact will not fully achieve the desired reconciliation. Using the budget to implement stabilisation policy while still ensuring a reduction of the debt-to-GDP ratio during cyclical downturns, as required by the Treaty, is likely to require large structural surpluses. Assuming positive nominal growth rates, the closer the debt ratio is to 60 per cent the larger are the surpluses needed. If countries with debt ratios higher than 60 per cent set insufficiently ambitious deficit targets, they will not be able to make full use of the margins allowed by the 3 per cent threshold. During cyclical downturns such countries may have to adopt a pro-cyclical budgetary stance. The regulation of the interaction between deficit and debt rules is complicated by the EU definitions of debt and deficit, as they refer to different groups of transactions and are based on different accounting conventions.

Suggested Citation

  • Fabrizio Balassone & Daniela Monacelli, 2000. "EMU fiscal rules: Is there a gap?," Temi di discussione (Economic working papers) 375, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_375_00
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    References listed on IDEAS

    as
    1. Lippi, Francesco, 2000. "Median Voter Preferences, Central Bank Independence and Conservatism," Public Choice, Springer, vol. 105(3-4), pages 323-338, December.
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    Cited by:

    1. repec:rej:journl:v:16:y:2013:i:47:p:75-90 is not listed on IDEAS
    2. Paola Veroni, 2001. "Dix ans de politique budgétaire au service de l'euro : l'exemple italien," Post-Print hal-01016956, HAL.
    3. repec:hal:spmain:info:hdl:2441/2545 is not listed on IDEAS
    4. Zotteri, Stefania & Franco, Daniele & Balassone, Fabrizio, 2003. "Fiscal rules for sub-national governments: what lessons from EMU countries?," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 34926, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    5. Marco Buti & Sylvester Eijffinger & Daniele Franco, 2003. "Revisiting the Stability and Growth Pact: grand design or internal adjustment?," European Economy - Economic Papers 2008 - 2015 180, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    6. repec:spo:wpecon:info:hdl:2441/2545 is not listed on IDEAS
    7. Giuseppe BOGNETTI & Giorgio RAGAZZI, 2009. "EU new member countries: public sector accounts and convergence criteria," Departmental Working Papers 2009-20, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    8. Cronin, David & Daniel McCoy,, 2000. "Fiscal Sustainability When Time is on Your Side," Research Technical Papers 4/RT/00, Central Bank of Ireland.
    9. Abderrahim Chibi & Sidi Mohamed Chekouri & Mohamed Benbouziane, 2019. "Debt sustainability, structural breaks and nonlinear fiscal adjustment: empirical evidence from Algeria," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 66(4), pages 369-397, December.
    10. Marco Buti & João Nogueira Martins & Alessandro Turrini, 2007. "From Deficits to Debt and Back: Political Incentives under Numerical Fiscal Rules," CESifo Economic Studies, CESifo Group, vol. 53(1), pages 115-152, March.
    11. repec:hal:wpspec:info:hdl:2441/2545 is not listed on IDEAS
    12. Paola Veroni, 2001. "Dix ans de politique budgétaire au service de l'euro : l'exemple italien," SciencePo Working papers Main hal-01016956, HAL.
    13. Seppo Honkapohja & Frank Westermann, 2009. "Fiscal Policy and Macroeconomic Stabilisation in the Euro Area: Possible Reforms of the Stability and Growth Pact and National Decision-Making Processes," Palgrave Macmillan Books, in: Seppo Honkapohja & Frank Westermann (ed.), Designing the European Model, chapter 6, pages 177-228, Palgrave Macmillan.
    14. Fabrizio Balassone & Daniele Franco, 2004. "EMU fiscal rules: new answers to old questions?," Chapters, in: Giuseppe Eusepi & Friedrich Schneider (ed.), Changing Institutions in the European Union, chapter 1, Edward Elgar Publishing.
    15. George Kararach & Jacob Oduor & Edward Sennoga & Walter Odero & Peter Rasmussen & Lacina Balma, 2022. "Working Paper 365 - Public Investment Efficiency, Economic Growth and Debt Sustainability in Africa," Working Paper Series 2491, African Development Bank.
    16. Abderrahim Chibi & Sidi Mohamed Chekouri & Mohamed Benbouziane, 2019. "The dynamics of fiscal policy in Algeria: sustainability and structural change," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 8(1), pages 1-27, December.
    17. Mackiewicz, Michał, 2005. "Making The Stability Pact More Flexible: Can It Lead to Procyclical Fiscal Policies?," MPRA Paper 16033, University Library of Munich, Germany.
    18. repec:spo:wpmain:info:hdl:2441/2545 is not listed on IDEAS
    19. L. Marattin, 2007. "Private and Public Consumption and Counter-Ciclical Fiscal Policy," Working Papers 588, Dipartimento Scienze Economiche, Universita' di Bologna.
    20. cipollone piero, 2001. "Is the Italian Labour market segmented?," Temi di discussione (Economic working papers) 400, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    Fiscal Rules; Stabilisation Policy;

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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