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EMU fiscal rules: Is there a gap?

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Author Info

  • 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.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 375.

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Date of creation: Jul 2000
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Handle: RePEc:bdi:wptemi:td_375_00

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Keywords: Fiscal Rules; Stabilisation Policy;

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References

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  1. Francesco Lippi, 1999. "Median Voter Preferences, Central Bank Independence and Conservatism," Temi di discussione (Economic working papers) 351, Bank of Italy, Economic Research and International Relations Area.
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Citations

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Cited by:
  1. Marco Buti & Jo�o Nogueira Martins & Alessandro Turrini, 2007. "From Deficits to Debt and Back: Political Incentives under Numerical Fiscal Rules," CESifo Economic Studies, CESifo, vol. 53(1), pages 115-152, March.
  2. Mackiewicz, Michał, 2005. "Making The Stability Pact More Flexible: Can It Lead to Procyclical Fiscal Policies?," MPRA Paper 16033, University Library of Munich, Germany.
  3. Paola Veroni, 2001. "Dix ans de politique budgétaire au service de l’euro : l’exemple italien," Sciences Po publications info:hdl:2441/2545, Sciences Po.
  4. Buti, Marco & Eijffinger, Sylvester C W & Franco, Daniele, 2003. "Revisiting the Stability and Growth Pact: Grand Design or Internal Adjustment?," CEPR Discussion Papers 3692, C.E.P.R. Discussion Papers.
  5. Lars Calmfors & Giancarlo Corsetti & John Flemming & Seppo Honkapohja & John Kay & Willi Leibfritz & Gilles Saint-Paul & Hans-Werner Sinn & Xavier Vives, 2003. "Fiscal Policy and Macroeconomic Stabilisation in the Euro Area: Possible Reforms of the Stability and Growth Pact and National Decision-Making-Processes," EEAG Report on the European Economy, CESifo Group Munich, vol. 0, pages 46-75, 05.
  6. L. Marattin, 2007. "Private and Public Consumption and Counter-Ciclical Fiscal Policy," Working Papers 588, Dipartimento Scienze Economiche, Universita' di Bologna.
  7. 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.
  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. Andrei Radulescu, 2013. "The impact of the Great Recession on the Romanian economy," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 16(47), pages 75-90, March.

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