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Patching up the Pact: some Suggestions for Enhancing Fiscal Sustainability and Macroeconomic Stability in an Enlarged European Union

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  • Buiter, Willem H
  • Grafe, Clemens

Abstract

The paper considers the implications for the EU accession candidates of Central and Eastern Europe of the fiscal-financial constraints imposed by the Stability and Growth Pact and the Maastricht Treaty. Our findings apply also to those current EU members whose initial conditions (e.g. infrastructure and progress in state pension reform) or other structural characteristics (e.g. demographic structure, growth potential, Balassa-Samuelson equilibrium real exchange rate appreciation) differ significantly from the EU average. We find the existing criteria to be seriously flawed and propose an alternative rule, the Permanent Balance Rule, based on a strong from of tax smoothing.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3496.

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Date of creation: Aug 2002
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Handle: RePEc:cpr:ceprdp:3496

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Keywords: EU accession; fiscal sustainability; golden rule; stability and growth pact; tax smoothing;

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References

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  1. Beetsma, Roel & Uhlig, Harald, 1999. "An Analysis of the Stability and Growth Pact," Economic Journal, Royal Economic Society, vol. 109(458), pages 546-71, October.
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  7. Willem H. Buiter & Clemens Grafe, 2001. "Central Banking and the Choice of Currency Regime in Accession Countries," SUERF Studies, SUERF - The European Money and Finance Forum, number 11 edited by Morten Balling.
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Citations

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Cited by:
  1. Lucjan T. Orlowski, 2005. "Monetary Policy Adjustments on the Final Passage towards the Euro," CASE Network Studies and Analyses 0294, CASE-Center for Social and Economic Research.
  2. Mauro Visaggio, 2004. "Does Stability and Growth Pact Provide an Adequate and Consistent Fiscal Rule?," Macroeconomics 0407008, EconWPA.
  3. Jordi GalÌ & Roberto Perotti, 2003. "Fiscal policy and monetary integration in Europe," Economic Policy, CEPR;CES;MSH, vol. 18(37), pages 533-572, October.
  4. Heikki Oksanen, 2003. "Population ageing and public finance targets," European Economy - Economic Papers 196, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  5. Eichengreen, Barry, 2003. "Institutions for Fiscal Stability," Institute of European Studies, Working Paper Series qt34p6v7pt, Institute of European Studies, UC Berkeley.
  6. Antonio Fatas & Ilian Mihov, 2009. "The Euro and Fiscal Policy," NBER Working Papers 14722, National Bureau of Economic Research, Inc.
  7. Coricelli, Fabrizio & Ercolani, Valerio, 2002. "Cyclical and Structural Deficits on the Road to Accession: Fiscal Rules for an Enlarged European Union," CEPR Discussion Papers 3672, C.E.P.R. Discussion Papers.
  8. Waltraud Schelkle, 2003. "A Mixed Blessing: Monetary Enlargement within the Maastricht Policy Framework," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 72(4), pages 624-635.
  9. Orban, Gabor & Szapary, Gyorgy, 2004. "The Stability and Growth Pact from the perspective of the new member states," Journal of Policy Modeling, Elsevier, vol. 26(7), pages 839-864, October.
  10. Óscar Afonso & Rui Henrique Alves, 2006. "“To Deficit or Not to Deficit”: Should European Fiscal Rules Differ Among Countries?," FEP Working Papers 219, Universidade do Porto, Faculdade de Economia do Porto.
  11. Johnson, Richard, 2003. "A comparison of the constant-tax rule and a standard fiscal reaction rule in the IMF's MULTIMOD model," Journal of Policy Modeling, Elsevier, vol. 25(6-7), pages 639-653, September.
  12. Elena Flores & Gabriele Giudice & Alessandro Turrini, 2005. "The framework for fiscal policy in EMU: What future after five years of experience?," European Economy - Economic Papers 223, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  13. Szapáry, György & Orbán, Gábor, 2004. "A stabilitási és növekedési paktum az új tagállamok szemszögéből
    [The Stabilization and Growth Pact in the light of the new EU member-states]
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(9), pages 810-831.

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