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Appendix 6 : The New Member States and the Stability and Growth Pact : Needs for adapting in the prospect of euro area membership

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  • Catherine Mathieu

    (OFCE)

  • Henri Sterdyniak

    (OFCE)

Abstract

The New Member States (NMS) have to comply with the Stability and Growth Pact (SGP) rules: public deficits below 3% of GDP and public debts below 60% of GDP, although they cannot be subject to fines as long as they are not members of the euro area. Most of the NMS currently run higher than 3% of GDP deficits but lower than 60% of GDP debts. The implementation of the surveillance procedures had led 6 of the 12 NMS to be under an excessive deficit procedure (EDP) soon after they joined the EU. Are the SGP rules adequate for the NMS? The SGP rules were not designed for catching-up countries, but for ‘old member States’. In particular, the initial rules of the SGP did not account for investment needs. A Golden rule for public finances would be especially appropriate for the NMS, since it would allow them to borrow to finance investment needs that will benefit not only current but also future generations. We argue that SGP rules are not adapted for the NMS and that better rules should be introduced in the prospect of euro area enlargement. Section 1 provides a brief assessment of the current situation of public finance criteria in the NMS. Section 2 considers the rationale of SGP framework for the NMS. Section 3 advocates for a better fiscal rule: the golden rule. Section 4 concludes.

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Paper provided by Sciences Po in its series Sciences Po publications with number info:hdl:2441/5081.

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Date of creation: Mar 2006
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Handle: RePEc:spo:wpmain:info:hdl:2441/5081

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  1. Ludger Schuknecht, 2001. "The Implementation of the Stability and Growth Pact," OECD Journal on Budgeting, OECD Publishing, vol. 1(3), pages 81-116.
  2. Garrett, Shane & Mathieu, Catherine & Nolan, Anne & Nolan, Brian & Sterdyniak, Henri, 2004. "Budget Perspectives 2005," Research Series, Economic and Social Research Institute (ESRI), number BMI176 edited by Callan, Tim & Doris, Aedin & McCoy, Daniel.
  3. F. Modigliani & J.-P. Fitoussi & B. Moro & D. Snower & R. Solow & A. Steinherr & P. Sylos Labini, 1998. "An economists' Manifesto on unemployment in the European Union," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 51(206), pages 327-361.
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