Why 3 and 60 per cent? The rationale of the reference values for fiscal deficits and debt in the European Economic and Monetary Union

The origins of the reference values for budget deficits and public debt (3 and 60 per cent of GDP) in the euro area are explored. Both numbers came into the Maastricht Treaty by coincidence. Later attempts to legitimise them are traced and found unconvincing. In particular the debt cap is scrutinised, often considered as a precondition for debt sustainability. Since the first overhaul of the Stability and Growth Pact in 2005, reference values for structural deficits became the focus of fiscal policy, but derived from the 60 per cent debt cap. With the so-called Fiscal Compact from 2012, caps for structural deficits were added to the semi-primary law of the European Union. It is argued that the reference values for deficits and debt are not consistent. If the Domar equation is observed, the changing relationship between interest rates on public debt and output growth should be included in the fiscal policy framework. Therefore ‘eternal’ reference values for deficits and debt should be removed from the primary law by Treaty amendments.