Fiscal Responses

We noted in Chapter 7 that fiscal policy was faced by a number of challenges in the EU. In the first place there are longer-run pressures from ageing and from the competition by countries such as China, with low wage rates and managed exchange rates. These are both requiring politically difficult readjustments to ensure that the fiscal position is sustainable. Second, the nature of the economic cycle tends to mean that downturns are more effective in shaking out labour than upturns of the same size are in (re)employing it. This therefore tends to add further pressures in the same direction. The longer-term pressures have been addressed through a number of routes, particularly the Lisbon Strategy to increase the sustainable rate of growth by 1 per cent a year and the Broad Economic Policy Guidelines that seek to coordinate the macroeconomic responses. Ameliorating the consequences from the economic cycle are treated in part by monetary policy but also by the Stability and Growth Pact (SGP) which seeks on the one hand to encourage the longer-term improvement in fiscal positions by trying to ensure that budgets are normally in balance or in surplus and on the other by preventing excessive deficits (deficits exceeding 3 per cent of GDP except under extreme pressures).