EMU fiscal rules: Is there a gap?

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.