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`Excessive Deficits': Sense and Nonsense in the Treaty of Maastricht


  • Buiter, Willem H.
  • Corsetti, Giancarlo
  • Roubini, Nouriel


In this paper we evaluate internationally agreed limits on public sector debt and deficits, such as those agreed by the EC countries in the Treaty of Maastricht as preconditions for membership in a monetary union. These fiscal convergence criteria require that general government budget deficits should not exceed 3% of GDP and that the gross debt of the general government should not be above 60% of GDP. The Maastricht requirements, especially the debt criterion, are much more stringent than those required to ensure public sector solvency. Their implementation would require an excessive degree of fiscal retrenchment which would adversely affect the level of economic activity. The deficit guideline does not appear to be sensible, since the numerical criterion refers to the nominal interest payments-inclusive financial deficit, with no corrections for inflation and real output growth, no cyclical adjustment and no appropriate allowance for future revenue-producing public sector investment. The verbal qualifications are too vague to neutralize the potential for serious damage attached to the numerical guidelines. We discuss the various `externality' arguments in favour of binding fiscal rules and find them wanting, both theoretically and empirically. An argument in favour of external enforcement of binding fiscal rules might be made in the presence of `excessive deficits' due to political distortions. We conclude that the fiscal convergence criteria should be disregarded or applied quite loosely in order to avoid the risk of serious fiscal overkill.

Suggested Citation

  • Buiter, Willem H. & Corsetti, Giancarlo & Roubini, Nouriel, 1992. "`Excessive Deficits': Sense and Nonsense in the Treaty of Maastricht," CEPR Discussion Papers 750, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:750

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    European Monetary Union; Fiscal Policy; Fiscal Rules; Maastricht; Public Debt; Public Sector Deficits;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt


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