`Excessive Deficits': Sense and Nonsense in the Treaty of Maastricht
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.
|Date of creation:||Dec 1992|
|Date of revision:|
|Contact details of provider:|| Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.|
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:750. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.