Public Investment, Growth and Fiscal Constraints

Public Investment, Growth and Fiscal Constraints

Challenges for the EU New Member States

Edited by Massimo Florio

This book makes a unique contribution in advancing understanding of the fiscal condition and growth potential of the New Member States of the European Union. It provides new data, policy evaluation, and offers national and regional perspectives. The core research questions are the effect of public investment in the context of macroeconomic disequilibrium and how it is possible to finance capital accumulation in the present and future conditions of mounting public sector debt.

Chapter 5: EU New Member States: Public Sector Accounts and Convergence Criteria

Giuseppe Bognetti and Giorgio Ragazzi

Subjects: economics and finance, public finance, regional economics, urban and regional studies, regional economics


Giuseppe Bognetti and Giorgio Ragazzi INTRODUCTION In this chapter we analyse the recent economic performance of six New Member States (NMS), with particular regard to the convergence criteria required in order to join the Euro area. The first sections are dedicated to a review of the definitions and consistency of the public finance targets set by the Maastricht rules, which may help to understand and evaluate the performance of NMS. 1. THE MAASTRICHT FISCAL TARGETS The Maastricht rules set two targets for members’ public finances: net indebtedness (deficit) must not exceed 3 per cent of GNP and public debt should converge towards 60 per cent or less of GNP. The first target presumably aims at limiting the negative effects that expansionary policies of one member might have on others, the second target at reducing the risk that an excessive debt might lead to the insolvency of a Member State. Both targets were set at ‘arbitrary’ levels. The debt target simply reflected the average debt/GNP ratio of the largest Member States at the time; the literature on state insolvency indicates that many more factors in addition to the debt/GNP ratio contribute to the risk of insolvency, while a 60 per cent debt ratio does not appear to have any particular relevance. The 3 per cent deficit target represents the historic average ratio of public investment to GNP in most European countries: an implicit reference to the ‘golden rule’. Whatever the opinion may be regarding the level of the targets, they appear...

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