Theory, Evidence and Institutions
3. 1. Medium-term ﬁscal targets* INTRODUCTION The Maastricht Treaty introduced convergence requirements on ﬁscal policy as a condition of eligibility for membership of Economic and Monetary Union (EMU). These requirements were spelled out in terms of ‘reference values’ for the deﬁcit-to-GDP ratio and the debt-to-GDP ratio (3 per cent of GDP and 60 per cent of GDP) with ‘forgiveness clauses’ to accommodate deviations from these values. The Stability and Growth Pact (SGP) demands that the countries of the European Union (EU) aim for ‘medium-term objectives of budgetary positions close to balance or in surplus’. The Pact can be seen as strengthening the procedures introduced by the Maastricht Treaty, at least in relation to the deﬁcit criterion. Its objective is to ensure that respect for ﬁscal prudence, as embodied in the ﬁscal criteria, applies not only in the run up to monetary union but also within it, that is once participation in the euro area has been achieved and the threat of exclusion dissolved. The aim of this chapter is to provide the policy maker with a roadmap in implementing this important clause of the Pact. We ask how to set the medium-term ﬁscal targets having in mind the need to strengthen the credibility of EMU ﬁscal discipline, the objective of restoring room for manoeuvre for cyclical stabilization in EMU, and the long-term sustainability of public ﬁnances. In short, the task is to show how to set a medium-term ﬁscal target which is ‘roughly right’. The Maastricht deﬁcit...
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