Fiscal Policy in Economic and Monetary Union
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Fiscal Policy in Economic and Monetary Union

Theory, Evidence and Institutions

Marco Buti and Daniele Franco

This book explores the origins, rationale, problems and prospects of the European fiscal policy framework. It provides the reader with a roadmap to EMU’s budgetary framework by exploring its theoretical and empirical foundations, uncovering its historical roots and emphasising its supranational nature.
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Chapter 3: Medium-term Fiscal Targets

Marco Buti and Daniele Franco


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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