Theory, Evidence and Institutions
7. 1. Long-term sustainability* INTRODUCTION While the intuition is clear (a sustainable policy must ultimately avoid bankruptcy), the analytical and operational deﬁnition of sustainability is not straightforward. The theory has proposed diﬀerent conditions for sustainability (from a non ever-rising tax rate to an intertemporal discounted budget constraint);144 furthermore, the problem has always been dealt with in a partial equilibrium framework where the interactions between the budget and the economy are not fully taken into account. In practice diﬃculties arise with regard to the statistical deﬁnition of the main variables to be used for the assessment of sustainability (is it gross or net debt to be relevant, how should the deﬁcit be measured?); moreover, as sustainability is a forward-looking concept, long-term projections are needed and these are necessarily subject to wide margins of error. Yet sustainability is a central tenet of the Maastricht Treaty. Article 109(1) makes a sound government ﬁnancial position an explicit criterion for a country’s eligibility to join EMU. The ﬁscal rules set out in the Treaty and subsequently integrated by the Stability and Growth Pact require budget positions close to balance or in surplus in the medium term, deﬁcits lower than 3 per cent of GDP and the reduction of debt to GDP ratios below 60 per cent. Compliance with these rules, which aims at combining ﬁscal discipline and ﬂexibility, clearly excludes divergent and unsustainable ﬁscal dynamics.145 Although the choice of the actual parameters is somewhat arbitrary,146 the...
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