The Demise and Reform of the European Union’s Stability and Growth Pact
Edited by Lelia Simona Talani and Bernard Casey
Chapter 6: The Revision of the Stability and Growth Pact: The Medium-Term Objective
6. The revision of the Stability and Growth Pact: the Medium-Term Objective Michael J. Artis and Luca Onorante1 INTRODUCTION: THE MTO The Medium-Term Objective, or MTO, is the concept around which the preventive arm of the Stability and Growth Pact operates. The ‘preventive arm’, in turn, is (at least in theory) the core of the SGP, in the sense that it should guide ﬁscal policies in normal times. In practice, insuﬃcient consolidation in good times, as mandated by the preventive arm of the SGP, implies that the corrective arm has been the one used more often. Many countries hit the 3 per cent deﬁcit during the recent economic stagnation. The improvement in balances experienced until 1999 was largely due to the favourable economic upswing in the second phase of the EMU (1998–2001), and the structural surpluses turned out to be insuﬃcient to allow the automatic stabilizers to work fully through the recession which started in 2001. This conclusion is conﬁrmed by von Hagen (2002), who argues that after entry to the Union most countries, and especially the big ones, abandoned the process of ﬁscal consolidation. As a result, some countries adopted a restrictive pro-cyclical ﬁscal stance in order to respect the 3 per cent threshold during the recent economic slowdown, possibly increasing its amplitude. The current emergency phase seems to be at least partially ﬁnishing, putting the preventive arm in a central role again. According to the European Commission’s autumn 2006 economic forecasts, the general...
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