Between Growth and Stability
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Between Growth and Stability

The Demise and Reform of the European Union’s Stability and Growth Pact

Edited by Lelia Simona Talani and Bernard Casey

Combining economic and political science perspectives, this timely and important book describes and analyses the circumstances and events leading to the demise and subsequent reform of the Stability and Growth Pact (SGP).
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Chapter 6: The Revision of the Stability and Growth Pact: The Medium-Term Objective

Michael J. Artis and Luca Onorante


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 government deficit of the Euro area is projected to decline from...

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