Fiscal Rules on the Road to an Enlarged European Union

Abstract

The Stability and Growth Pact (SGP) has come under increasing pressure as the fiscal position of several European Union (EU) member countries has deteriorated with the slowdown of their economies (European Commission 2002a). Proposals for revising the fiscal rules contained in the SGP have advanced in two main aspects: first, the budget deficit limit should apply to the cyclically adjusted balance, and second, public investment should be excluded from the computation of the balance. Indeed, in a recent proposal, the European Commission (2002c) suggests that the deficit be adjusted for the economic cycle. The proposal also gives more weight to public investment and the cost of structural reforms in assessing the fiscal position of countries with a public debt stock below 60 percent of GDP. These revisions would also provide more flexibility to most countries which recently completed, or are currently candidates for, EU accession and which have moderate debt ratios and high public investment.