Abstract
AbstractThe aim of our paper is to contribute to the debate on optimal fiscal rules in a monetary union: in terms of global budgetary deficit, of structural budgetary deficit, or of public debt. Indeed, these rules seem to be mixed in the framework of the European Economic and Monetary Union, with the new Fiscal Compact. With the help of a simple macroeconomic model, we show that a goal in terms of public debt is the most appropriate in order to decrease the indebtedness levels, but that it could increase the recessionary risks for the most indebted European countries. Goals in terms of global budgetary deficit or public debt are the most appropriate to limit the budgetary activism and to stabilize fiscal variables in case of demand or supply shocks. However, a goal in terms of structural budgetary deficit is the most appropriate in order to stabilize economic activity levels in case of asymmetric demand or supply shocks.
Highlights
In the framework of a monetary union, the necessity to introduce fiscal rules has widely been studied in the economic literature
From the Stability and Growth Pact (SGP) to the Fiscal Compact In 1992, article 104c of the Maastricht Treaty and the annexed Protocol 5 included thresholds and constraints on the global budgetary deficit and on the public debt
Pisani-Ferry (2002) already proposed to put a threshold on the public debt levels. He proposed the option, for Economic and Monetary Union (EMU) member countries, to subscribe voluntarily to a “Debt sustainability pact,” where countries would engage to maintain their public debt below 50% of GDP for example, and would in exchange be exempted from any Excessive Deficit Procedure (EDP)
Summary
In the framework of a monetary union, the necessity to introduce fiscal rules has widely been studied in the economic literature. As mentioned by the ECB (2012), the European sovereign debt crisis underlined that a stronger coordination of macroeconomic policies was necessary in the framework of a monetary union, as well as promoting convergence and competitiveness, and that imbalances were dangerous for the stability of the whole Euro-zone. This crisis has reinforced the necessity and the urgency, for the European authorities, to strengthen the European institutional framework and governance, in particular by the way of more efficient fiscal rules.
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