Working Paper: CEPR ID: DP3496
Authors: Willem H. Buiter; Clemens Grafe
Abstract: The paper considers the implications for the EU accession candidates of Central and Eastern Europe of the fiscal-financial constraints imposed by the Stability and Growth Pact and the Maastricht Treaty. Our findings apply also to those current EU members whose initial conditions (e.g. infrastructure and progress in state pension reform) or other structural characteristics (e.g. demographic structure, growth potential, Balassa-Samuelson equilibrium real exchange rate appreciation) differ significantly from the EU average. We find the existing criteria to be seriously flawed and propose an alternative rule, the Permanent Balance Rule, based on a strong from of tax smoothing.
Keywords: EU Accession; Fiscal Sustainability; Golden Rule; Stability and Growth Pact; Tax Smoothing
JEL Codes: E32; E42; E61; E62; E63; F33; F42; H62; H87
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Existing fiscal rules under the Stability and Growth Pact and the Maastricht Treaty (E62) | Harm to accession candidates (F55) |
| Rigid application of existing fiscal rules (E62) | Excessive fiscal adjustments (E62) |
| Excessive fiscal adjustments (E62) | Economic and political challenges (P19) |
| Lack of flexibility in fiscal rules (E62) | Procyclical fiscal policies during economic downturns (E62) |
| Procyclical fiscal policies during economic downturns (E62) | Exacerbation of economic instability (F65) |
| Existing fiscal rules (E62) | Harm to economic stability of accession countries (F65) |
| Permanent balance rule (D50) | Enhanced fiscal sustainability (H69) |
| Permanent balance rule (D50) | Improved macroeconomic stability (E60) |