DP3496 Patching up the Pact: some Suggestions for Enhancing Fiscal Sustainability and Macroeconomic Stability in an Enlarged European Union

Author(s): Willem H. Buiter, Clemens Grafe
Publication Date: August 2002
Keyword(s): EU accession, fiscal sustainability, golden rule, stability and growth pact, tax smoothing
JEL(s): E32, E42, E61, E62, E63, F33, F42, H62, H87
Programme Areas: International Macroeconomics, Transition Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3496

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.