Benchmarks and Targets Under the SGP: Evaluating Safe Deficit Targets Using NiGEM

2003 ◽  
Vol 185 ◽  
pp. 54-63 ◽  
Author(s):  
Ray Barrell ◽  
Ian Hurst
Keyword(s):  
Policy Debate ◽  
Output Volatility ◽  
Supply Shocks ◽  
Automatic Stabilisers

Fiscal pacts and automatic stabilisers are widely discussed in the policy debate. Pacts put bounds on borrowing, and the bounds have to be evaluated. We use our model, NiGEM, to set safe targets for European deficits. Although there are many issues to consider, we conclude that cyclically adjusted target deficits of 1 per cent of GDP would ensure that governments seldom had to borrow more than 3 per cent of GDP, especially if they stood ready to raise taxes when the deficit deteriorated either for reasons separate from cyclical developments or because supply shocks had occurred. Offsetting the automatic stabilisers when supply shocks occur is shown to help stabilise output volatility.

Saving Europe's Automatic Stabilisers

1997 ◽  
Vol 159 ◽  
pp. 92-98 ◽  
Author(s):  
Barry Eichengreen
Keyword(s):  
Fiscal Policy ◽  
Fiscal Federalism ◽  
Policy Coordination ◽  
European Countries ◽  
Stability Pact ◽  
Automatic Stabilisers ◽  
The Stability ◽  
National Governments ◽  
Flexible Application ◽  
Excessive Deficit Procedure

European policymakers have repeatedly suggested that fiscal-policy coordination and fiscal federalism will play key roles in Europe's monetary union. This paper warns that this hope is misplaced. Fiscal federalism will not be available to offset recessionary shocks for the foreseeable future. The effects of coordination designed to internalise the cross-border spillovers of fiscal policies are too weak. Freeing up fiscal policy to replace national governments' loss of monetary independence requires allowing European countries' automatic stabilisers to operate. That in turn requires a flexible application of the Excessive Deficit Procedure and the Stability Pact.The solution suggested here is that the Excessive Deficit Procedure and any fines and sanctions associated with the Stability Pact be applied to the constant-employment budget balance, not the actual deficit. Applying them to actual deficits when European countries enter EMU up against the 3 per cent limit will render fiscal policy strongly procyclical, aggravating the problem of macroeconomic fragility created by the loss of monetary autonomy. Still, countries like Germany haunted by the spectre of fiscal pro fligacy need to be reassured that member states will not abuse their fiscal discretion. Procedural and institutional reform to offset the deficit bias in national political systems is the obvious quid pro quo.

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