6.
The Reliability of EMU Fiscal Indicators:
Risks and Safeguards
Fabrizio Balassone, Daniele Franco and Stefania Zotteri*
6.1 Introduction
The effectiveness of any fiscal rule crucially depends on the indicators to which it is
geared. The indicators should be resilient to manipulation and opportunistic exploitation.
EMU fiscal rules rely on yearly targets set in terms of traditional indicators of deficit and
debt. Continued compliance with these targets is expected to ensure long-term fiscal
sustainability. Arguably, reference to forward-looking indicators would have been more
appropriate. However, such indicators require complex computations, often relying on
strong assumptions, and do not lend themselves to be adopted for the enforcement of
formal rules, especially in a multinational context where moral hazard issues gain
prominence (Balassone and Franco, 2000).
Having dismissed sophisticated indicators for the sake of effective monitoring, the
expectation is that EMU fiscal indicators should score high in terms of reliability.
However, recent episodes of large upward deficit revisions suggest that this is not always
the case. The chapter acknowledges that all fiscal indicators can be manipulated.
Therefore, replacing current indicators with new ones would not solve the problem. By
highlighting the weak spots of EMU fiscal indicators, the chapter aims at identifying
ways to improve monitoring.
The chapter points out that EMU’s deficit indicator is particularly fragile in two
respects.103 First, since it measures net borrowing, it draws a line between transactions in
financial and non-financial assets, with the latter alone being considered in the
computation of deficits. But the distinction between financial and non-financial
transactions is not clear-cut, and the available margins of interpretation can be used
opportunistically.104 Second, EMU’s deficit indicator is measured on an accrual basis,
103
104
The views expressed in this paper are those of the authors and do not commit Banca d’Italia. We
thank Marco Buti, Joao Nogueira Martins and Alessandro Turrini for kindly making available to us
the dataset used for their article. We thank Joao Nogueira Martins also for his valuable discussion
and the participants to the European Commission workshop on “Fiscal indicators in the EU
budgetary surveillance” for useful suggestions.
There is also an issue concerning the definition of the public sector whose deficit and debt have to be
considered (see Balassone et al., 2006).
This problem is similar to the one arising in the application of the “golden rule”, where the deficit
measure should only take into account current transactions and exclude capital ones (see Balassone
and Franco, 2001).
163