maintain the euro’s purchasing power. If high deficits ultimately cause faster inflation, it
would only neutralize the advantages of establishing a monetary union.
Beginning in 2002, however, the SGP-97’s deficit and debt constraints and its preventive
and corrective mechanisms proved unacceptable.15 SGP-97 called for corrective fiscal
policies to be adopted if a breach of deficits or debt limits appeared imminent regardless
of the Member State’s position in the business cycle and potential for GDP growth. A
revised Stability and Growth Pact has now been in effect since March 2005 (SGP-05). It
incorporates constraints and objectives (time paths of future deficits and debt) tailored to
each member country’s economic conditions.
The revised agreement introduces greater flexibility in implementing the SGP’s
constraints and allows implementation of preventive and corrective mechanisms to be
deferred in case a member country faces temporary economic difficulties. Some
observers claim, however, that although SGP-05 continues to define constraints in terms
of traditional deficit and debt-to-GDP levels, it really represents an abandonment of the
original objectives underlying those constraints (Feldstein, 2005 and Wierts et al., 2006)
of preventing excessive discretion in fiscal policies. If correct, this would constitute good
news. This chapter’s thesis is that traditional fiscal measures - annual deficits and debt-
to-GDP levels - are both potentially misleading indicators of a country’s fiscal stance.
The SGP-05 also calls for the development of long-term fiscal indicators for policy
surveillance of Member States. This effort should consider recently developed fiscal
measures that are theoretically sound and policy relevant. They would better inform EU
policymakers of the condition of each Member State’s current fiscal stance and provide a
basis for an apples-to-apples comparison of the policy options and trade-offs that each
country faces. The bad news is that many member countries and EMU policymaking
bodies appear to be a long way from developing appropriate long-term fiscal accounting
measures and from developing a consensus on whether they should be part of formal
preventive mechanisms.
This chapter first addresses issues relating to the proper accounting and reporting of the
government’s net prospective payment obligations. It compares alternative long-term
measures of a country’s fiscal stance and discusses their theoretical soundness,
applicability to budget reporting, and ability to reveal information about the true
economic choices that policymakers face. Four types of measures are considered --
traditional deficit and debt measures, accrual accounting measures and two measures
based on actuarial accounting. The latter include generational accounting and fiscal and
generational imbalance measures.
The chapter argues for the adoption of fiscal and generational imbalance measures by
integrating these measures into existing country budget reports. It provides brief
examples of how fiscal and generational imbalance measures could help policymakers to
define the feasible set of policy choices and the trade-offs involved in selecting from
among them.
The deficit constraint requires each Member State to maintain annual deficits at 3 percent of GDP or
less. Each member state is also required to maintain a total debt-to-GDP ratio of 60 percent or less.
These constraints were specified in the original Maastricht treaty of the European Union.
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