Setting Medium-Term Fiscal Targets in the EMU (*)

Abstract

Under the Stability and Growth Pact, countries are committed to achieve medium-term budget positions of “close to balance or in surplus”. the rationale for this commitment is that such budgetary positions would allow for the full working of the built-in stabilisers without triggering the sanctions procedures of the Pact. the paper sets out to explore what factors affect the level of the budgetary target and suggests how the safety margin for cyclical fluctuations and unforeseen budgetary variability may be allowed for. All in all, on the basis of past fiscal behaviour, broadly balanced budgets in the medium term appear to be adequate for most EU countries in safeguarding the 3% of GDP deficit ceiling. of course, as the cyclical behaviour of the euro-area economy adapts to the new EMU environment, the medium-term targets will need to be addressed again.