Patching Up the Pact: Some Suggestions for Enhancing Fiscal Sustainability and Macroeconomic Stability in an Enlarged European Union

76 Pages Posted: 27 Sep 2002

See all articles by Willem H. Buiter

Willem H. Buiter

Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Columbia University; Independent Economic Adviser; Independent

Clemens Grafe

University of London, Birkbeck College - Department of Economics

Date Written: August 2002

Abstract

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.

Keywords: Stability and growth pact, EU accession, fiscal sustainability, golden rule, tax smoothing

JEL Classification: E32, E42, E61, E62, E63, F33, F42, H62

Suggested Citation

Buiter, Willem H. and Grafe, Clemens, Patching Up the Pact: Some Suggestions for Enhancing Fiscal Sustainability and Macroeconomic Stability in an Enlarged European Union (August 2002). Available at SSRN: https://ssrn.com/abstract=332661

Willem H. Buiter (Contact Author)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Columbia University ( email )

420 West 118th Street
New York, NY
United States

Independent Economic Adviser ( email )

Independent ( email )

Clemens Grafe

University of London, Birkbeck College - Department of Economics ( email )

Malet Street
London WC1E 7HX
United Kingdom

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