A New Budget Rule for Germany
18 Pages Posted: 14 Feb 2012
Date Written: March 29, 2007
Elke Baumann and Christian Kastrop discuss the main features and shortfalls of Germany’s current fiscal framework and examine possible reforms. They analyze the shortcomings of the golden rule that has been applied in Germany since the end of the 1960s, which include the rule’s asymmetry over business cycles, its unclear specification of the cases under which it can be violated, and the weakness of the enforcement mechanism and the de facto absence of sanctions. The paper then discusses possible reforms. The authors stress that a new budget rule should allow for flexibility over the business cycle, be compatible with the Stability and Growth Pact, be enforceable and be coherent with the decentralised structure of German general government.
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