Fiscal Policy and Budget Balancing: The European Experience

Abstract

The European Union’s constitutional balanced-budget amendment, the Stability and Growth Pact (SGP), dictates that EU member states keep their budget deficits within three percent of GDP and that government debt be kept at or below 60 percent of GDP. After 20 years, unintended consequences of the SGP have created a contractionary fiscal-policy bias that prioritizes budget-balancing over reductions in spending and unemployment. For Americans, this a valuable lesson, as it shows what budget-balancing mechanisms not to use.

Keywords: Balanced Budget, Macroeconomics, Fiscal Policy, Budget Deficit, Structural Deficit, Currency Union

JEL Classification: E60, E61, E62, E63, E65, H00, H60, H61, H62, H63