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

36 Pages Posted: 26 Apr 2004

See all articles by Willem H. Buiter

Willem H. Buiter

Citigroup New York; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Columbia University

Clemens Grafe

University of London, Birkbeck College - Department of Economics

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 form of tax smoothing.

Suggested Citation

Buiter, Willem H. and Grafe, Clemens, Patching Up the Pact: Suggestions for Enhancing Fiscal Sustainability and Macroeconomic Stability in an Enlarged European Union. Economics of Transition, Vol. 12, pp. 67-102, March 2004. Available at SSRN: https://ssrn.com/abstract=513520

Willem H. Buiter (Contact Author)

Citigroup New York

Citigroup Global Markets Inc
388 Greenwich Street
New York, NY 10013
United States
+12128162363 (Phone)
+12128168970 (Fax)

HOME PAGE: http://willembuiter.com/

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

Clemens Grafe

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

Malet Street
London WC1E 7HX
United Kingdom

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