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Journal of Economic Integration 2012 December;27(4) :537-563.
The European Fiscal Compact: A Counterfactual Assessment

Jérôme Creel1 Paul Hubert2 Francesco Saraceno 2

1OFCE & ESCP Europe
Corresponding Author: Jérôme Creel ,Fax: +33 1 44 18 54 56, Email:
Copyright ©2012 Journal of Economic Integration
Faced with the global financial crisis and an increasingly worrisome sovereign-debt crisis, the Eurozone countries are rethinking their fiscal governance. This paper discusses the different reforms and subsequent fiscal rules which have emerged since 2011. It assesses the impact of fiscal rules on the output gap and inflation rate of three representative countries of the Eurozone. By means of a counterfactual, the rules based upon their macroeconomic outcomes are ranked. The new debt reduction rule would certainly lead to lower debt levels, hence to larger fiscal margins for maneuver in the future but, in steep contrast with the golden rule of public finance, it would be very costly to implement as the requirement to enforce a substantial consolidation in the short run would be considerably higher than that of a golden rule and would worsen the output gap and inflation rate. The cap on the cyclically adjusted deficit also leads to unfavorable outcomes whereas the Maastricht status quo, limiting overall public deficit, would be a “second best” behind the golden rule of public finance.

JEL Classification
C54: Quantitative Policy Modeling
E62: Fiscal Policy
H68: Forecasts of Budgets, Deficits, and Debt
Keywords: EMU | Fiscal compact | Stability and Growth Pact | Fiscal rules | Counterfactual
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