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The failures of the ‘fiscal compact’
Malcolm Sawyer
University of Leeds, UK and
FESSUD
The views expressed during the execution of the FESSUD project, in whatever form and or by whatever medium, are the sole responsibility of the authors. The European Union is not liable for any use
that may be made of the information contained therein
Introduction
• The ‘fiscal compact’ as a more rigorously
enforced version of the Stability and Growth
Pact (SGP) with requirements for ‘structural
balanced budget’ and ‘excessive deficit
procedures’ for budget surplus in the face of
debt ratio over 60 per cent.
Fiscal compact
• In the absence of a Federal level budget of any
substance and possibility of budget deficits,
‘fiscal compact’ as the SGP confronts a ‘one
size fits all’ problem: no allowance is made for
differences in private behaviour nor in need
for public investment.
Fiscal compact
• Budget deficit = Private savings minus Private
investment plus Current account deficit
• It is well-known that current account positions
differ enormously between EMU member
countries; and also differ substantially with
regard to savings and investment behaviour
Fiscal compact
• The calculation of ‘structural budget’ position
is problematic;
• Depending on notion of ‘potential output’ and
its estimation
Structural budget
• Structural budget is budget position at
‘potential output’
• Requirement for balanced budget is that:
private savings minus private investment plus
current account deficit equals zero
• Does that occur when economy at potential
output?
Structural budget
• Historical experience of budget deficits and
hence significant public debt to GDP ratios;
• Are there reasons to think that there can be
some combination of higher investment,
lower savings and higher net exports which
could underpin a balanced budget?
Questions
• Consequences of interdependent countries
each pursuing fiscal consolidation
• Will the current account imbalances remain?
• How long before realisation that balanced
budget is not universally feasible?
• Is there an alternative short of a substantial
Federal budget and fiscal policy?