Cyclical and Structural Deficits on the Road to Accession: Fiscal Rules for an Enlarged European Union

33 Pages Posted: 17 Jan 2003

See all articles by Fabrizio Coricelli

Fabrizio Coricelli

University of Siena - Department of Political and International Sciences ; Paris School of Economics (PSE); Centre for Economic Policy Research (CEPR)

Valerio Ercolani

Bank of Portugal - Department of Economic Studies

Date Written: December 2002

Abstract

The Paper is one of the first attempts to compute cyclical and structural deficits for a set of countries candidate to accession to the EU. Three main results are derived: first, the high deficits observed in candidate countries in recent years have a structural nature. Second, the fiscal stance has been pro-cyclical in candidate countries. Finally, because of higher volatility of output in these countries, the risks of surpassing the 3% budget limit that applies to all members of the EU are much higher for them. Without changing existing rules in the European Union, it is likely that candidate countries will have to undertake costly and inefficient adjustments of the last minute. Recent proposals by the European Commission would improve matters for candidate countries, without however solving some of their major potential difficulties. The Paper suggests a new fiscal rule for an enlarged European Union, which is consistent with the philosophy of the Stability and Growth Pact but focuses on ex ante limits to expenditure. Such a rule would imply that in periods of growth above trend, countries are forced to run budget surplus, while in periods of economic slack they will run deficits. The rule is fully consistent with the theory of optimal tax smoothing and would, at the same time, strengthen fiscal discipline.

Keywords: EU enlargement, fiscal rules, golden rule, cyclically-adjusted budget balance, fiscal stance, stability and growth pact

JEL Classification: E62, E63, H50, H62, P35

Suggested Citation

Coricelli, Fabrizio and Ercolani, Valerio, Cyclical and Structural Deficits on the Road to Accession: Fiscal Rules for an Enlarged European Union (December 2002). Available at SSRN: https://ssrn.com/abstract=369580

Fabrizio Coricelli (Contact Author)

University of Siena - Department of Political and International Sciences ( email )

Via Mattioli, 10
Siena, 53100
Italy

Paris School of Economics (PSE)

48 Boulevard Jourdan
Paris, 75014 75014
France

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Valerio Ercolani

Bank of Portugal - Department of Economic Studies ( email )

Av Almirante Reis, 71
P-1150-012 Lisboa
Portugal

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