Economics focus

Ties that sometimes bind

Fiscal rules to ensure budgetary responsibility are often ignored. They can still be useful

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Readers' comments



In my opinion, fiscal rules are necessary and have their use. However, it is far distant enough. The nature of democratic politics is winning the election through promising tax cuts and public spending. So no matter how many fiscal rules have been made, the budget deficit is increasing high thanks to the rigidity. Greece is a good example of this. So the discussion should not been limit at the rules but a further layer.

The Prospective Economist

Ugo Troiano (Harvard), Veronica Grembi and Tommaso Nannicini (Bocconi) have a draft of a paper (circulating under the title "Do Fiscal Rules Matter? A Difference-in-Discontinuities Design") that has very convincing evidence on the power of fiscal rules for Italian cities. I found no draft online but it might be worth looking up or contacting the authors.


Very funny to know those exact countries which have rules are all facing the increasing deficit. It seems to me like that rules only work when they don't matters. US's debt ceiling is a public joke and continuously disobey some US early ideas, an irresponsible government with want-to-be responsible citizens. Bet how fast US need another ceiling increase, in two years or five years? The ceiling will be 20 trillion? or 50 trillions?


One problem with the Maastricht’s criteria, the Eurozone’s fiscal rules, was certainly the lack of enforcment , with an acquiescent Eurostat standing idly as the perimeter Public Administration was shrunk, and more and more expenditures and debt were reclassified as non-public.

Enforcement is done by people, who are naturally subject to various influences, and no one had any incentives to look at the growing debt icebergs as Governments borrowed off-budget. Even the rating agencies and creditor seemed to have their "debt sonars" turned off.

But the more critical issue is that the poorly designed Maastricht criteria focused attention only on the intermediate and instrumental targets, the domestic fiscal deficit, rather than on the true ultimate goal, the current account balance. Worse than defining objectives is to establish the wrong objectives.

External imbalances were ignored because it was convenient to believe that intra-Eurozone trade imbalances could be financed forever. In fact, having put aside the normal adjustment tools, the Single Market and the Single Currency make balanced external accounts all the more imperative. But even in mid-2011, many continue to believe in this Single Curency illusion, and its collarary that trade surplus countries need do nothing to participate in the “intra-Eurozone external adjustments”, which are seen as wholly the responsibiliity of trade deficit countries.

These fragile Eurozone economies are now being asked to do all the work necessary for the intra-Eurozone CAB adjustments, without the benefit of any of the usual balance of payments adjustment tools.

Economic midgets with their hands tied behind their back playing volleyball against economic giants.

It is not going to work.

Mariana Abrantes de Sousa, PPP Lusofonia

Wim Roffel

The article claims that the rules work - and offers figures to "prove" that - and then it comes up with the fact that those countries with formal rules seem to move lots of debt off these balance-sheets. The latter is not specified so we are left wondering whether this neutralizes the official figures.

I think formal rules are a bad idea. Moving the debts off the balance sheets is harmful in the democratic process as it hides from the voters and the parliament the true height of the debt. Greece is a good example of this. We like to stress that Greece deceived the EU. But it also deceived its own citizens who might have started to ask questions if they had known the true facts.


As a rule, democratic governments will undertake an unpleasant act only after they have exhausted every alternative, and at last have no choice.



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