by Alberto Mingardi
February 23, 2012
Now teetering on the edge of bankruptcy, Greece was first sanctioned for violating the European growth and stability pact in 2005. The euro crisis highlights the ineffectiveness of European fiscal rules in the recent past, and it is why European leaders have agreed on a new “fiscal compact” to target debt and deficit limits. But previous failures in enforcing fiscal rules might justify skepticism among international observers when it comes to the credibility of Europe’s leaders in setting these new targets.
The new targets will be credible only if the leaders find a way to rewrite their own pact with voters.
On paper, Europe has never experienced a shortage of fiscal rules. The Maastricht Treaty (Article 121) fixed numerical targets for states seeking accession to the European Union. EU states were to keep their government deficits below the reference value of 3 percent of gross domestic product (GDP), whereas debt should not exceed the threshold of 60 percent of GDP. In case of a higher debt ratio, the Treaty required it to show a decreasing trend.
These fiscal rules enjoyed a limited success. Of the 17 eurozone countries, only Finland and Luxembourg consistently complied with the Maastricht parameters. The very need for a new fiscal compact stems from previous failures in policing public finances. But can this time be different?