ABSTRACT
The effectiveness of any fiscal rule crucially depends on the indicators to which it is geared. The indicators should be resilient to manipulation and opportunistic exploitation. EMU fiscal rules rely on yearly targets set in terms of traditional indicators of deficit and debt. Continued compliance with these targets is expected to ensure long-term fiscal sustainability. Arguably, reference to forward-looking indicators would have been more appropriate. However, such indicators require complex computations, often relying on strong assumptions, and do not lend themselves to being adopted for the enforcement of formal rules, especially in a multinational context where moral hazard issues gain prominence (Balassone and Franco 2000). Having dismissed sophisticated indicators for the sake of effective monitoring, the expec-
tation is that EMU fiscal indicators should score high in terms of reliability. However, recent episodes of large upward deficit revisions suggest that this is not always the case. The chapter acknowledges that all fiscal indicators can be manipulated. Therefore, replacing current indicators with new ones would not solve the problem. By highlighting the weak spots of EMU fiscal indicators, the chapter aims at identifying ways to improve monitoring. The chapter points out that EMU’s deficit indicator is particularly fragile in two respects.2
First, since it measures net borrowing, it draws a line between transactions in financial and non-financial assets, with the latter alone being considered in the computation of deficits. But the distinction between financial and non-financial transactions is not clear-cut, and the available margins of interpretation can be used opportunistically.3 Second, EMU’s deficit indicator is measured on an accrual basis, relying on estimates which are by their nature subject to an element of subjective evaluation.4
