1. 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

2. 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.

3. 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.

4. 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

5. Fiscal compact The calculation of ‘structural budget’ position is problematic; Depending on notion of ‘potential output’ and its estimation

6. 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?

7. 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?

8. 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?