Fiscal consolidation in Europe

The Maastricht Treaty imposes constraints on fiscal policy that will last beyond the formation of EMU. However, the fiscal requirements are determined in an ad hoc way, and do not consider the position of the countries in the business cycle, nor the medium-term planning horizons of the governments. In this paper, we revisit the concept of \\"sustainability\\" of deficits announced in the treaty. After discussing the cyclical and the structural aspects of total deficits that occurred until 1994, we use an intertemporal, forward-looking approach to evaluate the fiscal stands of the countries under several scenarios until 2000. The advantage of our framework over the Maastricht fiscal criteria is that it provides different options for countries to follow for membership in EMU, while taking into account the effect of the cycles on the deficit and debt accumulation. Our analysis shows that if countries follow the sustainability rule, they have to pursue tight fiscal policies until 2000 in order to qualify for membership in EMU. If the fiscal restraints start in 1995, all countries become eligible. Otherwise, our analysis provides explicit measures each country needs to apply to have a sustainable deficit.