Europe is putting in place a new system of fiscal rules following the euro area sovereign debt crisis and decades
of rising government to debt-to-GDP ratios. These include the so-called “six pack” to upgrade the Stability and
Growth Pact to a new Treaty incorporating the “fiscal compact”. Much of the discussion about the new rules has
been procedural or theoretical. This paper shows what the rules will mean in practice under a realistic mediumterm
scenario developed by the OECD. In the short term, fiscal consolidation will largely be driven by the
current wave of Excessive Deficit Procedures. Only once these commitments are fulfilled will the new system
of rules come into action. Although the rules are complex, the central pillar of the new fiscal rules will be the
requirement to balance budgets in structural terms. These imply a tight fiscal stance over the coming years for
many European countries by comparison with the performance achieved in past decades: almost all countries
will have to be as disciplined as the few countries that managed to make meaningful progress in tackling high
debt levels in the past. A further tightening of budgetary Medium-Term Objectives is likely in 2012, which will
in many cases make the required fiscal stance even tighter. Over the very long term, the rules imply very low
levels of debt. The requirements can thus not be considered to be a permanent approach. The methodology to
calculate the structural balance has a number of weaknesses and discretion will be needed in implementing the
rules.
