Posted by: Dirk | July 8, 2014

The theoretical foundations of the three percent government deficit rule

The rules in the euro zone are clear: the government deficit should be no higher than 3% of GDP. Where is this rule coming from and on which theory it is based? In 2012 already, the following paragraph of Guy Abeille, a former French official, was quoted by Le Parisien (via voxeurop):

We came up with the 3% figure in less than an hour. It was a back of an envelope calculation, without any theoretical reflection. Mitterrand needed an easy rule that he could deploy in his discussions with ministers who kept coming into his office to demand money. […] We needed something simple. 3%? It was a good number that had stood the test of time, somewhat reminiscent of the Trinity.

So, there you have it. One of the most important rules in the European macroeconomic framework is based on a brainstorming session of a bunch of bureaucrats. ‘It was a good number that had stood the test of time, somewhat reminiscent of the Trinity’ – that wasn’t true in 2012, and in 2014 it still looks like a bad thing to say. Fresh economic thinking is needed to replace the quick&dirty rules that the stability and growth pact is based on.

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