01 Oct 1995

Excessive Deficits and Debts

Daniel Gros

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In 1995, when Daniel Gros first published this Working Document, he argued that there was an urgent need to clarify the meaning of the Maastricht criterion concerning public debt. EMU had not yet started and the focus was on how the debt of a country should be judged in deciding which countries should be allowed to participate in EMU. At the time, the debt criterion was widely ignored because it was clear that countries like Italy or Belgium would not be able to participate in EMU if the 60% of GDP reference value on debt were to be taken as an absolute limit.
Gros pointed out in this paper, however, that the Treaty only required that the ratio of debt-to-GDP “approach the reference value at a satisfactory pace”. He thus proposed at that time in this CEPS WD No. 97 (p. 6) that the interpretation should be:
“The debt-to-GDP ratio is considered ‘approaching the reference value at a satisfactory pace’ if, over the previous three years, it has been declining continuously and, on average, one-twentieth of the difference between the initial debt ratio and the reference value has been eliminated each year.”
On 29 September 2010, the European Commission has adopted exactly this idea in its latest proposal for a Council Regulation on speeding up and clarifying the implementation of the excessive deficits procedure in the Growth and Stability Pact.
The Commission’s proposal reads:
“1a. When it exceeds the reference value, the ratio of the government debt to gross domestic product (GDP) is to be considered sufficiently diminishing and approaching the reference value at a satisfactory pace in accordance with Article 126 (2) (b) of the Treaty if the differential with respect to the reference value has reduced over the previous three years at a rate of the order of one twentieth per year.” (see p. 9 of http://ec.europa.eu/economy_finance/articles/eu_economic_situation/pdf/com2010_522en.pdf).