01 Jan 2003

A Public Stability Pact for Public Debt?

Daniel Gros

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Abstract updated by the author, March 2012. Back in 2003, when the future of the Stability Pact was in doubt because France and Germany had been able to convince a majority of member states to “suspend its application”, Daniel Gros argued that the key issue was the sustainability of public debt and that the Excessive Deficits Procedure should also be linked to debt levels.  The solution he proposed was to give concrete meaning to the Maastricht criterion on public debt, which stipulates that if public debt exceeds 60% of GDP, it must be ‘sufficiently diminishing and approaching the reference value at a satisfactory pace’'. He proposed a simple rule: “any excess of the actual debt ratio above the 60% of GDP limit should be reduced each year by 1/20th. This implies that a country should be considered as having an ‘excessive deficit’ if its debt ratio declines by less than that. For example, a county with a debt to GDP ratio around 120% would have to reduce that ratio by 3 points each year (e.g. from 120 to 117% and then to 114% of GDP).” 

This rule was adopted in the context of the reform of the Stability Pact in 2010-11.