The Medium-Term Budgetary Objective in the European Union
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Publication date: 2013-12-31
GNPJE 2013;268(11-12):23–47
The article analyzes the nature and importance of the so-called Medium-Term Budgetary Objective (MTO) in the financial system of the European Union. The author discusses the MTO calculation method, which is consistent with the requirements of the EU’s Stability and Growth Pact. Baran also compares the results of the calculations with objectives declared by EU member states in their 2012 stability/convergence programs and assesses the effectiveness of the MTO. The role of the MTO in the EU financial system has evolved over the years, the author notes. In the first few years after the establishment of the euro area, nominal convergence criteria played the most important role. The MTO was expected to gain greater significance after the first change to the Stability and Growth Pact in 2005. The underlying idea behind the MTO was to provide a margin of safety in order to facilitate the maintenance of the fiscal balance and public debt within the limits specified in the Treaty on the Functioning of the European Union (TFEU). However, the adopted solutions proved to be ineffective, according to Baran, due to a lack of enforcement mechanisms combined with an inadequate mix of expansionary and pro-cyclical fiscal policies. In the future, the role of the MTO in the EU financial system may increase due to factors including the latest financial and economic crisis, the author says. Under the huge fiscal imbalances and high public debt levels in various EU economies (in 2012 the average debt ratio in the euro area stood at 93% of GDP), the MTO has been assigned a new role - to support the process of restoring the bloc’s fiscal stability, Baran notes. Since 2009, the MTO has been more strongly influenced by the level of debt, the author says. Countries with debt levels higher than a reference value must make an “extra effort” to reduce their debt. Moreover, implicit liabilities in the form of future costs related to population aging have become a new factor shaping the MTO. The rules according to which the MTO is designed have been standardized, but they have also become more complex. The MTO targets for the most heavily indebted countries are now more demanding. The effectiveness of the MTO as a fiscal rule will largely depend on its enforcement as part of the fiscal surveillance process and on the determination of member states in pursuing adjustments, the author concludes.