The myth (or folly) of the 3% deficit/GDP Maastricht 'parameter'

Abstract

A relation is presented defining the boundary, algebraically and geometrically, to the sustainability area of public finance. The relation (and area) involve three mag nitudes: deficit/GDP, debt/GDP and rate of growth. It is shown that the parameters stated in the famous Annex to the Maastricht Treaty (60% for the debt/GDP ratio and 3% for the deficit/GDP ratio) represent only one particular point on the above mentioned boundary relation to the sustainability area. There exists an infinite number of other points sharing the same characteristics. On the basis of the OECD data referring to the end of 1996, it is shown that all major European countries find themselves outside the sustainability area, except Belgium and Italy, i.e., exactly the opposite of what is widely believed to be the case in current discussions.

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