The new fiscal rules for the EMU. Threats from heterogeneity and interdependence

This paper examines the reform of fiscal rules inthe European Economic and Monetary Union (EMU), in particular the Stability and Convergence Plans (SCP) of public debts. The focus is on factors of heterogeneity and interdependence in the key variables of growth and interest rates. By means of dynamic models of the debt/GDP ratio in a multi-country setup, the paper shows how these factors may jeopardize the main goal of fostering convergence and keeping debt/GDP ratios equalized and stable over time, especially in case of uncoordinated implementation of large SCPs across member countries. Controlling for these factors in practice may be quite demanding, but the key flaw isthat they are almost entirely ignored in the SGP institutional framework that therefore requires a different approach.