The European fiscal compact will be hard to implement | Eurobank
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  • The cyclically adjusted budget balance (CAB) has taken center stage as a policy decision tool in the recently agreed fiscal compact, which aims at enhancing fiscal surveillance among euro area members. 
  • A major merit of the CABs is that they provide a more accurate picture of a country’s underlying fiscal stance, independent of business cycle variations. However, real time data, available at the time of decision making, may differ from the revised figures, raising concerns about their accuracy.
  • We find evidence that substantial revisions of real time CAB data limit their reliability in measuring both the level and the change of a country’s budget balance, underestimating both fiscal slippages and fiscal consolidations. 
  • The limited reliability of real time CABs raises enforcement risks of the fiscal compact, challenging its effectiveness to lead to a fiscally sounder Euro zone.