estimating potential output and measuring the costs and benefits of structural reforms) could make surveillance and implementation difficult. A potential weakness in the Pact’s preventive arm is a bias towards negative output gaps or “bad times” (that would require less adjustment), coupled with the provision that medium-term objectives do not necessarily have to be reached within the horizon of a country’s stability programme.
In sum, the preventive arm of the Pact, as recently revised, provides a useful framework for surveillance and benchmarking of sound fiscal policies and the reform might strengthen the pertinent provisions. However, if it is implemented in a minimalist fashion, the required adjustment and fiscal policy paths may not be consistent with determined consolidation, sufficient safety margins and adequate debt reduction.