Economics, 3rd Edition

structural deficit

 refers to a situation where the deficit is not dependent on 

movements in the economic cycle but indicate that a government is ‘living beyond its means’ –  spending 

what it has not got and contrasts with a 

cyclical deficit

 where government spending and income is dis-

rupted by deviations in the ‘normal’ economic cycle.

structural deficit

 a situation where a government’s deficit is not dependent on movements in the economic cycle

cyclical deficit

 a situation when government spending and income is disrupted by the deviations in the ‘normal’ 

economic cycle

Each member country will have a minimum benchmark figure for long-term sustainability which will be 

reviewed annually. Deviation from the balanced budget rule will be allowed in exceptional circumstances, 

such as a severe economic downturn but if the member state deviates from the rule, an automatic 

profligate spend-and-borrow countries higher interest rates on their debt. In fact, exactly such a no 

bail-out agreement exists among members of EMU. Unfortunately, however, it seems clear that the no 

bail-out clause is not credible: the attempts by members to support profligate countries throughout the 

sovereign debt crisis have confirmed this. If an EMU member were to default on its debt, this would have 

strong repercussions throughout the euro area as it would lead to the financial markets losing confid-

ence in debt issued by other members and to strong selling of the euro in the foreign currency exchange 

market. In order to avoid this, EMU members have acted to bail out member countries threatening to 

default on their debt.

For these reasons, the members of the currency union may wish to impose rules on one another 

 concerning the conduct of national fiscal policies in order to avoid fiscal profligacy by any one member. 

At the outset of EMU, a set of fiscal rules was indeed drawn up and agreed to by EMU members. This 

set of rules was known as the Stability and Growth Pact (SGP). The SGP not only laid down strict rules on 

the maximum permissible budget deficit and debt-to-GDP ratio for EMU members, it also stipulated harsh 

punishments – fines amounting to as much as 0.5 per cent of GDP – for offenders. In the event, several 

countries, including France and Germany, breached the SGP but managed to persuade other members 

not to impose fines.