Original Paper

Review of World Economics

, Volume 149, Issue 2, pp 247-272

First online:

Over-optimistic official forecasts and fiscal rules in the eurozone

  • Jeffrey FrankelAffiliated withHarvard University Email author 
  • , Jesse SchregerAffiliated withHarvard University

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Eurozone members are supposedly constrained by the fiscal caps of the Stability and Growth Pact. Yet ever since the birth of the euro, members have postponed painful adjustment. Wishful thinking has played an important role in this failure. We find that governments’ forecasts are biased in the optimistic direction, especially during booms. Eurozone governments are especially over-optimistic when the budget deficit is over the 3 % of GDP ceiling at the time the forecasts are made. Those exceeding this cap systematically but falsely forecast a rapid future improvement. The new fiscal compact among the euro countries is supposed to make budget rules more binding by putting them into laws and constitutions at the national level. But biased forecasts can defeat budget rules. What is the record in Europe with national rules? The bias is less among eurozone countries that have adopted certain rules at the national level, particularly creating an independent fiscal institution that provides independent forecasts.


Budget Discipline Euro Europe Eurozone Fiscal Fiscal compact Forecast Independent Institutions Maastricht criteria Optimism Procyclical Rule Stability and Growth Pact Wishful thinking

JEL Classification

E62 H50