The present paper provides an assessment of the effect of this revision on the European economy. A set of structural VARs, one for each eurozone country, is estimated. The estimated models are then used for assessing the possible effect of alternative sets of fiscal rules, with particular attention to the Stability and Growth Pact in its old and reformed version.

The investigation suggests that fiscal policy has had in the past a limited smoothing effect on the cycle, and therefore the cost of the old rules in the corrective arm of the Pact was also limited. As for the reform of the Pact, the analysis is overall supportive of the new country-specific Medium Term Objectives. The modified rules of the Excessive deficit procedure are likely to give the governments only a limited extra leeway to reduce the variability of the cycle.

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