D:/OUTPUTGAP2013/outputgap-ecostat.dvi

The Fiscal Compact obliges member states to limit net borrowing. Public budgets, however, are allowed to vary with the state of the economy, and deficits may be recorded during a recession, leading to the concept of cyclically adjusted balance (CAB). This study describes the production function approach adopted by the EU Commission to compute potential output and the CAB for EU member states, and discusses its application to the case of Luxembourg. The empirical framework established by the Commission is applied directly to national accounts data from STATEC and results compared with the available estimates released by the Commission. Several methodological differences lead to slightly more optimistic dynamics of productivity and potential growth, and show the limits of the "one-size-fits-all” EU approach.