The official EC methodology incorrectly attributes a significant share of cyclical variation to discretionary fiscal policy.

The official EC methodology and our model (true state) show that in more than one third of the cases breaching the SGP structural deficit rule does not lead to the violation of the Maastricht deficit rule → the provisions of the SGP seem to be too stringent for compliance with the Maastricht 3% deficit-to-GDP limit.

The official EC methodology mis-signals the violation of the SGP structural deficit limit in about 25% of cases which triggers corrective measures (fiscal tightening) that lead to an increased volatility of GDP growth; such inability of the official method is manifested even more during periods of Great Recession, when a robust fiscal governance framework is even more important.

Our results are robust and apply equally to small and large economies with the latter potentially having a strong impact on the ECB's monetary policy.

Our simulation experiment offers two policy implications: (1) a revision of the official methodology for estimating the CABB by explicitly incorporating a structural description of discretionary fiscal policy; (2) a revision of the SGP provisions that would allow for a more active fiscal stabilization might increase the overall robustness of the EU fiscal framework.