This is the third report dedicated to Public finances in EMU. In addition to reviewing Member States’ budgetary performance in 2001 and assessing the short and medium-term prospects, it contains an examination of some of the questions in the fast evolving debate on budgetary policy at EU level, with a particular emphasis on EMU.

• Part I reviews current developments and short-term budgetary prospects, as well as the medium-term plans set down in the latest stability and convergence programmes (submitted in late 2001 or early 2002). It is based on the Spring 2002 forecast of the European Commission.
• Part II examines four aspects of the evolving framework for budgetary surveillance at EU level. They are the revised Code of Conduct on the content and presentation of stability and convergence programmes, the early warning mechanism of the Stability and Growth Pact, the new method to calculate cyclically adjusted budget balances and the approach to assessing the sustainability of public finances in light of ageing populations.
• Part III examines the quality of public spending in Member States, an issue highlighted by the Lisbon and Stockholm European Councils. It compares the growth and composition of spending across Member States and examines various economic and institutional factors that may explain the growth in public spending over the past three decades. It presents a possible indicator of the composition of government spending, and whether it is geared towards policies that make a positive contribution to the goals of the Lisbon strategy.
• Part IV looks at whether there is a role for discretionary fiscal policies in EMU. It considers both the circumstances under which discretionary fiscal actions may be desirable in EMU and also the effectiveness of various discretionary policy measures. It concludes that the existing framework for fiscal policy is sound, i.e. it essentially relies on the operation of automatic stabilisers and discretionary fiscal policies should be the exception rather than the rule.
• Part V examines the budgetary policy challenges facing the candidate countries of Central and Eastern Europe. It explains the challenges they face in developing reliable and timely government accounts at a time when they are experiencing large economic and institutional changes. It also considers the role which budgetary policies can play in delivering a stable macroeconomic climate conducive to growth and employment.
• Part VI contains for each Member State a brief summary of budget developments and prospects. It also contains the Council Opinions on the updated stability and convergence programmes, as well as the country specific recommendations on budgetary policy in the draft 2002 broad economic policy guidelines.