Revisiting EMU's Stability Pact: A Pragmatic Way Forward

Abstract

The Stability and Growth Pact is under fire. Some countries are meeting major problems in sticking to the rules. Proposals to reform the Pact or ditch it altogether abound. The alleged weaknesses of the Pact tend to reflect trade-offs typical of supra-national arrangements. This aspect has to be factored in when considering reforms of the current fiscal rules: there is no miracle solution. EMU without rules would be an interesting experiment, but a risky policy option. Given the existing degree of political integration in EMU, internal adjustment rather than attempting to redesign the rules from scratch appears a more suitable way forward. Redefining the medium-term budgetary target, improving transparency, tackling the pro-cyclical fiscal bias in good times, moving towards non-partisan application of the rules, and improving transparency in the data can achieve both stronger discipline and higher flexibility.

Are European fiscal rules that bad? Discretionary fiscal policies in New Member States

“…In 1997 they were extended by the SGP and in 2005 by the decision of European Council entitled 'Improving the Operation of the Stability and Growth Pact'. 1 As a result, the performance of the EU fiscal rules has been improved, however, they still have some drawbacks (Buti et al, 2003;Wyplosz, 2006).…”

The limits of `independence' and the policy of the ECB^*

“…Proposals for 'reform' or 'relaxation' of the Pact abound. Buti, Eijffinger, and Franco (2003) consider, without endorsing, a number of them. 31.…”

Fiscal policy and capital mobility: the construction of economic policy rectitude in Britain and France

“…The recent arguments about the crudity of the SGP should not blind us to the fact that fiscal discipline was asserted very successfully in the 1990s, and in that context current differences appear so far at least quite marginal. 56 While almost all commentators have accepted the need for fiscal discipline, some questioned the desirability of any rules at all, while others questioned the particular rules applied. Although Article 104 of the Maastricht Treaty specified analysis of the role of public investment within the deficit, and the taking into account of the economic cycle, and the medium term budgetary position, these precisions have been largely forgotten.…”