Why has the Stability and Growth Pact Failed?

Abstract

This paper evaluates the Stability and Growth Pact. After briefly examining the rules in place and the experience so far, the Pact is analysed from a political economy perspective, focusing on the choice of hard versus soft law and drawing inferences from characteristics of successful fiscal rules at the state level in the USA. The main argument of the paper is that the Pact's enforcement mechanisms are too weak. It is also argued that big countries are less likely to adhere to the fiscal policy rules in place. Reform of the Pact should aim at stricter, instead of more flexible, rules and should not rely on cyclically adjusted deficit estimates.

The Bail-Out! Positive Political Economics of Greek-Type Crises in the EMU

“…The weakness of the current EMU set-up is that it neither provides sufficient incentives for curtailing excessive lending and indebtedness (see more De Haan et al (2004)), nor secures the degree of political integration necessary to attain a sufficient degree of policy coordination. Strengthening fiscal discipline is of key importance, but it has consistently collided with the enforceability problem of applying supra-national fiscal rules to sovereign states.…”

“…One of the key novelties in our work is that we formally take account of the negative externality problem that has been central to policy debates related to EMU's institutional design since the very birth of the euro (see, for example, Gros et al (2005) and de Haan et al (2004) for early contributions within this debate) and played an important role in the specific case of the Greek crisis in the form of -as some commentators call it -a "bail-out blackmail" (see Mayer (2010)). However, contrary to the existing literature, we do not only focus on the economic aspects of such a negative externality, but also look at where it emanates from and how it interacts with political factors, in particular the dynamics of the political negotiation process within the EMU, i.e.…”

Warum verstoßen vorwiegend die großen EWU-Länder gegen den Stabilitäts- und Wachstumspakt?

“…Eine erste theoretische Begründung kann auf folgendes rein spieltheoretisches Argument zurückgeführt werden (De Haan et al 2003). In einer kleinen offenen Volkswirtschaft ist im Allgemeinen die Fähigkeit zur Internalisierung der Wachstumseffekte einer expansiven, investitionsorientierten Finanzpolitik des staatlichen Akteurs im Vergleich zu größeren Volkswirtschaften relativ gering (Heise 2001).…”

The Impact of Political Events Related to European Fiscal Governance on the Volatility of a Time-varying Risk Premium in Euro Foreign Exchange Markets: The Early Years of European Fiscal Governance

“…The lack of outside monitoring increases the possibility that opportunistic governments will disregard the SGP rules. The soft-law nature and the contracting problem of the SGP rules increase uncertainty about their enforceability (e.g., De Haan, Berger & Jansen, 2004). This kind of uncertainty nurtures the undiversifiable risk component in euro exchange rate relations.…”