DP3692 Revisiting the Stability and Growth Pact: Grand Design or Internal Adjustment?

Author(s): Marco Buti , Sylvester C. W. Eijffinger , Daniele Franco

Publication Date: January 2003

Keyword(s): fiscal policy , fiscal rules , economic and monetary union , stability and growth pact

JEL(s): E61 , H30 , H60 , H70

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP3692.asp

The Stability and Growth Pact is under fire. Problems have appeared in sticking to the rules. Proposals to reform the Pact or ditch it altogether abound. But is the Pact a flawed fiscal rule? Against established criteria for an ideal fiscal rule, its design and compliance mechanisms fare reasonably well. Where weaknesses are found, they tend to reflect trade-offs typical of supra-national arrangements. In the end, only a higher degree of fiscal integration would remove the inflexibility inherent in the recourse to predefined budgetary rules. This does not mean that the EU fiscal rules cannot be improved. Given the existing degree of political integration in EMU, however, internal adjustment rather than attempting to redesign the rules from scratch appears a more suitable way to bring about progress. 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.