DP5216 The Stability Pact Pains: A Forward-Looking Assessment of the Reform Debate

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

Publication Date: September 2005

Keyword(s): fiscal policy , fiscal rules , economic and monetary union , Stability and Growth Pact

JEL(s): E61 , H3 , H6 , H7

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP5216.asp

The Stability and Growth Pact has been under fire ever since it was born. But is the Pact a flawed fiscal rule? Against established criteria for an ideal fiscal rule, its design and compliance mechanisms show strengths and weaknesses. The latter 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. No alternative solution put forward in the literature appears clearly superior. This does not mean that the original Pact of 1997 could not be improved. The debate on the SGP has shown that any reform should aim at overcoming the excessive uniformity of the rules, improving their transparency, correcting pro-cyclicality and strengthening enforcement. The reform of the Pact agreed in 2005 moves in this direction but leaves open a number of issues.