Working Paper: CEPR ID: DP3692
Authors: Marco Buti; Sylvester C. W. Eijffinger; Daniele Franco
Abstract: 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.
Keywords: Economic and Monetary Union; Fiscal Policy; Fiscal Rules; Stability and Growth Pact
JEL Codes: E61; H30; H60; H70
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Stability and Growth Pact (SGP) (E63) | reduced budgetary flexibility (H61) |
| rigid constraints of the SGP (C68) | inability to respond effectively to country-specific economic shocks (F65) |
| Stability and Growth Pact (SGP) (E63) | fiscal imbalances (E62) |
| Stability and Growth Pact (SGP) (E63) | disincentives for public investment (H54) |
| lack of fiscal integration (F36) | inherent inflexibility of predefined budgetary rules (H61) |