Working Paper: CEPR ID: DP4220
Authors: Olivier J. Blanchard; Francesco Giavazzi
Abstract: The Stability and Growth Pact (SGP) contains a serious error: the way governments are expected to account for public investment. Correcting this error and applying, as article 104.3 of the EU Treaty allows, the current rules of the Pact to a measure of the budget where the treatment of investment expenditures is done properly would, over time, drive the debt-GDP ratio to the ratio of public capital to GDP. Excluding net public investment from the definition of the budget that is relevant for the Pact would also help in the short run, by inducing countries to shift the composition of domestic demand, rather than to reduce its level.
Keywords: EMU; Stability Pact
JEL Codes: E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| correcting the accounting of public investment (H54) | driving the debt-to-GDP ratio (H69) |
| correct accounting of public investment (H54) | aligning debt-to-GDP ratio with public capital to GDP (H68) |
| excluding net public investment from budget definition (H69) | incentivizing countries to shift domestic demand composition (F69) |
| lack of transparency in public investment accounting (H54) | off-budget borrowing practices (H74) |
| correcting off-budget borrowing practices (H61) | improving fiscal discipline (E62) |