Working Paper: CEPR ID: DP5216
Authors: Marco Buti; Sylvester C. W. Eijffinger; Daniele Franco
Abstract: 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.
Keywords: Economic and Monetary Union; Fiscal Policy; Fiscal Rules; Stability and Growth Pact
JEL Codes: E61; H3; H6; H7
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| excessive uniformity (L15) | budgetary inflexibility (H61) |
| budgetary inflexibility (H61) | poor fiscal outcomes (H69) |
| 2005 reforms (E69) | improved compliance (L15) |
| 2005 reforms (E69) | fiscal discipline (E62) |
| lack of enforcement mechanisms (P14) | failure to adhere to fiscal rules (H68) |
| 2005 reforms (E69) | mitigate procyclical tendencies (E61) |
| robust enforcement mechanism (P14) | significant improvements in fiscal discipline (H69) |