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The stability and growth pact : an eventful history

Author

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  • Geert Langenus

    (National Bank of Belgium, Research Department)

Abstract

When it was adopted in 1997 the stability and growth pact was considered as one of the cornerstones of the European monetary union. However, against the background of the economic downturn starting at the turn of the century, this perception changed and some observers criticised the pact for unduly constraining governments’ fiscal room for manoeuvre. This sparked a long debate on the appropriateness of the fiscal rules in the monetary union that has finally ended in March 2005 when a political agreement was reached in the Council of the European Union that announces substantial changes to the pact. This article first recalls the reasons for fiscal rules, especially in a monetary union with a fragmented budgetary policy, and the main provisions of the original pact. It then shows that despite the strengthening of the fiscal rules nearly all EU-15 Member States have significantly relaxed budgetary discipline after 1997, i.e. the year in which compliance with the Maastricht convergence criteria was tested, which led to significant budgetary slippages in a number of countries. It is argued that this is due to specific institutional, political and statistical factors. Finally, the reform of the pact is assessed. Without prejudging the application of the new framework, the fiscal rules are found to be significantly weakened and there is a clear shift towards a more judgement-based institutional framework.

Suggested Citation

  • Geert Langenus, 2005. "The stability and growth pact : an eventful history," Economic Review, National Bank of Belgium, issue ii, pages 65-81, June.
    • Handle: RePEc:nbb:ecrart:y:2005:m:june:i:ii:p:65-81
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    File URL: https://www.nbb.be/en/articles/stability-and-growth-pact-eventful-history
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    References listed on IDEAS

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    1. Mr. George Kopits, 2001. "Fiscal Rules: Useful Policy Framework or Unnecessary Ornament?," IMF Working Papers 2001/145, International Monetary Fund.
    2. Juergen Stark, 2001. "Genesis of a Pact," Palgrave Macmillan Books, in: Anne Brunila & Marco Buti & Daniele Franco (ed.), The Stability and Growth Pact, chapter 4, pages 77-105, Palgrave Macmillan.
    3. Roel Beetsma, 2001. "Does EMU Need a Stability Pact?," Palgrave Macmillan Books, in: Anne Brunila & Marco Buti & Daniele Franco (ed.), The Stability and Growth Pact, chapter 2, pages 23-52, Palgrave Macmillan.
    4. Bohn, Henning & Inman, Robert P., 1996. "Balanced-budget rules and public deficits: evidence from the U.S. states," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 45(1), pages 13-76, December.
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    Cited by:

    1. L. Van Meensel & D. Dury, 2008. "The use and effectiveness of fiscal rules and independent fiscal institutions," Economic Review, National Bank of Belgium, issue ii, pages 69-84, June.
    2. Taiki Murai & Gunther Schnabl, 2021. "Macroeconomic Policy Making and Current Account Imbalances in the Euro Area," CESifo Working Paper Series 9153, CESifo.
    3. repec:nbb:ecrart:y:2015:m:december:i:iii:p:87-107 is not listed on IDEAS
    4. P. Bisciari & W. Melyn & L. Van Meensel, 2014. "Outlook for the finances of the Communities and Regions," Economic Review, National Bank of Belgium, issue ii, pages 04-22, September.

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    More about this item

    Keywords

    Stability and growth pact; fiscal rules; European monetary policy;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • H69 - Public Economics - - National Budget, Deficit, and Debt - - - Other
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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