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Implementing the Stability and Growth Pact: Enforcement and Procedural Flexibility

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  • Beetsma, Roel
  • Debrun, Xavier

Abstract

The paper proposes a theoretical analysis illustrating some key policy trade-offs involved in the implementation of a rules-based fiscal framework reminiscent of the Stability and Growth Pact (SGP). The analysis offers some insights on the current debate about the SGP. Specifically, greater ‘procedural’ flexibility in the implementation of existing rules may improve welfare, thus making the Pact more easily acceptable to euro area Member States. Here, procedural flexibility designates the enforcer’s room to apply well-informed judgment on the basis of underlying policies and to set a consolidation path that does not discourage high-quality policy measures. Yet budgetary opaqueness may hinder the qualitative assessment of fiscal policy, possibly destroying the case for flexibility. Also, improved budget monitoring and greater transparency increase the benefits from greater procedural flexibility. Overall, we establish that a fiscal pact based on a simple deficit rule with conditional procedural flexibility can simultaneously contain excessive deficits, lower unproductive spending and increase high-quality outlays.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5005.

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Date of creation: Apr 2005
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Handle: RePEc:cpr:ceprdp:5005

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Keywords: deficits; fiscal rules; procedural flexibility; Stability and Growth Pact; structural reforms;

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References

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  1. Blanchard, Olivier J & Giavazzi, Francesco, 2004. "Improving the SGP Through a Proper Accounting of Public Investment," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4220, C.E.P.R. Discussion Papers.
  2. Schuknecht, Ludger, 2004. "EU fiscal rules: issues and lessons from political economy," Working Paper Series, European Central Bank 0421, European Central Bank.
  3. Olivier Blanchard, 2004. "The Economic Future of Europe," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 3-26, Fall.
  4. Roel M. W. J. Beetsma & Xavier Debrun, 2004. "Reconciling Stability and Growth: Smart Pacts and Structural Reforms," IMF Staff Papers, Palgrave Macmillan, vol. 51(3), pages 431-456, November.
  5. von Hagen, Jürgen & Wolff, Guntram B., 2004. "What do deficits tell us about debt? Empirical evidence on creative accounting with fiscal rules in the EU," Discussion Paper Series 1: Economic Studies 2004,38, Deutsche Bundesbank, Research Centre.
  6. Gian-Maria Milesi-Ferretti, 2000. "Good, Bad or Ugly?on the Effects of Fiscal Rules with Creative Accounting," IMF Working Papers 00/172, International Monetary Fund.
  7. Sibert, Anne & Sutherland, Alan, 2000. "Monetary union and labor market reform," Journal of International Economics, Elsevier, vol. 51(2), pages 421-435, August.
  8. Hughes Hallett, Andrew & Jensen, Svend E. Hougaard, 2001. "Currency unions and the incentive to reform: are market mechanisms enough?," The North American Journal of Economics and Finance, Elsevier, vol. 12(2), pages 139-155, July.
  9. Alesina, Alberto & Tabellini, Guido, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 57(3), pages 403-14, July.
  10. Robert A. J. Dur & Ben D. Peletier & Otto H. Swank, 1999. "Voting on the Budget Deficit: Comment," American Economic Review, American Economic Association, vol. 89(5), pages 1377-1381, December.
  11. Hallett, Andrew Hughes & Jensen, Svend E. Hougaard & Richter, Christian, 2005. "The European economy at the cross roads: Structural reforms, fiscal constraints, and the Lisbon Agenda," Research in International Business and Finance, Elsevier, Elsevier, vol. 19(2), pages 229-250, June.
  12. Roel M. W. J. Beetsma & Xavier Debrun, 2003. "Reconciling Stability and Growth," IMF Working Papers 03/174, International Monetary Fund.
  13. Francesca Castellani & Xavier Debrun, 2001. "Central Bank Independence and the Design of Fiscal Institutions," IMF Working Papers 01/205, International Monetary Fund.
  14. Sibert, Anne, 1999. "Monetary Integration and Economic Reform," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 109(452), pages 78-92, January.
  15. Beetsma, Roel & Uhlig, Harald, 1999. "An Analysis of the Stability and Growth Pact," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 109(458), pages 546-71, October.
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Citations

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Cited by:
  1. Krogstrup, Signe & Wyplosz, Charles, 2006. "A Common Pool Theory of Deficit Bias Correction," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5866, C.E.P.R. Discussion Papers.
  2. Fiorella Kostoris Padoa Schioppa, 2006. "The 2005 Reform of the Stability and Growth Pact: Too Little, Too Late?," Bruges European Economic Research Papers, European Economic Studies Department, College of Europe 6, European Economic Studies Department, College of Europe.
  3. Esposito, Piero & Paradiso, Antonio & Rao, B. Bhaskara, 2011. "The dynamics of Spanish public debt and sustainable paths for fiscal consolidation," MPRA Paper 32563, University Library of Munich, Germany.
  4. Krogstrup, Signe & Wyplosz, Charles, 2010. "A common pool theory of supranational deficit ceilings," European Economic Review, Elsevier, vol. 54(2), pages 269-278, February.
  5. James Hollyer, 2010. "Conditionality, compliance, and domestic interests: State capture and EU accession policy," The Review of International Organizations, Springer, Springer, vol. 5(4), pages 387-431, December.
  6. Andrés Leal Marcos & Julio López Laborda, 2009. "Efectos externos del endeudamiento sobre la calificación crediticia de las Comunidades Autónomas," Hacienda Pública Española, IEF, IEF, vol. 189(2), pages 81-106, June.
  7. Schuknecht, Ludger, 2004. "EU fiscal rules: issues and lessons from political economy," Working Paper Series, European Central Bank 0421, European Central Bank.

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