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The reform and implementation of the Stability and Growth Pact

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Author Info

  • Richard Morris
  • Hedwig Ongena
  • Ludger Schuknecht

Abstract

Fiscal rules are instrumental for restraining deficit and spending biases in euro area Member States that could threaten the smooth functioning of Economic and Monetary Union (EMU). Ideally, fiscal rules should combine characteristics such as sufficient flexibility to allow for appropriate policy choices with the necessary simplicity and enforceability to actually discipline government behaviour. The Maastricht Treaty and the Stability and Growth Pact established such a rules-based framework for fiscal polices in EMU. However, the implementation of the Pact was less than fully satisfactory. One year ago, the Pact was reviewed and a reformed version adopted which emphasises more flexible rules and procedures, including more explicit room for judgement and discretion than in its original form. While its proponents argued that these revisions would strengthen commitment and implementation of the rules, others emphasised the risk of weakening the EU fiscal framework. A year on from the SGP reform, this paper takes stock of how the EU fiscal rules have evolved and how they have been implemented from the Maastricht Treaty to the present day, including initial experiences with the implementation of the reformed Pact. The first indications are of a smoother and consistent implementation, but with consolidation requirements that are rather lenient while fiscal targets and projections point to only slow and back-loaded progress towards sound public finances in many countries. The assessment of the implementation of the revised rules is therefore mixed. It is of the essence that the provisions of the revised SGP be rigorously implemented in order to ensure fiscal sustainability. JEL Classification: E61, E62, H6.

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Bibliographic Info

Paper provided by European Central Bank in its series Occasional Paper Series with number 47.

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Length: 49 pages
Date of creation: Jun 2006
Date of revision:
Handle: RePEc:ecb:ecbops:20060047

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Keywords: Stability and Growth Pact; Fiscal policy; Fiscal rules; EMU.;

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References

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  1. Martin Feldstein, 2005. "The Euro and the Stability Pact," NBER Working Papers 11249, National Bureau of Economic Research, Inc.
  2. Riccardo Faini, 2006. "Fiscal policy and interest rates in Europe," Economic Policy, CEPR & CES & MSH, vol. 21(47), pages 443-489, 07.
  3. Vincent Koen & Paul van den Noord, 2005. "Fiscal Gimmickry in Europe: One-Off Measures and Creative Accounting," OECD Economics Department Working Papers 417, OECD Publishing.
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  5. repec:fth:eeccco:148 is not listed on IDEAS
  6. Hauptmeier, Sebastian & Heipertz, Martin & Schuknecht, Ludger, 2006. "Expenditure reform in industrialised countries: a case study approach," Working Paper Series 0634, European Central Bank.
  7. Torsten Persson & Guido Tabellini, 2005. "The Economic Effects of Constitutions," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262661926, December.
  8. Ludger Schuknecht, 2005. "Stability and Growth Pact: issues and lessons from political economy," International Economics and Economic Policy, Springer, vol. 2(1), pages 65-89, 06.
  9. Marín, José M., 2002. "Sustainability of public finances and automatic stabilisation under a rule of budgetary discipline," Working Paper Series 0193, European Central Bank.
  10. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  11. Wyplosz, Charles, 2002. "Fiscal Policy: Institutions versus Rules," CEPR Discussion Papers 3238, C.E.P.R. Discussion Papers.
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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Where are the Ökonomen?
    by Dirk in econoblog101 on 2013-06-06 07:55:57
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Cited by:
  1. Holm-Hadulla, Fédéric & Hauptmeier, Sebastian & Rother, Philipp, 2010. "The impact of numerical expenditure rules on budgetary discipline over the cycle," Working Paper Series 1169, European Central Bank.
  2. António Afonso & Christophe Rault, 2008. "What do we really Know about Fiscal Sustainability in the EU? A Panel Data Diagnostic," CESifo Working Paper Series 2226, CESifo Group Munich.
  3. Coenen, Günter & Mohr, Matthias & Straub, Roland, 2008. "Fiscal consolidation in the euro area: long-run benefits and short-run costs," Working Paper Series 0902, European Central Bank.
  4. Andrew Hughes Hallett & Moritz Kuhn & Thomas Warmedinger, 2012. "The gains from early intervention in Europe: Fiscal surveillance and fiscal planning using cash data," European Journal of Government and Economics, Europa Grande, vol. 1(1), pages 44-65, June.
  5. Manfred Weber & Karl Knappe, 2007. "Fiscal policy in EMU after the reform of the european stability and growth pact," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 8(4), pages 45-51, 01.
  6. Erik J. Lundbäck, 2008. "Medium-Term Budgetary Frameworks," IMF Working Papers 08/163, International Monetary Fund.
  7. Nadine Leiner-Killinger & Víctor López Pérez & Roger Stiegert & Giovanni Vitale, 2007. "Structural reforms in EMU and the role of monetary policy – a survey of the literature," Occasional Paper Series 66, European Central Bank.
  8. Alfredo Pereira & Maria Pinho, 2008. "Public investment and budgetary consolidation in Portugal," Portuguese Economic Journal, Springer, vol. 7(3), pages 183-203, December.
  9. Xavier Debrun & Manmohan S. Kumar, 2007. "The Discipline-Enhancing Role of Fiscal Institutions," IMF Working Papers 07/171, International Monetary Fund.
  10. António Afonso & Christophe Rault, 2007. "What We Really Know about Fiscal Sustainability in the EU? A Panel Data Diagnostic," Working Papers Department of Economics 2007/20, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.

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