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Fiscal Discipline as a Social Norm: The European Stability Pact

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Abstract

This paper reviews the arguments for and against the ‘Stability and Growth Pact’ signed by the countries of the Euro area. We find the theoretical debate to be inconclusive, as both externality and credibility arguments can be used to yield opposite, and equally plausible conclusions. We also argue that evidence in favour of a Pact-like rule is scant. We therefore suggest the view that the Stability Pact is a public social norm, and that a country’s adherence to that norm is in fact a response to the need to preserve reputation among the other members of the European Union. Using this extreme but not implausible hypothesis, we build a simple model similar in spirit to Akerlof’s (1980) seminal paper on social norms, and we show that reputation issues may cause the emergence of a stable but inferior equilibrium. We further show that after the enlargement, with a number of countries anxious to prove their ‘soundness’ joining the club, the problems posed by the pact/social norm are likely to increase.

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Paper provided by Observatoire Francais des Conjonctures Economiques (OFCE) in its series Documents de Travail de l'OFCE with number 2007-22.

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Date of creation: 2007
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Handle: RePEc:fce:doctra:0722

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Keywords: Stability Pact; Fiscal Rules; Fiscal Policy; Social Norms; Reputation; Enlargement;

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Citations

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Cited by:
  1. Jean-Paul Fitoussi & Francesco Saraceno, 2007. "Fiscal discipline as a social norm : the European Stability Pact," Sciences Po publications n°2007-22, Sciences Po.
  2. Frédéric Marty, 2007. "Partenariats public-privé, règles de discipline budgétaire, comptabilité patrimoniale et stratégies de hors bilan," Documents de Travail de l'OFCE 2007-29, Observatoire Francais des Conjonctures Economiques (OFCE).
  3. Shirai, Sayuri, 2009. "Euの通貨統合と金融・財政政策の規律
    [EU Currency Union and Disciplines for Financial・Moneatry Policies]
    ," MPRA Paper 15713, University Library of Munich, Germany.
  4. Jérôme Creel & Paul Hubert & Francesco Saraceno, 2014. "French Public Finances at Risk?," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(1), pages 1-19, Februar.
  5. Jérôme Creel & Paul Hubert & Francesco Saraceno,, 2013. "Assessing future sustainability of french public finances," Documents de Travail de l'OFCE 2013-11, Observatoire Francais des Conjonctures Economiques (OFCE).
  6. Baldi, Guido, 2013. "Fiscal Policy Institutions and Economic Transition in North Africa," MPRA Paper 48677, University Library of Munich, Germany.

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