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Life Without the Stability Pact

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Author Info
Jan J.G. Lemmen

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Abstract

There is now a real chance that the Euro member states will not abide by the strict rules of the Stability Pact. Economic and political pressures are currently moving in that direction. What then imposes budgetary discipline on governments? This paper explores how government bond markets and financial regulators could take over the disciplinary role of the Stability Pact. For example, the application of the large exposure rule to public debt should ¶encourage¶ banks to diversify their government bond holdings, shielding countries banking system from bank failures in other countries. Information disclosure and capital adequacy requirements for government bonds should increase the sensitivity of governments borrowing costs with respect to debt, deterring governments from running high budget deficits. Markets need to believe that EMU governments and the ECB will adhere to the Maastricht Treaty and to the no-bail-out clause in particular. The Stability Pact is not essential for the disciplining of governments, the Maastricht Treaty is. Finally, whether rules and markets matter or not, may be a function of the broader economic conjuncture.

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Paper provided by Financial Markets Group in its series FMG Special Papers with number sp109.

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Date of creation: Jan 1999
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Handle: RePEc:fmg:fmgsps:sp109

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  1. István Benczes, 2001. "Stability Pact for Hungary? Rise of Third Generation Reforms," CERT Discussion Papers 0103, Centre for Economic Reform and Transformation, Heriot Watt University. [Downloadable!]
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This page was last updated on 2009-12-13.

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