Reform of the stability and growth pact

The euro area, after a poor growth performance in 2002, has stepped aside in 2003 the word economic recovery. Concurrently, as was easily predictable since its inception, all the flaws of the SGP emerged once the European economy started to loose speed. Compared to the strongly proactive fiscal policy in the US and the UK, Europe remained substantially inertial, with an almost neutral policy stance. As a result, and despite a growth rate of 0.4 % in 2003 — as compared with 3.1 % for the US and 2.3 % for the UK — the area had in 2003 a much lower public deficit than these two countries! The main flaws of the SGP become then obvious: it lacks flexibility; it is asymmetric; it disregards the intertemporal content of public spending; it neglects the long term sustainability of public finance. The arguments — both theoretical and empirical — in favour of the SGP appear so weak that the question arises if it is not following a hidden agenda. Reform proposals have been advocated since long and they are not mutually exclusive: -- to focus on structural deficits -- to apply the golden rule of public finance, the task of defining what belongs to investment spending being left to the European council and to the European parliament. -- to take into account long term sustainability, not so much as a mean of punishing high debt countries, but to reward low debt ones. But even if all these reforms are adopted, the new SGP would at most be a second best solution. The real missing element is an area-wide fiscal policy actor capable of interacting with the ECB, so as to assure an efficient policy-mix. Even if this solution is not conceivable in the present political setting, it may be considered as a benchmark to foster both more coordination inside the European council and more reactivity (i.e. more growth responsibility) from its part.